Lights out for the Carnival of Brazil?

Water shortages affect Brazil more than most countries. After China, Brazil is the world’s largest producer of hydroelectric power. Three quarters of Brazil’s power is produced in hydroelectric plants. And consumption is rising: By the year 2050, Brazil will need three times more electricity than now.

The current drought is especially threatening the highly populated regions and cities in south-eastern Brazil, Rio and São Paulo. The Cantareira system, a chain of reservoirs, supplies nearly half of the 22 million people in the greater São Paulo area. The storage reservoirs are only 5 percent filled. Across the country, 17 of the 18 most important hydroelectric plants are reporting lower water levels than in 2001, the year of the last energy crisis, or rather water crisis.

Climate change means that Brazil is threatened by even more frequent dry periods. Fourteen of the 15 warmest years have occurred since the year 2000. According to the World Organization for Meteorology (WOM), 2014 was the warmest year since weather records have been kept. As the air warms, ocean temperatures rise as well, which can have a considerable impact on local weather and especially precipitation. Some regions experience heavy rainfall and flooding, while other regions experience drought conditions.

Drought threatens the Amazon river basin, but also the United States and Europe

In 2009, Allianz and the WWF already warned about the drying-out of the Amazon rainforest in the climate report entitled “Tipping Points.” The report expects regional droughts to be ten times more frequent and also longer in the future. They will become the norm by the year 2050. These “tipping points” indicate  irreversible changes with dramatic consequences within a short period of time. Forests attract moisture, cool the air and promote rainfall. The huge Amazon rainforest is considered to be earth’s green lung. By the end of the century, longer drought periods could threaten up to 70 percent of the Amazon basin. Deforestation and slash-and-burn clearance methods heighten the risk further.

Not only Brazil, also other regions of the world are acutely threatened by drought. In the United States, southern California is particularly at risk. For the last three years, unusually little rain has fallen in this region. Destructive forest fires spread with frightening speed on the extremely dry terrain. Unlike the case in Brazil, however, the authorities here invested at an early stage in other forms of power generation besides hydroelectricity, so that the power supply is at least not directly affected by the drought. Europe, too, is affected by climatic changes. Last year, several regions of southern Spain experienced the worst drought since the Spanish Meteorological Office began keeping records. Furthermore, the consequences of the heat wave that struck Europe in 2003, causing thousands of deaths in France primarily, were exacerbated by a longer dry period.

The huge Amazon rainforest is considered to be earth’s green lung.

Climate change is now the biggest long-term threat to companies sales interruptions

Most companies have since recognized the risks of climate change. The current Allianz Risk Barometer shows that climate change is clearly the No. 1 long-term business risk for industrial customers. The leading short-term risks are business and supply chain interruptions and natural disasters, neither of which can be clearly separated from each other or from events induced by climate change.

As the world’s largest direct insurer, Allianz is directly affected by the consequences of extreme weather conditions such as drought and flooding, storms and heat waves. Since the 1980s, weather-related insurance claims have risen from an average of 15 billion US dollars a year to more than 70 billion US dollars a year today.

Energy companies in Brazil are scrambling to deal with the dry weather conditions. They need to purchase additional electricity on the spot markets to fulfill their delivery obligations. This is very expensive, as the government-owned energy concern UTE in Uruguay already learned during a drought in 2012. Allianz and two other insurers have now joined forces with the World Bank to develop a tailored insurance solution for UTE. To this end, rainfall data from 39 weather stations are analyzed on a daily basis. As soon as observed precipitation falls below a predefined limit, UTE receives payments that can total up to 450 million US dollars, depending on the drought severity and the current oil price. Such payments provide planning security for the national government’s budget and can mitigate the attendant rise in energy costs.

Investments are needed

Private-public partnerships can help by developing innovative approaches and mobilizing financial resources. For example, Brazil could generate solar energy during the day and produce hydroelectric power only at night. As a country with over twice as many sun-hours on average as Germany in February, the lights could stay on during carnival. However, time is running short, because this problem will likely arise again at the latest with the 2016 Summer Olympics – unless the country receives a lot of rain in the meantime.

Authors
Karsten Berlage, Managing Director Allianz Risk Transfer
Karsten Löffler, Managing Director Allianz Climate Solutions

Nicolai Tewes
Allianz SE
Phone +49.89.3800-4511
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