Brazil power emergency decree set to lapse

An emergency presidential decree issued in June to help Brazil's power sector cope with an historic drought and avoid power shortages will lapse on 7 November, with no lasting measures in place to avoid the same problems in the future.

During the period of the provisional decree, Brazil skirted the risk of shortages by importing power from neighboring countries and authorizing the dispatch of the most expensive power plants, run on diesel, fuel oil or natural gas, under spot prices. The costs to avoid a power shortage caused by a drought that restrained hydropower generation can be estimated at R22bn ($4bn) this year, according to the Brazilian association of energy-intensive industries (Abrace), shared among all power-consumers, even the ones with bi-lateral contracts on the open market.

But the country did little to avoid getting into the same situation again. The government's drought management committee (CREG), created by the decree, worked mostly on operational measures such as ordering state controlled Petrobras to lease its LNG terminal and increase Brazil's LNG processing capacity, or to define water dam operations for hydropower plants, usurping the water and sanitation agency ANA's authority.

The CREG failed to address important problems the power sector faces - and that will eventually take its toll in upcoming years, market sources said. One of them is the inaccurate spot power price, the PLD, calculated by the Power Clearing Chamber, CCEE. The spot price is capped at R583.88/MWh, even with power costs currently as high as R2,553/MWh. The generation costs higher than the cap are paid as surcharges, ex-post. Moreover, the PLD calculation takes rain forecasts into account, and even the first sparse rains of the rainy season can make prices drop.

The ministry of mines and energy estimates that actions determined by CREG resulted in power storage gains of 14pc at water reservoirs in the southeastern and central west reservoirs through September, and that without them, Brazil would have faced possible constraints in meeting demand.

The main accomplishment of the temporary decree during its 90-day duration - since it was not approved by the legislature - was holding a reserve power auction that hired power generation beginning in May 2022, which would not help the country overcome power shortage risks this year.