The billion-dollar time bomb Brazil needs to diffuse

. Feb 04, 2019

The Itaipu dam is a symbol of national pride in Brazil. When it was inaugurated, in 1984, it was the largest hydroelectric power plant in the world, and its magnitude earned it a spot on the list of the seven modern wonders of the world. It is, however, as much Paraguayan as it is Brazilian. Built in a border region along the Paraná River, it is half-owned by each country. But since Brazil’s appetite for electricity is infinitely bigger than its small neighbor, it buys around 85 percent of Paraguay’s share. With the Brazilian half combined, Itaipu accounts for 15 percent of the energy consumed in Brazil. And it is about to get much more expensive.

</span></p> <p><span style="font-weight: 400;">The contract between the two countries setting the prices for electricity is up in 2023. As parts of the deal will expire — and need renegotiation — there should be major changes in how energy is dealt between Brazil and Paraguay. Among the changes that could happen is a new allocation of energy by way of auctions. Besides, Paraguay will be allowed to negotiate its Itaipu share at higher prices. Some Brazilian distributors could experience major cuts in their portfolios if they can&#8217;t snatch their share in the auctions — or if the Paraguayans find a higher bidder.</span></p> <hr /> <p><img loading="lazy" class="alignnone size-large wp-image-13800" src="" alt="brazil paraguay energy" width="1024" height="213" srcset=" 1024w, 300w, 768w, 610w, 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">While four years might seem like a lot, renegotiating the terms of the Itaipu deal is crucial for Brazil. Energy consumption planning is always done in the long term, and new assets of power generation are projected with years in advance. Therefore, whatever happens to the Itaipu negotiations will have major implications on Brazilian consumers and power distributors. In 2014, a crisis of involuntary loss of contracts forced </span><a href=""><span style="font-weight: 400;">Brazilian distributors</span></a><span style="font-weight: 400;"> into taking on over BRL 21 million in new debts — which then generated a rise in tariffs. To this day, the payment of this debt is responsible for about 7 percent of Brazil&#8217;s energy bills. </span></p> <p><span style="font-weight: 400;">The potential damage is enormous, as Brazilian energy distributors would be left exposed if Paraguay doesn&#8217;t sign a new deal. Moreover, that would give new ventures too little time to be set up — which would inevitably spike energy tariffs. What is even more problematic is that Paraguayan President Mario Abdo Benítez&#8217;s term comes to an end in August 2022 — so, if there&#8217;s no deal by mid-2022, things could go back to square one with new leadership.</span></p> <h2>What each country is doing</h2> <p><span style="font-weight: 400;">According to experts, Brazil remains unprepared for a series of negotiations that will be anything but easy. Meanwhile, Paraguay has taken years to prepare itself for this moment. The government hired a consulting firm owned by economist Jeffrey Sachs — an activist in defending poorer emerging countries. Late last year, Mr. Sachs argued that Paraguay should invest in transmission lines to sell off Itaipu&#8217;s energy and increase its profits. </span></p> <p><span style="font-weight: 400;">As of now, Paraguay only has lines to Brazil and Argentina. And, since Buenos Aires is undergoing an acute financial crisis, there seems no risk of the Paraguayans turning to them. However, Paraguay could try sending energy to Bolivia in exchange for gas. </span></p> <p><span style="font-weight: 400;">Other options are being considered. One would be trying to attract multinational companies to Paraguay — thus increasing its consumption of energy from Itaipu. Thanks to low taxes, low wages, and low overheads, Asunción is already being able to attract investment from across the region — including from Brazilian companies.</span></p> <p><span style="font-weight: 400;">Since 2000, Paraguay implemented a &#8220;maquila law&#8221; aimed at replicating the economic successes of Mexico&#8217;s </span><i><span style="font-weight: 400;">maquiladora</span></i><span style="font-weight: 400;"> (manufacturing plant) operations. As Emerson de Pieri, Managing Director of Barings Investments Latin America, </span><a href=""><span style="font-weight: 400;">wrote</span></a><span style="font-weight: 400;">, &#8220;[at first, it was] broadly welcomed by the Brazilian government, [but] the migration of investment is now facing increasing scrutiny as unemployment rises to unprecedented levels.&#8221;</span></p> <p><span style="font-weight: 400;">Sources within the Brazilian government believe that Paraguay will ultimately opt for the easiest answer — which is trying to negotiate more benefits within the Itaipu deal with Brazil, raising its earnings but still sending most of its electricity across the border. The problem is that there is no plan B.

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