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World Cup Blackouts Ruled Out by Brazilian Government

Feb. 6 (Bloomberg) -- Brazil’s electricity grid, beset by low dam levels and blackouts, will be able to cope with hosting the soccer World Cup, according to the government.

While 6 million people were affected by supply cuts this week as a heat wave pushes up demand, temperatures and consumption will cool by the time the tournament begins in less than five months, said Deputy Energy Minister Marcio Zimmermann. The event, whose buildup has included cost overruns and project delays, will attract 600,000 visitors from outside Brazil, according to state tourism agency Embratur.

“We won’t face power shortages at the World Cup,” he said in a Brasilia interview yesterday. “We have a group of people working on the World Cup and we don’t see additional demand because it will be cooler with less air conditioning use.”

Brazil has increased power capacity since 2001 when it last had to ration supply and now has enough to face an even longer and harsher drought than the one draining reservoirs and sending spot power prices to record highs, Zimmermann said.

Dams in the southern region are low after the driest January since 1954. The drought and heat caused cattle prices in Brazil to surge to a record this week, while sugar futures are posting the longest rally in four months and soybeans touched a two-week high.

Poor Planning

The low reservoir levels and blackouts reflect planning errors rather than structural weaknesses, according to Claudio Sales, who heads industry think tank Instituto Acende Brasil.

“The government has diminished the industry’s investment capacity after concession renewals in such a way that there’s a significant drop in confidence from investors,” he said in an interview from Sao Paulo. “Elsewhere people are studying ways to produce more energy at lower costs. In Brazil, the government thought it could cut power rates by decree.”

In 2012, President Dilma Rousseff put forward a plan to reduce electricity rates in an attempt to contain inflation and cut production costs in the country by an average of 20 percent. The plan consisted in asking utilities to cut prices in exchange for early renewal of concessions.

Now the government is considering measures to help power distributors that need to tap the spot market, Mauricio Tolmasquim, president of Empresa de Pesquisa Energetica, the government’s energy-research agency, told reporters Jan. 4.

Spot Losses

Utilities including Eletropaulo Metropolitana SA and Ampla Energia & Servicos SA may face as much as 15 billion reais ($6.2 billion) of losses from high spot prices, Erico Evaristo, the head of Sao Paulo-based Bolt Comercializadora, said Jan. 31. The government will have to step in to ensure those costs aren’t passed on to consumers, he said.

“Any calculation on the magnitude of that help is still premature,” Tolmasquim said.

Electricity regulator Agencia Nacional de Energia Eletrica is calculating how the higher price of energy will feed through to rates that distributors charge clients, Romeu Rufino, the agency’s director, said yesterday in an interview.

“We need to have a solution for the distribution utilities by the end of the month because they need to make payments for spot market energy by March,” he said. “They are in a delicate situation.”

Low water levels at the nation’s reservoirs have prompted Brazil to produce more energy from fossil fuels. The country’s power system is “diversified” and there won’t be a need to ration energy, Tolmasquim said.

Blackout Probe

“We have over 120 gigawatt installed capacity and the consumption records went up to 84 gigawatt,” Zimmermann told reporters on Jan 4. “There is a surplus in the system.”

The government will investigate blackouts caused by two short circuits at a transmission line in Tocantins that shut off power from 2:03 p.m. to 3:30 p.m. local time on Jan. 4.

The blackout affected parts of 11 states and the short circuits were triggered automatically to avoid a shutdown of the wider system, a press official for the grid operator Operador Nacional do Sistema Eletrico, who asked not to be identified in line with company policy, said in a telephone interview yesterday. Government officials and companies will meet tomorrow to discuss what happened, the official said.

‘Biggest Challenge’

High spot prices could benefit generators that aren’t fully contracted to supply output to clients, such as Cia. Energetica de Sao Paulo, or Cesp, Cia. Energetica de Minas Gerais, or Cemig, and Cia. Paranaense de Energia, or Copel, according to Vitor de Sousa, an analyst at GBM SAB de CV.

“Is it the end of the world? No, because the rainy season goes on until late March or early April and if it rains dams can go up,” Sousa said by telephone from Sao Paulo. “With Copel, whatever gains the generation unit has are generally compensated by the bad results at the distribution unit.”

Brazil uses hydroelectric generation for 70 percent of its power needs, according to the regulator. Because reservoirs in the center-southeastern area are below 40 percent capacity, thermo plants use reached 15 gigawatt, sending spot prices to a record 822 reais per megawatt-hour last week.

The electricity system is going through the biggest challenge in recent years, Tolmasquim said. “We had droughts last year and now the driest January since 1954 and this is reducing the water reservoir levels,” he said.

This week’s blackouts add to concerns that the system conceived by President Rousseff while she was energy minister may fail her in an election year, according to Senator Alvaro Dias of opposition party PSDB.

“Rousseff said these blackouts were a thing of the past,” he said yesterday from Brasilia. “Obviously it’s still an issue.”

To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net; James Attwood at jattwood3@bloomberg.net

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