Introduction — or, Annabella’s Choice

Let’s start by describing the relationship with electricity from the point of view of a medium-sized consumer. Consider a fictitious family business, Annabella Eco-Friendly Shoes Ltda., which manufactures and sells women’s shoes made from sisal and other plant materials.

Joanna is the company’s manager and is looking to modernize the main factory, installing new equipment that will more than double its production capacity. But she is worried about the cost of electricity and, above all, about the predictability of future expenses, since the company will have to pay the modernization financing for a few good years. 

With the current machinery, Annabella already spends more than 40% of its total costs on the electricity bill it pays every month to the local distributor. If that expense goes up, Annabella may not be able to go through with the modernization project. Joanna also follows the news and is always apprehensive when she hears about the water crisis and the increase in the price of electricity, or when her friends discuss the risk of a blackout, but she doesn’t know exactly how this affects Annabella’s business.

* * *

In recent days, Joanna has received an offer that sounds great. A company called Sunarize Now Ltda. offered Annabella to buy solar energy and save 15% on her electricity bill. “It sounds too good to be true!”. Is it really possible that during all the time that Annabella has been buying electricity from the local utility, it could have simply purchased much cheaper energy? And even from a renewable source? 

Joanna needs to be wary of running the company. “Am I considering all possible scenarios or is it really a deal I can’t refuse?”. The contract that Sunarize offered to Annabella requires her to be part of a consortium with several other companies, for more than ten years. Joanna doesn’t know how the market will be by then, not even the footwear market, much less the electricity market. In addition, the company’s lawyer said that she will need to seek approval from all shareholders to enter this business, and that it is important to know who Annabella will partner with in the consortium, as it may entail some risks. 

Joanna has also read that Brazilian Congress intends to “tax the sun”, and she doesn’t know what it means or how that could hurt the project’s expected return. 

Joanna decides to study a little more, and thanks Sunarize.

* * *

A conference on electricity is taking place in the city, and Joanna decides to participate to find out a little more about the subject. 

Joanna’s attention was drawn to a lecture by the CEO of an electricity trader, VoltageXchange Electricity Trading Ltda., who said that everyone with an electricity bill above a certain amount could migrate to the free market. Joanna had already heard about the free electricity market, but she doesn’t know exactly how it works. As Annabella’s electricity bill is well above the value mentioned by the CEO, Joanna realizes that this could be an option to finally make the modernization of the factory possible.
The next day, Joanna enters the VoltageXchange website and is faced with the following promise: “Migrate now to the free market and save up to 30% of your electricity bill”. 

“Is that right?”. Joanna feels the same trepidation as before. “What is happening to this market for the offers to be so attractive?”. As it doesn’t hurt to find out, Joanna fills out a form on the website. Hours later, she is on the phone with a VoltageXchange representative, who tells her all about the migration process and the benefits if Annabella decides to participate in the free market.

* * *

Joanna has worked at Annabella for over twenty years and in that time she has never seen a single offer to buy electricity from third parties other then the local utility. But in the last few weeks she has learned of two options, to save 15% and 30% on electricity! “Wow”, she thought. “What other options are there?”.

Word gets out that Annabella is looking to break into the free market, and the proposals keep coming in. But one type of proposal stands out: different companies have already offered Annabella to become a partner in generation plants, solar and wind, to become a self-generator. 

Joanna finds the commercial promise of these companies really attractive. In addition to a much cheaper price than the electricity distributor, Annabella will not have to pay some charges in the sector, which are quite relevant. On the other hand, the business is more complex. Annabella will need to do an “M&A” (from Mergers & Acquisitions), and buy shares in a special purpose company, or, again, enter into a consortium. 

In any case, the “economics” are too good to ignore. Joanna is looking at what to do to get the best price from all those providers. An auction?

(to be continued…)