Itaipu Energy Dispute Blocks R$ 1 Billion Agreement Signed With Brazil

The Worsening Political Crisis in Paraguay Has Created Enormous Uncertainty About the Maintenance of an Agreement Reached with Brazil on May 24, Contracted by the Neighboring Country.

At stake is a difference of approximately US$ 250 million – almost R$ 1 billion at the current exchange rate – between the “declared” volume of purchases by Paraguay and what is actually consumed. The value of the agreement, which triggered a series of dismissals in the upper echelons of the Paraguayan government and threatens the future of President Mario Abdo Benítez, would translate into savings for Brazilian consumers over four years (2019 to 2022).

The crisis in Paraguay escalated yesterday with the dismissal of Chancellor Luis Alberto Castiglioni, the General Director of Itaipu on the Paraguayan side, and the president of the National Electricity Administration (Ande). The Paraguayan ambassador in Brasília, Hugo Saguier, also fell.

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With no public announcement, Brazil and Paraguay reached an agreement at the end of May regarding the amount of energy allocated to each side. The Itaipu Treaty defines the equal division of the power from the hydroelectric plant. However, Paraguayans consume only a fraction of what they are entitled to – less than 15% of total generation. The remainder is purchased by Brazil.

The Brazilian government’s complaint is the fact that Paraguay has indicated every year since 2002 an estimate of energy consumption lower than what is actually verified. In practice, they have been subcontracting energy from Itaipu. This difference has recently increased. “In the last four years, Paraguay’s energy consumption has risen by 40%, but its annual indications pointed to a variation of 8%,” says a negotiator in Brasília.

Eletrobras has been bearing the burden of this distortion. As it should not make any profit or loss from the binational plant, the cost is fully passed on to Brazilian consumers of electricity distributors in three regions – South, Southeast, and Central-West.

The state-owned company pays US$ 43.80 for each megawatt-hour of the “surplus” energy that Paraguay indicates, at the beginning of each year, it will not consume internally. And it even disburses these amounts. However, when Paraguay exceeds its consumption estimates, it pays a much lower rate: around US$ 6 – the price of the so-called “excess energy.” The Paraguayan government has been using this cheap energy, including to attract industries.

The agreement was considered a “political-diplomatic commitment” that would gain legal validity only with the signing of a formal contract. It was during the process of confirming the agreement between the two countries that there was a turnaround. Pedro Ferreira, former president of Ande, refused to sign the contract and stated that this instrument would be detrimental to Paraguay’s interests. He claimed that he was not aware of the negotiated details. This gave ammunition to opponents to even speak of impeaching President Abdo.

Privately, the Brazilian government repudiates Ferreira’s attitude and sees political interest in his “denunciation,” assuring that he was aware of the terms being negotiated. The intention is to stay firm in the purpose of addressing the issue of Itaipu’s energy volumes.

As Brazilian authorities are keen to emphasize, the agreement does not affect the renegotiation of Annex C, part of the Itaipu Treaty that expires in 2023. In that year, according to prevailing interpretations, Paraguay will be free from the requirement to sell to Brazil everything it does not consume from the plant.

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