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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: Brent Hendry X-To: Sara Shackleton@ENRON_DEVELOPMENT X-cc: X-bcc: X-Folder: \Sara_Shackleton_Dec2000_June2001_1\Notes Folders\Brazil news X-Origin: SHACKLETON-S X-FileName: sshackle.nsf FYI ---------------------- Forwarded by Brent Hendry/ENRON_DEVELOPMENT on 23/02/2000 12:51 PM --------------------------- Alexandre Bueno 21/02/2000 04:49 PM To: BCC cc: (bcc: Brent Hendry/ENRON_DEVELOPMENT) Subject: Brazil Power: October's Industrial Recovery and January's Rains... - CERA Alert Brazil Power: October's Industrial Recovery and January's Rains... - CERA Alert Brazilian power demand growth strengthened in October and November, rising 1.8 percent and 2.6 percent, respectively, above 1998 levels for those months (see Figure 1). Industrial power demand led this growth, as industrial physical output continued to recover along with Brazil's economy. Commercial sector power demand growth also remained strong, but residential consumption increased only as a result of the addition of new billed customers, as demand per customer declined (see Table 1). Recent legislation to reduce the government's fiscal imbalances will likely continue to support Brazil's economic recovery, leading to higher power demand growth in the coming months. Thermal power generation has taken on an increasing percentage of Brazil's total supply, substituting for hydro generation because of abnormally low rainfall throughout the spring months (see Table 2). Brazil's thermal capacity is limited, however, and hydro reserves to meet growing demand reached critically low levels by the end of December. The torrential rains in early January reduced the threat of drought-induced shortages, but by the end of the month reservoir stored energy levels in the South, Southeast, and Central West regions were only half of those in January 1999. Stored water in the North and Northeast regions was also significantly below the year-earlier level. Although hydro output has kept pace with demand and reservoir water levels continue to rise, the increase is much slower than historical rainy season buildups. Sustained rains must continue to replenish reservoir volumes for several months in order to eliminate the risk of power shortages. Thermal Generation Remained High as Water Levels Stayed Low Thermal generation continued to increase in December, reaching 1,847 gigawatt-hours (GWh), or 6.3 percent of Brazil's total generation (see Table 3). This increased reliance on thermal power was in response to the critically low reservoir water volumes resulting from Brazil's recent drought (see Figures 2 and 3). Although thermal generation was tapped to replace hydro power to the extent possible, hydro generators continued to produce power at levels similar to last year's in order to meet growing demand. The strong rains in early January reduced the threat of drought-induced shortages, but by the end of the month reservoir stored energy levels in the South, Southeast, and Central West regions fell again to only 50 percent of levels in January 1999, raising concerns among government regulators. Stored water volumes in the North and Northeast regions were also significantly below year-earlier levels, demonstrating that Brazil's power capacity problem is affecting nearly all regions of the country. Brazil is expected to add 1,200 megawatt (MW) of new thermal capacity in 2000, as well as a further 1,309 MW of nuclear capacity when the Angra II unit enters commercial operation. This new capacity will help meet the expected increase in demand growth as Brazil's economy strengthens throughout the year but will do little to mitigate power shortages if the current rainfall is insufficient to replenish Brazil's reservoirs. Industrial Activity: Recovery in October and November Boosts Power Demand October met expectations of a gradual recovery in industrial activity. This trend continued to gather steam in November, pushing power demand growth to levels not seen since April 1998. October's industrial physical output expanded 1.6 percent compared with that of September and 2.5 percent compared with that of October 1998, reaching the highest level since September 1998. In November, industrial output slowed slightly, dropping 0.1 percent compared with October 1999, but remained 4.8 percent above November 1998 levels. Power demand grew accordingly, reaching 3.5 percent in October and 3.8 in November, making industrial power demand Brazil's fastest-growing sector for the month. The year-to-date contraction in industrial output continued to shrink, with cumulative output through November only 1.5 percent lower than the same period in 1998. This recovery was enough to bring year-to-date power demand into positive growth numbers for the first time, increasing 0.5 percent over J! anuary-November 1998. October and November brought the strongest growth to the paper, beverage, and transportation materials sectors, supported by improved prices in international markets and the start of the summer. Consumer durable goods and capital goods also expanded strongly in October and November, rising from their weak performance of the first half of the year. Year-to-date growth has been strongest in oil, oil product, and export-oriented sectors, whereas consumer durable goods and capital goods have suffered the greatest contraction. On a regional basis, all states with a few exceptions showed positive growth in industrial output in October and November. Only the Northeast region and state of Bahia (still suffering from a lower level of oil industry activity) reported negative performance in October 1998 (2.5 and 3.2 percent, respectively), and Paran? was the only negative performer in November. S?o Paulo registered its first positive performance (1.1 percent) in the past 14 months, and four states registered double-digit growth: Esp?rito Santo (19 percent), Minas Gerais (13.8 percent), Ceara (11.9 percent), and Rio Grande do Sul (10 percent). Rio de Janeiro and Esp?rito Santo showed the strongest year-to-date growth, while S?o Paulo's total 1999 output remained 5.5 percent below that of 1998. Part of the recent increase in year-over-year monthly output can be attributed to the declining production levels in 1998 as the industrial sector had already begun to contract by October 1998. In recent months, however, there has been a slow but steady growth in industrial output, led by a recovery in international markets for export products and an improvement in the economic situation. This growth is expected to continue in the coming months as Brazil's economy continues to strengthen. Residential and Commercial Demand Growth Slows Residential demand grew slowly in October and November, increasing only 0.1 and 1.0 percent year-on-year, respectively. Even this limited growth is due entirely to the addition of new billable customers, which has expanded the customer base by 4.6 percent in the 12 months ending in November 1999. During that same period, per-capita power consumption declined 1.6 percent owing to cooler average temperatures in 1999 and a 19 percent decline in purchases of domestic electronic goods. The surge in consumer purchases following the Real Plan stabilization has now subsided, and the reduction in consumer buying power following the economic downturn has helped limit recent sales and use of electricity-intensive consumer goods. Commercial demand grew 3.6 percent in October and 3.2 percent in November, slowing slightly from recent months to give year-to-date growth of 4.9 percent in November. Much of the growth in commercial demand was due to internal tourism, which has benefited from the real devaluation. Increasing electricity intensity of new businesses has also played a role, as new businesses have greater electricity needs than their predecessors. Conclusion Although the recent rains have removed any risk of power shortages in the near term, reservoir water levels remain dangerously low, leading the government to develop an emergency thermal capacity building program. The current rate at which dams are being replenished is insufficient to meet the nation's needs within the historical rainy season. Either heavier rains or an extended season will be needed to avoid drought-related power outages toward the end of 2000. In the interim, thermal generation will remain higher than historical averages and new units, including Cuiaba and Angra II, will help increase thermal power contribution to the total generation mix. As Brazil's economy continues to strengthen in 2000, power demand growth will steadily increase. This growth will be felt first in the industrial sector, as power demand rises with increased physical output. As consumer confidence and buying power increase in tandem with economic growth, commercial and residential power consumption will also return to precrisis levels, surpassing 5 percent growth. This combination of demand growth and uncertain water supply will greatly increase the pressure for new generation capacity. Many risks and uncertainties remain, however, limiting any project's ability to reach financial closure. The continued delay in moving projects forward, combined with an additional one to two years of construction once projects are made viable, will further tighten Brazil's supply-demand balance in the coming year, regardless of the availability of water. Full report: http://ei-sp-data01/biblioteca/cera/la_alt_02_16_99.pdf
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