How Eletrobras’ privatization should make beer, meat and milk more expensive – 06/23/2021 – Market

More expensive beer, meat, milk and building material. And on top of all that, an even saltier electricity bill than the current one.

According to representatives of industry and consumer protection entities, these may be some of the effects of the MP (provisional measure) to privatize Eletrobras, approved on Monday (21) by Congress and now awaiting presidential sanction — what should happen within 15 days, which expires on July 6th.

The government disputes the experts’ estimates and claims that the privatization of the giant in the electricity sector could reduce the electricity bill between 5% and 7% starting next year.

According to Diogo Mac Cord, Special Secretary for Privatization, Divestment and Markets at the Ministry of Economy, savings would be possible with the allocation of R$ 48 billion to reduce consumer tariffs through the CDE (Energy Development Account). The money would be contributed over the years, after the company’s privatization.

The Ministry of Economy estimates that privatization could generate R$ 100 billion to the public coffers, with R$ 20 billion in a primary offering of shares and another R$ 80 billion in potential secondary offerings, which would take advantage of the increase in the company’s market value. According to Mac Cord, the value would make the operation the “largest privatization ever seen in the country”.

The expectation is that this primary offer — which will represent the privatization of the company, by reducing the government’s share of the capital from the current 61% to 45% — will be completed by February 2022.

For industry and consumer representatives, however, the potential benefits of raising funds from the sale of shares will be more than offset by higher costs resulting from four problematic points of the privatization MP.

Understand these four points and how it will get into your pocket.

1. More expensive energy sales after privatization

Fiesp (Federation of Industries of the State of São Paulo) estimates that the Eletrobras privatization MP, as approved by Congress, should generate an additional cost of R$ 400 billion to consumers over the next 30 years.

The largest portion of this cost, R$300 billion in the entity’s calculations, will result from the sale at market prices of energy currently sold cheaper by Eletrobras, due to the fact that it is produced by old hydroelectric plants, whose investments have already been amortized over the years of operation.

“The Eletrobras capitalization project was presented in 2017, still in the Michel Temer government [MDB]”, remembers Carlos Cavalcanti, director of the Infrastructure department at Fiesp.

“In this project, the attractiveness for the new investor — the bonus, the prize that is promised to him — is the so-called ‘decotization’ of the plants that had their generation price reduced in 2013,” explains the representative of the industrial sector.

In the year before that, former president Dilma Rousseff (PT) sanctioned a provisional measure (MP 579) that caused major imbalances in the electricity sector. On the other hand, this MP resulted in the reduction of the energy production cost of a group of Eletrobras hydroelectric plants to about R$ 100 per MWh (megawatt-hour), compared to R$ 200 per MWh of plants that sell energy at prices market.

“The ‘decotization’ means selling this energy at market prices, so it will go from R$ 100 to R$ 200”, says Cavalcanti. “They are trying to convince the consumer that the moment you increase the price from R$100 to R$200, it will lower the value of electricity. There is no math in the world to support this.”

2. Obligation to build gas thermoelectric plants where there is no fuel supply

A second factor that should generate additional costs for consumers was an obligation created by lawmakers in the processing of the MP for contracting by the government 8 GW (gigawatts) in natural gas-fired thermoelectric plants, which must be installed mostly in states in the Northern regions, Midwest and Northeast.

This is what is called in politics a “tortoise” – a norm included in the processing of a bill or provisional measure that is not related to the topic under discussion. The term originates from the popular saying “tortoise does not climb a tree”, which refers to events that do not happen naturally.

“There was a direct interference by the Legislature in energy planning”, assesses Clauber Leite, coordinator of the Energy and Sustainability program at Idec (Brazilian Institute for Consumer Protection).

“In planning, technicians carry out studies to meet demand at the lowest possible price, using mechanisms such as auctions, which consider the vocations of each region of the country. This is done through the EPE, the Energy Research Company,” he explains. “What happened at the MP was a market reserve that disregards any planning.”

According to the approved MP, the new thermoelectric plants will operate at the base of the system, that is, permanently and not only when other sources are generating insufficiently. And with a 70% inflexibility, which means they will have to operate 70% of the time, even if other cheaper and cleaner sources can meet the demand at any given time.

In addition, as Brazil’s natural gas production comes mainly from the pre-salt offshore, it will be necessary to build gas pipelines and transmission lines to integrate these plants into the system. Fiesp estimates that the construction of this infrastructure could generate an additional cost of R$ 50 billion to consumers in 20 years.

On Tuesday (22), secretary Diogo Mac Cord argued that the price of energy generation in these plants is cheaper than that of diesel oil plants and that, because of that, this measure will also help to reduce the value of the electricity bill.

3. Obligation to contract small hydroelectric plants

Another “tortoise” included by parliamentarians in the Eletrobras MP was the obligation to contract PCHs (small hydroelectric plants), small plants and high generation costs, due to the absence of scale gains.

“The obligation to contract small hydroelectric plants goes against the whole logic of the electricity sector: the source is the least competitive among renewables, putting pressure on final energy costs,” wrote Idec, in a note released in mid-June. “There is, therefore, no technical, economic and social reason for differential treatment for this technology.”

Fiesp estimates that the market reserve for SHPs represents almost R$30 billion in additional costs in 20 years, compared to other more competitive renewables.

4. Renewal of incentive wind contracts

Finally, the fourth measure that should generate additional costs for consumers was the extension of wind energy contracts included in the Proinfa (Incentive Program for Alternative Sources of Electric Energy).

“These plants were subsidized for 20 years and the contracts are being extended at the energy cost of an auction of new plants. In this type of auction, the plants still need to be built, so the energy cost includes the amortization of investments”, he explains Clauber Leite, from Idec.

Thus, according to what was approved in the MP, the contracts for these plants, which are old and have already had their installation costs amortized, are being extended at this higher price.

“This will make the tariff for consumers in general more expensive”, evaluates the expert.

Fiesp estimates that the additional cost with this extension of the subsidy will be around R$ 20 billion over 20 years.

But how does all this add up to the price of beer, meat and milk?

All these billions in additional costs will make consumers’ electricity bills more expensive in the coming years, experts explain.

But the effect doesn’t stop there. This is because electricity represents a relevant part of the costs of industry and the service sector.

Thus, this increase in energy prices should also be passed on to the products we consume, just as happens when diesel and natural gas are readjusted.

According to a survey by Abrace (Association of Large Industrial Consumers of Energy and Free Consumers), the cost of electricity represents 48% of the price of milk, 34% of the value of meat, 28% of what we pay for beer and 10% of the cost in building materials and sugar.

“This cost increase may represent, for example, an increase of 10% in milk and 7% in meat for all Brazilians,” estimated Abrace, in a statement published in May.

This impact adds to a scenario that is already under pressure on tariffs, with readjustments that could reach 20% or 30% in 2022, due to the situation of reservoirs amidst the water crisis and increases that were avoided by Aneel (Agency National Electric Energy Agency) in the midst of the pandemic, warned the entity.

Two-thirds of the impact of high electricity prices is on products or services consumed by the population, estimates the productive sector.

For example, steel rebar, cement and glass, used in home renovation, will suffer the effects of this cost increase. Frozen chicken and meat, which use a lot of energy in their production processes, should also become more expensive. The beauty salon, with its various electrical equipment, may have to charge consumers more.

That is, the indirect impact is greater than the direct effect on electricity bills.

And is there any chance of this being reversed in the presidential sanction?

Experts believe not, for two reasons.

The first is that the “tortoises” included by lawmakers in the provisional measure served as a bargaining chip for it to be quickly approved in Congress.

“The MP only advanced because of the tortoises, so it was the tortoises that carried it on their backs, otherwise it would not have been approved,” says the Idec representative.

A second point is that the MP was written by Congress in such a way as to, in practice, make any presidential veto impossible.

“Article 1 of the MP basically makes it impossible for the Executive to veto anything there. It was built in a way that, if vetoed, makes privatization unfeasible, but it also contains most of these tortoises”, explains the expert.

“So the MP was purposely built so that there is no veto. What can happen is a judicialization”, evaluates Leite.

Since 2015, the STF (Supreme Federal Court) has ruled that “legislative smuggling” in the form of tortoises is unconstitutional, which leaves room for parties to appeal the Eletrobras privatization MP in the upper court.

Representatives of Eletrobras workers lament the rush to approve the proposal in the midst of the health crisis.

“In this context of pandemic, what is the relevance and urgency to privatize Eletrobras?” asks Nailor Gato, an Eletronorte employee and coordinator of the National Electricity Collective (CNE).

“We have 14 million unemployed, 6 million despondent, millions without food and without vaccines, in the midst of the biggest health crisis in the country’s history. There was no debate with society”, evaluates the union leader.

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