SAO PAULO, (Reuters) – Soil moisture in Brazil’s main river basins used for hydropower generation has fallen to nearly two-decade lows, data collected by the London Stock Exchange Group shows, threatening a prolonged impact from a serious drought even after rains return.
Tropical rains feeding Brazil’s vast network of rivers typically allow hydropower plants to generate around two thirds of Brazil’s electricity but years of weak rainfall have hurt the sector, pushing up energy costs and stoking inflation that has led economists to forecast a fresh round of interest rate hikes.
Analysts warn that even if seasonal rains arrive next month as expected, hydroelectric reservoirs may be slow to fill because so much moisture will be absorbed by the soil.
The Paranaiba, Grande and Tocantins hydroelectric basins, stretching across southeast, center-west and north Brazil, make up a large part of the sector’s capacity. LSEG data shows they hit the lowest level of soil moisture for September since 2005.
Claudio Vallejos, an LSEG analyst, said the parched soil is a troubling result of a decade with just one year bringing rainfall above the long-term average.
“The soil ends up acting as a kind of memory of the rains, with the moisture levels reflecting the entire bad history,” he said.
The worst effects of the current drought have hit run-of-the-river generators, including the partial shutdown of the Santo Antonio plant in northern Brazil, one of the largest in the country, which relies on the Madeira River.
Brazilian grid operator ONS has struggled to operate the system at peak load times, leading to the activation of expensive thermoelectric plants in recent months.
Growing wind and solar capacity in the north and northeast has offered uneven relief, as transmission bottlenecks led ONS to cap how much power it takes from those generators.
Those energy sources have allowed Brazil to somewhat reduce its reliance on hydropower, drawing reservoirs down more slowly than in previous droughts. Reservoirs at Brazil’s major hydropower dams are at 53% capacity – well above the depths of the 2021 water crisis when they hit 16%.
But Vallejos said the soil moisture data reflects Brazil’s precarious situation, especially if next year is another dry one.
“The reservoirs themselves store energy, but what really collects the rain to bring it to the reservoir is the soil in the basins,” he said.
Alexandre Nascimento, managing partner at weather forecaster Nottus Meteorologia, said seasonal rains are expected to arrive at the end of this month, but they may be spotty until the second half of October.
“Before it gets better it’s going to get a lot worse,” he said. “We continue to have extremely high temperatures and very low relative humidity, which ends up speeding up the depletion process of the reservoirs even more.”
Sergio Romani, chief executive officer at Genial Energy, a power trader and generator, said electricity prices will remain high until abundant rains arrive.
“The baseline scenario is for prices to be a little more stressed for the last quarter,” he said.
“We have fat to burn in the reservoirs,” Romani said, while noting that metrics for the potential energy of September’s rains hit an all-time low. “It’s frightening. I’ve never seen that happen to Brazil’s electricity system.”
Genial Energy forecasts that Brazilians will keep paying the top ‘red flag’ power rates through the end of the year in its baseline scenario.
Warren Rena, a local broker, forecasts that the high power rates will remain only until October, followed by cheaper ‘yellow flag’ rates for the rest of the year. If the year ends with the ‘red flag’ rates, Warren Rena calculates that it could add an additional 14 to 32 basis points to its 2024 inflation forecast.
Banco Daycoval has also forecast 12-month inflation could end the year around 30 basis points higher if power rates remain at ‘red flag’ levels instead of falling to the cheapest ‘green flag’ tariffs by December.