US embassy cable - 05BRASILIA1686

UNCLAS SECTION 01 OF 03 BRASILIA 001686 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/BSC 
NSC FOR RENIGAR, BREIER, SHANNON 
TREASURY FOR OASIA - DAS LEE AND FPARODI 
DOE FOR SLADISLAW 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, Energy 
SUBJECT: BRAZIL'S SUPPLY OF ELECTRICITY SUFFICIENT FOR NOW, BUT 
CONCERN FOR THE FUTURE 
 
REFS: (A) Brasilia 0775, (B) Sao Paulo 0721, (C) Brasilia 1239 
 
1. (U) Summary:  Brazil's electricity generation and 
transmission 
network continues to be strong and has been able to weather 
recent troubles stemming from both politics and nature.  Despite 
a continuing drought in southern Brazil, the turmoil in Bolivia 
that threatens natural gas supplies to Brazil, and a storm that 
knocked out two of the Itaipu hydroelectric plant's (a major 
supplier) transmission lines, no concern has been expressed about 
a potential black-out because of Brazil's abundant electricity 
generation capacity and flexible national transmission grid. 
While the sector has been able to overcome these immediate 
challenges, significant new investment is necessary in the next 
few years for Brazil to avoid a power shortage.  End Summary. 
 
Lurking Dangers 
--------------- 
 
2. (U) After facing a serious electricity shortage and rationing 
in 2001 and 2002, due to an extensive drought and lack of 
transmission capacity to move energy from surplus to deficit 
areas, the GOB has made a concerted effort to improve the 
national electricity generation and distribution network.  In 
terms of electricity generation capacity, the GOB encouraged 
Petrobras to enter into several thermoelectric generation plant 
contracts as a guarantor, thereby establishing a thermal power 
insurance policy that would secure supply and help avoid another 
shortage.  The thermoelectric plants had the added advantage that 
they could be constructed and enter into operation relatively 
quickly.  Brazil's electric power system has been able to ride 
out three major incidents recently, showcasing its current 
strength.  First, southern Brazil is in the midst of its worst 
drought in 40 years and there is widespread concern regarding the 
impact on agricultural output (Ref A), local populations, and 
hydroelectric generation.  Second, the political upheavals in 
Bolivia have called into question the reliability of the natural 
gas supply to Brazil.  Third, a recent storm at the Itaipu 
generation plant knocked out two of its transmission lines. 
Nevertheless, Brazil is not currently in danger of a repeat of 
the 2001-2002 crisis. 
 
Drought Pressure on Reservoir Levels 
------------------------------------ 
 
3. (U) The drought has depleted southern Brazil's reservoir 
levels, which were just over 50% in May (but had risen to 70% by 
mid-June).  In response, the National Electric System Operator 
(ONS) decided to increase production of electric energy at the 
Itaipu plant by 10% to reduce demand on the hydroelectric supply 
and thus conserve the southern region's reservoir levels.  But 
the low reservoir levels in the south are also offset but the 
high levels in the other three regions, which are currently 94% 
in the Northeast, 84% in the Southeast, and 97% in the North 
(although the North remains the least interconnected of all the 
regions). 
 
4. (SBU) Rafael Machado, an engineer in the Brazilian National 
Electric Energy Regulatory Agency (ANEEL), told EconOff that the 
Brazilian system of hydroelectric generation relies on a system 
of balances, in which, because of climatic variations, it is 
assumed that there will be periods of time in which the rainfall 
is lower in some regions and higher in others.  He said that 
right now, as a whole, there is plenty of water in reserve to 
generate the necessary power, while there wasn't in 2001.  In 
addition, Machado explained, the infrastructure for transmission 
of energy from one part of the country has expanded sufficiently 
now to accommodate shortfalls in one region with the surplus in 
another, which also wasn't the case in 2001-2002.  The 
relatively 
flat landscape in the south generally does not allow for large 
reservoirs, according to Machado, resulting in relatively smaller 
reserves even during times of good rain.  Although there are 
serious water shortages for the human population and for 
agriculture and animal husbandry, Machado pointed out that the 
south does not have a problem with electricity supply.  Machado 
said that in southern Brazil the first line of defense against 
shortages is the thermoelectric plants (which initially went 
into 
full capacity operation), but any additional shortfalls would be 
met through energy transfers from other regions. 
 
The Thermoelectrics and Natural Gas Supplies 
-------------------------------------------- 
 
5. (U) Because the thermoelectric plants generate a relatively 
low proportion of the electricity consumed in Brazil, the 
potential shortage of gas from Bolivia and the current shortage 
from Argentina has not negatively impacted electricity 
generation.  Given the current electric energy glut in Brazil in 
general, however, the thermoelectric plants have shifted to 
playing more of a contingency role in the overall power 
generation mix, which is dominated by hydroelectric power. 
Thermal generation represents 18% of Brazil's overall generation 
capacity, but much of that capacity is typically under-utilized. 
This was fortunate, since Argentina has not sent Brazil all of 
the natural gas that it contracted for due to shortfalls in 
meeting Argentina's own demand.  As a result, two thermoelectric 
plants in southern Brazil that run on Argentine natural gas were 
reportedly shut down temporarily.  The excess in hydroelectric 
generation capacity also made it easier to plan for a potential 
cutoff in Bolivian natural gas supplies in view of the political 
crisis in that country.  Although the first step in Brazil's 
contingency plan was to shut down its natural-gas powered 
thermoelectric plants, such an action would not have stressed 
power supplies.  The possible rationing raised enormous concerns 
for the city of Sao Paulo because of the large quantities of 
bottled and natural gas consumed by both industries and 
households there (Ref B); however, the consensus is that if 
rationing does come to pass, it will not impact electricity 
supplies. 
 
Storm at Itaipu 
--------------- 
 
6. (U) A powerful storm on June 14 knocked out two of the 
transmission lines at the Itaipu hydroelectric generation plant, 
shutting down four of its twelve turbines and reducing its 
operation to 60% of capacity.  The ONS responded to the emergency 
by restarting turbines at other hydroelectric plants that were 
undergoing maintenance, activating natural gas thermoelectric 
plants (through an agreement with Petrobras), asking the Angra I 
and Angra II nuclear plants to increase their output, and 
importing electricity from Argentina.  The Director-General of 
the ONS was reported in the press as saying that the solution was 
indicative of how "robust the interconnectivity of the system" 
is.  (Completed in 1983, Itaipu is the largest hydroelectric 
plant in the world and a joint venture between Brazil and 
Paraguay; it has the capacity for generating up to 12,600 MW -- 
twice the capacity of the Grand Coulee in the United States.) 
 
Comment: Is All This Sustainable? 
--------------------------------- 
 
7. (SBU) Brazil's combination of a relatively flexible energy 
grid and its current hydroelectric power generation capacity 
surplus allowed the country to weather recent challenges.  To 
meet Brazil's future energy demands, however, the electric energy 
sector will require significant investments soon as the current 
excess supply won't last forever.  Time is short, as the GOB 
needs to get new hydroelectric power plants under construction 
now to meet supply shortfalls expected in 2009.  This is 
especially urgent in light of new findings reported by the 
Brazilian Natural Gas and Petroleum Institute (IBP).  The IBP 
asserts that, because of the delay in the construction of new 
hydroelectric plants, the thermoelectric plants will likely be 
operating at full capacity in 2008 just to meet projected demand. 
IBP says that would mean an increase in natural gas consumption 
to close to 100 million cubic meters per day, even though the 
forecast supply of natural gas for 2008 is only 70 million cubic 
meters per day.  In other words, even if the large natural gas 
supply in Brazil's Santos Basin comes on-line early and the 
proposed natural gas ring connecting Chile-Argentina-Uruguay- 
Brazil materializes, Brazil will need a secure natural gas supply 
to meet its future electricity demands, especially if the water 
reservoir levels decrease. 
 
8. (SBU) The Ministry of Mines and Energy (MME) is preparing its 
first auction for new power generation plants under the GOB's new 
energy model.  The transition to the new model and a bungled 
electricity supply auction (Ref C), however, has hurt many 
existing private power companies in the sector and damaged the 
MME's credibility with investors.  The situation is not yet dire 
as the MME could resort to filling the predicted supply gaps with 
additional thermoelectric and biomass plants, which can be built 
more quickly than hydroelectric plants, although Brazil would 
still be faced with questions about the adequacy of its gas 
supplies.  Whatever the source of the energy, the upcoming bids 
for new generation capacity should help answer the fundamental 
question of whether the GOB will be able to attract significant 
new private investment in the energy sector. 
 
9. (U) This cable was coordinated with Consulates General Sao 
Paulo and Rio de Janeiro. 
 
DANILOVICH