Concessions Pave Way for Brazil’s Power Price Cuts

Brazil’s president has announced power price cuts in a bid to strengthen the country’s ailing economic state.
Published: Sat 06 Oct 2012

What happened                                                                         

Brazil is about to see the biggest-ever cuts to its energy prices, writes BNAmericas. The new tax reforms will be introduced in January 2013 and includes a 19.7 to 28% cut in industrial power prices, while residential areas will see a 16.2% cut. The new legislation has done away with the fuel consumption account tax (CCC) and it includes a 25% cut in the general reserve reversion tax (RGR).

In exchange for lower electricity costs, Energy Minister Lobão announced the renewal of 20 concessions for electricity generators, due to expire between 2015 and 2017. This accounts for about 20% of the country's generating capacity.

Background                                                                                                              

Brazil’s president Dilma Rousseff says the new energy tax reforms are aimed at helping the country face the uncertainty of the world’s current global economic situation. She adds that the cuts will decrease production costs, improve international standing, slow inflation, encourage investment, boost productivity for businesses, increase employment and guarantee growth.     

The country’s hydroelectric plant network, which supplies Brasil with 75% of its electicity, has made the electricity price cuts possible. Explains Rousseff “The reason is that these are projects of great longevity. Their duration is longer than the period of the concession and amortization. It is this factor that allows us to deliver cheaper energy prices to Brazilian consumers."

Energy minister Edison Lobão explains that renewed power concessions include 20 generation, nine transmission and 44 distribution contracts. The concessions - 70% of which are controlled by federal power holding group Eletrobras, will have a maximum renewal period of 30 years, writes BNAMericas. 

According to Reuters, the lower electricity costs will bring significant relief to Brazilian energy-intensive industries such as steel, aluminum and petrochemicals.

Brazil, the world’s sixth biggest economy, has the world’s third highest electricity tariffs. Brazil's average electricity cost of US$180 per MWh is exceeded only by Italy and Slovakia, according to a 2011 study by the Getulio Vargas Foundation. High electricity costs are to blame for Brazil’s sluggish investment and production in energy-intensive industries, writes Reuters. Electricity accounts for 35% of the industry’s production costs. The high electricity rates have destroyed the country’s once-booming primary aluminum industry. No new aluminum factories have been built for almost 30 years and two have closed. With the new power price cuts, companies may be willing to re-invest in the country since production costs will be closer to the world average, explains Reuters.

The country has been in financial stress since the middle of last year after a decade of strong performance. High taxes and a strong local currency, amongst other factors, are to blame for Brazil’s financial situation, explains Reuters. Therefore, the electricity cuts will offer significant relief to the country’s businesses and consumers.

According to an Energy Ministry spokesman, consumers can expect to see lower-cost electricity as of February 5 2013.

The Final Say         

Rousseff’s power cuts will bring much-needed relief to local industries which are losing market share to overseas competitors who enjoy lower power tariffs.

Sources                                                                                                 

Bloomberg-Brazil Said to Plan Tax, Rate Cuts to Lower Energy Cost 20%

BNAmericas-Energy tax reform to guarantee economic growth, says Rousseff

Reuters Africa-Brazil cuts electricity taxes to bolster economy

Reuters-UPDATE 3-Brazil cuts high electricity costs to boost economy

The Herald-Brazil cuts power rates to sharpen economy

The Wall Street Journal-Brazil electricity stocks drop on price-cut plan