The ITAIPU hydroelectric power plant represents for Paraguay what the Cantarell oil complex meant for Mexico in the early 1980s: exploitation of natural resources with great impact on the energy security of the countries and sources of great weight in public financing. Moreover, in both cases the high production levels (of energy or energy sources) placed the countries on the world energy map. Cantarell was the most productive oil complex in the world. ITAIPU is the second-largest hydroelectricity generator in the world. The differences, however, are relevant: ITAIPU takes advantage of renewable energy resources for the production of electricity and Cantarell has already declined the production of non-renewable energy sources (hydrocarbons). And the domain of the natural resource, the hydraulic potential of the Paraná River, in the case of ITAIPU, is shared, in equal parts, by Paraguay and Brazil.
This comparison between the use of natural resources facilitates the understanding of the economic significance of ITAIPU using an example from the oil world, perhaps closer to the everyday life of the general population. But it also provides a dimension of analysis of the relevance of this binational hydroelectric power plant in a world energy matrix whose share of renewable sources is growing steadily in all global energy forecasting exercises, largely due to the need to reduce the emission of Greenhouse Gases (GHG). An energy transition toward the use of energy based on more efficient technologies and the substitution of fossil fuels is proposed. The growing use of electricity generated from renewable sources is an essential part of the strategies for this transition.
Itaipu: opportunities and obstacles
ITAIPU represents an opportunity for Paraguay’s socioeconomic development based on a renewable energy source, which is in line with the aforementioned main challenge of the global energy transition. The country’s electricity system is based exclusively on hydroelectricity. The current installed capacity, with 98% participation of binational hydroelectric power plants (particularly ITAIPU), allows generating more electricity than the domestic market needs, an advantageous condition that would extend, in principle, until the beginning of the next decade.
This “energy bonus” condition, together with the “demographic bonus” period the country is going through and the existence of an attractive legal framework for foreign investment, makes the country a land of opportunities to develop projects of a “decarbonized” economy (low GHG emissions), both in terms of commodity production (green hydrogen, green ammonia, green steel, among others), and in the implementation of a low-emission transportation paradigm, with the participation of electric vehicles. These innovations in the industrial and transportation structure could, in turn, facilitate the participation of the productive sector of the country and the region (due to the existence of strategic minerals in bordering countries, such as lithium, for example) in value and supply chains of goods related to the transition to a low GHG emissions economy.
The opportunities for socioeconomic development based on Paraguay’s abundant hydroelectricity face obstacles related, on the one hand, to a vulnerable institutional framework, which hinders the effective implementation of investment-friendly policies and regulations. On the other hand, obstacles to an infrastructure under development, with limitations including in the electricity transmission and distribution system, as well as in the expansion of sustainable generation. The state-owned electricity company National Electricity Administration (ANDE), which has exclusivity of public supply, needs to invest at least US$ 600 million annually over the next 10 years to offer a highly reliable and secure service in the National Interconnected System. However, the level of investment, although it has improved recently, reaches only 50% of what was programmed. This brings the debate regarding ITAIPU and energy development opportunities into the realm of income expectations, particularly about the value that can be generated by the transfer of energy from ITAIPU to the Brazilian market.
The binational entities, but particularly ITAIPU, have been a source of income and benefits for the Paraguayan economy since the time of construction and, in a sustained manner, during the 40 years of operation. More than US$ 500 million per year is the net income to the country from the sale of ITAIPU’s energy. This has allowed the Electricity and Water economic sector to contribute about 7% of the GDP, according to official figures. The economic benefits received from the binational power plant for the generation of electricity (fees of officials and contracts, royalties, profits from the capital contribution, compensations for ANDE) and the additional value received from Brazil in compensation for the transfer of Paraguayan energy that is not contracted (the energy produced is divided into equal parts, according to the Treaty that instituted the binational entity ITAIPU) have been topics of public debate since before the signing of the Treaty. Not only were the values that Paraguay would receive for ceding its energy to the partner country questioned, but also the obligation to cede the energy surplus exclusively to Brazil (which is complemented by Brazil’s commitment to contract all of Paraguay’s energy surplus).
The values of the compensation for the transfer of energy were firmly claimed by Paraguay in the last twenty years, which led to an increase totaling 4,000% concerning the value determined in 1973. These claims were obtained during the first two terms of Lula de Silva as head of the Brazilian Executive Power, with better results in the negotiation of Fernando Lugo’s government. However, the other relevant aspect claimed by Paraguay (the free availability of its energy surplus) has not been achieved in the negotiations, but Brazil has always complied with the contracting of Paraguay’s energy surplus.
Discussions surrounding a complex negotiation
A few years ago, in the period prior to the revision of Annex C of the ITAIPU Treaty (part of the bilateral agreement that establishes the financial and commercialization conditions of energy), which entered its scheduled revision phase in August 2023, the discussion about the strategies for the revision of the agreement intensified in Paraguay. The motivation stems from two relevant facts: the energy bonus would be maintained for at least another decade, and the cost of the electricity service was reduced by at least 60% concerning the value of 2021 since the largest component of the cost — payment of amortization and interest on the debt — will no longer exist as of 2024. A space of strategies was generated that gave different degrees of priority to the alternatives of deepening energy use in the country or claiming higher rents from Brazil for the energy surplus.
The discussion is not trivial because although the natural resource used for energy generation (hydraulic potential) is renewable, the energy surplus could be interpreted as a non-renewable resource. After all, it is reduced as Paraguay’s domestic electricity market grows. In other words, taking advantage of the “energy bonus” is, in reality, a window of opportunity in the medium term. Analyses on the suitability of alternatives indicate that the dominant strategy should be to use energy for the domestic market. However, the conditions for this to occur depend on having adequate electricity infrastructure and an industrial infrastructure that multiplies the economic value of energy, generates employment, and promotes the circulation of capital in the economic system. In other terms, public and private investment is needed. Therefore, the most reasonable option is to seek higher income and allocate that income to gradually improve the conditions for the use of electric energy in the country. However, obtaining greater income faces the great challenge of ensuring that the destination of the income is the most appropriate and that the administrative procedures and the use of funds are totally transparent for the citizens.
The complexity of Paraguayan interests and the expectations of the Paraguayan people concerning the revision of Annex C are elements that are not fully in line with the interests of the Brazilian federal government. The Brazilian government has expressed its interest in having energy from ITAIPU at the lowest possible cost, a position reinforced by the interest of Brazilian businesspersons who see the possibility of reducing ITAIPU’s energy costs as an opportunity for productivity gains. The Brazilian government, in turn, does not rule out the possibility of obtaining rents through tariffs higher than the cost, although its intentions are more limited than those of the Paraguayans and the main destination would be for social projects. Recently, there has been a difficult negotiating atmosphere between the representatives of the two countries, which clearly shows the difference in their positions.
The negotiation phase regarding the revision of Annex C has not officially started. In January 2024, the two countries held an initial summit where Paraguay clearly and firmly presented its objectives to the government of Lula da Silva. In the presidential speech following the meeting, the Brazilian president emphasized the differences in positions between the two countries. Paraguay aims to increase the tariff to generate income, while Brazil expresses its intention to lower the tariff to provide lower costs for Brazilian consumers. The negotiation currently revolves around the tariff.
It is essential to consider other historical elements in ITAIPU’s history, such as more favorable energy procurement conditions for ANDE. The current situation precedes a negotiation with prospects for at least 10 years: the revision of Annex C, which is more complex and has the potential to establish a path of bilateral cooperation and integration, possibly with regional implications. Sustainable development and mutual long-term benefits are envisioned. Both presidents share this vision, which could lead to a negotiation expanding the role of the binational entity, turning it into a catalyst for the development of both countries. The greatest challenge lies in the phase that has not yet arrived.
*Translated by Janaína Ruviaro da Silva from the original in Spanish.
Autor
Profesor e investigador de la Facultad Politécnica de la Universidad Nacional de Asunción. Doctor (PhD) en Energía, Máster en Ciencias en Historia Social de las Ciencias, B. Sc. y Licenciado en Física por la Universidad de Sao Paulo, Brasil.
