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Feature: Low Brazil hydro to boost fossil fuel-fired power output, LNG import

Houston — Brazil's hydropower shortfall will lead the state-owned power grid operator to increase the use of fossil fuel-fired power this year, a move that will eventually lead to higher prices for consumers and a surge of LNG imports, sources say.

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"With the weak inflows and consequently water scarcity, we have seen many expensive thermo-electric plants already being dispatched, including fuel oil-powered plants," a Brazil-based power trader said. "It is very likely that Brazil will import more LNG than was expected."

Brazil's hydrology situation is not looking good, as Southeast-Midwest reservoir levels have been stable, totaling only 41.5% of capacity on Tuesday, data from the grid operator, the National Electric System Operator, show. A year ago, reservoir levels were close to 60%.

"The rainy season that ended in March was worse than expected," a second Brazil-based power trader said. "Now we are in the dry season and the logic now is to preserve water and keep the reservoirs as full as possible."



Brazil's Southeast-Midwest region, the country's industry and economic hub, faces an 0.8% risk of an energy shortfall this year, while the Northeast, hit by drought since 2012, faces a 0.1% risk, according to the federal Electricity Sector Monitoring Committee (CMSE).

Due to the lower-than-expected rainfall, drought in the Northeast and restrictions on flows at hydro plants along the Sao Francisco River led Brazil's Electricity Regulatory Agency to impose a red flag (level 1) tariff for April, when consumers will pay Real 3/100 kWh (96 cents/100 kWh).

The Sao Francisco River Basin is one of the most important hydrographic basins in Brazil, home to multiple hydroelectric plants that supply power from the Northeast to the industrial Southeast.

As a consequence, Brazil's marginal cost of producing electricity at fossil fuel-fired power plants rose last week to Real 420.28/MWh, up 90% compared with the prior week, according to ONS.

Another factor has already boosted power use in Brazil: the suggestion of an improvement in Brazil's GDP. This has boosted load grow expectations to 2.7% compared with 2016, the equivalent of 15,426 GWh, sources said.

GDP is expected to grow 0.5% in 2017, the second trader said, adding: "It is a very subtle growth, but is at least positive, which reflects a possible strengthening in industrial activity, resulting into a load increase."


WEAK EL NINO ADDS TO CONCERNS


Other changes in the weather, already detected by multiple international meteorology agencies, could also increase the chances for a weak El Nino phenomenon in the region.

The impacts of El Nino in Brazil are quite varied, considering the country has continental dimensions. Overall, the phenomenon causes droughts in some areas and increased temperatures and rains in others, causing profound meteorological changes.

The CMSE said last week the surface temperature of the Pacific Ocean is currently compatible with a neutral situation, which should not significantly interfere with rainfall in the coming months.

"However, most models predict a warming of the waters of the Equatorial Pacific Ocean in the second half of the year, which could lead to the establishment of a weak El Nino phenomenon, subject to the uncertainties of these forecasts," according to CMSE.

Wind power in the Northeast also declines during the Brazilian fall and winter.

"With or without El Nino, the weather will be drier and the winds, from here onwards, will be on downward curve in the Northeast and Southern Brazil, the main hubs for wind power generation," the second trader said.

But regardless of weather conditions, the energy cost will likely continue to move higher because the government is also changing risk metric parameters for its planning and pricing models. This will boost thermal dispatch as the use of water to generate power is turning more expensive, multiple sources said. "Surprises happen," the second trader said. "Considering all factors, Brazil might need to import more LNG than what was expected."

Brazil has been facing economic and political crises for at least two years. This has translated into less demand for electricity, leading to less LNG imports by Brazil's sole importer, state-led oil and gas company Petrobras. Imports were down 83% in the first quarter of 2017 from the year-ago quarter, according to S&P Global LNG Navigator data.

Petrobras declined to comment about its LNG imports.

As Brazil enters the dry season, Petrobras naturally expected an increase of LNG imports in the coming months, but sources say this volume is likely to be higher than first expected.

In 2016, Petrobras imported 26 cargoes, a source familiar with Brazil's data said. The initial expectation was that it would import similar levels of LNG in 2017, sources said.

"But the scenario is no longer as it was in 2016," the second trader said "The pressure for more LNG imports really exists."

--Ingrid Furtado ingrid.furtado@spglobal.com

--Edited by Richard Rubin, richard.rubin@spglobal.com