Brazil Boosts Utility Drought Relief With $5 Billion Aid

Brazil unveiled a 12 billion-real ($5.1 billion) aid package for utilities to cope with record-high spot prices as a drought cuts hydroelectric output.

Measures include an additional 4 billion reais from 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 today. 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 dividing the impact of the low reservoir situation by government, consumers and the energy industry,” Mantega said. “This will reduce the costs for distributors.”

Light SA and EDP-Energias do Brasil SA led a rally among Brazilian utility stocks today in anticipation of today’s announcement, made after the close of trading. Valor Economico newspaper reported today that the government would grant rate increases to cover some of the losses, while the Treasury will provide assistance to cover the rest.

Consumer Prices

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.

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 burden 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 today.

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