Brazil: Rousseff’s water torture

By:
Rob Dwyer
Published on:

A lack of rain to fill the dams that power Brazil is becoming a potential crisis. But as experts call for action to protect dwindling reservoirs the government refuses to act, and running the hydrology risk is becoming increasingly dangerous for it.

The chances of a recession in Brazil in 2015 are rising: the country is experiencing a water shortage and the government – which faces an increasingly tight election in October – is in denial. Some leading private-sector consultancies say the chance that the government will be forced to ration power is close to 50%.

And the longer the wait for rationing, the more severe the action will need to be should it be required. Investment banks’ models – based on the last time rationing was implemented, in 2001 – point to a possible energy-deficit blow to 2015 GDP that would push the country into a recession and a stagflationary spiral. Foreign direct investment would collapse, leading the exchange rate to plunge – by as much as 33%, according to an HSBC projection – creating financial losses for companies, investors and speculators alike.

Already, the drought in the southeastern and centre-western regions of Brazil is beginning to have an impact on the country’s current weak GDP growth. The modest expectations for 1.7% GDP growth in 2014 of the 100 economists surveyed by the Brazilian central bank look likely to be missed as some large industrial users begin to take profits from selling back energy allocations to the grid and scaling back production.

Dilma Rousseff, Brazil, president
However, the real concerns focus on the potential impact to growth next year. The government has boxed itself into a political corner and is refusing to heed the increasingly numerous and urgent calls for power rationing to be introduced immediately.

Failure to bring in rationing until the beginning of the rainy season (in November, which is not entirely coincidentally after the presidential elections in October) will lead to more severe rationing measures being introduced should mandatory reductions in energy usage be needed. Private-sector consultancies predict that the likelihood of rationing is growing rapidly, and in mid-May hit 46% according to PSR, one of the most respected consultancies in the energy sector. Rio de Janeiro Federal University’s Engineering Research Institute has already recommended reduction in energy consumption of between 5% and 10%.

Brazil relies on hydroelectric power. Water is the basis for about 68% of the current energy matrix. The southeast and centre-west produce 75% of this hydroelectric power; they are the regions suffering worst from the drought. The country’s reservoirs entered 2014 at levels (40%) within the normal range of recent history, but a very hot and dry summer has led to a fall in the levels of almost 10 percentage points at the start of the year.

As Brazil entered its dry season at the beginning of May, the levels in the southeastern and centre-western reservoirs were uncomfortably low, at 38% and close to the levels of 2001, the last time water rationing was implemented in Brazil. Some reservoirs are already at critical levels: for example Furnas, a hydroelectric dam in Minas Gerais, was at 29% at the beginning of the dry season, compared with 72% last year and 18% in 2001.

No one really knows what will happen to the hydro turbines if reservoir levels drop below 15%; sand and mud will likely have an impact on their effectiveness. As Morgan Stanley summarizes the situation: "The minimum levels of reservoirs that the government would accept is unknown. In fact, there is no consensus from sector specialists on what is the minimum level at which the system could keep operating. At 15% levels, the operational efficiency of plants would drop materially and there could be operational issues, exposing the system to the risk of collapse."

An HSBC report already sees worrying signs of systemic weakness: "Blackouts have already occurred in several cities in the country, including major cities like São Paulo, Rio and Brasilia during February, due to the automatic disconnection of transmission substations – a sign, in our view, that the system is overloaded and stretched."

Models from respected consultancies such as Thymos Energia point to the 15% threshold being breached in October if the country receives 80% of its long-term average (LTA) rainfall in its dry season. If rainfall is just 70%, the threshold will be breached in September. These are distinct possibilities: according to PSR, rainfall in the first half of the month was 79% of normal levels and ONS (the operator of Brazil’s national grid) predicts 70% for the month as a whole.

Rainfall is notoriously difficult to predict outside the short-term forecast, which is for more dry weather. The critical factor is the level of water in the reservoirs as Brazil reaches the rainy season. "Many experts have said the water could be as low as 15% by the end of November – that is critical," says Jose Soares, vice-president at Moody’s in São Paulo.

Another expert’s assessment is starker: "Even with a normal dry season we will have reservoir levels at between 15% and 25% at the start of the rainy season, which is very close for comfort. Rain by year-end is the most important thing. We need to pray."