Supplying the grid: Capacity upgrades are needed to meet rising demand

Increased demand on the national power grid has prompted investments seeking to boost power generation capacity throughout the country via both hydroelectric and natural-gas-fired thermoelectric power plants. Indeed, from 2011 to 2013 the central bank has predicted investment in the electricity sector to total just over $7bn. The Ministry of Energy and Mines (Ministerio de Energía y Minas, MEM) already reported $1.95bn worth of investments to improve Peru’s national electricity grid in 2011. Peru had installed capacity in 2011 of 70,000 MW, with more than 40 generating companies supplying the national grid and more than 80 private companies generating electricity for their own use.

IN DEMAND: Ricardo Vásquez Campos, technical advisor for the General Directorate of Electricity, told OBG forecast growth in electricity demand in Peru should be roughly 500 MW per year for the next 10 years, essentially doubling the current figure. As the country strives to guarantee energy security in its power generation sector, it is faced with complex decisions. Water resources are used for various purposes, including irrigation, mining and domestic use, and the number of social conflicts revolving around their use increase almost daily. Meanwhile, the introduction of natural gas is estimated to have reduced electricity costs in Peru by 30%. However, attractive export markets and the potential to develop value-added downstream industries also loom large. Hydroelectric power was responsible for more than 90% of generation just 20 years ago but by 2010 that figure had been reduced to 58% while thermoelectric plants were responsible for the remaining 42%.

HYDROELECTRICITY: Although the discovery of enormous reserves of natural gas has rapidly transformed the supply of electricity to the national power grid, historically hydroelectricity has been the dominant source of power. This is not likely to change in the long term, due to the abundance of untapped hydro resources that exist throughout the country.

According to Vásquez, “So far our estimates indicate a total potential capacity of 70,000 MW in hydroelectric power across the country, meaning we have currently harnessed just 5% of our hydro resources.”

With such a vast renewable resource available at its disposal, if Peru can harness sufficient power from hydroelectricity it can save its natural gas resources for a hungry export market and potentially develop further value-added downstream industries, such as petrochemicals. As such, medium- and long-term planning for the national grid centres on the development of hydroelectricity.

NEW PROJECTS: MEM, together with a special Committee for the Energy and Agricultural Development of the Marañon River, is looking to develop generation capacity of 12,430 MW along the river, which flows into the Amazon. It is a bold plan that will more than triple the capacity of the current grid and require an investment of $15bn and the construction of 20 power plants. The three largest proposed projects – Rentema (1500 MW), Escuprebraga (1800 MW) and Manseriche (4500 MW) – would themselves double generating capacity on the grid.

Peru’s largest power plant, the Mantaro Complex, is still run by ElectroPerú – a state-owned enterprise (SOE) with private rights. The initial phase went into operation in 1973 with a generation capacity of 798 MW, although expansion has seen its capacity rise to 1008 MW. The facility takes advantage of a 1000-metre drop in the Mantaro River as it flows from the Andes into the Amazon basin, and features two separate hydroelectric complexes.

Edegel, which is the country’s largest private power-generating company with 1668 MW in effective generating capacity from both hydro and thermal stations, is a partially owned subsidiary of Israel’s Inkia Energy but Spain’s Endesa owns the controlling stake. Edegel was one of several SOEs privatised during the 1990s under the government of former President Alberto Fujimori. Edegel owns and operates seven hydroelectric plants, primarily in the Lima area, with a combined total of 760 MW of installed capacity.

ProInversión awarded three concessions to build hydroelectric power stations in March 2011 to Consorcio Generación Pucará, Cerro del Águila and Empresa de Generación Huallaga. The MEM estimates the construction and operation of the three facilities will require an investment of $1.84bn and have a combined capacity of 958 MW – roughly 20% of current demand. Kallpa Generation, also a partially owned subsidiary of Inkia Energy, is developing a $900m hydroelectric plant in the province of Tayacaja. The Cerro del Águila plant will have installed capacity of 400 MW when it becomes operational in 2015. Consorcio Generación Pucará, which is owned by the Peruvian firms Graña y Montero and Egecusco, expects its plant in Cuzco to come on-line in 2014 with a capacity of 150 MW. Meanwhile, Empresa de Generación Huallaga, which belongs to Brazil’s Odebrecht, will construct the $1.2bn Chaglia hydroelectric plant in central Huanuco, due to begin operating in 2016 with a 400-MW capacity.

THERMAL: Just 64 km south of Lima in the district of Chilca, the TGP Pipeline carrying natural gas from the Camisea field has prompted the development of several natural-gas-fired thermoelectric plants that have been vital to maintaining a sufficient power supply in the short term. So far, Kallpa Generation operates the largest thermal plant in the country with three turbines producing 565 MW.

Kallpa is also due to complete work on a $400m project to convert the plant into a combined-cycle facility, which will further increase capacity to 850 MW. EnerSur, which is part of the GDF Suez group, is also upgrading its 535-MW Uno Plant in Chilca to become a combined-cycle facility at a cost of $395m. The project is scheduled to bring an additional 300 MW to the national grid in 2013.

It was Edegel that developed the first combined-cycle facility in Peru, with its plant in Ventanilla. This plant was completed in 2006 with a generating capacity of 492 MW. Another combined-cycle facility is being developed by Houston-based AEI Energy. The 597-MW Fenix combined-cycle plant will commence operation at the end of 2012 after a $656m investment layout. The increased output of combined-cycle plants from a fixed gas supply will likely see more investment into upgrading and establishing such facilities in the future.

Other thermal plants in Chilca include Duke Energy’s 192-MW Las Flores Plant, which came on-line in 2010 at the cost of approximately $110m. Termochilca’s 196-MW Domingo de los Olleros thermal plant is due to come on-line in late 2012 and will bring 200 MW of energy to the grid.

The construction of the TGP Pipeline and subsequent natural gas supply contracts were essential for the establishment of thermoelectric power plants in the Lima area. However, capacity limitations will prevent the continued construction of gas-fired generation facilities in the Lima and Chilca areas.

The construction of Kuntur’s South Andean Gas Pipeline, due to be complete in 2015, will likely see any new gas-fired power plants established further south, possibly near the city of Ilo. EnerSur is already working on its first plant in the south – a $200m, 400-MW thermoelectric plant in Ilo.

CHALLENGES: Luis Ortigas, the vice-minister of energy at the MEM, told OBG, “The demand side of Peru’s energy equation has grown quickly as a result of economic growth and stability, prompting doubts on the supply side of the equation as the sector faces opposition to the exploitation of hydro resources by local communities and other sectors of the economy.” Issues surrounding the distribution of water are particularly worrying, as evidenced by the cancellation of the construction of Brazilian firm Egasur’s $4bn Inambari Dam.

From the perspective of natural gas, if Peru can utilise a greater percentage of its hydro resources, it can then focus on producing gas for export markets and potentially developing downstream industries. Furthermore, the introduction of renewable resources (see analysis) could see alternative energy sources such as wind, solar and geothermal play a larger role in electricity generation.

Demand for electricity will continue to swell alongside economic growth, necessitating large-scale investment and private sector assistance. Despite possessing a relatively clean, cheap source of fuel, gas-fired thermal plants represent a short-term solution to Peru’s rising demand for electricity.

The construction of the new southern pipeline will likely prompt the building of thermoelectric power plants in southern cities such as Arequipa and Ilo. Nevertheless, the fact that government estimates indicate that the country has so far only tapped approximately 5% of its hydroelectric resources will see the long-term continuation of investment in hydroelectric plants, with other forms of renewable energy possibly also coming in to close the gaps.