Electrifying Effects: High Temperatures and the Capital Markets in the Face of El Nio


What do high temperatures do to the electrics? This is a question that many investors in the capital markets are asking as they try to anticipate how El Nio will impact the energy sector. El Nio is a weather phenomenon characterized by the warming of Pacific Ocean waters, and it can have significant effects on global weather patterns.

After experiencing two heat waves in less than sixty days, Ita BBA, a prominent bank, expects that higher temperatures will continue to significantly affect energy demand. Even without unusual events like heat waves, the impact of El Nio on energy prices and marginal operating costs is expected to be substantial.

One of the major concerns is the effect of El Nio on hydroelectric heating elements (UHEs). These elements, like the water heating element in the northern region of Brazil, play a critical role in meeting energy demand. However, in the case of El Nio, there may be a substantial decrease in production due to a shorter heating period and lower water flows.

This decrease in hydroelectric production may lead to more energy price volatility and an increase in thermal energy surplus. As a result, Ita BBA recommends investing in companies that stand to benefit from this scenario, such as Eletrobras, Copel, and Eneva. In particular, Eneva has a thermal power plant complex that can be activated as needed to ensure the reliability of Brazil’s electrical grid.

In addition to these companies, Ita BBA also anticipates a positive impact on distributors with concessions in regions where higher temperatures are predicted. Equatorial and Energisa are two examples of these distributors.

Looking specifically at the 2024 El Nio, climate researchers at Columbia University have predicted a 55% chance of a “strong” El Nio between January and March of that year. There is also a 35% chance of reaching “historically strong” levels between November and December. While a historically strong El Nio may not necessarily have a significant influence, it can increase the likelihood of climate anomalies during that time period.

The researchers also indicate a 58% chance of a neutral scenario for June, July, and August of 2024. However, the La Nia scenario for the end of 2024 seems to be gaining strength.

The impact of these weather patterns on rainfall is also significant. The report predicts below-average rainfall for most of Northern and Northeastern Brazil and below-average precipitation in parts of Minas Gerais during the first quarter of 2024, which is 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.

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

Overall, the impact of El Nio on the capital markets and the energy sector is highly dependent on various factors, including temperature, rainfall, and hydroelectric production. Investors and market analysts will need to closely monitor these factors to make informed decisions about their investments.