Brazil and Paraguay raise costs in Itaipu to US$ 1 billion on the eve of debt end

The government celebrated in recent weeks the first reduction in 13 years in the energy tariff of the Itaipu plant, but the sector does not see so many reasons to celebrate. The assessment among experts in the area is that Brazil lost an important arm wrestling with Paraguay.

The government of Jair Bolsonaro (PL) has agreed to raise the cost of exploiting the plant’s energy to an unprecedented amount of US$ 1 billion (R$ 5 billion), which raises the tariff paid by Brazilians by almost US$ 300 million (USD $1.5 billion).

The decision, which served the management of Paraguayan Mario Abdo Benítez, was interpreted as a harbinger of Brazilian fragility in a decisive negotiation that is approaching. As of 2023, the year in which the bilateral treaty turns 50, the debt for the construction of the plant will be paid off, making room for the revision of Annex C — precisely the part of the treaty that governs financial management.

The Itaipu tariff must be negotiated annually. However, it had been frozen since 2009. Even at the end of last year, Brazil did not want a freeze for 2022. It would be an election year, and Bolsonaro had the goal of reducing the energy tariff. The electricity bill was already weighing on Brazilians’ pockets, at a time of falling incomes, and rising inflation.

There was a window of opportunity for relief. The treaty that governs the plant establishes that Itaipu cannot make a profit, that is, money left over. The tariff is equivalent to the expenses to maintain the plant, technically called Cuse (Electricity Service Costs). They are the sum of three major groups.

There is the payment of royalties for the use of water, which is linked to the production of energy and is in the region of US$ 400 million per year. Also relevant is the so-called exploration cost, which in practice groups together the expenses for the operation and maintenance of the plant, and which, on average, stood at US$ 763 million (R$ 3.9 billion) in the last ten years.

The heaviest cost has always been the debt incurred for the construction of the plant, which had represented just over 60% of the total. It required annual disbursements of US$ 2 billion (R$ 10.4 billion).

The payment of the debt, however, is in the final stretch. This year it dropped to US$ 1.4 billion (R$ 7.3 billion), reducing the cost of the plant by US$ 600 million (R$ 3 billion). Next year, it will be settled, with the payment of US$ 300 million. The treaty establishes that, once the debt is terminated, a complete revision of Annex C will be possible.

To claim the tariff reduction in 2022, Brazil considered the US$ 600 million drop in debt, the normal value of royalties and an operating cost of US$ 750 million, within the average. It transferred 100% of the debt reduction discount to the energy consumer.

In this scenario, Brazil estimated a tariff for Itaipu of US$ 18.97 per kW (kilowatt) (R$ 98.56 per kW), a reduction of 16%. The value, on a provisional basis, was adopted in January with the approval of Aneel (National Electric Energy Agency).

Paraguay, however, did not agree. He estimated that the cost of exploration would rise to US$ 1.3 billion (R$ 6.6 billion), which would leave the total cost practically the same. Thus, he defended that the tariff had to remain frozen at US$ 22.60 (R$ 117.42).

The negotiations dragged on for eight months and, in the end, Brazil accepted half of what it wanted. An 8% reduction was agreed, and the annual fee was raised to US$ 20.75 (R$ 107.80).

Thus, the negotiated exploration cost rose to US$ 1 billion, an unprecedented value. For the consumer, it represents an additional nearly US$ 300 million in the Itaipu tariff, on the eve of debt settlement. In reply to Sheet on what extra expenses would justify the increase, the Itaipu press office stated that “exploration expenses for 2022 were the result of an agreement between the governments of Brazil and Paraguay”.

The MME (Ministry of Mines and Energy), however, has already announced that Brazil will remain this year with the tariff of US$ 18.97 approved by Aneel until the end of the year — the difference to the US$ 20.75 subsidized with Itaipu’s energy trading bill, according to the binational company.

The 2023 tariff is anyone’s guess. The increase in costs is already incorporated into the tariff and it will be necessary to wait and see how negotiations on the value of the tariff progress in the same year in which Annex C can be negotiated.

The Brazilian government considers it has reached a good compromise. “It’s the first reduction in more than ten years. I think it’s a good start,” he told Sheet Minister Adolfo Sachsida (MME), who is also a member of Itaipu’s board of directors.

President Bolsonaro himself made a post celebrating the drop in the tariff. The message included a photo shaking hands with the Paraguayan president, whom the President of the Plateau likes to call by his nickname, Marito.

Critics of the result, however, question the accounting contortionism and the lack of technical data to justify the high cost claimed by Paraguay and accepted by Brazil. Letters sent to Aneel on the subject are confidential.

The conclusion in the sector is that the Brazilian energy consumer was penalized when he would be entitled to reductions in the electricity bill proportional to the fall in debt. Paraguay is entitled to half of the production. However, it consumes a fraction, and sells the rest to Brazil.

“Brazilian consumers pay for practically 90% of Itaipu’s energy, that is, they paid for the plant’s financing, so they deserve a significant reduction in the electricity bill as the construction debt ends”, says Luiz Eduardo Barata, president of National Front of Energy Consumers. Barata has already worked in Itaipu.

“Energy tariffs follow a technical-economic logic, but the Itaipu tariff now appears to be political”, he says.

PLANT PAYS WORKS

There is an additional reason for the energy sector to question the billion-dollar expenditure.

In 2005, the use of a device called the Reversal Note expanded Itaipu’s mission from generating energy to also promoting social, economic and environmental development in its area of ​​influence. On this side of the border, the beneficiary is Paraná. On the other side, practically the whole country.

The main instruments for promoting this development are works, such as bridges, roads and airport runways. The expenses are accounted for as exploration costs, precisely in the account that became billionaire this year.

Recently, the governments of both countries have increased the volume of these works, whose disbursements are always equivalent. Every dollar invested in the left bank, Brazil, needs to be offset by another dollar in the right bank, Paraguay, and vice versa.

In December 2018, at the end of the term, Michel Temer (MDB) and the newly sworn in Benítez signed the agreement to build two new bridges between the countries, supported by Itaipu resources, in the amount of R$ 1 billion.

Bolsonaro expanded the package in November 2020. In the midst of the Covid-19 pandemic, he went to Paraná to announce 31 projects, which totaled an investment of R$ 1.4 billion with money from Itaipu. Report published at the time by Sheet detailed that the list included works on roads, military schools and even installation of stained glass windows in a cathedral.

“With these works, Brazilians and Paraguayans got together to loot and inflate the cost of Itaipu, therefore the tariff, to the detriment of Brazilian consumers”, says José Luiz Alquéres, counselor at Cebri (Brazilian Center for International Relations), who presided over the Eletrobras and was a member of Itaipu’s board of directors.

In a note to the report, Itaipu’s advisory stated that the funds are “applied in structuring works, which leave a legacy to society, meeting the company’s institutional mission.”

The fact is that this whole context is beginning to frustrate the expectation that there would be a cheap energy clash with Itaipu at the end of the debt payment.

“When any plant finishes paying its debt, it becomes a financial surplus machine, as the remaining costs are usually low”, says Altino Ventura Filho, who ran the plant for five years and also presided over Eletrobras.

“Part of this surplus is going to works, we had this reduction in the tariff, but we will need to discuss whether we want to continue using this money to finance the construction of markets and customs, paving roads and building bridges, or if we are going to be more ambitious.”

Abraceel (Brazilian Association of Energy Traders) already wants to start the debate. The entity will defend with the presidential candidates that the revision of Annex C of the treaty will allow Itaipu to sell its energy on the free market and act in a more technical way.