Powering down Peru's renewable energy auctions


Despite being a steadily growing investment grade economy with a relatively stable currency and consolidated rule of law, Peru has in recent time not received as much attention from international energy developers and investors as some of its LatAm peers. This has much to do with the sense that Peru has overbuilt its power market.

Technology-specific power auctions used to be the main driver for new projects, with the government in 2008 establishing auctions to contract on-grid renewable energy capacity every two years.

Peru has so far held four renewable energy auctions, awarding 64 projects. However, the last auction was back in 2015.

The country's Energy and Mining Ministry (MINEM) cancelled the next auction which was originally scheduled for 2017. Some government officials then announced that the procurement process would happen in late 2018 and now the market is hoping for an auction in 2019, though there is no guarantee that this will actually happen.

For now, it seems that the energy industry in Peru has stalled. And the reason – at least the official one – is overcapacity.

Peru's GDP growth has been in a downward trend since 2008, when it reached more than 9%. According to World Bank data, annual GDP growth in 2017 was 2.527% compared to 6.14% in 2012. From 2005 to 2015, electric power demand in the country grew by 90% – a hard pace to sustain.

A slower economy, coupled with a large volume of projects already contracted for the long-term, has led Peru to its current state, in which projects awarded power purchase agreements (PPAs) were never built. Surely then, if already-awarded projects are not being built, there is no need for a new power capacity auction?

Efficient generation

If only it were that simple. First of all, many market watchers believe that the overcapacity will only last until 2021, which means Peru has only three more years to increase its power capacity or risk struggling with supply (and pricing).

Members of the renewables industry maintain that only nontraditional renewable energy projects – comprising mostly solar, wind, geothermal and biomass – could be built on time, since other options – such as gas-fired power plants and hydropower projects – have longer construction periods.

Another reason for Peru to continue to invest in renewables would be to diversify its energy mix.

In 2016, 46.4% of the country's electricity came from gas-fired units and 39.8% came from large hydropower plants. Biomass, wind, solar and small hydropower projects were responsible for 10.8% of electricity, while the remainder came from units powered by coal, oil and diesel.

Peru's power generation capability is therefore heavily dependent on fossil fuels and hydropower.

The technology debate

Discussions on subsidies are part of the debate surrounding the next potential power auction. Besides having a technology-specific auction system, Peru also offers priority dispatch and accelerated depreciation for renewable energy projects.

But fossil fuels also receive incentives. For example, the Camisea gas project has had a long-term contract to sell its gas to power plants for a stable price since 2004. The agreed price is even lower than Henry Hub prices following developments in the US fracking industry.

This creates two problems. One is that the controlled gas prices have a deadline of 2023. The other is the instability it creates on the spot market. When there is an issue with the gas pipeline, prices can increase twentyfold in just a few hours.

Peru tried to deal with the latter problem through the construction of the Gasoducto Sur Peruano (GSP), a $7 billion pipeline to transport natural gas 1,000km from the Camisea deposit near the Urubamba River in central Peru to the Pacific coast. The construction was cancelled in early 2017 as a result of the corruption scandals involving Odebrecht, the concessionaire.

Now, the project's future is uncertain. The government wanted to promote a new auction, while many people in the industry suggest a different approach – such as using Peru's solar and wind resources to produce power locally in even the most remote areas of the country.

Call for regulation

The fragility of the spot market leaves the door open not only for a potential new auction round but for private deals. Large energy consumers have been cited as interested in closing bilateral private PPAs directly with power producers.

This could be an opportunity for renewables projects. However, current legislation demands that a project declare its firm capacity. Since renewables are intermittent, regulatory distortion attributes to these projects null-capacity – meaning that they will either have to sign private contracts, or have to go merchant and sell power on the spot market.

Peru's renewables sector has requested new regulation regarding the firm capacity requirement, and is waiting for a new power auction. Without both, it is unlikely that the country will see a huge influx of investors in the energy sector over the next few years.

Snapshots

Asset Snapshot

Gasoducto Sur Peruano GSP (1000KM)


Est. Value:
USD 7,300.00m
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