Dilma’s Government Takes Decisive Action to Fuel Economic Growth / by Mark Langevin

This week President Dilma’s government announced several new energy policies aimed at fueling economic growth in 2013.  While transportation fuel prices will increase in 2013, electricity rates will be significantly reduced and the long awaited oil and gas auctions will be bigger than expected.  All in all, these recent announcements indicate that 2013 will be a huge year in Brazil’s energy policy with changes that will likely promote economic growth beyond what many experts forecasted for 2013.

The National Electricity Agency (known as Aneel) approved a far-reaching rate reduction on January 24th that will rapidly decrease the cost of power to residential and industrial consumers by 18% and 32% respectively, according to Reuters.

These rate reductions will be partially offset by the establishment of an Energy Development Account (known in Brazil as the CDE) financed by the National Treasury and administered by Electrobras, whose initial investment of $3.3 billion reais (about $1.6 billion USD) was increased to $8.46 billion reais ($4.2 billion USD).  These additional funds were needed to compensate for lost tax revenues from the rate reductions as well as the abstentions of CEMIG, COPEL, and CESP from the new regulations renewing contract concessions for longer periods, but at lower returns. In all, the Energy Development Account will pay out over $14 billion reais in subsidies to customers in order to finance these significant price reductions in 2013 alone.

According to André Pepitone, Director of Aneel, the CDE will now be responsible for financing all of the subsidies granted to the generation-transmission-distribution (GTD) system.

These rate reductions and the establishment of the CDE allows for subsidies to directly benefit consumers, especially national industrial enterprises whose international competitiveness was jeopardized by higher than world average energy costs.

While investor groups and generation companies have criticized the Rousseff’s approach to lowering the cost of energy in Brazil, these rate reductions are likely to find plenty of political support among the President’s governing coalition.

In addition to these remarkable power rate reductions, President Dilma also announced that the upcoming oil and gas block auctions will offer 68% more block acreage than originally anticipated, according to Bloomberg. The upcoming auction, the first since 2008, should bring in nearly $5 billion (USD) in auction related revenues.

Bloomberg reports that the National Petroleum Agency (known as ANP) will auction 289 onshore and offshore block licenses near the Northeastern coast (where Petrobras has discovered high quality oil in the Ceará and Sergipe basins) on May 14 and 15.  The ANP will also auction blocks associated with the large off-shore, pre-salt reserves on November 28 and 29th as well as onshore shale gas blocks on December 11 and 12th.

Taken together, these policy announcements serve to reinforce the growing role of energy production and consumption in the Brazilian economy; now decisive factors in shaping development and driving growth throughout many sectors of the national economy.  Moreover, the industrial electricity rate reduction and the expanded oil and gas auctions are both important steps to rectifying the national accounts and moving the economy toward greater export potential in the coming years.  There are more needed reforms, especially in the areas of taxation and auction administration, but President Dilma is positioning for a successful re-election in the short term and sustainable economic growth in the long run.