Brazil's hydropower is at risk due to the drying of river basins
Data collected by London Stock Exchange Group show that soil moisture in Brazil's major river basins for hydropower production has dropped to a level not seen since the early 1990s. This means that a severe drought could continue even when rains come back.
The tropical rains that feed Brazil's vast river network allow hydropower plants generate two-thirds of Brazil’s electricity. But years of low rainfall have hurt this sector, driving up energy prices and fueling inflation. This has led economists forecasting a new round of interest rate increases.
Analysts warn, even if the seasonal rains do arrive as predicted next month, it may take longer for hydroelectric reservoirs to fill up because of so much moisture being absorbed by soil.
Large parts of the capacity in this sector are derived from hydroelectric basins Paranaiba Grande and Tocantins that stretch across northeast, central-west, and north Brazil. LSEG data show that they have reached the lowest soil moisture level for September since 2005.
Claudio Vallejos is an LSEG analyst who said that the parched soil was a result of a decade in which only one year had rainfall above the average.
He said that the soil acts as a sort of memory for the rains. The moisture levels reflect the bad history.
The current drought has had a major impact on run-of the-river generators. This includes the partial closure of Santo Antonio, one of Brazil's largest plants, which is dependent on the Madeira River.
The Brazilian grid operator ONS struggled with the operation of the system during peak loads, resulting in the activation expensive thermoelectric plants over the past few months.
Ons has capped the amount of power that it can take from these generators due to transmission bottlenecks.
These energy sources allowed Brazil to reduce its dependence on hydropower and draw reservoirs more slowly than during previous droughts. The reservoirs at Brazil's hydropower dams have a capacity of 53%, which is well above that in the water crisis of 2021 when the levels reached 16%.
Vallejos, however, said that the data on soil moisture reflects Brazil’s precarious position. This is especially true if we have another dry year in Brazil next year.
He said that "the reservoirs store energy but the soil in the basins is what collects rain and brings it to the reservoir."
Alexandre Nascimento is the managing partner of Nottus Meteorologia. He says that seasonal rains will arrive by the end of the month but may not be widespread until the second half.
He said that before things get better, they're going to be a lot worse. "We are still experiencing extremely high temperatures, and low relative humidity. This is accelerating the depletion of reservoirs."
Sergio Romani is the chief executive of Genial Energy. The company is a power generator and trader. He said that electricity prices would remain high until there are abundant rains.
He said that the baseline scenario was for prices to become a bit more stressed in the fourth quarter.
Romani noted that the metrics for potential energy from the September rains had reached a record low. "It's frightening. "I've never seen anything like that happen in Brazil's electric system."
Genial Energy predicts that Brazilians are likely to continue paying top "red flag" power rates until the end of this year, in its baseline scenario.
Warren Rena, an independent broker in the area, predicts that high rates of electricity will only last until October. Then, the yellow flag rates will be cheaper for the remainder of the year. Warren Rena estimates that if the year ends at'red-flag' rates, it could add 14 to 32 basis point to its inflation forecast for 2024.
Banco Daycoval also predicted that 12-month inflation would end up around 30 basis point higher if electricity rates remained at "red flag" levels rather than falling to the lowest "green flag" tariffs by December. (Reporting and writing by Leticia fucuchima, edited by Brad Haynes, Diane Craft and Stefanie Eschenbacher)
(source: Reuters)
