Oil Report

Brazil at risk of energy rationing from 2010-study

SAO PAULO, April 13 (Reuters) - Brazil’s economy is at high risk of energy rationing as early as 2010 because of a shortage of natural gas, even though abundant rainfall has filled its hydroelectric dams, sector consultants Instituto Acende said.

A drought in Brazil's southeast forced energy rationing in 2001 that restricted consumption by 20 percent and cast the economy into a recession. Energy companies such as the local unit of U.S.-based AES Corp. AES.N are only now returning to profitability.

“Our study is not intended to be alarmist but rather to alert the government of potential risks and to suggest preventive measures that can help avert these risks,” Acende President Claudio Sales told a news conference on Friday.

After discovering a shortage of natural gas in Brazil in late 2006, the Brazilian government had to remove more than 2,000 megawatts worth of gas-fired electric plants from the national system of emergency reserve thermal generation capacity.

These plants come on-line at times when demand for electric energy is at risk of exceeding supply.

Around 85 percent of Brazil’s electric energy generation is hydroelectric, and water levels in dam reservoirs fall every year during the dry season. It is common for these thermal plants to come on-line during these periods.

Fortunately, Brazil’s hydroelectric reservoirs are literally overflowing after heavy rains in the southeast in December and January, said Acende analyst Mario Veiga Pereira. This will guarantee minimal risk of rationing through 2009.

But the lack of the emergency thermal plants and sufficient new generation capacity coming on line, demand will slowly drain the reservoirs over the next few years to critical levels.

“It’s important that the government know it has to act now to avoid having to make a ‘Sophie’s Choice’ later, where all options are terrible,” Veiga Pereira said, referring to the 1979 novel by William Styron.

The Acende study showed that some government officials were downplaying the risks of energy rationing because they failed to account for the industry’s need to take preventive rationing before dam reservoirs became too low.

Veiga Pereira said that some government officials were confusing the risk of energy shortages with the risk of having to implement preventive energy rationing.

The risk of the latter is much higher than the former because curbing demand early on in a more conservative way in times of shortage has less negative impact on the economy and society than waiting until “the last drop of water is gone from the reservoir,” Veiga Pereira said.

The Acende study showed that the risk of rationing was 5 percent in 2009, a level that is widely seen as acceptable. But risks rise to a relatively high 8 percent and 14 percent in 2010 and 2011, respectively.

“This is under conservative models where economic growth does not exceed forecasts and new generation projects are not delayed,” Sales said.

The risks of rationing rise as high as 23.5 percent and 30 percent in 2010 and 2011 if both the economy grows above 5 percent a year and the arrival on-line of some generation projects is delayed, as is commonly the case -- mainly due to long delays with obtaining environmental licenses.

The government is even considering a bill that would remove the environmental license requirement for “projects of national interest,” according to the power sector regulator, Aneel.