Brazil power costs surge amid dry spell

Brazil’s electricity rates are likely to remain elevated in the coming months as drier conditions hamper hydroelectric power generation, local experts said.

The country’s energy regulator Aneel has activated the red tariff flag (level 1) for June, signaling higher electricity costs for consumers. This means that electricity bills will include an additional charge of 4.46 reais (about $0.78) for every 100 kilowatt-hours (kWh) consumed.

The agency stated that, given the scenario of below-average inflows across the country, a reduction in hydroelectric generation is projected compared to May. As a result, more expensive thermoelectric plants will need to be activated to meet demand, increasing overall generation costs.

When hydroelectric plants operate at high capacity, Aneel activates the green flag. But when water availability decreases, the agency may switch to the yellow or red flags, leading to higher electricity rates for consumers.

In May, Aneel switched to the yellow flag after five consecutive months under the green flag. The shift comes as Brazil transitions out of its rainy season, which typically spans December through March in the southeast, home to the country's largest hydroelectric reservoirs.

According to Brazil’s national grid operator ONS, the estimated natural inflow energy – the volume of water naturally flowing into hydro reservoirs – is expected to remain below the long-term average in all regions for June. 

The south, meanwhile, is projected to reach 86% of the long-term average, the southeast-center-west 75%, the north 57% and the northeast 29%.

Despite the decline in inflows, energy storage levels remain relatively strong in most regions. By the end of June, reservoir levels are expected to reach 99.1% in the north, 67% in the northeast, 66.8% in the southeast-center-west and 48.5% in the south.

Mayra Guimarães, prices and market studies director at Thymos Energia, projects red flag level 2 in July and August, red flag level 1 in September and October and a return to the yellow flag in November and December. 

"For now, we haven't identified any risks to energy supply in the national interconnected system [SIN]. Although rainfall during the wet season was below the historical average, reservoirs closed the month of May with storage levels close to 70%," she told BNamericas.

Fernando Borborema, energy studies manager at the Delta Energia group, said the red rate flag is likely to remain in place in July, August and September, driven mainly by the low generation scaling factor (GSF), a measure of hydrological risk. 

"A low GSF increases the likelihood of the rate flag being red or even red level II, even if the PLD drops," he said, referring to the Settlement Price for Differences, the main price benchmark in Brazil’s free power market.

Borborema also dismissed any immediate risk of energy shortages. 

"While additional thermal generation may be required during heat waves, there is no risk of failing to meet system demand," he said.

According to Alan Henn, CEO of Voltera and an electrical engineer, the adoption of the red tariff flag in June indicates a significant increase in the marginal cost of operation (CMO), driven mainly by the decline in reservoir levels and the greater need to activate thermoelectric plants.

The  CMO represents the additional cost of producing one more unit of energy (MWh) in an electrical system. This is a key metric for the ONS and the free power market, as it indicates the cost of meeting additional demand.

"In this scenario, electricity bills are expected to rise by up to 8% on average during the period," Henn said in a press release. "It is important to promote awareness in energy consumption to support the sustainability of the sector and the preservation of natural resources."