Brazil lacks power shortage plan, risks blackouts

Brazil may be at an increased risk for blackouts this year amid a historic drought and a lack of measures to mitigate power shortages.

Hydropower makes up 65pc of the Brazilian power generation mix but the country is facing the most severe drought in 91 years. There is a high chance of power supply not being able to meet demand in the second half of this year, at the height of the dry season.

But Brazilian energy authorities do not have a plan to address power shortages, such as implementing controlled rolling blackouts, meaning consumers are not being prepared for power rationing. And power sector regulations lack incentives for industrial consumers to lower their use during peak consumption hours.

The added cost for thermal power generation to keep the country's grid stable amid the drought is growing. In 2019 added thermal power cost R1.7bn, in 2020 it increased to R4.3bn, but in the first four months of 2021 it has already topped R5.4bn, according to the power system operator. Those costs are expected to rise further, even for consumers with fixed-price contracts in the open market, since they are added to consumer power costs after they occur, making it difficult for companies to hedge their total power expenses.

Power distribution companies — which supply 70pc of the Brazilian power demand in the captive market — are not planning for rolling blackouts, said Marcos Aurelio Madureira, president of the Brazilian association of electricity distribution companies, Abradee.

"At this moment we do not have any information that leads us to consider any supply restrictions," he said.

The only action distributors are taking at this moment is a campaign warning residential consumers to conserve power in order to avoid unexpected costs.

Distributors fear that the government is not disclosing the true nature of the power sector challenges and thus not allowing distribution companies and industrial consumers to plan for shortages or rationing, according to a source close to the companies. There is also a lack of communication between power companies and government representatives so companies can help develop solutions to avoid shortages or lessen the costs with rolling blackouts, the source said.

The Brazilian government denies that power rationing is being considered, such as asking consumers to reduce power consumption in specific regions — including stopping production in factories during peak hours.

Industrial power consumers are not discussing scheduled shut downs to conserve electricity, nor a shift to using power during off-peak hours, according to the Brazilian association of large power consumers, Abrace, whose list of associates include Vale, GM and Nestle.

Under current regulations, industrial power consumers have no incentive to conserve power. Brazilian industrial activity fell by 4.5pc in 2020 but has recovered somewhat amid the loosening of Covid-19-related restrictions. Despite the rising cost, power consumption is ramping up, with May demand up by 12.4pc from a year prior.

Industrial consumers worry the government will decide on compulsory measures, such as fines for consumption above pre-established limits or rationing schedules, Abrace technical managing director Fillipe Soares said. The group is participating in meetings with the Ministry of Mines and Energy to have input on government plans to avoid shortages. A key focus would be creating a power demand response program, where consumers reduce or shift electricity use during peak periods in response to financial incentives, allowing the system operator to avoid dispatching the most expensive power plants.

The Ministry of Mines and Energy confirmed its technical staff was meeting with Abrace but declined to comment on the nature of the discussions.

By Flávia Pierry