VZCZCXRO8922
RR RUEHRG
DE RUEHSO #0204/01 0931302
ZNR UUUUU ZZH
R 031302Z APR 09
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 9089
INFO RUEHBR/AMEMBASSY BRASILIA 0234
RUEHRG/AMCONSUL RECIFE 4338
RUEHRI/AMCONSUL RIO DE JANEIRO 9096
RUEHBU/AMEMBASSY BUENOS AIRES 3464
RUEHAC/AMEMBASSY ASUNCION 3711
RUEHMN/AMEMBASSY MONTEVIDEO 2885
RUEHSG/AMEMBASSY SANTIAGO 2711
RUEHLP/AMEMBASSY LA PAZ 4089
RUCPDOC/USDOC WASHDC 3257
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SECTION 01 OF 03 SAO PAULO 000204 
 
SIPDIS 
SENSITIVE 
 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
STATE PASS NSC FOR ROSSELLO 
DEPT OF TREASURY FOR LINDQUIST 
DOE FOR CGAY, RDAVIS 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EFIN EINV BR
SUBJECT: THE FINANCIAL CRISIS AND BRAZIL'S ELECTRICITY SECTOR 
 
REF: A. 08 Sao Paulo 260; B. 08 Sao Paulo 392; C. Sao Paulo 92 
 
SENSITIVE BUT UNCLASSIFIED--PLEASE PROTECT ACCORDINGLY 
 
¶1.  (SBU) Summary:  Brazil's electricity demand generally follows 
economic growth and recent data confirms a big dip in consumption, 
particularly from the industrial sector.  The electricity sector 
itself should suffer minimal impacts as most companies are 
well-capitalized and were financially sound leading up to the 
crisis.  Tighter financing is likely to lead to fewer new projects; 
and those will be much less leveraged than before.  The crisis has 
opened a window of opportunity for long-term planning, but given the 
financial strength of the sector, the GOB is unlikely to undertake 
any strategic planning, and instead focus on other sectors to boost 
economic growth.  End Summary. 
 
Electricity Demand Measure of Economic Activity 
--------------------------------------------- -- 
 
¶2.  (SBU) After starting last year with concerns of an energy 
shortage (Ref A), Brazil closed out 2008 with electricity to spare. 
Generally speaking, Brazil's electricity demand has tracked with 
economic growth, increasing at nearly the same margins.  In 2008, 
however, economic growth outpaced that of electricity consumption, 
5.1 percent versus 3.8 percent, respectively.  Primarily due to the 
impacts of the financial crisis on the industrial sector, 
electricity consumption in the last quarter of 2008 declined by 1.4 
percent compared to the fourth quarter of 2007.  Statistics from the 
government-owned Energy Research Company (EPE) show that in December 
alone electricity consumption declined by 1.8 percent over December 
¶2007.  This marked the first decline in electricity consumption in 
Brazil since the GOB implemented an electricity rationing program in 
¶2001. 
 
¶3.  (SBU) In a recent conference on the electricity sector and the 
financial crisis hosted by the Sao Paulo Association of Cogeneration 
of Energy (COGEN-SP), Professor Nivalde Jose de Castro from the 
Federal University of Rio de Janeiro's (UFRJ) Electricity Sector 
Research Group (GESEL) explained that the financial crisis has hit 
energy intensive industrial sectors harder than other sector.  The 
spot price for electricity reflected the ecline in the demand - 
rices fell from R$ 190 per megawatt/hour (MW/h) inOctober to R$ 
120MW/h overnight.  The most pronounced example of the impac of the 
financial crisis on electricity demand ws the 14.9 percent decline 
in electricity demand for Brazil's industrial sctor in January of 
this year compared to January 2008.  This decline is in line with 
the 17.2 percent drop in industrial production observed during the 
same month.  According to Marcelo Parodi, President of energy 
trading company COMERC, 45 percent of Brazil's electricity demand is 
from industrial consumers (about 25,000 MW).  Parodi told Econoff he 
estimates electricity consumption growth would be flat or slightly 
negative, in line with current consensus for Brazilian economic 
growth at 0.01 percent this year. 
 
Impacts on the Sector 
--------------------- 
 
¶4.  (SBU) Roberto Brandao from UFRJ underlined the impact of the 
financial crisis on companies in the electricity sector:  less 
available credit, banks had limited companies' ability to extend 
loan maturities, increased banking spreads, and delays in IPOs and 
stock offerings.  As a result, he expected fewer new electricity 
projects, and noted that highly leveraged companies would have a 
clear disadvantage because developers would need to put more equity 
into projects.  He also anticipated fewer business opportunities for 
generators.  As with other sectors facing the financial crisis, 
Brandao expects to see an increase in mergers and acquisitions. 
 
The Numbers Do Not Explain the Whole Picture 
-------------------------------------------- 
 
¶5.  (SBU) Following on the declines in electricity consumption at 
the end of 2008, early estimates for the first quarter of 2009 which 
show increased electricity consumption when compared to those of 
 
SAO PAULO 00000204  002 OF 003 
 
 
2008 are somewhat surprising at first glance.  For example, February 
and March showed 1.1 and two percent increases, respectively, 
although electricity demand in January was down 2.6 percent over 
¶2008.  However, several factors make it difficult to draw any 
conclusions based on a comparison of electrical demand between the 
first quarters of 2008 and 2009.  Fausto Pinheiro Mendezes, from the 
National Electricity System Operator (ONS) Office of Forecasting and 
Demand, cautioned that many other factors influenced electricity 
demand in the first quarter of 2008.  By and large, the first months 
in 2009 have been warmer than the same months in 2008, requiring 
more electricity to cool residences.  The spot price for electricity 
reached record highs at the start of 2008 because of a drought (Ref 
A), driving down demand in some industries sensitive to price. 
Mendezes noted that demand in 2008 was also mitigated by an increase 
in cogeneration across the manufacturing sector over previous years. 
 He also pointed to the Brazilian Customs strike in March 2008, 
which slowed production and electricity consumption.  Finally, 
because of the greater reliance on gas-fired generators, especially 
in the first part of 2008, Brazil had lower technical losses in the 
transmission grid because the gas-fired generators are closer to 
industrial consumers. 
 
Brazil's Electricity Model to Withstand Crisis 
--------------------------------------------- - 
 
¶6.  (SBU) According to Castro, Brazil's electricity business model 
will withstand the global financial crisis.  Castro explained that 
most of the large distributors and generators went into the crisis 
with a good financial position due to several profitable years 
following the blackouts and rationing in 2001.  Fifty of the 
companies that UFRJ reviewed in a recent report had an average 
growth in profits of 57 percent in 2007.  Similarly, Professor 
Roberto Brandao from UFRJ noted that prior to the crisis, the sector 
had access to long-term structured financing in local currency 
through Brazil's National Development Bank (BNDES), minimal demand 
for external financing, and access to bridge loans from commercial 
banks.  Despite the fact that BNDES previously delayed and decreased 
opportunities for bridge loans and some projects had suffered 
funding problems, Brandao noted that financing for new projects has 
been adjusted to resolve these issues. 
 
¶7.  (SBU) In addition, Castro touted the structure of the 
electricity sector as an instrument against the crisis.  Castro 
stated that the solid regulatory framework protects distributors 
because the GOB guarantees payment.  As a result of the financial 
crisis, he identified industrial consumers as those with the 
greatest risks of non-payment (particularly in the state of Espiritu 
Santo) and residential and commercial consumers as those with the 
lowest risks (mostly located in the SE/South and N/NE), though 
losses to the distributors would be minimal due to government 
guarantees.  Duke Energy, one of the two U.S. companies operating in 
the electricity sector in Sao Paulo, told Econoff that despite the 
decrease in energy consumption in the first quarter of 2009 versus 
the forecasted demand, none of their clients requested a reduction 
in volume or termination of any existing energy supply contracts. 
In general, vertical holding companies are active in generation, 
distribution, and commercialization.  According to Castro, the 
system of electricity auctions facilitates expansion of electricity 
generation, supply and demand readjustments, and incorporates 
long-term inflation indexed contracts.  In response to the crisis, 
large energy consumers that were part of the free market sold off 
1,400 MW of excess electricity to distributors on the regulated 
market in an electricity auction in February. 
 
Over the Long-Term: Plan and Invest 
----------------------------------- 
 
¶8.  (SBU) Growth in electricity demand will likely see more 
increases when industrial production recovers.  Over the long-term, 
the EPE estimates that Brazil will need to invest another R$ 181 
billion (R$ 142 billion in generation and R$ 39 billion in 
transmission, approximately USD 65 billion and 17.7 billion, 
respectively) to meet their demand projections from 2008 through 
¶2017.  UFRJ's Castro stressed that Brazil lost an opportunity for 
 
SAO PAULO 00000204  003 OF 003 
 
 
strategic long-term planning and investment following the 2001 
electricity rationing.  In his view, the current financial crisis 
opened another window of opportunity to think strategically about 
electricity supply.  In October 2008, demand for electricity 
averaged 54,088 MW, compared with 49,991 MW in January 2009.  This 
matches the consumption levels of September 2007.  According to 
Castro, Brazil's electricity consumption will continue to decline 
and it could be another three to four years before consumption 
returns to October 2008 levels. 
 
¶9.  (SBU) On a more positive note, Brandao expects that the GOB will 
consider more dedicated opportunities for alternative energy 
projects because there is less pressure to meet electricity demand. 
Alternative energy projects still face regulatory and financial 
hurdles, and would require incentives to compete with natural gas 
and fuel oil projects because of the lower costs involved.  Laine 
Powell of Duke Energy Brazil told Econoff that the lack of available 
credit is affecting the development of alternative energy projects 
such as biomass and wind power.  However, the GOB has in place 
initiatives for these types of projects, which should in time offset 
the lack of available credit through other sources. 
 
Comment 
------- 
 
¶10.  (SBU) Although there is a clear link between economic activity 
and electricity consumption, comparing consumption data to last year 
to evaluate a potential economic recovery is unlikely to provide an 
accurate picture.  Financially, the structure of the sector is solid 
and should have no problem withstanding the current global financial 
crisis.  However, the crisis in the short-term has impacted 
development of some alternative energy projects in Brazil; many of 
Brazil's sugar mills are facing financial difficulty due to the lack 
of credit and have delayed expansion plans for electricity 
generation capacity (see Refs B and C for more on bioelectricity). 
The fact that, until recently, the sector's capacity to meet demand 
was stretched to the limit is alleviated by lower demand as a result 
of the financial crisis; however, under normal conditions Brazil 
would not be generating enough electricity to meet demand. 
Unfortunately, the GOB may be preoccupied with combating the crisis 
and facing budget shortfalls due to the economic slowdown in Brazil, 
and could miss another opportunity to address capacity deficiencies 
through long-term planning in the electricity sector.  End Comment. 
 
 
¶11.  (U) This cable was coordinated/cleared by Embassy Brasilia and 
Consulate Rio de Janeiro. 
 
WHITE