As of May 2019 Peru maintained 14,900 MW of renewable energy generation capacity, based on a mix of contributions from hydroelectric, wind, biomass and solar facilities. Hydroelectric and wind provided 43% and 40%, respectively; biomass sourced a further 11.6%; and solar produced the remaining 5%. The country earned a reputation as a renewables pioneer in the region with the completion in 2012 of Repartición, a 22-MW solar project, which was the largest of its kind in South America at the time.

While the segment’s development got off to a promising start, the growth of wind and solar capabilities in particular has slowed significantly, and renewables still account for a small share of the total energy mix. As of 2017 these sources accounted for 2.7% of the energy distributed through the country’s power grid, known as the National Interconnected Electric System (Sistema Eléctrico Interconectado Nacional, SEIN), according to an assessment from EY.

Peru’s energy development strategy intends to triple the share of renewables by 2030 to account for about one-sixth of all installed generation capacity. “I don’t see that as an ambitious goal. In fact, I think it falls short, because Peru has very good solar and wind resources,” Rodolfo Zamaolla, director of energy and intelligent systems at the domestic electricity producer Continua Energías Positivas, told OBG. “When the resources are good the renewables market will grow. However, the regulatory framework needs to be adapted to the changes that are happening worldwide, as solar and wind can have competitive prices.”

Recent Developments

In 2018 Peru added roughly 500 MW of green capacity, led by the March opening of the 145-MW Rubí solar photovoltaic (PV) plant. The facility was built in Moquegua, a department near the Chilean border that has one of the highest PV electricity potentials of any region in the world.

The $170m facility was constructed with the support of Italian energy multinational Enel and the European Investment Bank. It will operate under the terms of a 20-year power purchase agreement (PPA) between Enel and Peru’s Ministry of Mines and Energy ( Ministerio de Energía y Minas, MINEM), and will eventually supply 440 GWh annually to the SEIN.

In February 2019 the Spanish renewables developer Grenergy won tenders to build a pair of wind facilities, Duna and Huambos, with a combined capacity of 36 MW. The firm paid roughly $37 per MWh to build the plants in Cajamarca, a mid-sized city in the northern Andes. Both facilities are likewise written into 20-year PPAs and are scheduled to begin operations in 2020.

Policy Tweaks

Efforts to drive the development of renewables are meant to dovetail with a push to achieve nationwide electrification by 2021. “Bringing electricity to rural communities generated by smallscale solar plants is a real possibility,” Zamaolla told OBG. Towards that end, the minister of energy and mines, Francisco Ísmodes, announced in June 2018 that the government intended to install as many as 260,000 solar panels countrywide, with a focus on rural regions in the Andes and the Amazon.

In addition, work is under way at MINEM to re-evaluate and recalibrate the regulatory framework for renewable resources. Central to that change is an overhaul of the project-tendering process and the promotion of electric and hybrid car imports. Moreover, the proposal emphasises utilising renewables technologies to reduce the country’s greenhouse gas emissions, which are relatively high for a country of its demographic size and socio-economic profile.

Raising Capital

In addition to utilising tender auctions to solicit financial support, policymakers have recently explored promising, alternative methods of securing capital to fund the development of renewables projects. For instance, in May 2019 Peru’s Development Finance Corporation (Corporación Financiera de Desarrollo, COFIDE) issued a PEN100m ($30.3m) green bond on the Lima Stock Exchange. The Treasury, which carried a three-year maturity and an interest rate of 5.1%, was the first of its kind sold in the country and the second in South America, following the issuance of a similar security in Chile.

Moreover, COFIDE’s listing was over-subscribed, drawing particular interest from Peru’s private pension funds and pension fund administrators, which together purchased 80% of the inaugural security. Funds raised from its sale will be dedicated exclusively to investment in green energy projects that can help to mitigate climate change and its effects.

Distributed Generation

In August 2018 MINEM submitted a resolution for public consultation on the potential implementation of a net metering programme known as Distributed Generation for Self-Consumption (Generación Distribuida para Autoconsumo, GDA). Should it be approved, GDA will allow residential, commercial and industrial entities generating up to 200 KW annually to sell their surplus back to the grid at market rate. The initiative has drawn significant interest from both households eager to lower their utility bills and businesses keen on generating additional revenue streams from monetising excess energy produced by their own solar and wind equipment. However, the implementation of the GDA programme is contingent on the establishment of an appropriate regulatory framework.

“Peru needs to acknowledge the prices of power, and those costs are not yet defined,” Juan Carlos Novoa, director of the electricity sector at the National Society of Mining, Petroleum and Energy, told OBG. “That means that contracts cannot be signed, and that is holding up investment.”

Auction Troubles

Peru was ranked last out of five South American countries assessed by EY in the firm’s 2019 Renewable Energy Country Attractiveness Index (RECAI), behind – from highest ranking to lowest – Argentina, Chile, Brazil and Mexico, and 38th of the 40 countries listed. The methodology of the RECAI weighs factors like investment regulation, political stability, and energy security and affordability, as well as the potential for local deployment of specific technologies, such as PV solar and concentrated solar power.

Beatriz De la Vega, an energy partner at EY Peru, attributed the country’s competitive slippage – it fell from 33rd in 2017 – to difficulties in the auction system. The four biennial bidding rounds hosted between 2009 and 2015 – mandated under the renewable energy law passed in 2008 – together secured investments worth $1.9bn that were used to fund 64 additional energy projects. However, the 2017 auction was repeatedly postponed for want of investor interest, owing in large part to an oversupply of energy in the domestic market that has persistently pushed down prices paid by consumers.

Novoa also asserts that Peru’s auctions and the energy spot market – or trading entailing the immediate delivery of a security, in contrast to futures trading – are partly to blame for price distortion. Auctions have tended to drive down consumer prices, as developers bid lower and lower to secure a government contract. Meanwhile, the rapid decline in the price of renewables technologies during the last several years has already served to reduce end-user costs, rendering the auction system largely superfluous.

Under the 2008 renewables law, however, Peru is still obliged to undertake bidding rounds for renewable energy projects, leaving it at a competitive disadvantage in enticing capital and undercutting the viability of local renewables businesses. “There is a certain lag in Peru compared with other countries because renewables can only be built through power auctions,” Zamaolla told OBG. “The 2016 auction price was $48 per MWh, which is way above the those now seen in Mexico and Chile in their auctions.”

Regulatory change with respect to the implementation of renewable sources is key to changing the market’s inflated prices. Many industry observers agree, given the increasing affordability of renewables technnologies, that policymakers ought to retire the auction system and allow renewables to compete with conventional sources, including coal, petroleum and natural gas. Developing green projects that can compete with conventional fuels is particularly urgent given the cost of importing hydrocarbons to cover shortfalls in domestic production: in the 18-month period between January 2017 and June 2018, Peru paid $3.5bn to import 45m barrels of oil from abroad.

Despite setbacks in renewables development, there is cause for optimism about the segment. First, the same changes in the global market that threaten to render Peru’s auctions inefficacious have made renewables competitive with conventional fuels on a per-KW basis. Second, compared with the obstacle posed by activism to the growth of hydrocarbons, there is significant community buy-in regarding renewables. “Society knows of the advantages of clean energy, and there have not been protests that have delayed projects,” Zamaolla told OBG. “That acceptance of such projects among the population is likely to grow.”