Aurora Energy Research 's analyses identify a convergence of climatic and regulatory factors that could significantly increase the restriction of electricity supply in the short term, with major repercussions on project cash flows and the debt repayment capacity of the current fleet of contracted assets.
The Brazilian electricity sector faces considerable risk from the likely intensity of an El Niño phenomenon that would reach its peak at the end of 2026, an event for which the US meteorological agency NOAA forecasts an 81% probability.
Aurora's nodal model, which captures the full complexity of the Brazilian electricity system with hourly resolution, indicates that conditions associated with El Niño could increase the total reduction of renewable sources to 25% in 2026 , compared to 17% in the consultancy's reference scenario (considering only energy reduction and system reliability).
The reduction in solar photovoltaic generation could reach 40% , while that of onshore wind generation could reach 21% , due to the increased capacity factors of renewable energies under drier climatic conditions. In the Aurora model, the capacity factor of onshore wind energy in the northeast increases from 47% in the baseline scenario to 52% under El Niño conditions. At the same time, medium- and long-term hydrological flows in the region decrease from 53% to 40% of the long-term historical average.
This scenario would represent a 47% increase over Aurora's central reduction projection for 2026 and a 7 percentage point increase over the levels observed in 2025. Consequently, the total cost of the reduction could exceed R$ 8 billion, more than double the baseline scenario estimate.
An additional risk stems from out-of-merit thermal dispatch. During the 2021 drought, reservoirs in the southeastern region plummeted from approximately 69% to 29% storage capacity in five months, forcing the CMSE (Electric Sector Monitoring Committee) to authorize 37 TWh of emergency thermal generation, equivalent to 32% of total thermal production that year. Should a severe drought materialize alongside El Niño conditions in 2026, a similar dynamic could reemerge, adding mandatory thermal generation that directly displaces renewable production and further increases the constraint. The Aurora model suggests that an additional 3 GW of out-of-merit thermal dispatch could add up to 6 percentage points of constraint to the El Niño climate scenario for solar PV assets.
The increase in energy demand partially offsets the effects of El Niño. The higher temperatures associated with this phenomenon boost consumption for cooling, especially in the southeast, absorbing some of the generation surplus and reducing the pressure on production constraints. However, Aurora's analysis shows that, even considering this increase in demand, production constraints remain higher than the central scenario, indicating that the gains in renewable energy capacity factors outweigh the mitigating effect of increased consumption, particularly for onshore wind farms.
"While higher temperatures may stimulate growth in energy demand, the increase in renewable generation tends to more than offset this effect, increasing the pressure on the electricity system," commented Rodrigo Borges , Executive Director of Aurora Energy Research in Brazil.
"If combined with higher levels of off-merit thermal dispatch, production limitations could solidify as one of the main risks to the profitability of renewable projects in the country, reinforcing the need for investors, financiers and developers to incorporate this climate risk into their risk management assessments and strategies," he added.
Meanwhile, Rodrigo Longo , senior associate at Aurora Energy Research, added: "What makes 2026 particularly complex is the potential interaction between climate and dispatch dynamics. El Niño reduces hydroelectric flows in the northeast, while simultaneously increasing the capacity factors of renewable sources, thus increasing the production constraint."
"If reservoir conditions deteriorate further and trigger large-scale thermal dispatch outside of demand, as happened in 2021 with the 37 TWh of emergency thermal generation authorized by CMSE, both effects are cumulative. Our models show that an additional 3 GW of mandatory operational thermal capacity, combined with El Niño conditions, could add up to 6 percentage points of production limitation for photovoltaic solar assets, reaching 47% in 2026," he explained.
Strategic Energy will be present at Intersolar
LATAM is going through a key moment for the expansion of renewable energies, driven by new regulatory challenges, the growth of electricity demand and the development of storage.
In this context, Energía Estratégica will be present at two of the leading solar industry events in Latin America: The Smarter E South America, from August 25 to 27 in São Paulo, Brazil, and Intersolar Mexico, from September 1 to 3 in Mexico City. From both events, the publication will provide special coverage with exclusive interviews, regulatory analysis, and the key developments that will shape the future of regional markets.