March 14 (Bloomberg) -- Brazil unveiled a 12 billion-real ($5.1 billion) aid package yesterday for utilities to cope with record-high spot prices as dry weather crimps hydroelectric output.
Measures include an additional 4 billion reais from the Treasury to help distributors pay their spot-market commitments, as much as 8 billion reais in financing via the country’s electricity trading board and power auctions starting in April, Finance Minister Guido Mantega and Deputy Energy Minister Marcio Zimmermann told reporters in Brasilia. The additional Treasury subsidies will require tax increases.
The most severe drought in at least four decades has reduced southeastern hydroelectric dam levels to the lowest since 2001, when Brazil was forced to ration power. That’s forcing the country to rely more on higher-cost thermoelectric generation, pushing up spot power costs to record levels. Brazil’s Ibovespa Electricity index is down 11 percent this year, with all but one of its 15 members posting losses.
“We are sure these measures will be accepted by the market,” Treasury Secretary Arno Augustin told reporters yesterday. “We also listened to the market, so we are confident we’re going to succeed.”
Light SA and EDP-Energias do Brasil SA led a rally among Brazilian utility stocks yesterday in anticipation of the announcement, made after the close of trading. Valor Economico newspaper reported yesterday that the government would grant rate increases to cover some of the losses, while the Treasury would provide assistance to cover the rest.
Costs may be passed on to consumers from next year, Mantega said. The planned power auctions are intended to help distributors avoid record-high spot prices by using longer-term contracts to attract generators.
“We are dividing the impact of the low reservoir situation by government, consumers and the energy industry,” he said. “This will reduce the costs for distributors.”
The government announced on March 7 that it would free up 1.2 billion reais from the CDE energy fund to enable utilities to meet a March 11 deadline to pay for power on the spot market. The Association of Electricity Distributors calculates costs rose by 1.8 billion reais in January, said an association official, who isn’t an authorized spokesperson.
Consumer price caps mean distributors will have to bear the burden of the difference, with the government’s ability to intervene limited by budget and inflation targets, Adriano Pires, director of the Brazilian Center for Infrastructure consulting firm, said March 8. In February, the extra drought-related costs for distributors probably will be higher, he said.
“This package will solve our problems,” Nelson Leite, who heads the distributors’ association, told reporters yesterday.