PERUVIAN PRIVATE ENERGY MARKET

Transcription

1 Opportunities for Swiss Service and Equipment Providers PERUVIAN PRIVATE ENERGY MARKET OFFICIAL PROGRAM

2 The strong economic growth in Peru over the last decade has enhanced its energy market, which is expected to further expand in the future. Traditionally Peru satisfies most of its energy demands with hydropower. However, during the last ten years the use of natural gasfired thermal power plants has increased substantially. This is due to the fast growing demand for energy, the fact that the development and construction of gas-fired thermal power plants is quicker and the availability of domestic natural gas from the Camisea gas fields at an affordable price. Peru s major challenge is to satisfy the future demand for energy, because it is expected that the current pipeline of projects will not be sufficient to cover the potential growth of the future consumption. It is very likely that the ideal reserve margin will not be met this year, and shortage in energy will start by 207 at the latest. Most of the future demand for energy is intended to be covered by hydropower and natural gas-fired plants; nevertheless, the Peruvian State also wants to diversify and increase the use of renewable energy sources such as wind, solar, biomass and geothermal. In order to achieve the successful implementation of current and future projects, services and equipment will be required, and this is creating opportunities for new entrants and the introduction of new products to the Peruvian Energy Market. Date: July 204 Language: English Number of pages: 36 Author: Richard Ludwig Andreas Marohn (M.A. HSG) Phone: richard@marohn.ch Other architectural reports: Are you interested in other reports for other sectors and countries? Please find more reports here: DISCLAIMER The sources of information used in this report is believed to be reliable and presented in good faith. Neither the author nor the Switzerland Global Enterprise can be held liable for data presented which might not be complete, accurate or up to date. The information given in this report does not have legal or juristic character unless otherwise specified.

3 Table of Contents PURPOSE AND STRUCTURE OF THE REPORT 6. PERUVIAN ENERGY MARKET 7.. Introduction 7.2. Overview of the Energy Market Market Structure Major Institutions in the Peruvian Energy Market 9.3. Supply Energy Generation Energy Transmission Energy Distribution 9.4. Demand Energy Generation Energy Transmission and Distribution Future of the Peruvian Energy Market Future of the Market Major Challenges Strategy of the Government MAJOR PARTICIPANTS AND THEIR PROJECTS _ Introduction Major PARTICIPANTS in the Peruvian Energy Market Energy Generation Energy Transmission Energy Distribution Projects in the Peruvian Energy Market Opportunities during Opportunities during Construction Opportunities during Common Procurement Practices of Companies USEFUL INFORMATION Introduction Framework for Doing Business in Peru Networks and Entities Promoting Investments and Sources of Information Events and Expositions Useful Information Online CONCLUSIONS AND RECOMMENDATIONS 45 ATTACHMENTS 46 Attachment : Energy Generation Projects 46 Attachment.: Projects in 46 Attachment.2: Projects under Construction 72 Attachment.3: Projects under 75 Attachment 2: Energy Transmission Projects 83 Attachment 2.: Projects in 83 Attachment 2.2: Projects under Construction 8 Attachment 2.3: Projects under 22 Attachment 3: Energy Distribution Projects 24 Attachment 4: Index of Abbrevations BUSINESS OPPORTUNITIES Introduction Products and Services RequireD 35

4 List of Tables Table : Overview of the Peruvian Energy Market in Numbers... 2 Table 2: Energy Production in Gigawatt hours by Primary Source of Energy... 3 Table 3: Energy Production in Gigawatt hours by Generation Technology... 3 Table 4: Effective Capacity by 203 in Megawatt... 3 Table 5: Evolution of the Participation of Domestic Natural Gas in the Generation of Energy... 4 Table 6: Evolution of Transmission Systems... 7 Table 7: Capacity and Peak Demand in Northern, Central and Southern Areas Table 8: Expansion of the SINAC Table 9: Reserve Margin of the SINAC Table 0: Demand major Mining Projects Table : Reserve Margin of the SINAC, in the Northern, Central and Southern Zones Table 2: Major Energy Generation Companies connected to the SINAC Table 3: Major Energy Transmission Companies connected to the SINAC Table 4: Major Energy Distribution Companies connected to the SINAC Table 5: Number of Companies with Generation, Transmission and Distribution Projects Table 6: Opportunities during Table 7: Opportunities during Construction Table 8: Opportunities during... 39

5 List of Figures Figure : Interaction between Supply and Demand of Energy in the Peruvian Energy Market... 9 Figure 2: Principal Institutional Structure of the Peruvian Energy Market... 0 Figure 3: Percentage of Effective Capacity according to the Primary Source of Energy... 4 Figure 4: Evolution of Energy Generation Matrix in Peru... 5 Figure 5: Existing Generation Facilities... 6 Figure 6: Existing Transmission Lines... 8 Figure 7: Current Distribution Areas... 9 Figure 8: Mining Projects in operation, Expansion and Exploration Figure 9: Coverage of Maximum Demand... 2 Figure 0: Growth of Peak Demand and Energy production Figure : Energy Demand Figure 2: Energy Demand with Energy Project in the Southern Part of the Grid... 28

6 Purpose and Structure of the Report The purpose of this sector report is to provide an insight into the Peruvian private energy market and to identify opportunities for Swiss services and equipment providers. To achieve this objective, the sector report is subdivided into five main chapters. The first chapter will give you an insight into the Peruvian energy market, starting with an overview about the market, including its structure, major public and private institutions, energy demand and supply, major challenges, outlook and government strategies. The second chapter presents the major companies involve in the generation, transmission and distribution of energy, and their projects. After having a clear understanding of the market, knowing the major companies and their projects, chapter three identifies business opportunities for Swiss service and equipment providers. To facilitate access to the Peruvian energy market, chapter four offers some useful information and suggestions for starting and doing business in Peru. Finally, chapter five provides conclusions and recommendations. 6

7 . Peruvian Energy Market.. INTRODUCTION Peru is a constitutional democratic republic with three independent branches the Executive, Legislative and Judicial. The President of the Republic, who is elected for a 5-year term and cannot be re-elected for a second consecutive term, is at the head of the Executive branch. The Prime Minister and the Council of Ministers are assigned directly by the President of the Republic. Changes in legislation can be proposed by the Executive branch, but need to be approved by the Congress (legislative) before entering into force. In Peru the Executive, Legislative and Judicial branches are independent from each other. Peru has approximately 30 million habitants, from which nearly 75% live in urban areas and 25% in rural areas. The official language is Spanish; however in many regions Quechua and Aymara are spoken by the local population. The national currency is the Nuevo Sol (PEN); nevertheless the USD is widely used in business transactions and it is accepted in most shops from urban areas. Geographically Peru can be divided into three main regions, the Coast, the Highlands and the Jungle. The Highlands are characterized by the Andean mountains reaching up to almost 6,800 m.a.s.l.. Climate zones ranges from tropical in the Amazon rainforest to dry along the Pacific coast line; in the highlands temperatures can range from temperate to frigid. Nowadays, because of the climate change the Peruvian glaciers and rivers are between the most affected ones in the world. Due to its geographical and climatological conditions Peru has many rivers with very high flows during rainy season and relatively low flows during dry season. The Peruvian economy depends highly on the exploitation, production and exportation of primary natural resources. The main minerals are copper, silver, zinc, lead, hydrocarbons, phosphate and gold; other important products that are exported come from fishing, and agricultural activities. In 203 mining exports represented 65% of Peru s overall exports. The principal destinations for exports are Switzerland, Germany, Brazil, Canada, Chile, China, South Korea, Italy, Japan, Spain and USA. The country major imports include machinery, vehicles, iron, steel, wheat, paper, petroleum and byproducts, and plastics. The principal countries of origin are Argentina, Brazil, Chile, Germany, China, Colombia, South Korea, Ecuador, USA and Mexico. With most of its trading partners Peru has Trade Promotion, Protection and/or Free Trade Agreements. Over the years Peru and Switzerland have made Agreements that benefits both countries, which are a bilateral Investment Promotion and Protection Agreement in November of 993, a Free Trade Agreement in July of 20, and a Double Taxation Agreement in September of 202, which was approved by the Peruvian Congress on December last and has been ratified in February of this year. This Agreement will enter into force on January st 205. Peru s economy has been between the world s fastest-growing emerging markets worldwide, with a GDP growth rate of 5% in 203, and Peru was considered the fastest-growing economy of the region. In the last 0 years Peru has experienced an average growth rate of 5.6%. During the same time, inflation was only 2.9%, the lowest annual average inflation rate in Latin America. In 204 Peru is expected to be the second fastest-growing economy in Latin America after Panama and the fastest-growing in South America. Peru s solid historic performance throughout the past decade and the good forecast has brought the country to an improved country risk rating by the principal risk rating agencies, S&P, Fitch and Moody s. All three rating agencies gave Peru the second best investment rating in Latin America after Chile. An important factor to take into account in order to meet the high growth rate and development expectations is the supply of energy required for the exploitation and processing of minerals, the production of goods and the private consumption. 7

8 This close relationship becomes clear when looking at the growth in energy demand throughout the last 0 years which was around 7% in average, very similar to the economic growth rate of Peru during the same period..2. OVERVIEW OF THE ENERGY MARKET.2.. Market Structure The privatization of the Peruvian energy market was initiated by the Electricity Law of 992 (Law No 28832), which subdivided the vertically integrated state monopoly into three submarkets. These submarkets are generation, transmission and distribution. The reason for splitting the market in to three different activities was to minimize the potential for energy price manipulation of a vertically integrated energy monopoly company. This division works very well for the generation submarket, where Peru nowadays has many different national and international companies operating; however for the transmission and distribution submarkets the privatizations itself has not led to important changes, since the nature of these two submarkets inevitable results in natural monopolies. Therefore, further state intervention was required to set clear rules for private participation in transmission and distribution submarkets. Hence energy transmission and distribution markets are more regulated than the generation market. In particular, the transmission and distribution companies get absolute exclusivity within a defined concession area. Within these areas each company has the exclusive right to provide transmission and distribution services, but also has the obligation to provide these services to anyone who wishes to connect to the National Interconnected System (Sistema Eléctrico Interconectado Nacional SINAC). In order to provide these services companies are allowed to charge a regulated price. The exclusivity and attractive compensation schemes has motivated several national and international companies to enter these submarkets. The detailed regulation and structure of the three privatized submarkets are defined in the Electricity Law approved by the Supreme Decree No EM, along with its regulations and a number of other norms and decrees that have been published by the Peruvian authorities. A major challenge for regulators in the privatized Peruvian energy marked is that private companies usually have a return driven strategy and only invest if adequate return for their investment can be expected. In the energy market this return depends on the number of consumers and/or the price they pay for the electricity. The fact that most of the Peruvian population lives in or close to a major urban area and that the industrial consumers also mostly are concentrated in specific locations, has resulted in the development of the SINAC that interconnects Peru s major consumption areas and rural areas close to those. Most industrial consumers, as part of their investment plan and to secure stable energy supply, also connect to the SINAC. However, approximately 5% of the Peruvian population has not yet been connected to the SINAC. This part of the population either does not have access to electricity or is connected to an independent grid system. For lack of profitability almost a 00% of these rural independent systems are owned by the state. To make rural electrification more attractive to private investors and to provide these areas with electricity the Peruvian state has been promoting projects that integrate independent grid systems into the SINAC. Therefore, by 204 only one major independent system has not been integrated into the SINAC. This is the system of Iquitos, a city with approximately 400,000 citizens, located in the middle of the Jungle and that requires the construction of a transmission line of approximately 0 km in order to cross the jungle and connects it to the SINAC. Nevertheless there are still many families and consumers, especially in rural areas, that are still not connected to the SINAC. So the Peruvian state implemented several programs to provide electricity to rural areas not connected to any system. For example, in 204 a tender for the installation of up to 500,000 independent solar panels to provide families and consumers in rural areas with electricity has been executed. 8

9 Compared to the rural electrification, investments made into the generation, transmission and distribution markets related to the SINAC are mostly done by private investors. Hence, approximately 90% of the generation investments, 00% of the transmission investments and 70% of distribution investments are provided by private investors. The generation, transmission and distribution activities represent the supply side of the energy market. The demand side of the energy market consists of three principal submarkets, the regulated submarket for consumers that require less than Megawatt, an unregulated submarket for large industrial consumers that require more than Megawatt and the Spot Market that is operated and controlled by the Committee for the Economic of the National Interconnected System (COES), that determines the conditions and prices for spot energy transactions. The following figure presents the interaction of the supply and demand side of the Peruvian Energy Market. Figure : Interaction between Supply and Demand of Energy in the Peruvian Energy Market Source: Author (204) Whereas unregulated clients are free to negotiate with generation or distribution companies, regulated clients can only buy electricity from distribution companies at a regulated price. COES does not only controls the spot market by operating the grid and the dispatch of energy of generation companies, it also approves the operational studies, one of the main prerequisites for generation, transmission and distribution projects before connecting and operating as part of the SINAC. Considering the importance and the coverage of the SINAC the following chapters will focus mainly on the information available from the SINAC Major Institutions in the Peruvian Energy Market After the implementation of the decentralized and privatized structure of the Peruvian energy market, several public and private institutions as well as entities were established and/or incorporated to manage, organize, supervise and support the energy market and their participants. Major institutions directly involved in the electricity sector are: Ministry of Energy and Mines (MINEM) Supervising Organization of Investment in Energy and Mines (OSINERMIN) Committee of the Economic of the National Interconnected System (COES SINAC) Ministry of Environment (MINAM) 9

10 The following figure presents the principal institutional structure of the Peruvian Energy Market and their main tasks. Figure 2: Principal Institutional Structure of the Peruvian Energy Market Source: Author (204) In the MINEM the Vice Ministry of Energy is the entity within MINEM that is in charge of all topics related to the energy market. The Vice Ministry consists of a number of directorates that are in charge of specific areas of the market. The most important Directorates are: General Directorate of Electricity (DGE), General Directorate of Rural Electrification (DGER), General Directorate of Energy Efficiency (DGEE), General Directorate of Energy-Related Environmental Affairs (DGAAE), General Directorate of Social Management (OGGS), General Directorate of Legal Assessment, and General Directorate of Hydrocarbons (DGH). Each directorate of the MINEM is responsible for its respective area and has to assess, deliver opinion, observe and approve the applications for concessions or other requests. OSINERGMIN does not only establishes the electricity prices for the regulated market and supervises the private sector investments, it also manages the energy tender for energy generation from renewable resources such as hydro, wind and solar (since 2009 there have been three renewable energy tenders for generation projects connecting to the SINAC and one for rural electrification). As mentioned above the COES is in charge of the operation and development of the SINAC. Each project that wants to connect to the SINAC requires a previous approval of the COES. 0

11 The MINAM through the Agency of Environmental Evaluation and Auditing (OEFA) supervises and penalizes companies that are involved in the energy market. Moreover it is foreseen that the competence to approve Environmental Impact Studies that so far has been done by the DGAAE of the MINEM, will become responsibility of the MINAM in 204. However it is not clear when this transfer will be executed. Other institutions indirectly involved in the Energy Market are: Ministry of Agriculture (MINAG) Ministry of Culture (MINCU) Ombudsman Office, National Institute for the defense of Competition and Protection of Intellectual Property (INDECOPI) Proinversion Congress of the Republic of Peru Commission of Energy and Mines Regional and Local Governments The MINAG gets involved in the Peruvian energy market mainly through the National Water Authority (ANA), because each energy project in Peru that either uses or consumes water needs the approval of ANA before being able to start any activity. ANA is a very important authority, especially for hydropower plants that require water not only for construction, but also for operation. The Ministry of Culture participates in the Peruvian energy market through the National Institute of Culture (INC). The INC has to inspect each energy project location for archeological or historic remains before the project receives the Certificate of Non-Existence of Archaeological Remains (CIRA), which is a prerequisite for the execution of any project in Peru. The Ombudsman Office was created by the state to defend the interests of the population. For the most part the Peruvian Ombudsman Office helps to manage social conflicts. In Peru there are several major infrastructure and energy projects that either have problems or cannot carry on because of social unrests. Most of the time, conflicts are between rural population and transnational companies that try to develop and implement their project without a clear social management and investment plan. INDECOPI s main task in the Peruvian energy market is to make sure that companies comply with the vertical division of the market (generation, transmission and distribution), that was made to avoid concentration of market power and potential manipulation of prices. Only under certain conditions companies are allowed to operate in more than one of the submarkets. However in Peru some exceptions have been made and several companies are operating either directly or indirectly, in several submarkets. The Congress of the Republic of Peru plays an important role in approving changes in laws or passing new laws. The Congress also has a Commission of Energy and Mines that analyses changes made in laws and legislation regarding this market. Proinversion is the state s private investment promotion agency. During the last few years several energy projects developed by state entities have been tendered to private investors. Proinversion also tendered power purchase agreements with the Peruvian State. So far we have been talking about the national institutions of the central Peruvian government. However each Regional government in Peru also has its directorates for different areas such as energy, environment, agriculture, and others. These directorates are independent from the central government and can act in an autonomous manner. Although most of the projects require the approval of a central government institution, there are some projects and permits that only require a regional approval. For example, a definite concession for energy projects with an installed capacity of up to 0 Megawatt, an environmental approval for energy projects below 20 Megawatt or a regional transmission lines which are not directly connected to the SINAC.

12 .3. SUPPLY As mentioned earlier the supply side of the energy market consists of the generation, transmission and distribution markets. The following table gives a quantitative overview of these submarkets based on information provided by OSINERGMIN in 203. Table : Overview of the Peruvian Energy Market in Numbers ACTIVITY COMPANIES - ENTITIES GENERATING UNITS SUBSTATIONS Generation Transmission 4 Not applicable 96 Distribution ,44 Auto-production Production by Municipalities TRANSMISSION UNITS QUANTITY HT and LT Lines km 23,325.5 Towers and Structures No 55,954 DISTRIBUTION UNIT QUANTITY MT Grids km 77,439 LT Grids km 54,00 Towers and MT structures No 533,638 LT Towers No 2,33,69 Delivery Points No 5,632,783 Source: OSINERGMIN (203) On the supply side of the market the generation submarket, being the source of energy, is the most important element. The transmission submarket connects the generation facilities with the demand side of the market, and the distribution submarket is in charge of distributing the energy amongst consumers. Large unregulated consumers also have the possibility to have a direct connection to a transmission line..3.. Energy Generation The Peruvian energy generation market is a competitive market with a huge number of active domestic and international companies. In 203 the total installed capacity of the SINAC was 8,340 Megawatt with an annual energy generation of 39, Megawatt hours and an effective installed capacity of 7,83 Megawatt. About 53.26% of the total energy was produced by hydropower plants, 46.24% by thermal power plants and 0.50% by solar power plants; and in terms of installed capacity hydropower represents 39.27%, thermal power 59.72% and solar power.0%. These numbers change slightly when looking at the effective capacity of the projects. In effective installed capacity, hydropower has 40.58% or 370. Megawatt, thermal power 58.39% or Megawatt and solar power.02% or 80 Megawatt. The following tables present the production of energy according to technologies and source. Both tables subdivide the generated energy according to the north, center and southern part of the SINAC. 2

13 Table 2: Energy Production in Gigawatt hours by Primary Source of Energy AREA HYDROPOWER THERMAL POWER SOLAR HYDRO HYDRO (Renew.) NATURAL GAS COAL WASTE DIESEL BIOGAS (Renew.) (Renew.) TOTAL North 2, ,923.5 Center 5, , ,740.7 South 2, ,005.3 Total 20, , ,669.4 Source: COES (204) It can be clearly seen that both hydropower and natural gas-fired plants play a very important role in the Peruvian energy generation matrix. Table 3: Energy Production in Gigawatt hours by Generation Technology AREA HYDROPOWER TECHNOLOGY THERMAL POWER TECHNOLOGY SOLAR PELTON FRANCIS KAPLAN TURGO COMB. GAS STEAM DIESEL TOTAL North Center, ,53.8, ,508.5 South ,402.5 Total 2, ,69.6, ,83. Source: COES (204) In terms of technology Pelton turbines followed by Francis turbines are the most common technology used in Peru for hydro energy generation and combined cycle power plants for thermal energy generation. The dominance of Pelton and Francis turbines indicate that most operating hydropower projects in Peru are high to medium head power plants. Please also take note about the dominance of the central area of the SINAC, which can also be clearly seen from the following table that presents the effective energy according to the source of energy and the geographic location of the generation facility. Table 4: Effective Capacity by 203 in Megawatt AREA HYDROPOWER THERMAL POWER SOLAR POWER TOTAL North Center 2, , ,508.5 South ,402.5 Total 3,70.6 4, ,83. Source: COES (204) By 203 solar power and small hydropower plants were the only renewable energy resources used for energy generation (Note that according to the Peruvian legislation only hydropower plants up to 20 Megawatt are considered renewable. Larger 3

14 hydropower projects are not considered renewable, despite that technically they are). However the participation of the so called RER projects (energy generation from renewable sources) in the Peruvian energy matrix has been promoted by the Peruvian government for some years now, and several projects are expected to start operation in 204 and the following years. The contribution of RER projects was Gigawatts in 203 corresponding to 2.52% of the total energy production. In terms of effective capacity, renewable energy accounted for 3.07% in 203. The following figure illustrates the distribution of different sources of energy in the SINAC. Figure 3: Percentage of Effective Capacity according to the Primary Source of Energy Source: COES (204) What clearly can be noted is the importance of domestic natural gas, mainly form the Camisea gas field, but also from other smaller gas deposits. During the last decade the participation of natural gas has been growing steadily, and as can be seen from the following table accounted for 42.92% in 203. Table 5: Evolution of the Participation of Domestic Natural Gas in the Generation of Energy YEAR NATURAL GAS PRODUCTION COES % % % % % % % % % % PARTICIPATION 4

15 YEAR NATURAL GAS PRODUCTION COES % PARTICIPATION % % Variation 3 / 2.00% 6.29% Growth between 2003/203 Growth between 2007/203 Source: COES (204) 30.06% 6.73% 5.2% 6.46% Note that the energy generation has been growing on average by 6.73% since 2003, whereas the generation form natural gas has been growing by 30.06% during the same period. On the one side, this was due to the start of commercial exploitation of the Camisea gas fields in 2004 and a gas friendly policy of the Peruvian government. On the other side, Peru had to satisfy the growing demand for energy to maintain its high economic growth, and also the gas-fired power projects are less complex to develop and quicker to construct than hydropower projects. This led to substantial changes in the generation matrix of the Peruvian energy market, as can be seen in the following figure that presents the evolution of the energy matrix since Figure 4: Evolution of Energy Generation Matrix in Peru Source: COES (204) Nonetheless, the participation of natural gas-fired energy projects increased substantially since 2005 and hydropower in terms of installed capacity only accounts for 39.3% of the generation market; in terms of energy hydropower plants with 53.26% of the total energy produced still play a very important role in Peru. This happens because COES, the dispatch center and operator of the SINAC, operates the power plants connected to the SINAC according to the lowest marginal costs to keep the cost of generation as low as possible. plants presented 5

16 are considered with zero marginal costs and therefore have preference over all other generation facilities, except renewable energy generators which have the same priority right to dispatch before all thermal generation facilities. Figure 5: Existing Generation Facilities A special challenge in operating the grid is the geographic distribution of the operating facilities connected to the SINAC. As already mentioned above, energy generation capacity is concentrated in the center part of the SINAC. The following figure shows all major Peruvian generation projects above 8 Megawatt and their geographical distribution within Peru. Due to the concentration of the generation facilities in the center part of the SINAC, energy is usually exported from the central area to the northern and southern part of the SINAC. Transmitting this energy to the north and the south is a special challenge for the Peruvian transmission system, because it has limited capacity to transport energy to the south and to the north. Therefore, to satisfy future demand for energy in the southern, northern and central areas of Peru, many new generation and transmission projects will be presented shortly. Source: MINEM (203).3.2. Energy Transmission Due to the monopolistic nature of the transmission market, it has been more regulated than the above described generation market. On the one side, the owners of definite transmission concessions are the only ones who have the authority to transport energy, and the recovery of their investment is guaranteed; but on the other side they are obligated to give access to any generation company that also wants to connect with the SINAC. In total, the Peruvian transmission system consists of almost 24,000 km of high and medium voltage transmission lines above 30 Kilovolt exits. Typically, transmission voltage in Peru is, 38, or 500 Kilovolt. Most transmission lines are operated by specialized transmission companies, however some generation and distribution companies, as well as some unregulated large consumers operate their own transmission systems to either secure their connection to the SINAC or in case of isolated independent systems to secure the transmission of energy between the location of the generators and the location of consumption. After the integration of the isolated systems of Tarapoto, Moyabamba, Bellavista, Bagua, Jaen and Puerto Maldonado into the SINAC, the only major independent system remaining is the one in Iquitos. There are plans to connect Iquitos to SINAC, but this line would have to cross about 0 km of jungle in order to get connected to the SINAC; therefore for environmental reason it is a very sensitive topic. However ProInversion, the Private Investment Promotion Agency of the government, is tendering the project to private investors. Even so the Peruvian transmission system is widely interconnected, by 204 there has been only one Kilovolt line that connects the central part of the SINAC with the southern part, two Kilovolt lines that connect the central part with the 6

17 northern part of the SINAC, and only one 500 Kilovolt line that connects Trujillo in the North with Moquegua in the South of SINAC. The latter has just started operated at the beginning of 204 and is not yet fully integrated in all parts of the SINAC. Due to the concentration of generation facilities in the central part of the SINAC and the shipping of energy due to demand in the northern and southern areas, lines often gets congested. To secure energy supply and integration in the south and north of SINAC more transmission lines and generation facilities are being constructed. The following table presents the evolution of the transmission lines that are part of COES between 2005 and 203. Table 6: Evolution of Transmission Systems Year LENGTH OF TRANSMISSION LINES IN KILOMETERS 500 kv kv 38 kv < 69 kv TOTAL , ,670.6,.7 9, , ,870.9,.7 0, ,963. 2,878.8, , ,38.4 2,890.8,336. 0, ,53.8 3,22.6, , , ,738.5, , , ,82.5 7, , , , , , , , , , ,899. Source: COES (204) International interconnection of the SINAC and export of energy to other countries has been on the agenda for ages, but so far the only interconnection that has been established is a Kilovolt line to Ecuador that is hardly being used. The international interconnection of the SINAC to other countries like Chile and Brazil, have been put on and erased from the political agenda for years. Due to political reasons the installation of new international transmission lines in the near future is very unlikely. The following figure presents the principal transmission lines that have been in operation since early

18 Figure 6: Existing Transmission Lines Source: COES (204) 8

19 .3.3. Energy Distribution Similar to transmission submarket the distribution submarket is monopolistic in nature and therefore is highly regulated as well. Companies operating in the distribution submarket have exclusivity within a concession area. They can charge regulated prices to regulated customers and negotiate prices directly with unregulated customers. Distribution networks operate at medium and low voltage. The typical tension is at, 0, 0.4, 0.38 and 0.22 Kilovolt. Approximately 90% of the Peruvian population has access to electricity and most of them are connected to one of the major distribution companies. The following figure presents the current distribution concessions covering the major urban and rural areas. Figure 7: Current Distribution Areas Source: MINEM (202) 9

20 .4. DEMAND COES as the operating entity of the SINAC oversees and coordinates the future development of the transmission system, taking into account future energy demand and supply projects. In Peru the future demand growth will be almost entirely related to industrial activities. The major industrial sector that drives the level of consumption is mining and natural resource activities. Therefore, it is important to know the future development of this sector. The following figure presents major current and future mining activities, as well as expansion projects of the existing mines. Note that many new and expansion projects are located in the southern parts of Peru. Figure 8: Mining Projects in operation, Expansion and Exploration Source: MINEM (204) 20

21 .4.. Energy Generation In 203, the peak demand of the SINAC was 5,575.2 Megawatt. This peak demand has been covered to 50.5% by hydro energy and 49.5% by thermal energy. The following figure presents the coverage of energy during the peak demand in 203 by technology. Figure 9: Coverage of Maximum Demand Source: COES (204) The majority of the peak demand has been covered by hydropower plants and combined cycle plants. This is because COES control the dispatch of all projects connected to the SINAC, according to the marginal costs of the generation units, hence projects with low marginal costs begin operating before projects with higher marginal costs. is considered to have marginal costs of zero and therefore can dispatch their energy before thermal generation facilities. Diesel projects have very high marginal costs, so they can only enter to cover the peak of the energy demand. Having a closer look at the geographical distribution of the peak demand we learn that most demands occur in the center area of the SINAC. The following tables will provide more details about the peak demand in the north, south and central part of the SINAC. 2

22 Table 7: Capacity and Peak Demand in Northern, Central and Southern Areas CENTRAL AREA HYDRO THERMAL SOLAR TOTAL Installed Capacity (MW): Effective Capacity (MW): Annual Production (GWh): Peak Demand by Dic.203 (MW) : , , CENTRAL AREA HYDRO THERMAL SOLAR TOTAL Installed Capacity (MW): 2, , ,888.3 Effective Capacity (MW): 2, , ,508.5 Annual Production (GWh): 5, , ,740.7 Peak Demand by Dic.203 (MW) : 2,06.5 2, ,537.2 SOUTHERN AREA HYDRO THERMAL SOLAR TOTAL Installed Capacity (MW): 427.8, ,543.5 Effective Capacity (MW): ,402.5 Annual Production (GWh): 2,792.8, ,005.3 Peak Demand by Dic.203 (MW) : Source: COES (204) The following figure illustrates the steady growth of the peak demand since 997 to 5,575 Megawatt in 203. Figure 0: Growth of Peak Demand and Energy production Source: COES (204) 22

23 .4.2. Energy Transmission and Distribution Demand for energy transmission and distribution is mainly related to demand for energy by private and industrial consumers. Private consumers, due to the monopolistic nature of the transmission and distribution markets, do not have any choice, but to contract with the distribution companies that have the concession in their area. Demand for these systems is defined by the geographical position of the generation facilities that provide the energy and the location of the consumers that buy the energy. Small consumers usually cannot influence the installation of these systems, however there are some large scale consumers that negotiate directly with transmission and distribution companies, or even construct their own direct transmission or distribution systems. The geographic difference between the supply and the growing demand side of the energy market as well as the integration of all new future generation facilities in the interconnected system requires an expansion of the transmission and distribution systems. Major expansion projects aim to improve the interconnection within the southern area and northern area and to the central area of the SINAC. Also, the integration of the Iquitos independent system is on the agenda..5. FUTURE OF THE PERUVIAN ENERGY MARKET.5.. Future of the Market Peru has been blessed with an enormous potential in energy generation from renewable sources and from natural gas. For hydropower the technical feasible potential has been estimated to approximately,000 Megawatt, for wind power 22,000 Megawatt and for Geothermal power 3,000 Megawatt. For biomass energy potential there are no official numbers available. However experts estimate the biomass potential, only taking into account agricultural industrial waste products, to around 250 Megawatt, which seems to be too low considering that Peru also has a huge forestry industry. For solar power there are no numbers available, but the Solar Atlas of Peru indicates that that the entire Peruvian coast has from 5.0 kilowatts per hours per square meter to above 7.5 kilowatts, hours per square meter in the south of Peru. Regarding the potential for thermal power the potential is difficult to determine, because fuel can be imported in case that the domestic sources dry out and therefore potential depends almost entirely on space available to install thermal power plants. In Peru there is more than enough space available to install thermal power plants, however suitable location are limited due to the lack of distribution systems for gas and other fuels. To improve the availability of natural gas in Peru Proinversion in 204 is tendering the Southern Gas Pipeline from the Camisea gas fields in the Cusco region to the southern coast of Arequipa, Moquegua and Tacna Regions. Looking at the project pipeline in the short and medium turn thermal installation is expected to decrease and hydropower installations to increase. The following table provides the official forecast of COES for projects that are expected to connect with the SINAC. Table 8: Expansion of the SINAC Type 204 MW Hydro RER MW MW Total SINAC Source: COES (203) 23

24 .5.2. Major Challenges The main challenge in the Peruvian energy market is to keep pace with the speed of the fast growing economy to secure current and future demand for energy. Even if Peru has an enormous potential for hydro power, throughout the past decade the increase in demand mainly has been covered mainly by gas fired thermal power plants, using gas from the Camisea gas fields. This was not only due to the government policy to use domestic gas for domestic demand but also, because gas-fired power plants are cheaper and faster to construct and less complex to develop and since the Peruvian economy has been growing very quickly, energy supply had to match the growing demand. This fast growth in the demand of energy could not be satisfied with hydropower only. However the disadvantage is that operating cost of thermal power plants are higher than the ones of hydropower pants. This situation apparently has not changed, nonetheless there are many hydropower projects on the way; the next figure clearly shows the growing demand that still cannot be satisfied by the project portfolio of hydropower developments registered with COES. Figure : Energy Demand Source: COES (203) Nonetheless there are more hydropower projects under development than the ones registered with COES, it is very likely that the gap of 980 Megawatt identified in the following figure for the period between 207 and 2022 will either remain or even bigger, because some of the projects registered with COES have been around for ages and do have serious problems with authorities, population, and for other reasons. Therefore it is very likely that some projects will not be implemented according to schedule or in some cases ever. 24

25 According to the forecast of COES the energy shortage will start in 207; however the actual problem has already started earlier, because in case one or several major generation facilities fails to operate, stand by power plants are required to guarantee a stable operation of the grid and to satisfy demand. According to COES the ideal reserve margin is 33.33%, which already will be at risk this year. Details can be seen in the following table. Table 9: Reserve Margin of the SINAC Year Peak Demand MW Effective Capacity MW Firm Capacity MW Reserve Margin MW Reserve Margin % () (2) (3) (3) - () (3)/() ,8% ,3% ,9% Source: COES (203) Note that the numbers above are average numbers comparing total supply and total demand of the SINAC that do not take into account the difference in demand in the southern, central and northern part of the SINAC. Having a look at the major future projects that will require energy it becomes clear that most projects are in the southern part of Peru, hence more energy will be required in the southern part. The following table presents the major projects that cause the increase in demand subdivided into south, center and north. Table 0: Demand major Mining Projects MAJOR DEMAND PROJECTS MW GWH MW GWH MW GWH Proyecto Tía María Extension Cerro Verde Extension Quimpac (Oquendo) El Brocal (Colquijirca) Extension Shougang Hierro Perú Extension Antamina Extension Concentradora Toquepala Extension Concentradora Cuajone Extension de Aceros Arequipa Extension Cerro Lindo Extension Bayovar Extension Cemento Pacasmayo

26 MAJOR DEMAND PROJECTS MW GWH MW GWH MW GWH Extension Cementos Lima Toromocho ,98 52,202 Pachapaqui Antapacay Marcobre (Mina Justa) Las Bambas (Apurimac) ,228 58,270 Constancia Quellaveco Mina Chapi Chucapaca - Cañahuire Pukaqaqa (Milpo) Shahuindo Haquira (Antares) Extension de la Fundición de Ilo Extension de la Refinería de cobre Corani Salmueras de Sechura La Arena El Porvenir Mina Alpamarca Cementos Piura Nueva Planta de Óxidos Volcán Extension SIDER PERU TOTAL PROJECTS IN NORTHERN AREA ,46 TOTAL PROJECTS IN CENTRAL AREA , ,439 TOTAL PROJECTS IN SOUTHERN AREA 308, ,530,075 8,05 TOTAL PROJECTS 778 4,45,35 9,647,849 3,96 Source: COES (203) 26

27 If we take into account the geographical differences in future demand the problem becomes worst. In the central part of the SINAC there is enough reserve margins, in the northern and southern parts there is way to less generation capacity available and even becomes negative, meaning that energy shortage has to be expected. The following table provides the corresponding numbers that quantify the potential shortage. Table : Reserve Margin of the SINAC, in the Northern, Central and Southern Zones YEAR NORTHERN AREA PEAK DEMAND MW EFFECTIVE POWER MW SOLID POWER MW RESERVE MARGIN OF GENERATION MW RESERVE MARGIN OF GENERATION % ,4% ,4% ,2% ,% CENTRAL AREA ,6% ,2% ,0% ,4% SOUTHERN A REA ,% ,9% ,3% ,5% Source: COES (203) This gap between current and future supply and demand demonstrates the major challenge to the Peruvian energy market and cannot be covered with current projects in the pipeline. The idea is to cover the shortage in future supply with gas-fired thermal power plants that are quicker to install. The outlook presented in the following figure is taken into account. Nevertheless a gap of 490 Megawatt of installed capacity remains. A way to cover this can be to increase the transmission capacity between the southern and northern part of the grid to get access to the reserve margin in the central part of the SINAC which according to the table above will be sufficient to cover future demand. 27

28 Figure 2: Energy Demand with Energy Project in the Southern Part of the Grid Source: COES (203) However, gas power plants have one problem which is that the infrastructure for the supply is not established yet, and without the cheap and easy logistic solution thermal generation can get very expensive. In theory the challenge describe above is easy to face, Peru needs more projects to produce energy and the government should put a legal and political framework to encourage companies to develop, construct and operate projects. However this is not that easy since it takes time to develop, construct and start the operation of an energy project, especially if we talk about large energy projects. Also permitting processes can take very long hence the development of a project to a ready for construction level takes its time as well, although the authorization processes in theory is very clear. However in practice, the responsibilities are not always clearly defined and ministries (usually there are at least two or more ministry involved depending on the type of project) do not coordinate necessarily amongst them. Therefore it is necessary to define and implement a clear and fast interinstitutional permitting process that allows bringing projects to ready for construction and at an operation level. For companies and investors that develop, construct and operate projects the challenge is to find the right experts and companies that have the right technology and tools and know how to develop, construct and operate projects taking into account technological, environmental, social, legal and financial aspects. In Peru there are international and national companies as well as consultancies that have experience and the knowhow in these areas, however one of the major problems here is that people very often don t trust each other and it is very difficult to earn the trust of someone in Peru. The reason for this is that often companies and people do not comply with contracts and agreements; therefore it is a challenge to prove that you are trustworthy, especially if you are new and not yet known in the market. Regarding technology expertise in traditional energy technology for hydropower, transmission lines and distribution grids experts do exist in Peru, but for high end technology, control systems and operation equipment it is very hard to find expertise and experienced people. This is also because there are only few equipment providers that fabricate their products in Peru. 28