Drought-hit Brazil maxes out thermal energy

RIO DE JANEIRO, Jan 17 (Reuters) - Brazil is trying to offset falling water levels at drought-hit hydroelectric reservoirs with more thermoelectric generation, including using pricey fuel oil, but officials deny risks of energy shortages.

Outgoing acting Mines and Energy Minister Nelson Hubner said on Thursday the Cuiaba gas-fired plant, which stopped working last September after Bolivia reduced natural gas supplies, will go back on line, now running on fuel oil.

Cuiaba is owned by Shell (RDSa.L) and Ashmore Energy. In addition, the ministry authorized on Thursday the construction of three new plants that will use costly fuel oil and one that will consume sugar cane bagasse to produce electricity.

"There is no risk (of shortages), but water reservoirs in the northeast are very low and the Electricity Sector Monitoring Committee decided to keep all thermoelectric plants already working on-stream and add a bit more," Hubner said.

Hubner is to be replaced as minister by Sen. Edison Lobao, whom President Luiz Inacio Lula da Silva appointed on Wednesday.

Hubner has been serving as the interim minister since his predecessor, Silas Rondeau, resigned in May over corruption allegations.

The government also ordered the state energy company Petrobras (PETR4.SA)(PBR.N) to substitute natural gas used at its own installations like refineries and oil platforms for other materials, such as naphtha and oil, to free up more gas for power plants to generate an additional 750 megawatts of electricity.

Hubner said he was optimistic rains would help refill reservoirs in the coming days. In that case, Brazil could turn off some high-cost thermoelectric plants next month, running only those with lower costs to help avoid problems next year.

The newly appointed minister, a politician and a former journalist with no technical experience, will be taking over the sector at an uneasy moment.

Last week, the chief of Brazil's power sector regulator Aneel, Jerson Kelman, cautioned that he could not rule out Latin America's largest country facing energy rationing this year, although such a scenario was unlikely.

Sector analysts have long warned of potential power shortages starting in 2009, but unusually dry weather in the industrial southeast and in northeastern Brazil brought such a possibility closer.

Short-term energy prices in the non-regulated part of the power market soared in the past few weeks, reaching levels nearly 20 times higher than a year ago.

But other government officials, including President Lula, say Brazil is safe energy-wise and will not need rationing.

The installed power generation capacity of about 90,000 megawatts has grown little since the country's last drought-triggered power rationing in 2001-2002, which then crippled the economy and seriously affected power companies.

But there are more transmission lines now, which can send power from regions with damper climate to drought-hit areas.

Brazil relies on hydroelectric plants for about 85 percent of its energy, and has more than 20 thermoelectric plants, mostly gas-fired, that are switched on to balance out demand when water reservoirs run low during the dry season. (Reporting by Denise Luna and Andrei Khalip; Editing by Walter Bagley)