Energy, cash, and climate shape talks over the giant Itaipu dam - The Brazilian Report

Itaipu: Energy, cash, and climate shape talks over the giant dam

As Paraguay’s new president, Santiago Peña, took office in 2023, another milestone was being reached at the nation’s eastern border with Brazil. The bilateral agreement that created the mammoth Itaipu dam — the world’s third-largest hydropower station, shared by the two countries — reached its 50th anniversary, triggering a renegotiation of its terms.

This deadline, agreed with Brazil half a century ago, may have come at an opportune moment for the country: improving its terms and access to renewable energy from the dam “could be a magic key for Paraguay’s energy transition,” says Guillermo Achucarro, a Paraguayan climate policy researcher.

Across the border, Brazil’s President Luiz Inácio Lula da Silva is back, returning to office in 2023 for a third time, 12 years after his last term. It was during Lula’s previous government, in 2009, that an historic agreement was reached to triple the amount Brazil pays to Paraguay for Itaipu’s energy.

Under the terms of the original treaty, Paraguay has sold much of the energy to which it has been entitled — half of the dam’s output — to Brazil at a preferential price. The arrangement is a contentious one in Paraguay as, to this day, it still must cede any energy it does not use domestically to Brazil.

Several factors have threatened the prospects of the renegotiation, including disagreements over the pricing of energy from the dam, the pressures of climate change — likely to impact future output — and an increasing possibility that Paraguay will need to retain all its energy entitlement for its own consumption.

A ‘dream’ born out of conflict

Paraguay’s President Peña has spoken of Itaipu’s creation as the fruit of Brazilians and Paraguayans who “dared to dream.” In practice, the dam’s story has been somewhat less idyllic.

Latin American historian Jacob Blanc has detailed how the 1973 Itaipu treaty emerged from a diplomatic rift over differing interpretations of the Brazil-Paraguay border, since it had been demarcated at the end of the War of the Triple Alliance (1865–1870), in which the two countries had been adversaries. In June 1965, forces of the Brazilian military dictatorship occupied the area, where it had identified hydropower potential a decade earlier. Four months later, armed guards detained a Paraguayan delegation visiting the site, which included allies of Paraguay’s then-president, the dictator Alfredo Stroessner.

What followed was a year of active regional diplomatic conflict, including threats of war, mediated by the U.S. In 1966, Paraguay and Brazil signed the Iguazú Act, in which they agreed to jointly explore the area’s hydropower potential. The 1973 treaty later declared Itaipu a “binational entity.” The disputed territory was to be dammed and flooded, formally settling the conflict.

The treaty forged an “equitable division of energy and administration,” notes Tomaz Espósito Neto, a scholar of Brazil-Paraguay relations. But it also created controversy: while Paraguay assumed its share of the dam’s construction costs, the country’s lack of hydropower infrastructure at the time led to its agreement to cede to Brazil any energy unused from its entitlement of 50 percent of the dam’s output.

In 1975, as the project got underway, Brazil and Paraguay together took on debts of just over USD 3.5 billion, including loans via Brazilian state utilities company Eletrobras. Independent analysts estimate this debt had grown to USD 79 billion by the time it was fully paid off in 2023: the figure ballooned amid accusations of overbilling for construction and the refinancing of initial loans with Brazil.

In addition, the lending banks raised the cost of repayment to recoup its losses from a below-cost energy tariff used between 1985 and 1997, which had benefited the Brazilian industries that were using the majority of Itaipu’s power.

Questions have been raised by some social organizations and political parties in Paraguay over what has been described as a “spurious” debt. A 2013 report overseen by the US-based Columbia Center on Sustainable Investment also concluded that Paraguay had in fact already paid off its...