Brazil may lose US$1.5 billion of GDP in 2021 due to higher electricity prices – CNI study

RIO DE JANEIRO, BRAZIL – Brazil may lose up to R$8.2 (US$1.5) billion of its GDP in 2021 due to the increase in the price of electricity. This is what the National Confederation of Industry (CNI) estimates in the study “Economic impact of the increase in the price of electricity”.

For 2022, the drop may reach R$3.8 billion in relation to the GDP that would occur without increasing energy prices.

The average readjustment of energy tariffs between 2020 and 2021 was 7.04%. However, in addition to the tariffs charged by the utilities, the National Electricity Agency (Aneel) sets additional tariff flags throughout the year to compensate for possible extra costs for electricity generation. With this, the increase in electricity bills can reach 16.87%.

In 2020, ten months were under the green flag, that is, without any additional cost. In 2021, all the months had yellow or red flags, with extra costs per kilowatt-hour consumed. The most expensive value reached R$ 14.20/100 KWh.

The reason, according to Aneel, is the worst water crisis in the last 91 years, which dried up the hydroelectric reservoirs and made necessary the increased use of other energy sources, such as thermoelectric plants and the importation of energy from neighboring countries.

Economist Carlos Eduardo de Freitas, former director of the Central Bank, points out that thermoelectric plants’ cost of energy production has also increased.

“This was the case in 2021 when there was a superposition of a water crisis, which affected the production capacity of the hydroelectric plants, and at the same time, there was an explosion of oil prices in the international markets. In the last twelve months, the price of crude oil more than doubled in the international market. This has an impact on fuel oil, derived from petroleum, which moves the thermoelectric plants,” Freitas explained.

IMPACT ON THE ECONOMY

Economist Freitas explains that the increase in energy tariffs directly impacts the cost of living and the population’s purchasing power. “It impoverishes consumers, who have to reduce the consumption of other items in their basket of products and services.”

The Institute for Applied Economic Research (Ipea) revised last Wednesday (24) its inflation forecast for 2021. The Broad Consumer Price Index (IPCA) forecast went from 8.3% to 9.8%. The National Consumer Price Index (INPC) forecast rose from 8.6% to 10.1%.

The cost of energy was one of the factors pointed out by the institute: “Among these is the drought seen in the country this year, which generated a historic low in the levels of the reservoirs, leading to the adoption of the water scarcity flag and red flag readjustments to cover the higher cost of energy produced by thermoelectric plants.”

“The higher energy price causes a domino effect: all products and services offered by the economic system become more expensive because energy, which is a production factor, is more expensive. This affects the consumer’s pocket negatively and, therefore, is another impact of the impoverishment of society,” adds economist Freitas.

Cost for the productive sector

Even before the water crisis, the high cost of energy was already one of the main obstacles to the increase in competitiveness of the Brazilian industry. In the ranking of the study Brazil Competitiveness 2019-2020, prepared by CNI, Brazil is in last place, among 18 countries, in the energy infrastructure factor, due to the high cost of electricity and the low quality of the supply.

Also, according to the study “Economic impact of the increase in the price of electricity” by CNI, in 2021: The industrial GDP, related to all of industry – including the extractive industry, transformation industry, industrial services of public utility, and construction – should be reduced by R$ 2.2 billion at 2020 prices.

On the other hand, the transformation industry will have a drop of R$ 1.2 billion in its GDP in 2021 compared to what would have occurred without the increase in energy costs.

In this year, it is estimated that the direct and indirect effects of the increase in energy prices will generate a loss of about 166,000 jobs in the number of people who would have been employed without the rise in energy prices.

Families’ consumption will be reduced by R$ 7 billion at 2020 prices. Inflation for families in 2021 will suffer an increase of 0.16%. The loss in exports will be the equivalent of R$ 2.9 billion.

For 2022, it is estimated that:

• The increase in the price of electricity will result in a loss in GDP of R$14.2 billion at 2020 prices. Its effect on industrial GDP is a drop equivalent to R$ 3.8 billion at 2020 prices, in relation to the GDP that would occur without increasing energy prices.
• The estimated loss in the transformation industry GDP due to the increase in the price of electricity is R$ 1.7 billion in 2022. The impact on employment is a loss of about 290 thousand jobs in relation to the number of people employed between April and June 2021.
• Family consumption will be reduced by R$12.1 billion at 2020 prices. The increase in the price for families will be 0.41%.
• Exports are expected to drop by approximately R$5.2 billion.

NEW LEGAL FRAMEWORK

The New Legal Framework for the Electricity Sector project (PL 414/2021) is currently being processed in the National Congress, which could be advantageous for consumers and increase the sector’s competitiveness. The proposal aims to give consumers at all levels the freedom to choose their energy supplier, which is currently only allowed for large consumers.

Deputy Alexis Fonteyne (Novo-SP) says that energy supply companies are comfortable in an already captive market without competitiveness. “If there is this opening of the competition, they will have to serve their clients better; they will have to lower the price to compete and be able to conquer more clients.

The bill has already been approved in the Senate and is pending approval by the Chamber of Deputies.