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UPDATE 4-Brazil's hot, dry summer may lead to energy rationing

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* Hydroelectric dam reservoir levels critically low

* Energy minister dismisses private concerns of rationing

* Greater use of thermo-power expected to push up rates

By Anthony Boadle

BRASILIA, Jan 7 (Reuters) - Brazil faces the possibility of
widespread energy rationing for the first time since 2001, as a
hot, dry summer has deprived hydroelectric dams of needed water
while boosting power use to run air conditioners in sweltering
cities.

Even if the country escapes rationing, electricity experts
say it may have to boost use of thermo-electric power - a more
expensive option which could undermine President Dilma
Rousseff's plans to lower energy rates.

Energy Minister Edison Lobao said the extra cost of
diesel-fired plants would add less than 1 percent to consumers'
electric bills during the months they are in use, ruling out the
possibility of new government controls.

"There is no chance of rationing, no chance of shortages,"
Lobao said in an interview on the Globo television network.

On Monday, Brazil's stock market shed 1 percent as rationing
fears intensified. Depending on how Rousseff handles the
shortage - and whether it rains in the next few weeks - the
fallout could impair Brazil's ability to hit its inflation goal
in 2013 and damage growth in an already stagnant economy.

Several big cities already experienced long blackouts late
last year. Rationing would cause particular disruptions for the
country's large, power-hungry mining and metallurgical sector.

In late December, Rousseff dismissed the idea of rationing
or a power crisis as "ridiculous".

But on Monday, Folha de S.Paulo newspaper reported that the
president has called an emergency meeting of energy officials on
Wednesday to discuss the situation. Government officials told
Reuters the meeting of a committee that monitors electricity
supplies was previously scheduled.

Brazil's mostly "green" hydroelectric power sector, which
accounts for 67 percent of its electricity supply, has been the
envy of countries dependent on dirtier and more costly sources
of power. But low water levels and dry climate are now showing
the vulnerability of depending on hydro-power.

Due to environmental restrictions, Brazil's newer
hydroelectric dams have smaller reservoirs that are more
vulnerable to changes in climate and drought.

Energy shortages and deficient infrastructure, which caused
widespread blackouts in Latin America's largest nation last
year, are a sensitive issue for left-leaning Rousseff, who as
energy minister a decade ago was charged with making sure
rationing never happened again. An energy crisis on her watch
would dent her very high approval ratings.

The southern hemisphere summer is usually Brazil's wettest
season, but not this year. In the poorer northeast of the
country, lack of rain has hurt corn and cotton crops, wiped out
a third of sugar cane production and left cattle and goats to
starve to death in dry pastures.

CRITICAL RESERVOIR LEVELS

Brazil's private sector is growing increasingly anxious.

Shares in major power utilities traded on Sao Paulo's
BM&FBovespa fell 2.5 percent on Monday over concerns that
rationing would be implemented as water levels at hydroelectric
dams dip near critical levels.

According to the national grid operator ONS, hydroelectric
reservoirs in the populous southeast industrial hub of Brazil
are operating at 28.8 percent of capacity, and those in the
northeast are at 31.61 percent of capacity. Some reservoirs only
have enough water to operate for another six weeks.

"Let's hope for rain in January or February, because
reservoir levels are at their lowest in 10 years," said energy
expert Adriano Pires of the Brazilian Center for Infrastructure.
"If there is little rain and economic growth recovers, we are
bound to have rationing before the end of the year."

While forecasters expect rain in the south, the Northeast is
suffering its worst drought in decades, threatening hydro-power
supplies in an area prone to blackouts and potentially slowing
economic growth in an emerging agricultural frontier.

Power consumption shot up in recent weeks due to hot weather
that boosted air conditioner use.

GAS POWER AND HIGHER PRICES

Even though there are no estimates of the size of the energy
shortfall, private players on Brazil's open electricity market
are already factoring energy rationing into their projections.

"The chance of not having rationing is small. The situation
is ultra-critical," one power sector executive told Reuters last
week. He added that his company has factored in a period of
rationing into its planning for the year. The executive spoke on
condition of anonymity due to the sensitivity of the matter.

Mauricio Tolmasquim, head of the federal energy research
institute EPE and a close associate of Rousseff's, said in a
radio interview there was no risk of an energy shortage, noting
gas-fired generators were on hand as a backup.

Brazil generates 18 percent of its electricity with gas,
which is imported by state-run oil giant Petrobras,
energy expert Pires said. He added that the company is paying a
high price for imported liquefied natural gas (LNG).

Petrobras has stepped up imports of LNG with two cargoes
from Norway and the United States arriving at a northeast
terminal so far in January, Reuters ship tracking data showed on
Monday.

The energy ministry last week granted a natural gas import
license to the Uruguaiana thermoelectric plant in Rio Grande do
Sul state, which is owned by AES Brasil and has been at
a standstill since 2009 when Argentina cut off gas supplies. If
Argentina does not reopen the gas pipeline valve for Uruguaiana,
the plant will have to rely on LNG shipments from abroad.

Brazil imposed power rationing in 2001 and temporarily cut
supplies to homes that exceeded the limit, severely crimping
economic growth that year. Businesses that lowered consumption
were rewarded.

Brazil is susceptible to power crises caused by drought. The
one in 2001 caused huge economic and political turmoil, with
rationing for the better part of a year and a
multibillion-dollar push to build gas-fired thermal plants.

Brazil's electricity sector has grabbed headlines in the
past six months after the government imposed significant cuts on
the price of power to consumers. Power generating firms and
distributors have said that could undermine investment.

Analysts at BTG Pactual Group say the hydropower reservoir
scenario looks more "delicate" than it did in 2000, just a year
before energy rationing. But Brazil's thermal capacity is now
twice as big as in 2000 and major projects such as MPX Energia
SA's thermal plants and the Jirau and Santo Antonio
hydro plants are coming onstream soon, a BTG Pactual note to
clients said.

Higher electricity prices are more likely than rationing
since thermal plants will be used more throughout the year, and
rates could rise by as much as 14 percent, BTG Pactual said.

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