The Dangers Of Relying On Hydroelectric Power: Brazil's Lesson

BRASILIA, Brazil -- In early January, Brazilian President Dilma Rousseff cut short her end-of-the-year beach vacation and rushed back to Brasilia to lead an emergency meeting.

The reason wasn't a natural disaster or a terrorist attack. But it was still a national emergency.

She headed back to give directions to a government body charged with ensuring adequate supplies of electricity for the world's sixth-largest economy, which needs all the power it can get.

Summer rains, which usually start in December, had been late and light, and the amount of water in reservoirs at the nation’s major hydroelectric dams had reached critically low levels.

Newspapers had already been screaming in headlines that Brazil would have to ration electricity as it had threatened to do in 2001, the last time water at dams had reached such critical levels. Back then, the government told consumers that they would be fined and could have their power cut off if they consumed too much electricity. Panicked Brazilians rushed to buy compact fluorescent light bulbs to replace their inefficient incandescent bulbs.

Brazil gets up to 80 percent of its electricity from hydroelectric dams, which produce no emissions. That makes it one of the greenest countries in the world in terms of environmentally friendly energy generation, but it also leaves it vulnerable to the vagaries of nature. Since 2001, the country has built new thermoelectric power plants, which are supposed to be turned on to take up any slack in the system when hydropower fails. But those plants use expensive fossil fuels and emit huge amounts of greenhouse gases, defeating one of the main reasons to build dams in the first place.

Immediately upon Rousseff's return, the Brazilian government went into damage control, deploying Edson Lobão, the veteran energy minister, to downplay alarmist headlines and assure the nation that there was absolutely no risk of rationing or blackouts. Indeed, thermoelectric plants had been turned on since October, and Petrobras (NYSE:PBR), the state-controlled oil company, reported that it was spending US $10 million a day to import liquefied natural gas to fuel many of the power plants.

The Folha de São Paulo newspaper reported that Petrobras was actually losing money because it had to sell the LNG to power generators at a cost lower than what it was paying on the international market due to contracts it had signed that locked in the price of the gas it sold locally.

Since then, water levels at dams have risen and the immediate threat of power shortages has passed, though many experts warn that Brazil's energy woes are far from over. In 2012, four blackouts plunged vast regions of the country into darkness at one time or another. That, experts say, indicates how bad a job the federal and state governments have done planning for emergencies and failing to invest in the regular maintenance of critical infrastructure.

A Surprise From The President

To top it all off, Rousseff has promised to slash electricity prices, something that would be hard to do in any situation, let alone when that electricity is becoming more scarce.

Yet, in her Independence Day speech to the nation in September, the president vowed to cut electricity prices by 16 percent this year. In part she was responding to an unprecedented ad campaign by Paulo Skaf, the president of the powerful São Paulo Federation of Industries, calling for cheaper electricity.

Brazil has some of the most expensive electricity prices in the world, mainly due to heavy taxes imposed by the federal and local governments. Private dam owners also play a part, claiming that they have to recoup the massive investments needed to build hydropower systems.

Yet Rousseff surprised everyone by addressing the nation again in January and saying that the cut in electricity prices for residential consumers would be even bigger than previously announced, at 18 percent. For industrial users, cuts could reach up to a whopping 32 percent. She called her critics "pessimists."

“It is surprising that since last month some people, who got ahead of themselves, or through disinformation, or for some other reason, made unfounded predictions when the water levels at reservoirs went down and the thermoelectric plants were switched on. These predictions failed,” Rousseff said.

Her leftist administration is no friend of the power producers, private companies that operate through public concessions given by the federal government. Brasilia has pointed out that many of the dams they operate are already 20 to 30 years old, and the cost of building them has been recouped long ago. Most of the concessions are up for renewal between 2015 and 2017, and the federal government has been trying to strong-arm the power producers into accepting lower rates for their electricity.

To make them swallow the pill, the government has thrown in some fiscal incentives, such as forgiving some debts, but that failed to sway regional power producers in the states of São Paulo, Minas Gerais, Paraná and Santa Catarina, controlled by opposition state governments, which have refused the offer.

So how would Rousseff pull off a reduction in prices? By subsidizing them, according to several analysts. The Brazilian Treasury would take the hit, to the tune of R$8.46 billion a year (US$4.23 billion), according to an estimate by the industry regulator, the National Electric Power Agency.

“Dilma has undertaken such a public commitment to cut power rates that even if she can’t find a way to do so, ultimately the government is going to have to subsidize this,” said Roberto Piscitelli, an economics professor at the University of Brasilia. He also pointed out that the money would be recouped from Brazilian consumers in other ways, such as an increase in gasoline prices, which are controlled by the federal government.

Petrobras has already asked for a 7 percent increase in the price of gasoline at the pump this year becaise it has to import oil at higher prices, which is something the government is trying to avoid for fear it will stoke inflation.

Complicating the scenario is Brazil’s extremely disappointing gross domestic product growth of only 1 percent in 2012, which hurt public finances and made it one of the worst-performing economies in Latin America last year.

'A Big Fiasco In Economic Terms'

Then there's the cost of running the thermoelectric power plants, which has reached R$1.6 billion (US$800 million) since October, according to Greenpeace Brazil. That also generated 16 million tons of carbon dioxide, O Globo newspaper reported, citing environmental consultancy WayCarbon's estimate. According to a Brazilian environment ministry official, the carbon emissions from power plants in 2013 would for the first time exceed emissions caused by the deforestation of Brazil's huge Amazon rainforests.

In a surprising shift of policy, the business daily Valor Econômico reported last week that the Brazilian government was going to keep thermoelectric power plants running virtually year-round, shutting them down only for periodic maintenance. This is in sharp contrast to the past practice of only switching them on a few months each year, usually during the dry season when dam reservoir levels dip.

The reason why is reportedly because the government wants to ensure an adequate electricity supply, despite the increased cost and environmental impact. (Greenpeace says the cost of electricity produced by Brazil's thermoelectric plants is almost double the cost per megawatt/hour of solar energy, and five times that of wind power.)

Valor Econômico said the government wants to decrease the amount of electricity generated by dams to 50 percent of total national production, with 30 percent coming from renewable energy sources such as wind and biomass, and the remaining 20 percent coming from thermoelectric plants.

This shift in policy has displeased some experts in the energy field. “The government has lost control by not being able to organize the supply of electricity,” said Ildo Sauer, a professor at the Institute of Electricity and Energy at the University of São Paulo, and a former government energy official. “The use of thermoelectric plants is proof of the failure of this planning. It’s a big fiasco in economic terms.”

Sauer, who is a member of the ruling Workers' Party, believes that if Rousseff insists on pushing through the cut in electricity rates, the Brazilian government will in effect be subsidizing power rates for all Brazilians, rich and poor. “What she’s doing is a crime against the Brazilian people,” he said.

He also believes that the threat of rationing is not over. “We won’t know until the end of April, or early May, if enough rain fell to fill the dam reservoirs, and whether it will be enough to last until the end of the year,” he said. “The threat of rationing is very low, but it is not negligible.”