At the beginning of June, the Brazilian government enforced a power rationing scheme in an attempt to relieve the severe power shortage that the country is experiencing. All power consumers are required to reduce their consumption, and the prospect of a four-day week and blackouts still loom.
The shortage has ostensibly been caused by low rainfall levels that have affected reservoir levels. The rainy season may provide some short-term relief, but the real concern is the long term impact: the rationing may undo the economic progress made by Fernando Henrique Cardoso’s government since the currency crisis.
With reservoir levels at historically low levels, the government has been forced to introduce an incentive-based power rationing programme to conserve resources. For the next few months, consumers must reduce their consumption by 20 per cent. Those that fail to comply will have their supply cut off for several days.
The power rationing has so far been quite successful, according to Jed Bailey, assistant director for power research with CERA’s Latin American energy team. “The public has been very supportive of these types of voluntary restraints,” said Bailey. “But the question is, how long will that last?”
The government has confirmed that there will be no blackouts imposed until August at the earliest, but this may change if consumption rises, or if reservoir levels are depleted faster than was envisaged.
Certainly a prolonged lack of rainfall started the crisis, according to Bailey. Brazil relies on hydropower to meet 92 per cent of its electricity demand, and reservoir levels in the southeast and central west regions are at around 30 per cent of their normal levels.
“One of the deeper reasons is simply a lack of adding enough capacity to serve growing demand,” said Bailey. “This has been a chronic problem in Brazil for many years, particularly since it began its reform process back in 1996.
“A large number of people have proposed projects, but have had difficulty getting them completed due to regulatory concerns and problems with the market structure.”
The power utilities are naturally concerned about the impact that power rationing will have on them, and want the government to clarify who will foot the bill for losses incurred. They have estimated that rationing will cause losses equivalent to 11 per cent of their revenues.
According to credit ratings agency Standard & Poor’s, the rationing will affect utilities’ financial health. These companies have high levels of debt; their debt servicing obligations are backed by future cash flows, and a large percentage of their debts are in US dollars. S&P estimates that power sales will fall by at least ten per cent.
The large industrial power consumers are also being hit hard by the rationing. Many heavy industrial operations have cut their power consumption by 25 per cent.
As a result of this rationing, the government estimates that at least 850 000 jobs and $14.6bn in production will be lost. It has revised its projection of foreign direct investment in the country from $23bn to just $19bn. The country now faces a recession.
The government plans to resolve the situation through a variety of measures. On the demand side, it has introduced an energy certificate trading scheme for industrial users, under which industrials that save more than their allotted quota can sell the saving to others.
The government has also tried to streamline the permitting process for new generators, and development bank BNDES will allocate more resources to power plant development. Cogeneration, mini-hydro and self-generation are being promoted.
The government recently pledged that it would invest $15bn over the next two years to ease the shortage, and expects 70 per cent of this to come from the private sector and foreign investors.
There are several key problems for Brazil in attracting overseas investment, according to Bailey. “What really set this [problem] off was the currency devaluation back in January 1999, which essentially put project finance on hold.”
The currency crisis highlighted some flaws in Brazil’s currency pass-through mechanisms. The majority of natural gas used by thermal power plants is imported from Bolivia and priced in US dollars. Generators are, however, required to sell their power in Brazilian Reals. “That currency exposure was only partially offset by the government’s regulations,” comments Bailey. “There was a partial pass-through of that currency risk, but no mechanism to take care of large fluctuations in currency during the year.”
The government has now introduced legislation to help overcome this currency risk, under which Petrobras covers the currency differences and generators can buy gas from Petrobras in Reals.
There have also been concerns among investors over the lack of progress in privatization, which began in 1996. While the distributors were successfully sold, the privatization of the generators was stalled, and the level of government ownership in generation has created uncertainty. “What we have now is roughly 85 per cent of the distribution market is privatized, while less than 25 per cent of the generation market is in private hands,” noted Bailey.
The power crisis will not be solved quickly. It will take several years for reservoir levels to return to normal, and depending on the level of investment in thermal plants, rationing and conservation measures could still be in place in 2003.
But most importantly, the economic impact of the crisis will run for longer. “The question is, how long and how deep will the rationing be next year, and how much of an impact will this have on future investment?” noted Bailey.