Ghosts of 2001: Brazil worries about another energy crisis

Wed Jan 9, 2013 12:23pm EST

* 2001 energy crisis shaved up to a point off GDP

* Severe drought revives fears history could repeat

* Today's power grid more diverse, but economy has grown

By Anthony Boadle

BRASILIA, Jan 9 (Reuters) - Brazil looks less vulnerable today to an energy crisis similar to one in 2001 that cut output at factories, lopped about a percentage point off economic growth, and led millions of people to spend their nights by candlelight.

Still, the risk of a major disruption remains - in part because the South American economic powerhouse has grown so much since then.

Twelve years ago, Brazil experienced a severe drought that reduced water levels at hydroelectric dams - just as is happening today. The solution then was to ration energy supplies for eight months, in large part because the nation relied on such dams for 88 percent of generating capacity.

Residential and industrial consumers were forced to cut back their power usage by a fifth. Brazilians learned to conserve energy, street lights were dimmed, and the then-president even ordered the exterior lights and refrigerators switched off at the presidential palace.

The solution to that crisis helps explain why Brazil looks somewhat less vulnerable now. In ensuing years, the government built dozens of thermoelectric power plants mostly fired by natural gas, expanding its generating capacity by 10,000 MW. That means hydroelectric dams now account for about two-thirds of electricity - making droughts less threatening.

Brazil's stock market broke three days of declines on Wednesday and rose 0.5 percent by early afternoon after government officials dismissed any comparisons with the 2001 crisis, and pacified investors by offering more specifics about their response to the current dilemma.

For example, a senior official told Reuters late Tuesday there was no change to President Dilma Rousseff's plan for a 20 percent cut in electricity rates this year - which many analysts have said is in grave risk because of the drought.

"We are looking at no other option than a 20 percent cut in rates," Treasury Secretary Arno Augustin said in an interview. He said the lower energy costs would trim inflation by more than half a percentage point this year - a rosier forecast than many independent analysts have made.

Despite such guarantees, worries remain that the current crisis could still trip up Brazil's economy, which has already struggled to grow for the past two years.

The main reason for concern is the economy's boom over the past decade, which saw electricity consumption grow by 40 percent under former President Luiz Inacio Lula da Silva.

The expansion pulled 30 million people from poverty and into the consumer market for household goods such as fridges, TVs and air conditioners - all of which consume large amounts of power.

Rousseff was Lula's first energy minister, charged with making sure that Brazil would never have to ration electricity again. She restructured the energy sector and pushed ahead with the building more hydroelectric dams which has not made her popular with environmentalists.

Due to environmental concerns, Brazil's new dams have smaller reservoirs to reduce the impact of flooding. That has made the new reservoirs more vulnerable to lower rainfall.

WAITING FOR RAIN

A hot, dry summer, coupled with the worst drought in decades in the poorer northeast of Brazil, has shown up the vulnerable side of the country's energy system, raising the risk of rationing again if it does not rain soon.

The budding energy crisis has already pushed up electricity prices on the spot market and forced Brazil to import more liquefied natural gas to fuel more costly gas-fired generators that are running at full capacity and producing 25 percent of the national grid's electricity.

Too much use of expensive LNG could undermine Rousseff's efforts to curb inflation.

Her government is insisting that rationing is not on the cards. Mauricio Tolmasquim, head of the energy research agency EPE, said Brazil's electrical grid is much stronger than in 2001 and guaranteed there would be no rationing.

"Today the situation is structurally different," he told reporters on Tuesday.

Brazil's generating capacity expanded by 75 percent between 2001 and 2012, and thermal power generation increased by 150 percent, Tolmasquim said.

He said Brazil still has a reserve back-up of 1,000 MW in thermoelectric generating capacity, including 640 MW at the gas-fired plant in Uruguaiana on the border with Argentina.

But firing up that plant depends on restoring Argentine gas pipeline supplies from Bahia Blanca, cut off in 2009. And Argentina is short of gas and having trouble importing LNG.