Heat Waves and Hydroelectric Hurdles: Impacts of El Nino on Brazil’s Capital Markets and Electric Companies
What impact will high temperatures have on the electrical industry? According to Ita BBA, companies like Eletrobras, Copel, and Eneva are expected to benefit from the effects of El Niño. The phenomenon has caused two heat waves within a short period, leading to significant impacts on energy prices and operating costs. Even without unusual events like heat waves, Ita BBA predicts that higher temperatures will continue to affect energy demand.
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Ita BBA also emphasizes the importance of certain hydroelectric heating elements, particularly the water heating element in the northern region of Brazil. These elements played a critical role in meeting energy demand during the first half of the year but may experience a decrease in production due to a shorter heating period and lower water flows.
The bank warns that major events related to El Niño could lead to more energy price volatility and an increase in thermal energy surplus. To take advantage of this scenario, Ita BBA recommends investing in companies like Eletrobras, Copel, and Eneva. Eneva, in particular, has a thermal power plant complex that can be activated as needed to ensure the reliability of Brazil’s electrical grid. The bank analysts also anticipate a positive impact on distributors with concessions in regions predicted to have higher temperatures, such as Equatorial and Energisa.
El Niño, which is characterized by the warming of Pacific Ocean waters, occurs at irregular intervals of five to seven years and lasts for an average of one to one and a half years. The most recent major El Niño event took place between 2014 and 2016. Columbia University climate researchers have predicted a 55% chance of a “strong” El Niño between January and March of 2024, with a 35% chance of reaching “historically strong” levels between November and December.
While a historically strong El Niño may not necessarily have a significant influence, it can lead to an increase in climate anomalies during that time period. The study also indicates a 58% chance of a neutral scenario for June, July, and August, while La Niña scenarios for the end of 2024 are gaining strength.
The report predicts below-average rainfall for most of Northern and Northeastern Brazil. It also forecasts below-average precipitation in several parts of Minas Gerais during the first quarter of 2024, which is the hottest month of the year in Brazil. However, the Sul region of Brazil is expected to have a moderate probability of above-average precipitation until at least the second quarter of 2024.
In terms of temperature, forecasts from Columbia University show a high likelihood of above-average temperatures throughout most of Brazil from December 2023 to May 2024. The only significant deviation from average temperatures is expected in the far northeast of Brazil.
These predictions have significant implications for the electrical industry in Brazil. Higher temperatures and changes in rainfall patterns can impact energy demand, production, and prices. Companies like Eletrobras, Copel, and Eneva are expected to benefit from these changes, while distributors in regions with predicted higher temperatures may also experience positive effects. Understanding and adapting to the effects of El Niño will be crucial for both investors and industry players in the coming years.
