Lights Out: Brazil’s Power Problem

With the World Cup over, Brazilians are turning to their next big event—October’s presidential elections. While President Dilma Rousseff still leads in the polls, her margins continue to shrink. A recent Datafolha poll puts Rousseff and Aecio Neves—her leading challenger—as statistically tied in a hypothetical second round.

Potentially adding to Rousseff’s vulnerabilities is Brazil’s electricity sector, which, though opened to private investment in the 1990s, remains dominated by the state through its stake in Electrobras. The combination of weather dependent sourcing, underinvestment, and rising demand has led the system to the brink of capacity. And political history shows that disruptions aren’t looked upon kindly by voters—as José Serra surely remembers, when power rationing helped Rousseff’s predecessor Lula finally get to Planalto.

The current shortages are a result of several factors. One is the lack of rainfall. Two-thirds of Brazil’s power depends on hydro. After a disappointing December-March rainy season, reservoirs are at near-record lows.

A second problem is the lack of connections. New power line construction has been repeatedly delayed. As a result, many plants and wind farms stand idle, unconnected to the grid. Other generating and transmission projects are also behind schedule.

These supply constraints are also exacerbated by growing demand. In 2013, consumption rose over 5 percent compared to the previous year, and electric power consumption shows no signs of abating in the near future. This reflects increasing wealth—as incomes rise, so too does electricity use. It is also spurred by government policies—electorally friendly 20 percent residential price cuts in 2012 boosted usage (Electrobras’ share price plunged in the wake of the announcement).

The government has tried to compensate by importing natural gas to fuel existing power plants and diversifying its mix away from hydro through new fossil fuel plants. Still, the current lack of spare capacity—estimated at just 2 percent—has led to power outages. Last February, as many as 6 million consumers and industrial users in eleven states lost power. In addition, several companies have struggled since the outage, including those serving Sao Paulo and Rio de Janeiro.  And studies by Rio de Janeiro-based energy consultancy PSR puts the risk of further blackouts at roughly 20 percent.

But even if the lights stay on through the October election, the next administration will face difficult choices. The sector’s current high costs will likely require both government financial support and consumer price hikes, feeding inflation. Shortages will dissuade investment in energy intensive industries—including steel and petrochemicals—and hinder economic growth more broadly. And the problem of increasing supply to keep pace with demand will only continue. While 2014 may bring more rain, what Brazil really needs is vast investments in electricity infrastructure to underpin a more promising economic future.