Every second, about 470,000 cubic feet of water tumbled over the Guaira Falls on the border of Brazil and Paraguay. By comparison, Niagara Falls exhibits an estimated flow rate of 85,000 cubic feet per second.
Inspired by Guaira Falls’ 18 individual cataracts grouped in seven clusters, Brazilian poet Carlos Drummond de Andrade described series of waterfalls as “seven liquid sculptures.”
But in 1982, the construction of the Itaipu Dam and hydroelectric power station permanently silenced Guaira Falls’ roar.
Over the past three decades, Brazil has harnessed its many rivers to produce inexpensive hydroelectric power; this source of inexpensive electricity accounts for about 80 percent of the nation’s generation.
Unlike solar- and wind-power installations, hydropower plants usually generate electricity at their nameplate capacity—unless water levels recede.
Besides destroying the nation’s ecological wonders, Brazil’s reliance on hydroelectric power makes the country’s electricity supply vulnerable to droughts; today, the nation finds itself in the midst of one of the worst dry spells in its modern history.
In late July, officials warned that many cities would need to ration water to limit draws on reservoirs. For example, Sao Paulo’s largest reservoir of potable water has dwindled to about 100 days of supply, while reservoirs in southeastern Brazil stand at about 33.6 percent of their total capacity.
At the San Francisco MoneyShow, I hosted a panel that included a representative from Companhia Energetica de Minas Gerais (Sao Paulo: CMIG4, NYSE: CIG), one of Brazil’s largest power generators and distributors. Hydropower accounts for more than 90 percent of the utility’s generation mix.
When asked about the potential for Brazil to diversify away from hydroelectric power, he indicated that any transition would require a great deal of times and investment.
Meanwhile, the severe drought gripping Brazil has propelled electricity costs to record levels this year.
In the short term, elevated electricity prices have been good news for Companhia Energetica de Minas Gerais (CEMIG), with power generation accounting for 96 percent of the utility’s pretax operating income, compared to between 60 and 70 percent in a normal year.
Ironically, the Brazilian government’s efforts to lower power costs are responsible for CEMIG’s windfall.
In September 2012, President Dilma Rousseff’s government demanded that Brazil’s leading utilities slash electricity costs by about 20 percent in exchange for extending concessions to operate their power plants. Failure to comply would mean that the ownership of these facilities would revert to the state.
Prior to this announcement, the industry had operated under the assumption that the government would extend the concessions under their existing terms.