Brazil electricity shortage predicted to last 2 years

By the OGJ Online Staff

HOUSTON, June 8, 2001—If electricity consumption in Brazil is not cut by 20% during the second half of the year, sweeping mandatory rolling blackouts will be used to ration power among users, said credit rating agency Fitch IBCA, Duff & Phelps.

The electricity crisis is expected to continue into next year and will negatively impact every participant in the Brazilian economy, analysts said. While Brazilian politicians have proposed assessing stiff financial penalties for not cutting usage and cutting off individual service completely, Fitch analyst Daniel Kastholm says the most "fair" way to ration an electricity shortage and conserve power is through blackouts.

"The crisis will not permanently affect the credit quality of most businesses," he said.

However, the power crisis will slash Brazil's economic growth rate almost in half, he said. Large industrial sectors such as pulp and paper, iron ore, and steel will be minimally affected because these industries have inside the fence cogeneration facilities and back up generation. Economically, sales of Brazilian heavy industry could be negatively impacted, however.

"The impact will depend on how much they sell into the local market. Whether people will be able to consume?" pointed out Kastholm. Fitch just published a new research report 'Brazil's Electricity Shortage: Far Reaching Implications.'

The existence of a shortage of electricity was known by Fitch officials late last year. But the extent and the depth of the crisis was not known until a few months ago, Kastholm conceded.

"The country was living on razor thin margins for years but sufficient rain allowed Brazil to avoid black outs," he said. "There was also underinvestment in generation and mismanagement of the hydro resources."

The reservoir levels were depleted over the last 3 years to produce more electricity. The impact of the shortage will mean distribution company revenues and income will decline by 20%, he said.

Kastholm said the crisis is not a short-term problem and will require substantial investment in transmission and generation. It is likely the same problems will recur next year. The country is 90% dependent on hydroelectric power and needs to diversify its energy mix.

"They have begun to see this," he said. For the latter to occur, generators must be able to pass gas prices through to end users. Kastholm said fuel adjustments clauses common in the US are a foreign concept to countries dependent on hydroelectricity.

However, this week Petrobras said it agreed to absorb the currency risk of natural gas contracts for power generation. Investors considering power generation projects are weighing if that is enough to warrant investment.

But with the political climate shaky about further privatization, some generation companies are abandoning plans to invest in Brazil. AES Corp., Arlington, Va., announced recently that it would suspend investments in Brazil, he noted.

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