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09 Apr 2013

Deep water: Brazil's power struggle

Sergio Monaro

by Sergio Monaro

Head of Project Finance, HSBC Brazil

Hydro power accounts for about two-thirds of the national electricity supply

Hydro power accounts for about two-thirds of the national electricity supply

In 2001 Brazilians were faced with the difficult choice of reducing energy consumption or being cut off completely after droughts threatened their main source of energy in the country – hydroelectric power.

The nation is once again facing a similar problem. Hydro power accounts for about two-thirds of the national electricity supply, but the hydro output is at a record low and relying on the weather each year appears a high-risk strategy for the government.

Securing supplies of cheap and reliable power is vital to Brazil's future and continuing reliance on hydro power has left the country vulnerable to crippling electricity shortages that push up prices and stifle industrial and manufacturing growth.

Operating gas and coal power plants all year can lower the dependence on hydro power. Although this helps supply it creates a pricing problem as it is five times more expensive to produce power with fossil fuels at current prices than with hydro.

Securing supplies of cheap and reliable power is vital to
Brazil’s future

In October 2012 gas-fired thermal plants were switched on to reduce the pressure on the hydro-power system, but because of the higher costs, electricity bills soared, adding to the problem of rising inflation. The price of electricity per kilowatt-hour reached 16 cents, compared to 6 cents in the US, and 7 cents in China.

In January this year, the rates were cut after the government pushed both private and part state-owned companies to reduce bills to alleviate the pressure on businesses and consumers.

The issue of price is intensified in Brazil because the country has many energy-intensive industries such as mining, steel, petrochemical and aluminium producers. It is estimated that electricity accounts for 35 per cent of production costs in the aluminium industry.

But it is not just industry that is affected. Rising incomes mean more families are receiving electricity for the first time and are buying goods such as fridges, televisions, electric showers and washing machines, which all use a lot of electricity.

This demand for power, coupled with the needs of industry, means the government has to consider low-cost energy projects to tackle supply or price problems are likely to continue during dry periods.

Wind power could be one solution and authorities have increasingly been promoting it as an alternative. Wind energy's most productive period in Brazil is during the dry season, when hydro generation is at its weakest. Installation of wind power in Brazil has nearly doubled in two years to about 1,800 megawatts, which is about 1.5 per cent of total capacity. But as in other markets it cannot be considered a sufficient alternative to meet demand.

In July 2012 three wind power parks in the north-eastern city of Brotas de Macaúbas became operational. In January the Barra dos Coqueiros wind farm in the north-eastern state of Sergipe went live. There is clearly scope for further development if renewable energy receives increased backing. However, the security of supply has been problematic because of the remote locations of most farms and power transmission lines have not been deployed at the same speed as wind farms.

There is also potential for the use of shale gas but many of Brazil's shale basins are in remote parts of the country, where the pipelines would have to be built from scratch. Shale exploration is in its infancy and could offer a long-term solution to Brazil's energy problems.

Brazil's challenge is not just to maintain current electricity supply levels but to raise production while at the same time keeping an eye on its much-prized renewable energy credentials. By increasing competition in the energy sector and encouraging the development of gas, wind and solar power, Brazil may safeguard long-term energy supplies without cutting off economic growth.

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