March 14, 2014 6:13 am

Brazil has announced a $5.1bn aid package for its electricity sector to shield consumers from sudden price increases following the worst drought in at least four decades.

The country’s distributors, which largely rely on hydroelectric dams, have been forced to switch to expensive thermal power after reservoir levels in the southeast of the country fell to the lowest since 2001.

However, the government has been loath to pass on these higher costs to consumers less than seven months before presidential elections and at a time when Brazil’s economy is barely growing.

Instead, finance minister Guido Mantega announced a series of measures late on Thursday to spread out the costs between the electricity sector, the government and consumers, bringing much-needed financial relief to utilities and putting off rate increases until 2015.

The Treasury will provide an extra R$4bn ($1.69bn) to power companies, in addition to the R$9bn already in the budget, so they can meet their financial commitments.

Meanwhile, the country’s wholesale power trading board, CCEE, will be authorised to raise R$8bn in the market to provide financing to the electricity companies, which can be paid back later by gradually increasing energy bills.

“The thermo electrical plants produce energy that is more expensive than hydroelectric plants, something like four, five or six times more,” said Mr Mantega, adding that the idea of the measures was to share the burden of these higher costs.

By avoiding unpopular price increases in the short term, the measures will also help keep a lid on inflation this year, which rose to 5.68 per cent on an annual basis in February – even further above the country’s 4.5 per cent target.

The government said the measures would not have an impact on Brazil’s fiscal position, seeking to calm concerns in the market over the country’s deteriorating finances and the prospect of a damaging sovereign ratings downgrade. While the extra R$4bn from the Treasury will come from tax revenues, the money raised by CCEE will not have a fiscal impact as the trading board is technically a non-government entity, it said.

“I also want to make it clear that there will be no alterations to the current contractual rules in the electric sector at this time,” said Mr Mantega.

In 2012 the government was heavily criticised for suddenly announcing it would slash energy prices – a move that caused outrage and confusion in the sector and raised general concerns about rising state intervention in the economy.