Peru boasts promising wind and solar resources in its northern and southern regions – but these resources are still untapped. A new mandate, forthcoming auctions for long-term power purchase agreements (PPAs) and mounting lender interest may encourage greater exploitation of these resources. 

Renewables make up a fraction of Peru’s generation mix today. Hydropower (55%) and fossil fuels (45%) are its main sources or power. Peru’s hydrology and plentiful onshore gas reserves explain this dominance, but Peru continues to lag behind its neighbours in renewables development. 

The Peruvian government is concentrating its efforts on procuring baseload capacity to meet strong power demand growth. ProInversión, Peru’s private investment agency, is expected to launch a tender as soon as March 2015 for 1,200MW of hydro capacity. Hydro projects larger than 20MW will be eligible to participate. 

International sponsors are increasingly comfortable investing in Peru. Brazil’s Odebrecht is a sponsor of the $1.2 billion 406MW Chaglla hydro project, which in 2013 closed a multi-tranched debt package with Brazilian development bank Banco Nacional de Desenvolvimento Econômico e Social, as well as a group of development finance institutions (DFIs) and commercial banks. A year earlier, Israel’s IC Power’s closed the debt financing for the $915 million 520MW Cerro del Águila hydro plant. 

In 2014 the government awarded the $4 billion southern gas pipeline to a consortium led by Odebrecht and Enagás. The pipeline will carry gas from Camisea to supply more than 1GW of capacity split between two power projects. Enagás owns one of those thermal power concessions, while IC Power owns the other. 

New mandate

As of January 2015, renewables accounted for just over 450MW of operational generation – across small hydro, biomass, solar and wind assets – according to the Ministry of Energy and Mines (MEM). 

Three wind farms were operating in Peru at the close of 2014, which have a combined installed capacity of 146MW. The 97MW Tres Hermanas project is slated to enter operations this year; Cobra, part of Spain’s ACS, is the sponsor. 

Renewables will remain a small part of Peru’s power matrix, but the capacity should soon double. At a November 2014 climate conference, Peruvian President Ollanta Humala said that Peru would set a mandate for 5% of power demand to be met by renewables. 

A month later, Peruvian state energy and mines investment regulator Osinergmin said it would hold a fourth PPA auction for 1,300GWh of renewable power purchases per year – including wind, solar photovoltaic (PV) and biomass – and 450GWh per year from small hydro (or projects that each generate less 20MW) in August. 

Peru’s MEM has also granted temporary concessions to more than 1.8GW of wind capacity, whose sponsors will be eligible to compete for PPAs in the August 2015 tender. 

Solar’s share of the Peruvian power market is even smaller than that of wind. Four PV plants are in operation in Peru today, with a combined capacity of 103MW. International developers Solarpack, Gestamp and T-Solar are among the sponsors of those plants. MEM has granted temporary concessions to a further 490MW of PV projects, whose sponsors will be eligible to compete for PPAs in the first renewables auction of 2015. 

A large part of Peru’s success in attracting international developers has been the bankability of its power purchase agreements. “Peru, and in particular ProInversión, has expert knowledge of the requirements for a successful project financing, and the electrical system to which the projects sell is strong, without events of default in their past,” says David Vuelta Mitchell, director for structured finance in North America at ACS Industrial in Houston. 

Adds Carlos-Ivan Lopez, managing director of debt capital markets at Bank of America Merrill Lynch (BAML) in New York: “Peru has implemented one of the most market-friendly models for infrastructure-type projects whereby contractors get fixed payments as long as they can meet certain milestones, which in the case of power companies, means that they are able to generate the energy.” 

Financing options

Four wind projects – two owned by ASC subsidiary Cobra, the others by ContourGlobal – recently closed long-term debt financings, after obtaining PPAs with the national grid in 2010. These contracts were among the earliest Peruvian renewables offtake agreements. 

Cobra relied heavily on DFIs for the two 17-year financings that it closed for its Marcona and Tres Hermanas wind projects, in January and February 2015, respectively. US Ex-Im, Proparco, FMO, DEG and Corporación Andino de Fomento (CAF) joined both debt packages, which totalled $230 million. Natixis was the only commercial bank participant, and lent to both projects; it was also a financial adviser alongside CAF. 

Assembling the Cobra wind financings proved to be laborious, and suffered several delays. “All strategies have their pros and cons, in some events pricing is lower at the expense of timing and vice versa,” Vuelta adds. 

Had the Cobra deals come to market today, the role of DFIs would be smaller. The deals would probably feature mostly commercial debt, says a banker familiar with the financings. 

“In the last two to three years there has been an increased appetite from commercial banks [for renewables]… and they are slowly joining the market,” Vuelta Mitchell says. “Multilaterals offer alternatives as well, and the bond option exists depending on the underlying contract structure.” 

ContourGlobal tapped international capital markets in December 2014 to refinance its operating Talara and Cupisnique wind farms, which were commissioned three months earlier. The sponsor closed a $204 million green bond offering – the first such issue for a Latin American infrastructure asset – whose proceeds repaid a bridge loan from Peruvian national development bank Cofide. 

The sponsor considered other sources of long-term financing, including DFIs, but found the green bond option most attractive, says Alessandra Marinheiro, chief executive officer of ContourGlobal LatAm in São Paulo. The two wind farms are geared at roughly 80%. 

“In marketing it as a green bond, we brought in new clients and achieved extended terms and better pricing,” says Reggie de Villiers, head of Latin American structured finance at BAML in New York. BAML and Goldman Sachs advised ContourGlobal on the issue and were its joint bookrunners. 

Although the US dollar-denominated issue was extensively marketed in the US and UK, Peruvian institutional investors bought some of the paper. “This shows that those who know the local sector and project best believed in the bond and this provides comfort to international investors,” Marinheiro says. 

Equity sought

Several experienced local hydro developers are now looking at Peru’s wind and solar sectors. Some are looking to collaborate with experienced European sponsors and investors for the 2015 tenders. 

“The electricity sector has only been open to the private sector for 10 years,” says a source at a Lima-based hydro developer that is in talks with French and German firms for a possible collaboration. “Local competitors are not established enough.”