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To Privatize Eletrobras, preferred option and challenge

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The Temer administration is desperately trying to reposition the Brazilian economy in the lanes and place the government’s finances in order. One key step: to privatize a wide range of the Brazilian economy now owned by the government, selling the “Mint” (mint), the state bank’s lottery unit, federal savings and government interest in the largest electric system of the country, to Electrobras.

The government expects to make 20 billion Reais or $ 6.4 billion in the share of Electrobras alone. In addition to raising desperately needed funds, the government hopes to free the economy from government interference.

At the same time, the government announced that the state development bank, the BNDES, will define its standard loan rate on the government’s Treasury five-year bond rates as of January, thus reducing BNDES freedom to provide subsidized loans.

Regardless of ownership, Eletrobras controls transmission lines and the power plant throughout Brazil, as well as owning energy distribution companies that are being sold. Eletrobras represents almost one-third of Brazil’s power generation capacity and almost half of the country’s high-voltage transmission grid.

These percentages include Brazil’s participation in the government-owned Itaipú hydroelectric project. The production of energy for a nation of that size is surprisingly low in CO2 production due to the predominance of hydromassage, some nuclear and renewable sources. Fossil fuels account for about 10% of total Brazilian electricity production.

There are many legal obstacles to removing Itaipu or the government-owned nuclear power plants, although Eletrobras can continue to operate. Then, the government is not going to leave the energy business.

The cost of capital for transmission and generation will increase because privatized Eletrobras will move from the government’s low-cost debt subsystem. BNDES also did not subsidize this former governmental entity. And for this utility to be privatized soon, more competition increases risk and, in turn, negatively influences the cost of capital.

The cost of capital can represent 40% or more of the costs of hydroelectric, renewable and nuclear generation and transmission. The bottom line? The highest electricity prices for the nation over time. Not necessarily immediately, though.

The privatization of the electricity generation market with few competing generator companies was one of the biggest mistakes made by Thatcherites in the UK. This almost monopolistic market with only two or three players underwent the development of real competition for years.

Despite having enormous resources of wind, solar and biomass energy, Brazil uses much less renewable energy (excluding hydromassage), proportionally, to produce electricity than the fog, in England. Renewable growth in Brazil, remember, was fast. But renewable energy still represents a small fraction of production and much less than other countries with similar advantages. This image may change however.

For the first time, newly released energy generators will face real and unsubsidized capital market conditions. This can change the views of huge dam projects that generate opposition from indigenous groups and environmental activists. With respect to the addition of generating capacity, smaller, faster and “greener” and can become the new management mantra.

To some extent, Brazil’s slow embrace of renewable (relatively speaking) can be an advantage. The latest technologies are more efficient than their immediate predecessors.

Renewable energies need energy storage to complement them. And Brazil has the perfect complement of “storage battery” for its new renewable energies. Its vast hydroelectric system. A hydroelectric system, with its expeditious expedition capability, is actually a large water-fed storage battery. As long as there is no drought, you are in business.

The Eletrobras administration indicated that its strength lies in the generation of energy, both large hydroelectric and nuclear operations. You may even be able to cede the renewable field to others to reduce their dominance in the market.

It would not come as a surprise if the Brazilian market for renewable sources, given the unique water resources, becomes one of the most important in the world in the near future.