Brazil in Hot Water

The recent blackouts have focused minds on Brazil’s rapidly growing need for power. Here, we look at the many challenges ahead.

Brazil is in many ways a country to watch. Not only will it be the host to two major sporting events in the coming years, but major oil discoveries, coupled with the country’s extensive use of biofuels, suggest that it may soon see a dramatic increase in its wealth, with expectations that it will soon become the world’s fifth most prosperous nation, up from its current position at number eight. There will be challenges, such as the danger of the “oil curse” in which oil earnings inflate the value of a nation’s currency, making its other economic activities less competitive on the world stage. To some extent, an early form of this phenomenon is happening already, as witnessed by recent efforts to reduce the tide of foreign investment entering the country to a more manageable level.

On the flip-side, Brazil’s politicians, business leaders and financiers are and will continue to be faced with the problem of growing the country’s infrastructure as prosperity and population rise. In the power sector, the matter is compounded by the sheer scale of the Brazilian territory, which covers an impressive 8.51mkm². This has contributed to a situation in which 20m Brazilians living in remote communities do so in the absence of a reliable electricity supply.

As recently pointed out by Mauro Storino, a Fitch Ratings director, more investment in Brazil’s power sector is desperately needed given that the nation’s GDP growth has outstripped any increases in its generating capacity since 2005, while electricity consumption has risen by 52.9 per cent since 1995, compared to just 45.6 per cent for GDP growth over the same period. However, there is a concerted effort by the central government to address this issue in the form of the Accelerated Growth Programme (PAC) which, in the wake of the financial crisis of 2008, has turned into a key part of the government’s economic stimulus package. It will oversee BRL65.9bn (US$37.66bn) in investment in Brazil’s power sector over the course of 2010.

Figure 1: Brazil’ s conventional thermal energy mix by type (2007). Source: Ministry of Mines and Energy

Current demand

According to the latest data available from the Power Research Corp, Brazilian electricity consumption in October was the highest seen since December 2008, suggesting that an economic recovery may be in progress. However, at 33,722GWh, it is still down 1.1 per cent compared to October 2008 and 1.8 per cent down on the 12 months to October. In the first 10 months of the year, residential and commercial demand increased by 5.8 and 5.3 per cent, respectively, while industrial consumption fell back by 9.9 per cent. As a result, electricity consumption in 2009 breaks down to 42.5 per cent for the residential and commercial sectors and 42.9 per cent for industry.

Water: powering Brazil’s economy

Hydropower vastly predominates in terms of Brazil’s power generation mix, thanks to a large extent to the colossal 14GW US$17.5bn Itaipu hydroelectric dam on the Panama river. In 2008, it produced enough electricity to meet the entire world’s requirements for two days. The dam’s output is shared equally between Brazil and Paraguay, but the latter sells most of its power back to Brazil’s Electrobras, due to the lack of domestic demand. An agreement signed in the summer of 2009 will completely free Paraguay from its obligation to sell to Electrobras by 2023, allowing it to potentially sell at a higher price to private Brazilian utilities. Fortunately for Brazil as a whole, 2008 witnessed higher than normal winter rains, thanks to an El Niño effect. As a result, as of August 31, 2009, hydro dam reservoirs were 7-39 per cent fuller than in the previous year.

Hydropower accounts for over 85 per cent of Brazil’s generating capacity

This is not the end of the story. Brazil is benefiting from its neighbours and their drive towards new hydropower capacity. The most recent example of this trend is the proposed 800MW plant in Guyana, which is expected to begin construction in 2010, with a view to also supplying the north of Brazil by 2015. In addition, Brazil currently buys electricity from Venezuela’s Guri dam complex and a consortium of Brazilian companies led by Electrobras, are planning to build of 15 hydropower plants in Peru with a total capacity of 15,000-20,000MW. The first five are expected to come online in 2015 at a total projected cost of US$15bn. Financing will be partially provided by the Brazilian state development bank, BNDES. However, the projects appear to be moving slowly, partly as a result of security problems within the region and the sensitive issue of Inca relics. In addition, the Peruvian Amazon, where all of the projects will be situated, has seen considerable unrest as a result of oil and other development licences being granted at sites too close to indigenous communities.

Closer to home, GDF Suez SA, though its majority stake in Energia Sustentável do Brasil, a consortium that includes Brazilian construction firm Camargo Corrêa, is looking to build a 3450MW dam at Jirau, on the Maderia river in he state of Rondonia, at an expected cost of US$7.2bn. However, it has encountered resistance from local public officials.
As far as smaller and less contentious projects are concerned, ANEEL, the country’s national electricity agency and regulator, estimates that 1108MW of new hydropower capacity came online without any issues in 2009, with another 1357MW of projects either also being commissioned or delayed as a result of specific hurdles, while 99MW in the form of small projects faced “grave hurdles”