Brazilian energy prices fall on El Niño rainfall surge, but uncertainty looms

An increase in rainfall in recent weeks has eased household electricity rates and spot prices, but the outlook remains volatile amid expected high temperatures, according to experts.

The Brazilian electricity agency, Aneel, has announced a "green tariff flag" for October on Sept. 25, a tariff mode that removes additional consumption charges. The decision highlighted increased rainfall in the southern and southeastern regions.

"The change in tariffs reflects an improvement in energy generation conditions, especially with a recovery in reservoirs and less need to activate more expensive power plants," according to Allan Henn, CEO of energy trading company Voltera.

With over 50% of electricity generation coming from hydroelectric plants, the Brazilian energy market is closely tied to reservoir levels, which affect wholesale and household prices.

The reduction in household tariffs follows the lower actual levels and outlook for the electricity spot price, or PLD. The average PLD was 105 reais/MWh in the southeastern and central-western regions on Sept. 27, down by 56% from 240 reais/MWh on Sept. 1.

"The transition to green flag with the springtime is a positive market sign, reflecting an improvement in water inflow into reservoirs, which is contributing to the reduction of the short term energy price, PLD," said Maikon Del Ré Perin, partner for risk and market intelligence at Ludfor, a Brazilian electricity generation and management company.

Rainfall intensifies

Rainfall in the country is being intensified by El Niño, which is expected to be the most intense on record this year.

The National System Operator, or ONS, calculates that energy natural inflow, or ENA, is at 193% of the long-term average in the southern region, while reaching 105% in the southeast and central-western regions.

However, the outlook remains cautious, as the phenomenon makes the weather more unpredictable. Some meteorological institutes are expecting lower-than-usual rainfall in summer, combined with higher temperatures, but the forecast is not unanimous.

"Temperature increases in the new season and an eventual influence of climate events such as El Niño may increase energy demand from air conditioning and refrigeration, while changing rainfall patterns," Perin added.

Forward energy prices have decreased sharply in September following increased rainfall, prompting generators and consumers to revise their estimates of energy supply and prices.

The Brazilian Meteorological Institute, Inmet, released a forecast for October on Sept. 25, expecting heavier-than-average rainfall in the southern and southeastern regions of Brazil, where most hydropower plants are located. But at the same time, it expects higher-than-average temperatures in most of the country throughout the month.

"Despite the sharp relief in prices, our recent history shows how energy costs can vary throughout the year," Henn said.