New Study: Brazil Power Report Q2 2016

T he Brazil ian electricity market will offer several business opportunities to project developers and power sector investors over the coming quarters , despite a worsening of the country's economic recession in 2016 . The renewables and hydropower sectors will present the biggest upside to international investors in terms of scale, but we see opportunities also in power transmission and distribution. That said, we maintain that high interest rates and continued currency weakness, coupled with a corruption investigation into state-run energy companies, will keep the power sector's growth below its full potential.

Latest Updates And Structural Trends

Brazil current macroeconomic malaise will increase costs for power project developers through higher interest rates, while persistent currency weakness will inflate import costs. These factors - coupled with an ongoing investigation on state-run utility Eletrobras, which could result in delays and asset impairments - are tempering our growth outlook for power capacity and generation in Brazil over the coming decade. As such, we forecast growth in the Brazilian power sector to be significant, but below the government's official targets.

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This quarter we have revised up our forecast for Brazil's hydropower capacity and generation over the next 10 years as a result of progress in the implementation of the country's project pipeline, including the Belo Monte mega-project. In late January 2016 a federal court revoked a lower court's injunction that had suspended the operating license for the hydropower plant, clearing the way for the commissioning of eight of its 24 turbines - with the switch-on scheduled for February 2016.

We expect to see a number of privatisations in the Brazilian power distribution sector in 2016 and 2017, starting with the sale of Eletrobras' stake in Celg-D. In late December 2015, the shareholders of Eletrobras authorised the sale of the company's 50.93% stake in Celg-D. The privatisation of Eletrobras' other six (fully owned) power distribution subsidiaries is also on the cards as the company needs to raise cash to invest in its power generation and transmission segments, but a decision on their sale has been delayed.

The drought that has affected Brazil over the past two years has started to ease since the last few months of 2015. As a result, in late January 2016, Brazil's electricity regulator Aneel cut part of the surcharge imposed on power tariffs - triggering a rally in the share price of Brazilian listed utilities. In particular, Aneel approved a reduction in the extra fee charged under the red and yellow flag system, with the change to be effective from February 1.

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