Viewpoint: 2022 Brazil to struggle with power prices

Brazil's hydropower water reservoirs will start 2022 barely changed from a year earlier as the worst power crisis in the country in 91 years continues, furthering dependence on higher-cost generation.

Reservoirs will start the new year at 26pc full, compared with 25pc in January 2021.

The mostly hydro-powered country — with around 56pc of its generation relying on water — will continue to rely heavily on costly thermoelectric generation, after contracting 1.2GW to be supplied between May 2022 and December 2025, during its October emergency power auction.

The auction, for power coming on line from May 2022 to December 2025, topped the total current spent on reserve power contracted in auctions since 2008 — with R11.7bn ($2bn) to be paid annually to generators by both regulated and bi-lateral market consumers under duties charged monthly ex-post. For the 12 months through August, payments to reserve power generators from auctions since 2008 totaled about R7.4bn.

With low reservoirs levels expected for January 2022, costs to power consumers will be no less hefty in the new year.

An adjustment to the highly criticized power calculated spot price (PLD) is expected next year that would make it more compatible with the system's realities by taking the reservoirs' short-term situation more into account and establishing shorter-term water storage goals. This may increase the price to help the grid operator conserve more water in storage, aiming at reaching November 2022 with a 20pc water level.

The country will also have to start paying for the costs incurred to maintain supply through this year and 2020, after distributors took loans to maintain distribution to unemployed consumers during the pandemic and to enable the usage of thermoelectric power plants.

The power crisis left a series of structural issues in the Brazilian electricity market open wide, that will still be exposed in 2022. From the necessity of a better energy/capacity balance in generation — leading to the introduction of a new type of power auction in the country during 2021 — to problems with risk allocation, badly distributed surcharges, and inadequate price calculation.

To avoid a blackout after grid operator ONS predicted a 2GW shortage for November, the government had to take a series of emergency measures that made energy more expensive this year and will continue to influence prices in 2022. Among these measures are the emergency power auction that contracted LNG-to-wire thermal powerplants, elevating power costs up to R2,500/MWh. The country also relied on importing power from Argentina and Uruguay, launching buy-back and energy saving programs and authorizing the use of high-cost merchant thermoelectric plants, such as Uruguaiana and Willian Arjona.

In Brazil, hydrogeneration is key for lower power prices and system stability. Starting 2022 with low stocks will translate into heightened concerns for consumers and authorities in the power sector in the new year.

By Rebecca Gompertz