Renewables Crisis: Brazil Scrambles To Avoid Blackouts As Energy Costs Soar

  • Date: 25/03/14
  • Jeb Blount, Reuters

Brazil is fighting against time to avoid crippling power blackouts and electricity rationing as a drought prevents the world’s most water-rich nation from recharging its hydroelectric dams. Without the new gas, coal and oil capacity built since 2002, Brazil would already be turning off the lights.

A decade of growth has diversified the electricity system away from hydropower, but policymakers, industrial companies and investors in the world’s seventh-largest economy may find little cause to relax.

Rio de Janeiro-based energy consultancy PSR puts the odds of rationing at nearly 1 in 4.

“Rationing or not, the drought’s impact on Brazil will be large,” said PSR Director Jose Rosenblatt. “There’s no way to avoid it.”

Hydro reservoirs, which generate two-thirds of Brazil’s power, are at near-record lows. To keep the lights on and factories open, all of the country’s main thermal power plants are running full throttle as an estimated 600,000 visitors prepare to arrive for the June start of the soccer World Cup.

The situation is already testing the government of President Dilma Rousseff as October’s presidential election nears.

The risks of rationing and costs associated with the drought threaten growth and investment in the country, Standard & Poor’s said on Monday when it downgraded the credit rating on Brazil’s foreign currency debt.

The administration said on March 13 that it will cost 12 billion reais ($5.2 billion) in 2014 to rescue utilities forced to pay record-high prices to replace cheap hydro with more-expensive power from natural gas, coal and oil plants.

That will probably drive up inflation this year and next. At nearly 6 percent, the rate is close to the top of the government’s target band. If the 2001-2002 drought is any guide, Brazil’s expected 1.7 percent 2014 growth rate could fall to 1 percent or less, according to Brazilian bank BTG Pactual SA.

Rationing, the bank says, is the worst option, but higher power prices for a steel mill or mine would cut corporate profit almost as surely as assembly lines or shops shut by rationing.

For Rousseff, even more is at stake. Without rain, her re-election chances may narrow despite a strong early lead in polls.

“The credibility of the government rests on Rousseff’s handling of the drought,” said Guilherme Schmidt, an energy industry lawyer and partner at L.O. Baptista in Rio de Janeiro “For Rousseff, this is personal.”

The government blames the problem on “Sao Pedro”, which is Portuguese for St. Peter, the heavenly agent Brazilians associate with rain. But many analysts say the problem has as much to do with government policy as it does with precipitation.

“Rain is a factor, but not the only one,” said Joao Carlos Mello, president of Sao Paulo energy consultancy Thymos Energia. “It’s also failed policies and poor management.”

THE ENERGY PRESIDENT

Since the 2001-2002 crisis, energy policy has been a major issue for the government, and no major Brazilian politician is more linked to the issue than Rousseff.

The last crisis forced the government to order consumers to cut electricity use by 20 percent or face blackouts. Anger at rationing helped Rousseff’s predecessor, Luiz Inacio Lula da Silva, win the first of two terms as president.

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