Power Shortages Threaten to Halt Brazilis Great Economic Rebirth

By Elizabeth Johnson

Thereis no denying that the news coming out of Brazil in recent months has been extremely positive. The country was recently upgraded to one notch below investment grade by Fitch and Standard & Pooris; demand for Brazilian products abroad is booming; foreign reserves have surpassed external debt; sovereign risk (as measured by the JPMorgan Chase Emerging Markets Bond Index) is at its lowest rate on record; and interest rates are as low as they have been in decades, prompting a boom in local consumption of everything from homes to appliances.

From the outside, it would appear that Brazil is finally on the path to sustainable growth.

The political risks of the past have been overcome and the countryis long tradition of hyper-inflation consigned to the history books. But Brazil is not out of the woods yet.

Perhaps the most serious threat to the countryis virtuous cycle is the lack of sufficient investment in electric energy. Sector specialists have been talking about possible power shortages for over a year. High yields on Brazilian treasury bonds in recent years crowded out the productive sector, particularly infrastructure, which as a result has not received adequate investment.

Last week, Roger Agnelli, chief executive of the Brazilian mining giant Companhia do Vale do Rio Doce (CVRD), discussed his companyis concerns about power supplies and the impact this is having on planned investments.

Agnelli said his company could not plan beyond 2010 because of concerns about energy shortages. He also said that the company would focus on projects that are not energy intensive, which has put a damper on plans to expand projects in the aluminium supply chain in particular. He added that the concerns about energy shortages have forced the company to relocate outside Brazil projects that require large amounts of energy.

Agnelliis comments corroborate a recent study by Instituto Acende, a local think-tank. It found that Brazil faces a high risk of power rationing as early as 2010. The main culprit is lack of investment in new power generation capacity, coupled with limited availability of natural gas to run existing thermoelectric plants during the dry season.

Roughly 85% of Brazilis power generation matrix is hydroelectric, which produces relatively low-cost electricity, but also makes the country vulnerable to drought. Abundant rains in 2006 have ruled out the possibility of power shortages through 2009, but the future will depend on Saint Peter, who Brazilians believe is in charge of managing the countryis rainfall.

In 2001, Saint Peter was not generous, forcing Brazilians to reduce energy consumption by 20% and sending the economy, which had been presenting signs of recovery, into recession.

Publicly, the Lula administration continues to downplay the risks of rationing, but the recent shake-up at the governmentis environmental protection agency (IBAMA) is an indication that the government is deeply concerned. It has good reason to be: at the heart of the problem has been its inability to provide environmental licensing for new hydroelectric capacity.

A case in point has been the large 10,500MW Madeira River hydroelectric project, which the government is banking on to meet future power demand. The administration announced the license would be issued in April, only to have the environmental impact study rejected by IBAMA. Other hydroelectric projects face similar delays.

Private firms have also been reluctant to invest in new capacity because of concerns that even if they receive the necessary licensing, they will be subject to endless lawsuits and protest from activists. Their strength was seen in late May, when a group of activists invaded the control room of the Tucurui dam in the state of Para, demanding compensation for the peoples displaced by the project which was built 20 years ago.

Some progress is being made but the government has been forced to admit energy prices will rise, no matter what. State-owned oil company Petrobras is speeding ahead with plans to import liquefied natural gas (LNG). The first regasification plant is expected to come onstream in 2008 and will supply thermoelectric plants in south- eastern Brazil. But questions remain regarding the price and availability of LNG given the recent surge in global demand.

Brazil is also in the process of expanding co-generation from bagasse, the biomass waste produced from sugar and ethanol, which is not only a renewable source of energy used to fire thermal plants on the mill sites but will provide the sugarcane industry with another source of revenue by selling excess energy back to the grid.

But even with new projects in these areas, Brazil is going to have trouble meeting demand, particularly if economic growth continues to accelerate. This means the regionis virtuous growth cycle may be interrupted by possible energy rationing over the next five years.

Brazilis predicament is not so different from that of other large and fast-growing emerging markets, such as India, which is now facing energy shortages. The good news is that as a result of the concerns expressed by Agnelli and others, serious discussions about future electricity supplies are now finally under way.

But the odds against Brazil being able to avoid repeating the mistakes and crippling electricity shortages of the past remain far from reassuring.

* Elizabeth Johnson is Brazil Editor of Trusted Sources, an analytical service on China, Russia, Brazil and India o www.trustedsources.co.uk

(c) 2007 Sunday Business; London (UK). Provided by ProQuest Information and Learning. All rights Reserved.