(Bloomberg) -- A worsening drought across Brazil that has stoked record wildfires and withered crops now threatens the country’s power supply, raising the risk of higher prices and blackouts in South America’s largest economy.
Hydroelectric plants supply more than half of Brazil’s power, typically at low cost. But the reservoirs that feed those plants are shrinking in the drought. Dams in Brazil’s Southeast-Midwest region are at an average of 57% of total capacity, according to the country’s power grid operator, known as ONS. That’s down from 68% in June. A year ago they were above 78%.
“The situation is serious,” said Ana Paula Ferme, head of utilities at Thymos Energia, an energy consultancy in Sao Paulo. “The impacts range from energy supply risks to inflation, requiring coordinated actions to mitigate consequences.”
In response, the country may need to rely on power plants burning coal, natural gas, diesel and biomass to prevent shortages. But their electricity is more expensive than hydropower, potentially hurting Brazil’s economy, said Juliana Inhasz, an economics professor at the Insper Institute of Education and Research. “It could be a bucket of cold water on the government’s expectations and a counterpoint to what we are seeing in economics estimates,” she said in an interview.
The drought has already taken a financial toll. Brazil is the world’s top producer of coffee beans, and Arabica coffee futures have increased over concerns about the harvest. Sugar-cane fields have burned, with the impact likely lasting into next year. Grain shipment companies have warned about the possibility of bottlenecks due to low river levels.
The environmental damage has been even more alarming. A record number of fires have struck Sao Paulo, Brazil’s wealthiest state, while other blazes have scorched portions the Amazon rainforest and the Pantanal wetland. The cities of Bauru and Piracicaba face water rationing.
All fossil-fuel power plants in Brazil have been notified since July to prepare for more intense use in the second half of the year. The government is also in talks with Paraguay to temporarily raise the water level at the Itaipu Dam on the border between the two countries to increase its electric output, the Ministry of Mines and Energy said in a statement.
Industries are being paid by the government to reduce electricity use during peak hours through auctions organized by ONS, according to Victor Iocca, director at Abrace, an association that represents large energy consumers. Companies offer to cut their consumption at a specific time for a certain price, and ONS decides the best option between the companies’ bids and the use of thermal power plants.
Either way, Brazil’s energy prices are set to increase this year, adding to inflation in an economy reliant on cheap hydroelectricity. Caio Megale, chief economist at investment management firm XP Inc., said in an interview that his company’s current inflation estimate for the year — 4.4% — could climb to 4.5% as power prices rise.
Southeastern Brazil — where the consumer market is concentrated — is also exposed to electricity supply risks, according to Iocca. That’s particularly true during the last hours of the day, when solar power is no longer available. It could severely test the power grid in October and November, when temperatures are high, and people keep their air conditioners running into the evening, Iocca said. “That’s when there is some risk of a blackout,” he said.
The situation could have been worse. Brazil is still benefiting from a strong rainy season in late 2022 and early 2023, which boosted reservoir water levels, Iocca said. The country will probably be able to get through the rest of this year without major blackouts, he said. But if the next rain season starting in October is not favorable, the system might get even tighter next year.
“ONS’s outlook indicates the possibility of critical levels in some reservoirs, if the drought persists and the rainfall pattern does not improve significantly in the coming months,” said Thymos’ Ferme.
--With assistance from Dayanne Sousa.
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