July 25, 2009 / 7:25 PM / 10 years ago

Brazil to triple price it pays Paraguay for energy

* Deal a political victory for Paraguay’s President Lugo

* But agreement likely to generate criticism in Brazil

* Paraguay wins right to sell excess energy on free market

By Todd Benson

ASUNCION, July 25 (Reuters) - Brazil agreed on Saturday to triple the amount it pays Paraguay for energy from the massive Itaipu hydroelectric dam on their border, ending a long-running dispute that had soured relations between the two neighbors.

Paraguay also won the right to gradually sell excess energy from the dam directly to the Brazilian market instead of doing so exclusively through state-owned power utility Eletrobras (ELET6.SA).

That move will allow Paraguay to fetch more for the power at market prices.

The deal is a much-needed political victory for Paraguayan President Fernando Lugo, whose first year in office has been marked by a severe economic downturn and scandals over revelations he fathered children when he was a Roman Catholic bishop.

But the agreement is likely to face criticism in Brazil, where opposition leaders and even some government allies have urged President Luiz Inacio Lula da Silva to play tough with Paraguay.

Lugo swept into office in August last year after promising to extract better terms from Brazil over the energy it sells from Itaipu. His victory ended a 60-year stronghold on power by Paraguay’s conservative Colorado Party.

Lugo and Lula said the deal would usher in a new era of relations between the two countries based on cooperation instead of recriminations over who benefits most from Itaipu.

WIN-WIN DEAL

Lula said the agreement is part of a campaign by Brazil to spur economic development in the region.

“Brazil is not interested in growing and developing if our neighbors aren’t growing and developing at the same time,” Lula said at a ceremony with Lugo at the presidential palace in Asuncion, Paraguay’s capital.

“This is not an agreement in which one side wins and the other side loses,” Lugo said. “This is for the good of both countries.”

Lugo had initially pushed to renegotiate the 1973 treaty that laid the foundations for Itaipu, which straddles their border along the Parana River. But Brazil pushed for a compromise that would allow Paraguay to boost its take from the dam.

Brazil gets close to 20 percent of its energy from Itaipu, paying Paraguay about $120 million a year, an amount that will now triple. Each country owns half of the 14,000 megawatts the dam produces annually, but Paraguay consumes just 5 percent of that amount and sells the rest of its share to Eletrobras for $45 per megawatt hour.

Paraguay will eventually be allowed to sell a growing share of that excess energy directly to the Brazilian power market, where it could fetch as much as $65 per megawatt hour under current market prices.

The deal gave negotiators 60 days to work out a timeline and the terms at which that excess energy will be sold on the Brazilian market. It also stipulated that Brazil and Paraguay could begin selling excess power from Itaipu to other countries in 2023, when the Itaipu treaty expires. (Editing by Xavier Briand)

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