Running dry … the impact of the current hydrological crisis on the Brazilian energy sector

Industry News – June 2021

The Cataratas do Iguaçu, located between Brazil and Argentina are the largest waterfalls in the world and a World Heritage Site. The normal volume of water flowing over the waterfalls is around 1.5 mn liters per second. In June of this year, that flow was down to a mere 310.000 liters per second, 20 percent of the normal level.

Iguaçu waterfalls affected by draught

Even though the drying up of Iguaçu is both a cyclical and a local phenomenon, it is representative of a larger problem. Brazil is not only struggling with Covid, the country is also facing what many call the worst drought in 90 years. While it is not clear what exactly has caused it, many experts agree on three contributing factors – the predominance of La Niña over the Pacific Ocean during 2020 and the first half of 2021, deforestation in the Amazon region, and global warming in general.

The effects are already visible in day-to-day life – prices for many food commodities, like beans, rice, oranges, milk, and coffee have started to rise and newspapers are full of reports on a looming energy crisis and the risk of electricity rationing towards the end of 2021.

The country relies on a vast and complex energy grid – the so-called SIN (Sistema Interligado Nacional) – that interconnects most of its huge territory and provides energy to more than 90% of Brazilians. Hydropower makes up 56% of Brazil’s energy matrix, an output unparalleled by all other energy sources combined. This massive supply chain is centered mainly around vast hydrographical basins, with the largest one located in central and south-eastern Brazil. The Paraná River subsystem, composed of the Paraná River and its tributaries, stretches from Brasília south towards Argentina, has an area of 820.000 km2, and contains 57 large hydroelectric power plants, It is the backbone of Brazilian electricity generation.

ONS (Operador Nacional do Sistema Elétrico), the federal agency that runs the nation-wide energy grid and is responsible for dispatching power plants and securing supply stability has been publishing alarming numbers about the amount of water available in the reservoirs located in the Paraná river basin. In June, the volume of available water has shrunk to 29% of total capacity. This situation feels like a déjà-vu of the past. In 2001 Brazil faced a similar draught which ultimately resulted in compulsory energy rationing. In 2014 the situation was similarly dire. Rationing could be avoided due to the massive dispatching of expensive (and polluting) thermal power plants. However, this came at a price, as Brazilians were to discover in the following years.

Analyses suggest this year’s situation is more severe than in 2001/2014. The predicted falloff might bring the southeast-central subsystem down to less than 10% by late November. At this level, it might be technically unsafe to operate the vast power plants of the Paraná subsystem, as two directors of ONS recently warned in a paper.

Evolution of water levels in hydropower reservoirs in the Southeast/Central Subsystem – 2001, 2014 vs. outlook for 2021

Oscillation of water levels in hydropower plants between humid summertime and dry winter is normal. Water levels dropped sharply during 2001 but came close to recovering entirely during the summer months of 2004-2007. Things were different in the aftermath of the 2014 crisis, though. Many reservoirs never fully recovered, rarely surpassing 50% of total capacity in the following years. The graph below shows the evolution of water levels for the Emborcação hydropower plant, one of the largest power plants in Southeastern Brazil.

Alarmed by recent numbers and by the prospect of an energy crisis impacting the 2022 presidential election, the federal government has scrambled into action. On Monday, June 28, the minister of Mines and Energy went on national TV, assuring Brazilians the national energy system is safe, despite the extraordinary circumstances. However, he also hinted at measures for ‘managing’ consumption of large industrial consumers and encouraged all Brazilians to avoid unnecessary electricity consumption. The following day, ANNEL, the federal regulatory agency of the electricity sector, approved an extraordinary price adjustment. Starting in July, electric utilities are authorized to charge an extra fee resulting in a 5% increase in average electricity prices. The agency also hinted at the possibility of further increases as early as August.

These developments have also triggered the attention of the Brazilian Central Bank. Despite lackluster economic growth during Q1 and Q2, annualized inflation stands at 8,06%, far above the bank’s upper ‘tolerance limit’ of 5,25%. Every 5% increase in electricity prices increases inflation by approximately 0,2%. Consequently, a further increase in electricity prices might contribute to an additional hike in interest rates, which have already risen from 2,0% in 2020 to 4,25% in June of this year.

The federal government hopes it will be able to ‘manage’ the crisis and recently established a specific body – the CRGE (chamber of exceptional rules for hydro energy management). Its purpose is to facilitate coordination between different governmental agencies, implement energy management measures and prevent rationing.

Maybe, Brazilians will be lucky and muddle through this crisis. Maybe, in 2022 rainfalls will be less scarce than this year. However, the truth is that there is no short-term fix to this problem. In a recent interview, Luiz Carlos Ciocchi, director-general of the ONS said that “… it has become clear that we should consider global warming and climate change within our analyses”. Those analyses might lead to a fairly obvious conclusion – instead of building even more hydropower plants, extending the “new market for natural gas”, or building yet another nuclear power plant, the country might consider taking advantage of a resource that is abundant and readily available. It’s called solar energy. It offers excellent complementary to both hydropower and wind generation and can be deployed faster than any other source. In a recent study, BNEF estimated that installed PV capacity might reach 124 GW by 2050 – a tenfold increase of the current installed base. Needless to say that other renewable sources, especially wind power, need to grow as well and that such massive deployment of solar energy will also require significant investments in energy storage. However, for Brazil, it seems like a natural choice to make – a choice that will provide cost-competitive, reliable, and environmentally friendly energy to all Brazilians.

Outlook for Brazil’s generation portfolio in 2050

In hindsight, the 2001 energy crisis was a blessing in disguise. It triggered the privatization of inefficient state-owned companies and created opportunities for biomass, wind, and solar projects. Hopefully, 2021 will yet again serve as a trigger to further modernize the Brazilian electricity sector.

THE AUTHOR: MARKUS VLASITS, FOUNDER AND MANAGING DIRECTOR NEWCHARGE ENERGY

Markus is the managing director of NewCharge Energy, an engineering and project development company, focused on energy storage and PV energy and headquartered in Florianópolis. Markus has a long history in the photovoltaic sector - he was vice president of Q-Cells in Germany, executive director of Yingli Green Energy of Brazil and co-founder and commercial director of Faro Energy, an investment company focused on photovoltaic projects for commercial and industrial clients. He also coordinates the energy storage working group at ABSOLAR, Brazil's leading solar association. He is Austrian and has lived in Brazil since 2012.

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