The National Treasury may be forced to make new fund transfers to the power industry from May, further complicating the 2014 fiscal scenario and the achievement of the target for public sector primary surplus of 1.9% of GDP.

The bill to be paid will depend on the result of a power auction that the government will hold next week, but government officials expect it to cost R$5 billion to R$9 billion through December. These funds are not included in the government budget and add to the R$13 billion that the National Treasury has already committed to spend this year.

The R$11.2 billion loan that the government organized to bail out power utilities is enough to pay expenses until April. From May, it will be necessary to seek another funding source, since the government doesn’t intend to resort to new financing.

A decision has not yet been taken about the use of taxpayers’ money, but the opening for the Treasury to make new allocations to distributors has already been made. The presidential decree that authorized the loan arranged last week and a resolution by the National Electric Energy Agency (Aneel) opened the possibility for the Treasury to transfer funds to utilities to pay for the costlier electricity generated by thermal power plants. The first article of the Aneel resolution says that the costs of thermal generation between February and December 2014 may be paid “entirely or partially by transfers from the Energy Development Account (CDE) from Union transfers.” Until the decree, the Treasury had no authorization to compensate such spending.

The Treasury’s participation and resulting fiscal effect will be directly proportional to the result of the power auction to be held next week. Currently, power distributors are buying 3,500MW on the short-term market to cater to their clients at a cost of R$822.83 per megawatt-hour. For the auction, the government set a cost for electricity between R$262 and R$271 and the contracts will have five-year durations. If distributors manage to contract all the 3,500MW they need to meet demand, the size of the fiscal problem will be greatly reduced. This scenario, however, is not considered possible even inside the government.

What’s most likely is that utilities continue buying part of the power they need to service customers at the short-term market price and need cash reinforcement. The government expects this balance to vary between R$5 billion and R$9 billion and to possibly be absorbed by provisional actions for revenue increase, as announced by the Finance minister, Guido Mantega.

The National Treasury will not be able to rely on the R$13 billion already earmarked for spending in 2014, if the decision is to rescue power distributors with money from the federal government. Those R$13 billion, as well as the R$4 billion promised early in March, were already accounted for by Aneel and served to reduce the rate hikes this year. Therefore, even though they have not effectively been disbursed, these resources are already committed to another destination and can’t be allocated to the utilities.

In 2013, the National Treasury disbursed R$9.8 billion to rescue the distributors. Low rainfall since 2012 has been forcing the government to turn on thermal plants to offset the drop in water levels at dam reservoirs. The power generated by thermal plants, however, is much more expensive than the hydroelectric plants, which means prices on the short-term market rise.

Moreover, the decision in 2012 by Cemig, Copel and CESP — power companies controlled by the state governments of Minas Gerais, Paraná and São Paulo — of not renewing their generation concessions in advance left distributors without long-term contracts to supply their customers, forcing them to buy power on the short-term market, which also exacerbated the economic imbalance of these companies.

The government has also decided to intervene with taxpayer money for political reasons: having announced a 20% reduction in electricity rates, it didn’t want to back down and used Treasury resources to avoid rate hikes.