A special report from Global Business Reports and POWER
At the same time as Peru struggles to extend transmission and distribution lines to all of its people, its neighbors are eager to buy electricity. And although gas has been fueling many of the most recent additions to Peru’s power generation fleet, the future appears brighter for traditional hydro and wind power. Setting priorities will be important in a country that has suffered from a lack of long-term planning.
After 2008’s economic boom and the significant pressures that this placed on energy supplies, Peru was able in 2009 to catch up with investments in new power generation facilities. Now the country is having to choose between settling for self-sufficiency and exploiting its enormous resources — especially for hydropower generation — in order to become a key exporter of energy to countries with a high demand, such as Brazil.
This dilemma is not a trifling one, as it will shape the country’s energy position for the next several decades. At stake are environmental and social considerations that are inevitable when you project several GW worth of hydro plants in the middle of the Amazon jungle. Nevertheless, many believe that Peru would be foolish not to take advantage of its privileged richness in energy sources. The question is, can the country afford to start exporting large amounts of electricity in the near future?
Considering 2008’s energy shortages, which caused spot electricity prices to skyrocket, some industry leaders believe that Peru needs to secure its own supplies first, for a simple reason: With natural gas reserves already looking insufficient to serve the phenomenal growth in demand (Peru is already at gas consumption levels initially foreseen for 2016), the country will need to increasingly shift back toward hydropower projects, which take many years to build. Some even anticipate energy shortages in two to three years’ time.
"The economic crisis has indeed affected the demand for energy, which has grown by less than 1% in 2009," explains César Raúl Tengan, general manager of Electroperú, Peru’s second-largest generator, which is state-owned. "For the next 24 months, we will cope with the current capacity. The problem will start in 2012, because hydro plants cannot be built in three years."
Alejandro Ormeño, general manager of SN Power, a generator owned by the Norwegian state, expects "dramatic changes" after 2011: "The current situation will have to alter. Gas prices will probably more than double, with a commensurate effect on energy costs."
Other managers, though, believe energy supplies are guaranteed for the next five years, thanks to the recently added capacity: "Demand is growing in the good years by 400 MW, but in 2009 not at all. Between 2008 and 2009 1,300 MW were added to the system. That is enough new capacity to last until 2013/14; then the combined cycle in our Kallpa plant will provide an extra year," claims Javier García-Burgos, CEO of Inkia Energy, headquartered in Lima and owned by Israeli investors.
A Bit of History
The 1992 Electricity Concessions law set up the basis of the current power regime and opened the door to investors other than the state. "The new law included concepts from Chile, Argentina, and England. It was a challenge to adapt all this new knowledge to the Peruvian system. Moreover, it included enormous tariff hikes (from less than 1 cent per kWh to 6 to 7 cents per kWh). It was a major restructuring," explains Carlos A. García, managing director of Summa Asesores Financieros, a firm that acted as a consultant for the Peruvian government during the process.
Alfredo Dammert, president of Osinergmin, the main governmental regulator in the industry, acknowledges that the privatization of the distribution sector faced a number of problems but argues that in the case of generation and transmission it was very successful. Today, the state maintains some assets in power generation, but the transmission lines are 100% in private hands.
The current picture shows a significant proportion of natural gas – fired power generation in the energy mix, but this is a recent phenomenon. Indeed, it was only in 2004 that Camisea’s Block 88 was put into production, thus beginning a revolution in the country’s electricity sector. The use of natural gas for power generation grew by 54% annually between 2004 and 2008, according to government sources.
Market Imbalances
The push for gas-fired generation had two main drivers, seen by many today as unfortunate. First, very cheap gas prices made open-cycle (simple-cycle) gas-fired plants very profitable and discouraged the construction of combined cycles. Second, a five-year moratorium on new hydro plants was passed by the Paniagua transition administration in 2001, with the intention of promoting gas consumption. This stopped the development of a number of projects, such as Celepsa’s 220-MW hydro plant, El Platanal. "The project was conceived in 1996, and all the basic engineering was done between 1996 and 1998. Due to the moratorium, however, we could only start construction in 2006," explains Pedro Lerner, general manager, Celepsa. The plant was finally put into operation in late 2009.
Mark Hoffmann, general manager of Duke Energy, remarks on the situation created by the arrival of natural gas: "By simple mathematics it is easy to demonstrate that the price of gas here makes otherwise attractive technologies unviable. We are talking hydro, which this country is particularly well suited to, and combined-cycle gas plants. It is an inefficient use of natural resources, but in the end if you are investing money, returns drive your decisions."
Mark Hoffmann, General Manager of Duke Energy Egenor
Now the industry is finally moving toward combined cycles, but traditional generators in Peru are not betting on any large hydro project. Celepsa, promoter of El Platanal, is actually the subsidiary of a large cement group that wants to ensure its own power supplies, whereas the plans for large hydro facilities in the Amazon jungle are being designed with the sale of energy to Brazil in mind (Figure 1). (See the Brazil country report in our Jan. 2010 issue, p. 48.) [Ed.: Print version incorrectly listed Jan. 2009.]
1. Mantaro, owned by state company Electroperú, is the country’s largest power generation complex, with a total of 1 GW. Brazilian investors, with the support of the Peruvian and Brazilian governments, are now evaluating large hydro projects in the Amazon jungle for a total of approximately 6 GW.
In Peru, many industry leaders argue that tariffs are too low to make new hydro projects feasible. When Proinversión, Peru’s investment promotion agency, launched an auction in 2009 for the purchase of 500 MW from new hydro facilities, only one bidder (SN Power) turned up, and just 109 MW were allocated at a price of $47.50 per MWh plus $5.99 per kW-month. Jorge León, executive director of Proinversión, defends the terms of the process: "We intended to give an incentive to investors through the purchase of up to 90% of their energy at the price they offered. This way they would ensure their revenues. The maximum monomial price, established at nearly $60 per MWh, is higher than in previous tenders and implies a big effort from consumers."
Patrick Eeckelers, general manager of Enersur, a fast-growing generator belonging to the GDF Suez group, states that this price does not provide for an adequate return. "One thing is clear: at $47.50 per MWh we will not be able to make our Quitaracsa hydro project economically viable. We need prices of $60 to $70 per MWh." For his part, Jorge Barata, managing director of Odebrecht, a large Brazilian constructor of hydro plants says, "We know that some mining companies today are paying $90 per MWh, so the market conditions will definitely offer room for new projects; $47.50 per MWh is too low for investors to take the risk."
Patrick Eeckelers, General Manager of Enersur (GDF Suez)
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