Some Companies Profit as Brazil Struggles to Secure Power

A small group of energy companies in Brazil are increasing revenues at a time when the country is grappling with its worst power crisis in more than a decade, taking advantage of sky-high prices to sell electricity in the spot market.

Power generators that have managed to produce extra energy in recent months or who aren't restricted by long-term supply contracts are being rewarded with prices up to six times higher than the average cost on conventional electricity contracts.

At the same time, distributors that had to resort to the short-term market to fulfill demand increases are facing financial burdens and are being rescued by the government.

The situation underscores the imbalances of the Brazilian power system, which has come under stress because of a prolonged drought. The energy crunch has also become a hot topic in Brazil's presidential race, with the government facing criticism for not ensuring a stable power supply at reasonable prices.

Among those profiting are listed companies controlled by state governments Copel, Cemig and Cesp , along with sugar and ethanol makers that also generate electricity from biomass such as Raizen, the joint-venture between Cosan and Royal Dutch Shell (RYDAF) , and Biosev, controlled by commodities trader Louis Dreyfus.

"Companies that have been able to offer energy in the short-term market are seeing high profitability," said Henrique Leme, director of Dcide, a local energy consultancy.


Power System
Around 70 percent of Brazil's electricity is sold at government-regulated prices under long-term contracts of up to 30 years. The rest exchanges hands at market prices, without government supervision.

When a distributor is short of energy, due to an unexpected surge in demand, it seeks power on the short-term market, called PLD, where prices vary widely depending on the current cost of additional generation.

Historically, that cost has not been much higher than those stipulated in long-term contracts.

Now, with some key hydro power plants nearly depleted after two years of below-average rains, prices are soaring as costly thermal power plants are picking up the slack.

Last May, prices in the short-term market (PLD) reached 822 reais ($360) per megawatt hour (MWh), the highest since the system was set up in 2001.

This week, PLD values were quoted at 711 reais per MWh, while a MWh from a hydro source on long-term contracts runs at 130 reais.

Ceding and Cesp have benefited from a disagreement with the federal government two years ago over the renewal of concessions for some hydro power plants.

They rejected the terms proposed by Brasilia and have to return the facilities to the government by 2015. Until then, they are free to sell the energy they produce in the short-term market.

Cesp increased its first quarter profit by 149 percent against the same period in 2013, buoyed by spot energy sales. In the second quarter, profit jumped 85 percent year-on-year. Cemig's second quarter profit jumped 20 percent.

Copel manages the 484 megawatt Araucaria thermal power plant in the southern state of Parana. The facility had not been awarded a long-term contract in previous auctions and is free to sell on the spot market.

In the first half of the year, the plant alone had revenues of 1 billion reais and a net profit of 244 million reais, boosting Copel's profit in the first half, up 28 percent from the same period in 2013.

"Initially, we expected this facility to operate only two months per year, but we have been running full time since January," said Flávio Chiesa, Araucaria's technical director.


Biomass
Cane mills are also profiting from the energy crunch. Many turn leftover cane waste into energy, a process known as co-generation, and sell the electricity.

This year, they managed to produce additional power, starting operations before the normal crop period, using other types of biomass such as wood waste.

The extra electricity was sold in the lucrative spot market.

"The financial contribution coming from power generation was important for the company," said Marcelo Martins, chief financial officer at Cosan, Brazil's largest producer of sugar, ethanol and power from biomass.

Martins said co-generation was boosted this year, increasing volumes by 10 percent.

Raizen's power sales reached 174 million reais between April and June, up from 97 million reais in the year-earlier period.

According to the Brazilian Sugarcane Industry Association (Unica), power production from biomass increased 28 percent this year up to July, compared with the same period last year.

($1 = 2.28 Brazilian reais)

(By Anna Flávia Rochas and Marcelo Teixeira, Editing by Todd Benson and Marguerita Choy)