Electricity bill: debate marks 50 years of the Itaipu treaty – 04/24/2023 – Market

The 50th anniversary of the signing of the treaty between Brazil and Paraguay for the construction and operation of the binational Itaipu power plant, on the Paraná River, this Wednesday (24th), marks two historic moments, say experts.

Looking back, the treaty endorses what the energy sector describes as the triumph of “diplomatic engineering”. Looking ahead, it marks another negotiation, the beginning of the review of the plant’s financial bases and, consequently, the price of energy.

The treaty has 25 articles and has three annexes that detail specific issues. Annex A brings the statute of the binational entity Itaipu. Annex B deals with installations intended for the production of energy. Annex C brings the financial bases and provision of services.

It was agreed between the parties that annex C can be revised when the debt is settled, which occurred in February of this year. As Brazil has just sworn in a new government and Paraguay defines the new president on April 30, the historic negotiation tends to be left for the second half of the year. However, it is already identified as sensitive.

“Itaipu is an extraordinary company that has three important commitments: consumers, the bilateral relationship with Paraguay and regional interests in Paraná. However, it is the consumer who pays for everything. The negotiation of Annex C needs to maintain the balance of these three pillars , but always respecting the consumer”, says Celso Torino, who was executive technical director of Itaipu and is vice-president of Cier (Regional Energy Integration Commission), an organization that brings together representatives of the energy area in South and Central America, as well as from the Caribbean.

According to Instituto Acende Brasil, as the partners are of very different sizes and backgrounds, the numbers show that the terms of the agreement demanded more from the Brazilian side. According to a law that also turns 50 on July 5, 1973, consumers in the South, Southeast and Midwest regions are obliged to pay for energy from Itaipu.

A survey by the entity shows that, from 1985 to 2021, the date of the company’s last balance sheet, Brazil paid US$ 83.2 billion (R$ 420.9 billion) to Itaipu. Paraguay, in turn, received profits of US$ 5.9 billion (R$ 29.8 billion).

“Few people realize this”, says Claudio Sales, president of Acende Brasil. “The combination of what Paraguay receives in royalties, capital remuneration and reimbursements gives a volume of money that is more than enough for it to pay for energy from Itaipu.”

There are other reasons to explain the difference. The financing for the plant’s work was a project finance, a modality in which the debt is settled through the project’s own cash flow —in this case, via a compulsory energy tariff.

“In terms of the amount of resources and timeframe, Itaipu’s project finance was the largest in the world”, says Altino Ventura Filho, who commanded Itaipu from 1996 to 2002. It was US$ 12 billion (R$ 60.7 billion), but due to interest accrued during the work, the loan totaled US$ 19 billion (R$ 96.1 billion).

By treaty, energy is split fifty-fifty. However, Paraguay does not consume all of its share, and necessarily sells to Brazil.

In the company’s last balance sheet, 76% of Itaipu’s energy went to Brazil, and the country was responsible for 86% of the plant’s revenues. Considering all financial operations that year, 98% of the total cost was borne by the Brazilian side, according to Acende Brasil.

There is one more difference. According to the agreement, Itaipu should not generate profit. The price charged for energy covers the costs for the plant to meet its obligations to operate. Without the debt, which accounted for 64% of costs in 2021, there is a financial surplus – and its fate fuels debate.

In an interview with Folha, the new general director of Itaipu, Enio Verri, defended that part should remain with Itaipu to finance socio-environmental projects. Verri wants to extend the use of resources, currently restricted to western Paraná, to the entire state.

Already following this strategy, Itaipu’s tariff fell less than it could have this year. Different studies have shown that, with the end of the debt, the tariff could be between US$ 10 and US$ 12 per kW (R$ 50 and R$ 60 per kilowatt). The fixed amount was US$ 16.71 (R$ 84.5) because around US$ 460 million (R$ 2.3 billion) were channeled to projects.

The issue has generated so much discomfort that the Senate is considering asking Aneel (National Electric Energy Agency) for explanations.

Something similar had already been done with around US$ 300 million (R$ 1.5 billion during the Bolsonarist administration.

Entities representing consumers want the surplus to be used to reduce tariffs.

“Today we live in a scenario of surplus energy in Brazil, and that of Itaipu is the most expensive”, says Paulo Pedrosa, president of Abrace (Brazilian Association of Large Energy Consumers and Free Consumers). “It could be reduced by almost two thirds if the financing payment is reduced.”

If it is not possible to channel all the surplus to the tariff, there are those who defend that, on the Brazilian side, the resources will be managed by the Union.

“If the government, for superior reasons, decides to capture the resources for itself, they should be directed to the Union”, says José Luiz Alquéres, former councilor of Itaipu and today councilor for the energy area of ​​Cebri (Brazilian Center of International Relations) . “But they can never be used to serve regional interests, as we have seen, to build small markets, a customs building and things that are the responsibility of other government instances.”

Other segments want energy from Itaipu to be negotiated according to the rules of the private sector.

Acende Brasil defends that the revision of Annex C allows each country to sell its share of energy internally, through auctions, in different markets. Today, Itaipu supplies the so-called captive market, where residential consumers, mainly the poorest, and small companies are essentially connected.

Abraceel (Brazilian Association of Energy Traders) advocates a similar line, which wants energy from Itaipu on the free market, where prices and supply terms are freely negotiated between the parties.

“It is very important that this cheap and renewable energy reaches the industry, which generates jobs and income, and mostly in the free market”, says Rodrigo Ferreira, executive president of Abraceel.

After 50 years, it is undeniable, say historians, that the treaty was fundamental for the project that paved the way for the formation of the Itaipu company, on May 17, 1974, and for the construction of the hydroelectric plant, which began in 1975. But the end das Sete Quedas, the strong environmental impact, the high cost and the large size of the work only succeeded, according to scholars, because they were taken over by presidents of dictatorship regimes. The generals and presidents Emílio Garrastazu Médici, from Brazil, and Alfredo Stroessner, from Paraguay, sign the treaty.

Not by coincidence, the plants that rival Itaipu are in China.

Historian Paulo Brandi, a researcher at the Electricity Memory Center, recalls that it took 20 years of technical discussions about the use of the river, and that the two countries only reached a compromise in 1966, with the “Ata de Foz do Iguaçu ” or “Ata das Cataratas”, which defined the binational characteristics of the area.

“The Itaipu treaty was the beginning of a new stage in international relations in the region’, says Micael da Silva, professor of History of International Relations at Unila (Federal University of Latin American Integration). “It established a new State policy in these 50 years.”