Brazil and Paraguay's Dam Deal

On Saturday Brazilian President Luiz Inácio Lula da Silva and Paraguayan President Fernando Lugo announced an “historic agreement” about the jointly owned Itaipu hydroelectric dam. The new pact allows Paraguay to sell excess power directly to Brazil’s market and triples to $360 million the annual payments that Brazil will make to Paraguay for excess energy. Moreover, the new agreement stands as a landmark in bilateral relations, given years of discomfort over the feeling that Paraguay got the short end of the stick in an earlier energy deal.

Itaipu, the world’s largest operational hydroelectric dam, located on the Paraná River on the border of Brazil and Paraguay, generates enough electricity to meet roughly 20 percent of Brazil’s electricity needs. The 1973 Treaty of Itaipu stipulated that, because each country invested equally in the dam’s construction, they would also divide its output equally. But Paraguay only uses about 10 percent of its allotment from Itaipu, selling the remainder to Brazil, which has a GDP roughly 100 times the size of Paraguay’s. Thus, under the 1973 pact, Paraguay found itself obligated to sell unused electricity to its neighbor for a capped price of $120 million per year until 2023. Sources estimate Paraguay’s lost income due to the decreased price stood at $4 per megawatt, reports a BBC article. Paraguayans have long complained the agreement was unfair and the issue has been a sore subject in the bilateral relationship.

The new deal represents an important gain for Paraguay and President Lugo, who made renegotiating the terms of the Itaipu agreement a central pillar of his campaign. The new deal also helps him turn the spotlight away from a set of paternity suits against him, which marred his first year as president. After sealing Saturday’s deal with Lula, Lugo said his government will spend the extra income on “the grave social needs of our people” and that “[w]e have recovered our sovereignty over Itaipu, as was promised when taking office.” Along with increasing payments to Paraguay and allowing the sale of excess electricity directly to the Brazilian market, the accord states that, during the 2023 renegotiations, Paraguay may secure the right to sell the excess to other countries, says Brazil’s Valor. The agreement also calls for the investment of $550 million to improve the outdated electrical grid and build a better transmission line between Brazil and Paraguay.

Some critics argue that Brazil will get nothing from the new terms. But the Lula administration argues the deal has a political payoff. Lula said bigger countries “have the obligation to help the smaller economies take a qualitative leap forward in their development.” Financial Times' Jonathan Wheatley writes that the agreement helps Brazil expand its regional influence.

The agreement awaits debate and approval from Brazil’s congresses before becoming official.

Learn More:

• Both President Lula and President Lugo spoke at AS/COA events last year.
• Energy Information Administration’s energy profile page for Paraguay
• Watch a video of President Lugo’s announcement of the agreement.
• Itaipu Binacional multimedia history of the dam.
• Read the 1973 Treaty of Itaipu.
• Both President Lula and President Lugo spoke at AS/COA events last year.
• AQ blog on Brazil's diminishing demand for Bolivian natural gas.