Brazil Drought and the Road Ahead for Electricity Markets

Electricity has become an integral part of every nation’s economic growth. According to IEA approximately 18% of the world’s energy consumption in 2012 is in the form of electricity. The electricity market globally has grown at a CAGR of 3.3% from 2000 to 2014 and is estimated to grow further to cater to the needs of growing electricity demand. So it is important for a country and any firm dependent on energy to have risk management system in place to mitigate the risks associated with the supply of electricity.

One of the important factors that affect the generation cost of electricity is the fuel mix of electricity. The fuel mix of electricity varies from country to country. Currently, developed countries moving towards renewable energy and the developing countries are still dependent on fossil fuels for generating electricity and their energy requirements. While some countries’ fuel mix is highly concentrated (Ex. Brazil, France), some countries depend on various fuels to generate electricity.

The fuel mix for generating electricity varies from country to country and it plays an important role in determining supply and price of electricity. In the present scenario where the energy price is dependent on the global supply demand scenario rather than on the domestic supply demand it is important for firms to be aware of the possible risk associated with the fundamentals influencing price of energy.

Brazil, a country who has got approximately 12% of the world’s fresh water resources depended on its natural water resources to produce electricity. Hydroelectricity contributes about 80% of Brazil’s domestic electricity generation. Brazil is currently facing the worst drought in last 80 years, since there were no enough rains from the last 3 years.

Author: Gadde Ramachandra Rao