Energy Market Update: Powering Brazil’s Future

The XXXI Olympiad is drawing to a close. And over the past couple weeks, Brazil has been under an international spotlight (or microscope) that many of its citizens probably wish would go away.

Because while the country has long been the emerging market darling of the western hemisphere, most of the headlines over the past two years have been less than favorable.

With core issues ranging from economic recession — by some estimates the country recently concluded its eighth consecutive quarter of negative GDP growth — to political upheaval, the Rio Olympics are being held at one of the more pivotal points in the country’s history.

In a similar sense, the future of Brazilian energy has entered what may prove to be a similar inflection point. The connection is hardly a coincidence. Energy has been at the core of country’s political and economic turmoil, and is being looked to for a push toward a sustainable recovery.

Thus, with the Olympic Games as a backdrop, there is perhaps no better time to highlight the evolution of energy in Brazil – examining the role it’s played in the past and present, and what the future likely holds.

At the outset, it’s important to know how energy came to be at the heart of the political and economic turmoil that has afflicted South America’s largest nation. Economically, pinpointing the exact cause of a recession is as difficult as naming the greatest Olympian of all time. (The answer is “Jim Thorpe,” obviously). But what is quite clear is that massive spikes in the cost of basic goods have a tendency to create some substantial issues. That’s the scenario Brazil confronted as the country faced a massive drought that by early-2014 saw spot electricity prices more than triple from the year prior. With nearly 80 percent of the country’s electricity coming from hydro generation, variations in rainfall have massive implications on the overall energy sector.

Perhaps the only thing more impressive than the rapid rise in electricity prices is just how quickly they plummeted when the rain returned. As hydro reserves recovered, spot power prices fell in some regions from the legal cap of roughly R$820 per megawatt-hour (MWh), sustained for months at the height of the drought, to the legal floor of R$30/MWh in a hair over 12 months.

While the high prices stifled activity in virtually every sector, the lower prices have presented a new challenge — over-contracted utilities now face the reality of selling their excess supply to the grid at a small fraction of what was originally paid. So even though today’s stronger supply condition is a welcome sight for most after battling power deficits in much of the country, power prices continue to have a major role in the country’s overall economic struggles.

But while hydro may be the heavyweight of the Brazilian grid, oil has long had a foothold on both political life and economics in the country. According to the U.S. Energy Information Administration, Brazil churns out an average of roughly 3 million barrels of crude oil every day. As a result, the sharp drop in crude prices that began in 2014 , which saw global prices plunge from more than $100 per barrel to as low $26, was less than favorable for the Brazilian economy.

The political implications behind oil have dwarfed the economic fallout in recent months, however, as a massive corruption scandal rocked state oil company Petrobras. The investigation and allegations into a sprawling web of kickbacks and corruption is understandably complex, but the simplified version is that hundreds of politicians have been implicated across party lines with the scandal having a pivotal role in the impeachment of Brazilian president Dilma Rousseff. In turn, the resulting uncertainty has undermined the economy, blurring the already cloudy line between political and economic instability.

Regardless, as the Olympics so often reminds us, everyone loves a story of perseverance and redemption. And Brazil is determined to write its own.

Energy may be a central link in the country’s current decline, but it is already evolving and may provide a path of growth. While hydro will continue to dominate, Brazil has seen exponential growth in renewables, with wind generation more than tripling in only the past two years. In addition, planned expansions to solar capacity, along with a concerted push toward conventional thermal generation, seeks to offer a grid that is less susceptible to the volatility of hydro reserves. Longer-term, plans and policies already in the works will help develop a Brazilian grid that enjoys lower volatility while still being a world leader in renewable generation.

Keeping an eye on fossil fuels, Brazil’s green grid helps the country maintain its position as one of the leading producers of crude oil. However, dedicated efforts designed to root out corruption are underway in the effort to ensure that state-run Petrobras isn’t using profits to line politician’s pockets. To this end, Brazil hopes to eventually rely more on the free market, which has fueled discussions about  privatizing and selling off many of the nationalized company’s assets.

In short, energy deserves plenty of blame for the issues that plague Brazil’s political and economic institutions, but steps are being taken to ensure it gets credit for the country’s rebound as well. Indeed, there are strong signs that a recovery has already moved through the early stages, with indicators such as unemployment, exchange rate and GDP contraction all trending in a positive direction. And that’s carried over to increases in recent months to both consumer and industrial confidence.

The Olympics will soon fade into the country’s history, however, energy’s grip on Brazil’s political and economic future is poised to hold long after the closing ceremonies. If a bounce back is truly on track, energy will help lead the way.

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