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ECONOMY | 04-10-2021 20:39

Global energy crisis comes to drought-stricken South America

The energy crisis sweeping the globe is about to hit South America, where a historic drought has the region desperate to replace a collapse in hydroelectric generation.

The energy crisis sweeping the globe is about to hit South America, where a historic drought has the region desperate to replace a collapse in hydroelectric generation.

Brazil is on the edge of power rationing and major blackouts, and will need to rely heavily on importing supplies from Uruguay and Argentina through next month until the rainy season starts and dams are replenished. That will strain the entire continent, with countries like Chile also hoping to rely on Argentine gas to make it through a hydro crunch of their own.

South America in many ways has been ahead of the game when it comes to the energy transition. Brazil, Latin America’s biggest economy, has relied on its hydroelectric industry for decades and would typically use the source for more than 60 percent of the country’s electricity. But climate change is shifting the dynamics as long-lasting and worsening droughts overtake the region, making hydro increasingly less dependable. 

Now the continent will be forced to compete for natural gas as its back-up fuel just as more of the world is doing the same, with Europe and China facing enormous energy squeezes as well. 

The surge in export demand has already sent gas prices sky-rocketing. Futures traded in New York have more than doubled this year. In Asia, prices for liquefied natural gas, which get shipped around the world, have soared five-fold since April to a record. 

The timing could hardly be worse. South America is still struggling to emerge from the economic shock of the pandemic, and rising grocery and electricity bills could increase poverty and accelerate emigration to the United States and other wealthy nations. The power crunch has become a huge political headache for Brazilian President Jair Bolsonaro, whose popularity is slumping ahead of elections next year. 

“There could be a populist race to the bottom,” said Schreiner Parker, the vice president for Latin America at consultancy Rystad Energy.

Brazil’s hydroelectric reservoirs in the southeast and central west, which represent almost three-fourths of the country’s installed capacity, have fallen to 17 percent amid the worst drought in 91 years. Itaipú Binacional, a massive hydroelectric plant owned in equal parts by Brazil and Paraguay, is generating at the lowest levels since 1993 on an annualised basis.

Still, Latin America’s energy situation is by no means uniform. While Brazil and Chile are feeling the pinch, Colombia is teeming with power. Thanks to the La Niña weather pattern, which has led to increased rainfall in north-eastern South America, Colombian dams are at an historically high 86 percent of capacity, almost double year-ago levels. Hydro-electricity accounts for as much as three-quarters of the nation’s energy mix. 

“That means the price of electricity has been basically zero for the last three months in the spot market,” Colombia’s Mines and Energy Minister Diego Mesa said in an interview Thursday from Bloomberg’s New York headquarters.

But for Brazil and others, things could get even more challenging. 

 

La Niña

La Niña is likely to delay the rainy season in the southern cone of the continent and make 2022 an even more difficult year for hydro power. There is a more than 70 percent chance that La Niña, caused by variations in ocean surface temperatures, will form across the equatorial Pacific sometime between November to January, the US Climate Prediction Center said in early September. 

This would almost certainly mean another round of drought for both the western United States, as well as southern Brazil and Argentina. The regions were parched by a La Niña in late 2020 early 2021.

“This is my biggest concern,” said Gabriel Dufflis, the lead analyst in Wood Mackenzie’s Brazil power sector research team. “If that happens, we will start the 2022 dry period in bad shape.”

And South America isn’t the only region struggling to compensate for dried out hydroelectric reservoirs as fossil fuel prices surge. A drought gripping the US West has dried up rivers and streams, reducing reservoir levels at some of the nation’s biggest dams to record lows. Overall, the extremely dry conditions are expected to reduce the nation’s hydropower generation by 14 percent in 2021 compared with last year, according to US Energy Information Administration.

“We are in a new paradigm of lower precipitation across the West” in the United States,  said Ethan Paterno, an energy markets expert at PA Consulting, a consulting firm. “Ultimately, that’s going to mean lower hydroelectric production going forward.” 

by Peter Millard & Mark Chediak, Bloomberg

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