Climate Change and Brazil’s Energy Matrix

The Brazilian energy system is very dependent on the level of rain. Changing weather patterns that increase the occurrence of droughts or change the predictability of rain materially challenge the system.

The Role of Hydroelectricity in Brazil & The Threat Posed by Climate Change

Approximately 75% of Brazil’s electricity comes from hydropower plants whereas the world average is 17% [1]. This mismatch is explained by Brazil’s abundance of rivers and lakes, making hydroelectricity the cheapest source of energy in the country.  These plants use a dam on a river to store water in a reservoir. Water released from the reservoir spins a turbine which in turn activates a generator to produce electricity. Rain is extremely important for this system, during droughts, rivers’ volume decline, impacting the level of water in the reservoirs and decreasing the energy generation. Changing weather patterns that affect the rain regime can have a devastating impact on Brazil’s economy if its hydro plants are unable to produce enough energy to fuel the demand.

In the past 15 years Brazil faced two serious droughts that threatened the energy generation. Many scientists attribute the increased frequency of droughts to global warming and the deforestation of the Amazon Forest [2]. In 2001, the country had to adopt rationing measures to guarantee that the system would not collapse, households had to reduce their energy consumption by up to 20% or fines would be imposed [3]. In 2014 and 2015, a similar drought occurred, if not for a decrease in energy demand caused by an economic recession, rationing would have to be adopted again [4].

How Brazils Electric System Works

Three government agencies are responsible for overseeing the system (Aneel, EPE and ONS). They forecast future demand for energy, define the capacity that should be built to serve the demand in the following years and manage auctions in which private companies bid for licenses to construct new power plants. Even when climate conditions are stable, this process involves uncertainties. For example, it takes 3 to 5 years to build a new plant, delays are very frequent and demand forecasts can be wrong. When the rain regime is more unpredictable the level of uncertainty increases materially because the current supply also becomes unclear [5].

Measures to Reduce Brazils Dependency on Rain

One way to tackle the uncertainty is to add excess capacity to the system in the form of additional plants that stay idle but are ready to be used when there is an unexpected drought or demand forecast error.  However, the tradeoff of having more buffers is a higher cost to operate the system (the private companies that own the idle plants still have to be paid). Consequently, consumers would have to pay higher tariffs for each megawatt used. This is a very unpopular solution because energy price is a key factor in defining the industrial sector competitiveness and inflation is usually a serious concern in Brazil (energy prices affect the prices of most other goods).

Another possibility considered is to diversify Brazil’s energy matrix by building power generators that do not rely on rain, some examples are nuclear, thermoelectric, wind and biomass plants [6]. But this solution also comes with costs, thermoelectric energy increases pollution and nuclear plants are much more expensive. Wind and biomass are clean energy sources but are costlier as well. The government agencies have been prioritizing a mix of thermoelectric and wind plants in the energy auctions in recent years to diminish the adverse impact of droughts, despite the fact that this decision generates some pressure on energy prices.

Finally, since the 2001 rationing, the government has been investing in transmission lines to link plants in different regions [7]. This measure reduces the impact of decreased rain because, since Brazil is a very large country with many different ecosystems, usually when one region is suffering a severe drought, others have excess rain. If the system is connected, the regions with surplus energy can help the regions with deficit. Accordingly, a connected system needs fewer buffers to have the same level of reliability as a non-connected system. Unfortunately, building transmission lines also increases the cost of the system, albeit less than building plant buffers.

Conclusion

The Brazilian energy system is very dependent on the level of rain. Changing weather patterns that increase the occurrence of droughts or materially change the predictability of rain reduce the reliability of the system. There are some alternatives to tackle the adverse impacts of climate change but all of them require investments that would increase the cost to operate the system and consequently the energy prices.

WORD COUNT: 739

 

[1] Brazil’s 2015 Statistical Yearbook of Electricity, EPE, 2015,

http://www.epe.gov.br/AnuarioEstatisticodeEnergiaEletrica/Anu%C3%A1rio%20Estat%C3%ADstico%20de%20Energia%20El%C3%A9trica%202015.pdf

[2] Deforestation and Drought, The New York Times,10/09/2015, http://www.nytimes.com/2015/10/11/opinion/sunday/deforestation-and-drought.html?_r=0

How forests attract rain: an examination of a new hypothesis, http://www.cifor.org/library/2770/how-forests-attract-rain-an-examination-of-a-new-hypothesis/

[3] From Power Provider to Power Policeman: AES Enforces Brazil’s Rationing Program, Wall Street Journal 30/07/2001, http://www.wsj.com/articles/SB996439402111726962

[4] Brazil Blackout Spawns Power-Rationing Fears, Wall Street Journal 01/20/2015, http://www.wsj.com/articles/brazil-blackout-spawns-power-rationing-fears-1421784617

[5] The Economics of Climate Change in Brazil, in this study conducted by the Federal University of Rio de Janeiro in partnership with the World Bank, researchers try to quantify the impact climate change on Brazilian hydropower generation (pages 28 and 29), http://www.usp.br/mudarfuturo/PDF/Estudo_do_Clima-Ingles-14-04-2011.pdf

[6] Plano Decenal de Expansao da Energia 2024 [2024 Decennial Energy Expansion Plan], EPE & Brazil’s Energy Ministry, 2014, http://www.epe.gov.br/PDEE/Relatório%20Final%20do%20PDE%202024.pdf

The Economics of Climate Change in Brazil (pages 45 and 46), http://www.usp.br/mudarfuturo/PDF/Estudo_do_Clima-Ingles-14-04-2011.pdf

[7] Os Desafios da Transmissao [Challenges in Energy Transmission], ANEEL,

http://www.aneel.gov.br/apresentacoes-e-publicacoes

 

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4 thoughts on “Climate Change and Brazil’s Energy Matrix

  1. I like the fact that you evaluate all the options available for Brazil with its pros and cons. It seems that the only way to prevent future droughts is raising the cost of electricity at some point in time. Does it make sense to divide the costs into short term and long term? Maybe options such as building wind and biomass plants are more costly in the near term, but will payoff in the future given the uncertainty of rain falling patterns over the next decades.

  2. I agree with the point Alejandra made on diversifying electricity options. In the long run, this is likely to pay off particularly as the weather in different regions of the country become more unpredictable as a result of global warming.

  3. Great post Marianna. I noticed that managing costs seem to be a recurring theme in your text. I understand why costs are such a debated topic amongst Brazilian agencies, as any fiduciarily responsible company aims to maximize profitability. My question is, what if the cost of not investing in alternatives eventually outweighs the upfront cost of changing the system now?

  4. Super interesting post, Mariana. Thanks! Do you have thoughts on the climate for foreign investment in the Brazilian energy space? I am aware of some restrictions and that a majority of the electricity production infrastructure is state-owned. Considering Brazil’s fiscals woes, do you anticipate any changes in attitude?

    Also (and this is a question regardless of supply concerns)– Do you know if smart grid thinking is also being used to lower absolute and peak energy demands? What about ‘smart’/economic responses to supply deficits (e.g., having a form of market to allow those spaces that most need electricity to pay more for it during shortages)?

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