Brazil Government Sees Market Driven Electricity Prices

  • Government plans to scale back interventions in power industry
  • ‘There was a giant destruction in the value of companies’

Brazil’s interim government is seeking a market-driven approach for the electricity industry amid waning power demand, growing debt and consecutive losses at the country’s largest power company. 

The administration of Acting President Michel Temer will scale back heavy-handed policies in the power industry and reduce dependence on state development bank BNDES for financing, said Paulo Pedrosa, executive secretary at Brazil’s mining and energy ministry. Capital markets will gradually replace loans from public institutions to finance new projects, he said.

"BNDES’s previous financing model is over," Pedrosa said in a June 3 interview from Brasilia, a day after he took the job. "Many options that were considered fine in the past, strayed from economic logic and nowadays are not viable." 

The plans are part of a policy shift since the Senate’s suspension last month of President Dilma Rousseff, who had increased the role of the government and state companies in the economy. Temer is trying to swiftly replenish public coffers after a recession has eroded tax revenue and expanded the budget deficit.

Wind energy may lose some of its subsidies and, as a result, see prices rise, Pedrosa said.

Brazil installed 2.75 gigawatts of wind capacity last year, the fourth-biggest addition in the world, according Brazil’s wind-power trade group Abeeolica. Total installed capacity is now 8.7 gigawatts.

In just more than a year Brazil’s power sector swung from exploding prices and rationing risks to low rates and falling demand, exposing structural problems and how prices don’t reflect supply and demand, according to Pedrosa. The need for utilities to purchase energy on the spot market to fulfill contracts also drove up debt levels.

"There was a giant destruction in the value of companies," he said. "The government has plans to reduce unpredictable interventions and to reinforce the role of regulatory agencies."

Eletrobras 

Centrais Eletricas Brasileiras SA will sell assets, particularly those that have caused financial losses, Pedrosa said. Divestments may include distributors, as well as stakes in companies, hydroelectric power dams, transmission lines or wind parks. 

"Eletrobras’s role is to make new projects viable," he said. 

Eletrobras’s current leadership will continue to solve problems with the U.S. Securities Exchange Commission while new management is chosen for the state-controlled utility, Pedrosa said. The New York Stock Exchange suspended trading of the utility last month and began de-listing procedures after Eletrobras said it would miss a deadline to submit its 2014 financial results.

The company has delayed filing to the SEC three times while auditors calculate corruption losses. The company says it still doesn’t have enough information to assess the impact on its financial statements.


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