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DE RUEHBR #0672/01 1371209
ZNR UUUUU ZZH
R 161209Z MAY 08
FM AMEMBASSY BRASILIA
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INFO RUEHSO/AMCONSUL SAO PAULO 2075
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RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 04 BRASILIA 000672 
 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
DEPT OF TREASURY FOR JHOEK 
DEPT OF ENERGY FOR CGAY, RDAVIS 
DOC FOR ADRISCOLL ITA/OLC 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EINV BR
SUBJECT: SOURCES OF GENERATION - ELECTRICITY SERIES #2 
 
SENSITIVE BUT UNCLASSIFED--PLEASE PROTECT ACCORDINGLY 
 
REF: A: Sao Paulo 0031; B: La Paz 0462; C: 06 Sao Paulo 1059 D: 
Brasilia 00593; E: Sao Paulo  F: Rio 0091 
 
 
1.(U)SUMMARY: As Brazil enjoys its recent strong pattern of economic 
growth, many observers question the sustainability of this growth 
given the poor condition of Brazil's infrastructure.  One critical 
element in supporting future growth will be Brazil's ability to 
provide a reliable electrical supply.  The country is currently 
heavily dependent on hydroelectricty without much diversification, 
leading to difficulties in years with light rainfall. Chief of Staff 
Dilma Rouseff says that by 2020 current resources will be 
insufficient to meet the demand, while some outside the government 
caution that problems could arise as early as 2009.  Brazil faces 
many challenges in its ability to ensure sufficient electrical 
generation capacity, and while there are long term plans to address 
the deficiency, the current generation capacity remains just barely 
sufficient. END SUMMARY. 
 
------------------ 
WHAT IS THE NEED? 
------------------ 
 
¶2.  (U) Apart from a slowdown in the 1980s during a period of low or 
negative economic growth, Brazil's energy consumption has been 
increasing at a rate higher than the world average.  According to 
the Ministry of Mines and Energy (MME), energy consumption decreased 
from 332 TW-hour/year (tera - or trillion - watts) in 2000 to 310 
through rationing in 2001 and since that time has risen at an 
average of 5% per year, which is also Brazil's target rate of GDP 
growth.  By 2007, the rate of consumption had risen to 435 TW-hours 
and is predicted to be 533 TW-hours by 2011.  Data from the national 
electrical system unified operator, ONS, shows that maximum demand 
for 2007 was 64,000 megawatts (MW) and they predict by 2011 that 
will rise to 79,000 MW.  This compares with an installed capacity of 
98,000 MW in 2007 and a predicted 109,000 MW in 2011.  However, 
sector experts note that installed capacity figures can be 
misleading, particularly since Brazil's capacity is heavily 
influenced by rainfall levels and actual production frequently falls 
short of capacity. 
 
----------------- 
RELIANT ON HYDRO 
----------------- 
 
¶3. (U) According to the World Energy Council (WEC), Brazil has the 
world's third highest potential capacity for hydroelectricity after 
China and the U.S., and is the third largest producer of hydro-power 
after Canada and the U.S.  Brazil's dams are located primarily in 
the heavily populated southeast, but there are smaller dams 
throughout the country which are linked into the national power 
grid.  The largest dam, Itaipu, is owned jointly with Paraguay with 
a 50-year contract that is due to expire in 2023.  (Note: 
Paraguayan president-elect Lugo made renegotiating more favorable 
terms on the Itaipu contract a central part of his campaign 
platform.  The GOB has said they are unwilling to renegotiate the 
contract, but in the days following the Paraguayan election have 
indicated a willingness to work on a solution outside of the 
contract.  The Brazilian Congress has been vocal in its opposition 
to any contract renegotiation in the wake of Lugo's victory.  End 
Note.) 
 
¶4. (SBU) Pricing electricity that is dependent on water levels can 
be an art not a science, AES Electropaulo CFO Alexandre Innecco 
explained to Econoff.  The national electrical regulatory body, 
ANEEL, sets an assured energy capacity for each hydro-generation 
plant based on average river flows.  ONS, in turn, controls how much 
water is dispatched via the various rivers based on reservoir 
levels, and upstream/downstream activity and determines which 
generators will produce and how much.  Hydroelectric plants can only 
 
BRASILIA 00000672  002 OF 004 
 
 
contract electricity up to their assured capacity; however, a plant 
can conceivably generate less than its contracted energy and would 
have to purchase electricity either on the bilateral electricity 
market (where generators can trade excess energy generated above 
assured capacity) or on the spot market.  Innecco explained, 
however, that contracted hydroelectric generators generally are not 
authorized to buy on the spot market and face penalties that 
effectively double the spot price. 
 
--------------------------- 
Other Sources of Electricty 
--------------------------- 
 
¶5.  (U) Aside from hydroelectricity, other renewables do not play a 
significant role in Brazil's electrical supply, although there are 
reports that the new Super Eletrobras may be charged with expanding 
into these areas.  There is significant interest in developing 
electrical production based on the next generation ethanol, some of 
which already provides electricity for ethanol factories (septel). 
As measured by the speed and regularity of prevailing winds, 
according to the WEC, wind energy is an untapped area with high 
potential in Brazil, especially in the areas of the Northeast that 
do not have sufficient water supply for hydroelectric dams.  Growth 
in this area remains constrained for many reasons, including a high 
tariff on the import of wind generation equipment.  The result is 
that Brazil has one of the world's lowest rates of installed wind 
capacity, and the growth rate in this area has lagged behind that of 
other countries. 
 
¶6. (SBU) Nuclear energy makes up a very small part of Brazil's 
electricity generation - its two nuclear plants in Rio de Janeiro 
State make up only about 2% of production capacity in the country. 
Although Brazilian officials, including MME Minister Lobco in a 
conversation with Ambassador Sobel, have indicated Brazilian 
interest in taking advantage of Brazil's large uranium reserves to 
become a yellow cake exporter, in the near term any civil nuclear 
expansion will be minimal.  In the long-term however, Chief of Staff 
Dilma Rouseff confirmed during Senate questioning on May 6 that the 
government has long term plans to expand civil nuclear generation 
even beyond construction of the long-anticipated third reactor. 
Brazil's long-term desire to increase their civilian nuclear program 
is in part delayed by the fact that, as World Bank Director Briscoe 
told Econoff and Ministry of Foreign Relations Director for 
Non-renewable Energy Vivian Loss San Martin confirmed, the GOB 
contracted the building of the third nuclear plant at the time of 
construction of the two existing ones, leaving a warehouse full of 
already purchased 1970s equipment that the government must now 
figure out how to update with its French and German partners in 
order to move ahead, as they clearly intend to do. 
 
¶7. (U) Brazil's thermo electrical plants run largely on coal, of 
which Brazil does not have sufficient quantities, and gas, which 
also requires imported sourcing.  Petrobras is installing new 
liquefied natural gas plants this year to augment thermal capacity 
(reftel A).  Over the medium-term, new sources of natural gas at 
Tupi and Sugar Loaf (reftel F) will provide a new, domestic source 
of natural gas for the potential expansion of thermal electric 
plants. 
 
---------------- 
Challenges 
---------------- 
 
¶8.  (SBU) ANEEL General Director Jerson Kelman told Econoff that one 
of the biggest challenges to Brazil's energy sector is increasing 
production in an efficient and environmentally friendly way.  As 
APINE president, Luiz Fernando Leone Vianna, also pointed out in a 
separate conversation echoing Kelman's, the current permitting and 
licensing system makes the building of hydroelectric dams very 
challenging due to societal and environmental concerns which 
perversely makes the more polluting, carbon heavy, non-renewable 
conventional thermoelectric plants much easier to build.  The World 
 
BRASILIA 00000672  003 OF 004 
 
 
Bank has recently completed a study which addresses this and other 
complications in energy licensing in Brazil, making recommendations 
in an attempt to ease the licensing challenges to electric companies 
seeking to operate in Brazil. 
 
¶9.  (SBU) The independent energy suppliers association, ABRACEEL, 
believes the governmental role in the concessions process has led to 
the distortion of the system.  ABRACEEL President Paulo Pedrosa told 
Econoff, that this year's concerns over a possible energy crisis 
were not due to true generation limitations, but rather a shortage 
of supply caused by the government's artificial intervention in the 
system of auctions to keep prices low.  He points to government 
understatement of the actual demand contracted at auction as a way 
of decreasing the number of contracts for suppliers to vie for.  In 
so doing, interested suppliers bid the price lower in an attempt to 
gain the contracts.  This tactic not only results in lower energy 
prices for the consumer but lower energy supply for the coming year 
as well. 
 
¶10.  (SBU) Also, as Brazil seeks to diversify its electrical 
generation base, it must contend with their current lack of other 
conventional resources such as coal and gas.  They must rely on 
imports and have in the past been caught on the short end of the 
stick with unreliable regional suppliers.  Bolivia for example 
reneged on their contract with Petrobras, successfully demanding a 
renegotiating.  Bolivia just this year tried to reopen the issue to 
pursue the GOB to cede part of its gas supply from Bolivia to 
Argentina, an offer the Lula government firmly declined.  Argentina 
as well has not lived up to its gas contracts and generally fails to 
supply the level of gas to Brazil that the two sides had negotiated. 
 (Reftels A and B) 
 
¶11. (U) Finally, according to ONS, the current dilemma in management 
of the electrical system is how to optimize the use of the 
hydropower available.  Having reached the limits of its current 
capacity, Brazilian electrical regulators must optimize the 
electrical supply they have available.  What percentage of 
hydroelectric power to reserve for the dry season and to what extent 
to utilize the stop gap measure of thermoelectric capacity is a 
perennial puzzle.  Since thermo power is much more expensive, ONS 
tell us they would prefer to minimize its use in favor of hydro. 
However, failure to predict demand or rainfall correctly may mean 
insufficient hydropower for the year.  This could cause authorities 
to find themselves on the wrong side of the spot market for coal- 
and gas-generated thermal electricity - leading to very painful cost 
hikes, most likely to affect industry and, therefore, potentially 
overall GDP growth.  Or, in the worst case scenario, authorities 
could be driven to impose rationing or risk blackouts.  On the other 
hand, trying to compensate early in the season with thermo power, 
having incorrectly anticipated a shortage of rainfall, may lead to 
the more economically efficient hydro supply going to waste and 
electricity costs rising unnecessarily due to the employment of 
thermal.  This juggling act is becoming more precarious as Brazil's 
thirst for electrical power equals its capacity for generation. 
 
¶12.  (SBU)COMMENT: As Brazil looks to continue on its path of strong 
economic growth, capitalizing on the recent decision by Standard and 
Poor's to upgrade Brazil's foreign currency sovereign credit rating 
to investment grade (reftel E), they may find this growth 
constrained by limits in the electricity sector.  The Lula 
government is searching for ways to expand the generation capacity, 
presenting areas ripe for possible bilateral and regional 
cooperation as well as potential U.S. investment.  In the meantime, 
the government finds itself having to do a precarious balancing of 
limited resources in the electrical sector to avoid rationing and 
possible blackouts on one hand, or spikes in electrical costs on the 
other.  The nature of the challenge and Brazil's attempts to control 
it will be the subject of the next cable in this series.  END 
COMMENT. 
 
¶13.  (U) This cable was written in conjunction with Sao Paulo and 
coordinated throughout Mission Brazil. 
 
BRASILIA 00000672  004 OF 004 
 
 
 
CHICOLA