Brazil's power concession snub leaves door ajar for new investors

Friday, December 14, 2012

The refusal of Brazilian utilities Cemig (NYSE: CIG), Copel and Cesp to renew expiring power contracts has created a raft of opportunities for new investors, energy consultancy Enercons told BNamericas.

The companies say government-enforced revenue cuts will leave their operations unviable, even allowing for a 30bn-real (US$14.4bn) compensation package for assets not yet amortized.

Enercon's president Ivo Augusto de Abreu Pugnaloni says small hydroelectric, wind and thermal biomass developers have been buoyed by the prospect of new concession auctions.

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"Their refusal to lower prices will allow smaller investors, whose demand varies between 0.5MW and 3.0MW, to capture more of the market," Abreu said. "The new legislation establishes that in this range, only renewables can operate in the free market."

The government's concession renewal conditions apply to contracts expiring between 2015 and 2017.

They form part of President Dilma's Rousseff's September pledge to cut power prices by an average of 20% in 2013.

The government has since announced the decisions by Cemig, Copel and Cesp mean prices will now only be reduced by an average of 17%.

Abreu believes the move lacks good business sense and suggested the companies have been driven by political motives.

"I cannot understand the reasons for not renewing contracts," Abreu said. "It is a bad deal for those companies' shareholders because they will lose a large number of consumers.

"It may be a coincidence, but the states of the opposing utilities are governed by the PSDB - political opponents of the federal government."