WHAT THE RETREAT IN ENERGY TRADING REVEALS ABOUT BRAZIL’S POWER SECTOR

Over the past few months, something curious and deeply revealing has been unfolding in Brazil’s electricity sector. Companies that once thrived on risk are quietly pulling back.

WHAT THE RETREAT IN ENERGY TRADING REVEALS ABOUT BRAZIL’S POWER SECTOR

Directional energy trading, especially in the Free Market, has stopped being synonymous with opportunity and has become a terrain where even seasoned players tread carefully.

This is not a momentary shock or an isolated crisis. The shift is structural. It reflects a combination of poorly priced credit risk, rising volatility, shrinking liquidity and, above all, a factor that until recently was treated almost as a side effect: curtailment.

WHEN MAJOR PLAYERS CHANGE COURSE

A Reuters report published in early February merely shed light on what market insiders had already been experiencing firsthand. Large groups such as CPFL Energia and CTG Brasil have stepped away from classic speculative positions long or short and returned to the obvious: selling their own generation.

At first glance, this may sound conservative. In reality, it is a rational response to a market where risk has ceased to be asymmetric and has become outright unpredictable. When a company like CPFL publicly states that it prefers to eliminate trading risk and focus on energy from its own assets, the message is unmistakable: this is not about lack of appetite, but about cold, disciplined scenario reading.

THE SQUEEZE ON INDEPENDENT TRADERS

The retrenchment has not been limited to large integrated groups. Independent trading companies historically responsible for much of the Free Market’s liquidity have sharply reduced their exposure. Some did so strategically; others out of necessity.

Limited capital, increasing collateral requirements and a bilateral market with no central clearinghouse create a hostile environment for leveraged positions. The natural outcome is lower trading volumes and a concentration of activity among players with stronger balance sheets and reputational capital.

DEFAULTS, FAILURES AND THE EROSION OF TRUST

The impact of recent bankruptcies cannot be ignored. Gold Energia, 2W Ecobank, América Energia, Máxima and, more recently, Grupo Elétron form a sequence that has shaken trust across the sector. Yet attributing these failures solely to recent volatility would be simplistic.

Much of the problem was seeded years earlier during the rapid expansion of the Free Market. Long-term contracts were signed at aggressively low prices to gain scale, often supported by thin margins and high leverage. These strategies assumed prolonged periods of low prices and abundant credit.

Markets and regulations changed. Contracts turned structurally loss-making, directly affecting generators, traders and commercializers.

When industry executives admit, often anonymously, that “they no longer know who has good credit,” the issue is not lack of information. It is misallocated risk embedded in poorly priced contracts, signed without robust guarantees in a bilateral market lacking central clearing. In this environment, reputation has become as valuable as financial collateral and many players have fallen along the way.

LESS LIQUIDITY, HIGHER PRICES

The pullback in trading has had a direct impact on prices. With less liquidity in the intermediary market and generators choosing to withhold energy to capture higher short-term values, the result is a more expensive and volatile market.

In Brazil’s Southeast/Central-West region, conventional energy is already trading near BRL 355/MWh, with forward curves pointing even higher. Unfavorable hydrology and increased thermal dispatch play a role, but the decisive factor is strategic: those who can afford to wait are holding back supply.

A BRAKE ON ENERGY EXPANSION

The retreat in energy trading is not a sign of weakness in Brazil’s power sector. It is an inevitable correction after years of underpriced contracts, underestimated risks and abrupt changes in market conditions. When risk becomes unintelligible, markets reorganize — as they always do.

But the adjustment goes beyond traders and commercializers. In 2025, Brazil’s electricity regulator ANEEL revoked more than 500 licenses for solar and wind projects — totaling roughly 22 GW many at the request of the developers themselves, who concluded that the projects were no longer viable under current economic and technical conditions.

This wave of cancellations exposed a critical flaw: a significant portion of the planned renewable expansion existed more on paper than in reality, driven by projects that could not withstand curtailment, transmission bottlenecks and the absence of robust risk and compensation mechanisms.

WHO BENEFITS FROM THE CHAOS

Not all generators are struggling. On the contrary, flexible hydroelectric assets with large volumes of uncontracted energy are experiencing one of their strongest periods in years. Companies such as Axia Energia benefit directly from volatility, capturing elevated margins in high-PLD environments.

CURTAILMENT AS A STRUCTURAL ISSUE

For renewable generation, however, the outlook is far less comfortable. Curtailment has shifted from an operational exception to a structural risk. Recurrent cuts approaching a quarter of wind and solar output destroy revenue predictability and undermine projects that once appeared solid on paper.

The surge in license revocations following regulatory changes is no coincidence. It is a direct response to grid constraints, rising implicit regulatory risk and the simple realization that the economics no longer work.

CONSUMERS SEEKING PREDICTABILITY

Faced with elevated and volatile prices, large consumers have begun to look beyond traditional trading structures. Self-production through asset leasing has emerged less as an innovation and more as a defensive strategy.

Cost predictability, long-term supply and reduced exposure to spot prices have become valuable attributes especially for industries with continuous consumption and tight margins.

A STRUCTURAL ADJUSTMENT, NOT AN ACCIDENT

The 37% drop in trading volumes in 2025 is not a passing statistic. It is a symptom of a structural adjustment underway. Large groups are tightening their perimeters, independent traders are seeking more stable niches, and the Free Market is entering a new phase precisely as full market opening is being debated.

The irony is hard to miss: never has so much been said about freedom of choice, and never has risk been so concentrated.

CONCLUSION

The retreat in energy trading is not a sign of fragility in Brazil’s power sector. It is an inevitable correction after years of accelerated growth, underpriced contracts and underestimated risks. When markets can no longer clearly distinguish risk from opportunity, the natural response is to reduce exposure and rethink models.

The lesson is clear: liquidity, expansion and innovation are only sustainable when paired with rigorous risk discipline. Ignoring this equation may work for a while but the bill, sooner or later, always comes due.

WHAT THE RETREAT IN ENERGY TRADING REVEALS ABOUT BRAZIL’S POWER SECTOR