How the water crisis formed and the impact on people and the economy | Companies

After a sharp reduction in consumption last year amidst the pandemic, the electricity sector is now facing a new threat with the lack of rainfall, which jeopardized the main source of energy generation in the Brazilian matrix. The situation worsened as of April and rekindled the fear of blackouts and even energy rationing, 20 years after the 2001 crisis. The issue has been gaining attention, as it represents a risk to the country’s economic recovery.

This week, the Minister of Mines and Energy, Bento Albuquerque, made a statement on national radio and television, urging the population to make efforts to reduce electricity consumption. The folder also approved a new tariff flag, called “Hydric Scarcity”, and launched a program that provides for a bonus to residential consumers who save energy in the coming months.

How did the electricity sector get into this situation?

Brazil has been experiencing its dry period with less rain since 1930. Because of this, the reservoirs of hydroelectric plants, the country’s main source of energy, have remained low. To compensate for the drop in hydroelectric generation, the National System Operator (ONS) activated more expensive thermal plants.

The situation is more critical in the South, Southeast and Midwest, where natural affluent energy (amount of water that reaches hydroelectric plants, in energy unit) has remained below the historical average over the last seven years.

Despite the strong growth of other generation sources in the country in recent years, solar and wind power plants depend on weather conditions to function and may not be available to generate energy in times of high demand. Therefore, it is necessary to have intermittent sources, such as thermals, which can be dispatched at any time.

What is the difference between the current situation and 2001?

Brazil’s energy matrix is ​​now more diversified, which has reduced dependence on a single source. 20 years ago, hydroelectric plants were responsible for around 90% of the country’s energy generation, but since then, the generation park has grown and started to rely on new sources.

Today, hydroelectric power plants generate 63% of Brazilian electricity. The wind source already has an 11% participation in the matrix and the gas thermal ones correspond to around 9%. Brazil also has biomass power plants, photovoltaic solar generation, diesel, oil and coal thermal power plants, in addition to nuclear power plants.

In addition, the country has also expanded the transmission network, which allows for greater exchange of energy between different regions. In 2001, the country had 70 thousand kilometers of transmission lines, an extension that by the end of 2020 had already reached 145,600 kilometers. This allows the excess of wind generation produced in the Northeast in recent months, during the “wind harvest” period, to help supply other regions.

Will Brazil enact an energy rationing program?

Some specialists point out that, in practice, the country is already experiencing a kind of rationing, but due to the price of energy, which discourages consumption. However, the implementation of mandatory rationing, similar to what occurred in 2001, is still ruled out by the Ministry of Mines and Energy (MME).

The PSR consultancy estimates that the need to institute rationing, that is, a compulsory consumption reduction program, is currently around 15%. According to estimates by the president of the consultancy and former president of the Energy Research Company (EPE), Luiz Barroso, if such a program were adopted, the need would be a small relief in the energy load, equivalent to the demand in the South and Southeast of the country by 5%. This represents about 3% of Brazil’s total electricity consumption. “In this scenario, rationing would create a lot of confusion for little need, this volume can be solved by operative maneuvers”, says Barroso.

Can Brazil have a blackout?

The specialists’ major concern is meeting demand during peak consumption times. As the economy recovers from the effects of the pandemic, energy consumption has grown. In July, the most recent data released by the ONS, the load in the National Interconnected System (SIN) grew 3.5% compared to the same month last year.

As a result, fears grew that the demand for energy at peak times would be greater than the supply capacity and, in this case, there could be blackouts. The fear of blackouts comes from the risk of lack of power, as solar and wind power plants may not be available due to low light or the lower volume of wind at some point. According to PSR estimates, the risk of the country facing power problems is 30%.

The ONS points out that the main concern is with the month of November, the month that marks the end of the dry period and the beginning of the rains. “Today we have energy to meet demand, but there is a risk of not having the power to meet a certain peak. There may also be a blackout due to the level of stress to which the hydroelectric plants are subjected”, explains the president of Instituto Acende Brasil, Cláudio Sales.

Could daylight saving time contribute?

Daylight saving time, which ended in 2019, helped to reduce electricity consumption when the greatest use of energy occurred in the early evening. In the past, the greatest demand for electricity occurred when people got home from work — between 6 pm and 8 pm. However, changes in consumption habits in recent years, such as the greater use of air conditioning by the population, made the greatest demand for electricity to be in the mid-afternoon. As a result, the energy savings caused by the time change are no longer significant.

Recently, the government even asked the ONS to update the studies on the adoption of daylight saving time and its impacts on the sector. However, the analyzes again concluded that the contribution of the return of daylight saving time to the reduction in electricity demand would be nil.

What are the main measures taken by the government so far to face the crisis?

The actions began in October 2020, still in the dry period, when the government identified a possible worsening of hydrological conditions. Since then, the country has been dispatching thermal plants for energy guarantee and increasing the import of energy from neighboring countries. More recently, a call was opened for additional generation through non-contracted thermal plants.

On another front, the government started to work on the flexibilization of hydraulic restrictions, such as minimum quotas, studies for the permanence of flexibilization during the wet period and also the adoption of temporary flexibilization.

On the demand management side, two voluntary reduction programs were launched, one aimed at industries and the other at consumers in the captive market.

In the case of industries, the idea is that companies can offer the ONS reductions in energy consumption, reallocating their production to times when the electrical system is less demanded. In return, they receive financial compensation.

For captive consumers, such as residential consumers, the government program provides for the payment of a bonus on the electricity bill for those who reach a goal of reducing consumption. The bonus will be paid to those who reduce consumption by at least 10%, in the sum of consumption from September to December 2021. The bonus amount is R$ 0.50 per kilowatt-hour (kWh) of the total energy saved in this time course.

And for 2022, what is the scenario? Will there be blackout?

Experts avoid making predictions for 2022, as the next rainy season could change the whole game, filling the hydroelectric reservoirs and removing the risks experienced at this time. For now, it is still not possible to have good visibility on the volume of rain for the next season. Regardless of the hydrological scenario, companies already consider that the price of energy will remain higher in 2022.

Parallel to this, the sense of urgency for a reform of the electricity sector model is growing. “It is time to seriously discuss the bill 414 [antigo PLS 232, que trata da modernização do setor]. As these are very complex issues, it is better that Congress gives a vote of confidence in the sector, in what was convergence during the discussion of the public consultation 33 [que lançou as bases para o projeto]”, evaluates Jerson Kelman, former general director of Aneel and first director-president of the National Water Agency (ANA).

What is the impact of the water crisis on companies in the electricity sector?

Among energy companies, those most exposed to the direct effects of the crisis are hydroelectric generators. The lack of rainfall resulted in a worsening of the hydrological risk, or “GSF”, as it is known in the sector. The GSF is the acronym for the deficit between the physical guarantee of hydroelectric plants and the energy actually generated by them. When the GSF increases, generators end up exposed to the short-term market, having to buy energy to honor their contracts at normally higher prices.

Although they are already used to dealing with this type of risk, companies more exposed to water sources saw their second-quarter results worsen, since such a severe shortage of rain was not expected. To mitigate hydrological risk, companies use different strategies.

One of them is the reduction in the contracting of hydro assets — the challenge, in this case, is to find the “optimal point”, balancing losses and gains with the unpredictability of energy price variations. On another front, there is portfolio diversification, focusing on renewable generation or businesses in energy distribution and transmission.

How are energy distributors affected?

These companies may suffer from the crisis because the electricity bill is becoming more expensive due to the activation of the red tariff flag level 2. Recently, Aneel created a new flag, called “Hydric Scarcity”, which will cost R$ 14.20 additional for every 100 kWh consumed, compared to R$ 9.49 in the current red flag 2.

With the increase in costs to consumers, a possible consequence is the increase in defaults in the payment of the electricity bill and even an increase in energy theft, popularly known as “cats”.

What is the impact of the crisis on free market consumers?

Consumers operating in the free energy market, such as industries and large companies, tend to have more predictability because they contract energy directly with the supplier (generator or trader), negotiating prices and contractual terms.

Despite this, several consumers, especially industrial ones, have been concerned about the skyrocketing of system services (ESS) charges. This year, the ESS account had a significant increase due to the need for dispatch from thermoelectric plants outside the order of cost merit. From January to August, the values ​​reached R$8.3 billion, already doubling the figure for the entire year of 2020 (R$4 billion). The topic is on the radar of large industrial consumers, who see an additional cost in the ESS that they had not anticipated.

With the crisis, how were energy prices in the market?

Energy prices in the “spot” market, known by the acronym “PLD”, were pressured. The recent price turn came to bring shocks to the energy trading market. Two trading companies, Brazil and Argon, defaulted on counterparties for not having the backing to honor the contracts signed – Argon even filed for bankruptcy protection. The cases prompted Aneel to accelerate discussions on improvements in the security of free market operations.

Captive consumers, served by energy distributors, should see their electricity bills go up even more as of September, with the new “Hydric Scarcity” banner. To try to ease the budget, the consumer can choose to reduce consumption, participating in the government program that will offer a bonus — membership is voluntary.

For the next few years, experts note that tariff adjustments that were planned ended up being postponed by Aneel. The measure eased the budget of families in the short term, but the bill will arrive at some point.

In this sense, initiatives to alleviate the problem from 2022 onwards begin to emerge. The government determined, for example, that Eletrobras will have to make a contribution of R$ 5 billion in 2022 to the Energy Development Account (CDE).

According to the government itself, the measure faces a “possible tariff pressure in view of the conditions presented by the hydroelectric reservoirs in view of the water scarcity currently experienced by the country”.