Hot Times for the Electrics: Capital Market Reactions to El Nio and the Potential Benefits for Brazilian Companies


What do high temperatures do to the electrics? Eletrobras, Copel, and Eneva are also expected to benefit, according to BBA.

With the increasing frequency of heat waves and the potential impacts on energy prices and operating costs, the capital markets are closely watching how El Nio will affect the energy sector. Ita BBA, a prominent bank, predicts that higher temperatures will continue to significantly impact energy demand, even without any unusual events like recent heat waves.

One crucial element that could be affected by these high temperatures is the hydroelectric heating elements (UHEs), particularly the water heating element in the northern region of Brazil. These UHEs have played a critical role in meeting energy demand in the first half of the year, but the shorter heating period and lower water flows may lead to a substantial decrease in production.

According to the BBA, major events driven by El Nio could cause more energy price volatility and potentially increase thermal energy surplus. To take advantage of this scenario, the bank 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. Furthermore, the bank also anticipates a positive impact on distributors with concessions in regions where higher temperatures are predicted, such as Equatorial and Energisa.

Looking ahead, the forecast for an El Nio in 2024 adds more complexity to the situation. El Nio is characterized by the warming of Pacific Ocean waters and occurs irregularly every five to seven years. Columbia University climate researchers predict a 55% chance of a “strong” El Nio between January and March 2024, with a 35% chance of reaching “historically strong” levels between November and December.

While a historically strong El Nio may not have a significant influence, it can still lead to an increase in climate anomalies associated with the time period. Additionally, there is also a 58% chance of a neutral scenario in June, July, and August, while La Nia scenarios for the end of 2024 are gaining strength.

The forecast indicates below-average rainfall for most of Northern and Northeastern Brazil, which could have implications for water supply and energy generation. There are also predictions of below-average precipitation in several parts of Minas Gerais during the first quarter of 2024, the hottest month of the year in Brazil.

On the other hand, the Sul region of Brazil has a moderate probability of above-average precipitation until at least the second quarter of 2024.

Meanwhile, Columbia University’s forecasts indicate a high likelihood of above-average temperatures throughout most of Brazil for the entire forecasted period (December 2023-May 2024). This is driven by a combination of factors, and the only area where temperatures are expected to be significantly different from average is the far northeast of Brazil.

These predictions and potential impacts on energy generation and demand have gained the attention of investors and market participants. The uncertainty surrounding El Nio and its effects on the energy sector create opportunities for companies like Eletrobras, Copel, and Eneva, which are well-positioned to benefit from these scenarios.

Overall, it is vital for market players to closely monitor the developments related to El Nio and the potential implications for the energy sector. The dynamic nature of weather patterns and their impact on energy supply and pricing make it crucial to adapt investment strategies accordingly.