Brazil power sector seeks loan for generation tab

Brazil power distributors facing surging costs are seeking a bank loan of up to $2.7bn to cover expanded thermal-fired generation as hydro power production withers from drought.

The R10bn-R15bn ($1.8bn-$2.7bn) loan is sought by the Brazilian Power Clearing Chamber (CCEE) for regulated power distribution companies to help to cover surcharges with power generators over the course of 2021.

Since distributors have rate reviews once a year, the sector would face difficulties covering the extra generation costs without passing-through those hikes to final consumers within the next few months. For power consumers in bilateral contracts, the surcharges are paid at the monthly clearing conducted by the CCEE and would not be included in the loan.

The financial move is being engineered by the ministry of mines and energy, the economy ministry and power sector authorities. Details are not yet public, and the government is interacting with commercial banks to negotiate the terms of the operation, which would be paid off by regulated power consumers over five years, a source close to the distributors told Argus.

The new loan comes as the sector is already paying off a R16bn loan at an interest rate of inflation plus 5.2pc a year. The loan was signed by power distributors in 2020 to avoid hikes to electricity bills during the Covid-19 pandemic and to help the companies meet their commitments with generators. Annual inflation was running at 10.7pc in the 12 months to October.

With the burden of the additional loan, distributors will face hefty financing costs.

In the first months of the shut-downs caused by the pandemic, distributors' revenue fell by 6.3pc as power consumption fell by 14pc and default rates rose by 10pc from before the shut-downs.

A similar financial move was conducted in 2014, when power distributors were short on their power contracts and were caught exposed when low rain levels hiked power generation costs, prompting a need for more thermal power generation and, consequently, higher costs. A R17.7bn loan was taken out for captive consumers to pay over the following five years and has been paid in full.

Total surcharges paid by power consumers, both captivity and consumers in the free market, under bilateral contracts to cover the low hydropower generation in 2021 may reach R22bn, according to estimates from the Brazilian association of energy-intensive industries (Abrace).

By Flávia Pierry