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In our view, investors abandon the of annual stability. Between 2026 and 2028, Brazil's power sector will likely be defined by unprecedented intraday swings, with spot prices potentially oscillating from the regulatory floor to explosive peaks within the same day. We believe volatility is no longer noise; it is the structural driver of asset pricing, contract design, and hedging strategies. In our view, portfolios that fail to internalize volatility as the central metric risk destroying value. Solar and wind expansion would push prices to the floor during daylight hours, while evening ramps would force expensive thermal dispatch and create premium peaks. We believe this back-and-forth will separate players that capture��substantial margins from those locked into inflexible contracts. We believe the market is still underpricing this asymmetry, and there lies the alpha.

In Brazil's new pricing regime, the contest is decided at the edges of the day. Those positioned to sell into the evening ramp secure average prices north of Brazilian Reales 355/MWh, while those locked into midday solar exposure face a market where prices collapse to close to Brazilian Reales 164/MWh. This stark divergence��should separates winners from losers. The market's apparent fixation on annual averages obscures the real battleground: the hourly curve. We believe true value is no longer about volume, but about timing—where an asset sits in relation to the price trough at noon and the price spike at dusk. To dissect this dynamic, we simulated different scenarios considering load growth, thermal dispatch and hydro generation (based on the last 12 months history or in minimums and maximums). From these scenarios, three conclusions emerge: 1) System operation will likely become more fragile, increasing the probability of blackouts as ramping needs intensify; 2) The Generation Scaling Factor (GSF) should not deteriorate further. Moreover, GSF would be higher than 1 at the hours of higher spot prices; 3) Curtailment will likely intensify structurally, eroding the economics of renewables over coming years. The data suggests Brazil's power sector is shifting from a debate on averages to a debate on volatility, timing, and system stress. In our view, the winners will be those who can monetize scarcity at the right hours; the losers would be trapped in abundance when it has low value.

The scenarios we simulated yield three decisive impacts: 1) the GSF stabilizes at the 76-89% range, yet improves precisely during periods of highest intraday prices – a shift we estimate could add Brazilian Reales 19.5/MWh to hydro generator's revenue; 2) curtailment worsens – we estimate that the combined effect of curtailment and intraday volatility could reduce renewable generator's revenues by approximately Brazilian Reales 5/MWh; and 3) intraday price volatility intensifies. In a scenario of 3.6% load growth per year (EPE estimates) and inflexible thermal power plant baseline, with any additional generation required to meet ramping needs, we estimate GSF of 84-89%, curtailment increasing every year at 10% in 2026, 13% in 2027 and 17% in 2028, while energy prices increase to an average of Brazilian Reales250/MWh in 2026, Brazilian Reales 160/MWh in 2027 and Brazilian Reales 197/MWh in 2028. Beyond these metrics lies a more systemic risk: the possibility of blackouts triggered either by insufficient demand absorption or by excess demand outpacing system flexibility. What emerges is not a benign cycle of volatility, but a structural stress test for the Brazilian power market.