Brazil can reduce power prices for all consumers by updating terms of its 50-year-old Itaipu Binacional hydropower plant agreement with Paraguay.
Signed in 1973, a key part of the deal for the 14GW plant on the Brazilian border with Paraguay that concerns financial terms and electrical services comes up for review this year. Market participants tell Argus they hope Brazil uses the opportunity to request decreases in power costs by removing capital expenditure costs that are now paid off, or change the model for selling the power in auctions and allowing for free market participants to purchase power.
Itaipu prices could drop by half — to around R160/MWh ($31.05/MWh) — if power from the plant is sold in the free market, according to Sao Paulo state industry federation Fiesp. Itaipu power cost consumers R362.26/MWh in 2022. The clearing spot power price is at R69.04/MWh.
"Brazil has better opportunities to purchase power at lower prices and we should share the benefits of the social environmental expenses better," power consultancy PSR's director Angela Gomes said.
The payment model for Itaipu is cost-plus (when the final price of the product is reached by adding a markup percentage to those costs), which provides no incentive for the power plant operator to reduce costs. Itaipu's operational costs are much higher than other hydropower plants in the same size, according to a Fiesp study. Para state hydropower plant Belo Monte'soperational costs are R9mn/GW, while Itaipu costs R413mn/GW.
The study points that Itaipu's power is the most expensive in Brazil. A 1973 law mandates that Itaipu power must be sold to distributors in proportion to how much their consumers demand. The power reaches distributors with a price calculated by Itaipu and approved by power sector regulator Aneel. By reducing prices or opting for market prices, distributors could reduce final tariffs, the study shows.
Social expenses
Itaipu's spending is boosted by $300mn/yrin social environmental costs, which include funding social benefits for communities near the plant, such as hospitals. Itaipu employs 205 workers for every GW of power generated, while similar-sized plant Belo Monte has 27 and Santo Antonio (in Rondonia state) plant has 107.
Brazil consumed 91pc of the power generated by Itaipu from 1985-2021 and pays a higher price than Paraguay. The average power price Brazil paid in 2021 was $60.56/MWh, while Paraguay paid $30.46/MWh.
According to Itaipu, there is no deadline for reviewing the treatyand current clauses are valid until both countries reach a new agreement. Mines and energy ministry MME said it is analyzing the issue.
