Energy bill expected to be price villain next year: The forecasts for 2022 in Brazil

RIO DE JANEIRO, BRAZIL – Some basic items in Brazilians’ lives registered sharp price hikes in 2021. Such is the case of electricity, meat and fuels. All of them have a common denominator, the dollar, which suffered a great variation this year.

Experts believe that fluctuations will not end next year, although the pressure tends to ease on a number of items.

However, the villain will be the electricity bill. Although rainfall has improved the level of hydroelectric power plant reservoirs in recent months, the current volume should not be enough to ensure a concern-free 2022 in the electricity sector.

According to the Ministry of Mines and Energy and the National Electric System Operator (ONS), the Southeast/Midwest subsystem – considered the “water tank of the electric sector” – is expected to reach 58% capacity by May 2022. The National Interconnected System (SIN) is expected to reach 34% storage by the end of this month. However, the level in this region currently stands at 20%.

“To end the year with a 20% level is not reassuring, so in 2022, we will continue to face difficulties in the electrical sector. We must wait and see how rainfall will behave in the wet season to determine if we will start the dry season, in April, with adequate storage levels,” says the Brazilian Center for Infrastructure (CBIE) director Adriano Pires.

In November, the National Electric Energy Agency (ANEEL) decided to maintain the Water Scarcity tariff flag, with an additional R$14.20 (US$2.52) for every 100 kilowatt-hours consumed. This is equivalent to a 6.78% increase in the electricity bill in relation to the red flag level 2, of R$9.49 per 100 kilowatt-hours.

Nevertheless, ONS director-general Luiz Carlos Ciocchi dismissed the risk of rationing and said that the experience gained from the measures taken in 2021 will provide greater efficiency and security to tackle the coming year.

“Depending on the rains, we may have a more or less peaceful 2022. With the current scenario, we do not see any reasons for rationing or blackouts due to water issues,” Ciocchi said.

THE COVID FACTOR

Professor Roberto Ellery of the University of Brasilia’s (UnB) Economics Department believes that, overall, the variation in input prices will depend on 4 items: the novel coronavirus pandemic, the speed in which companies will restructure after the 2020 and 2021 shock caused by Covid-19, the exchange rate, and public policies.

“Specifically in relation to Brazil, I emphasize that the Central Bank has been adjusting interest rates, which helps control demand and supports the exchange rate, and there may be some relief from the water crisis, thus reducing the pressure on energy prices,” the specialist reassures.

BEEF

The National Supply Company projects a better scenario regarding the value of beef. As well as the dollar, Chinese demand, the appreciation of the Brazilian real, and the increase in agricultural production provide a good perspective for next year. A lower exchange rate is another factor that can bring prices down.

According to the company’s executive director, Sérgio De Zen, the scenario is promising. For 2022, the estimate is for a harvest of 289 million tons, an increase of close to 19% compared to this year’s, anticipating weather conditions and normal adversities.

One of the decisive factors for the rise in beef prices was the embargo on exports from China, the world’s largest consumer of meat imported from Brazil. Suspended from October through December this year, exports to the Asian giant were resumed and led to a surge in prices.

“The resumption of exports to China is another point that can lead to new hikes in meat prices. The Real is still very devalued and this increases other countries’ interest in Brazilian products because our cheaper currency becomes competitive, so our products are cheaper. This boosts the increase in exports. By increasing the volume of meat exports, the Brazilian market is de-supplied and this drives up prices,” explains FGV’s Brazilian Institute of Economics economist and professor André Braz.