OBG talks to Jorge Merino Tafur, Minister of Energy and Mines

Interview: Jorge Merino Tafur

Peru could produce 16 times more electricity than it consumes. When will it become an exporter?

JORGE MERINO TAFUR: We possess hydroelectric potential of more than 60,000 MW and this must be developed. Close to 50% of electricity production is supplied through natural gas turbines, whereas this share should really stand at around 20-25%. Hydroelectric projects are based on a sound economic rationale and high sustainability.

Our present electricity demand of 5050 MW is growing by 7% per year. An increasing amount of energy is being consumed in off-peak hours due to our economic growth. As a result, more electrical production is needed through longer plant operating hours. Hydroelectric plants require greater investment costs than thermal facilities, but have considerably lower production costs, especially with longer operating hours.

Based on demand forecasts, we envisage 80% of electrical energy production coming from hydroelectric plants between 2025 and 2028. Priority is given to internal demand, with surplus supply going for export.

How does the comparative costs of hydroelectric and gas plants impact investment in the sector?

MERINO: For each MW of installed hydroelectric power, investment of between $1.2m and $1.8m is required. The corresponding figure for natural gas is just $500,000. Large hydroelectric plants take four to five years to build, while a thermoelectric plant running on natural gas has a construction period of 18 months to two years. A hydroelectric plant would begin to generate income only in the sixth year of operations, compared to the third year for a thermoelectric facility.

The main obstacle to securing financing is the lack of a long-term contract for fixed-price energy sales, which would guarantee capital flows and a consequent return on investment. Combined with the higher level of up-front investment and longer construction period, this has meant that private investment is orientated towards building natural gas thermal plants. The state promotes investment in hydroelectricity through long-term electricity supply tenders in which energy sale contracts of up to 20 years are awarded, at fixed prices throughout the period. There is already 1870 MW worth of hydroelectric energy in place, which should enter into commercial operation between 2014 and 2016.

What incentives has the government made available to investors in renewable energy projects?

MERINO: We have a regulatory framework for promoting renewable energy through auctions. In these auctions 20-year energy sale contracts are awarded by technology. In addition, the government also offers tax benefits such as anticipated value-added tax returns and up to 20% per year of accelerated depreciation of shares for income tax payment.

Two bids have been tendered that have led to the awarding of contracts for the installation of 640 MW. The first, for 430 MW, entails 142 MW of wind, 80 MW solar, 28 MW biomass and 180 MW hydroelectric. In the second bid 210 MW will be produced as follows: 90 MW wind, 16 MW solar, 2 MW biomass and 102 MW hydroelectric. The next tender will take place in 2013.

Which areas of energy exploration are in most urgent need of investment?

MERINO: In the electricity sector, we have to invest in feasibility studies. To date our numbers are very limited and we should aim to have a portfolio of projects permanently available that are ready for construction, with environmental impact studies complete and the necessary social agreements defined. These studies can be partly assumed by the private sector, and partly by the state. Selected projects will then by offered through public tenders, with a contract granted for the electricity generated for 30 years, after which the state will assume ownership. In the mining sector, there is interest in facilitating the development of projects identified by the state, and we are hopeful that the Law on the Right to Prior Consultation of Indigenous or Native Peoples can aid in their implementation.

Did the windfall tax on mining profits affect investor interest? Will other taxes be imposed?

MERINO: The windfall profit tax on mining companies is temporary and will endure only while the circumstances that necessitate it exist. Revenues obtained by this means are invested in the regions that benefit least from mining activity. According to Ministry of Finance data, the state collected PEN723m ($264.9m) in mining duties and royalties in the final quarter of 2011, of which PEN329m ($120.5m) corresponds to special mining duty, PEN215m ($78.8m) to the new mining royalty and PEN179m ($65.6m) to the special mining levy.

For 2012, the ministry expects to collect PEN2.9bn ($1.1bn) from the sector. Taxation has not affected the level of interest from domestic and foreign investors and the government does not foresee new taxes. On the contrary, it is devising a policy of competitiveness with a view to attracting larger investments.

Do you plan to reduce the rigorousness of environmental impact assessments (EIAs)?

MERINO: The state has no plans of that kind. It is government policy to protect the environment, which is a common asset and belongs to all Peruvians.

Without doubt, responsible companies apply environmental protection programmes. It is necessary to periodically review and update the regulations and this is what we are doing. In addition, we want to promote participative and transparent monitoring to dispel doubts and suspicions among the population and local and regional authorities.

Peru’s environmental requirements are standards that are demanded worldwide, as was recognised by the last report to the Conga project EIA by international experts. We do not believe this is a disincentive to investment. On the contrary, these days top mining firms have incorporated equally demanding, or even stricter, policies, because they recognise that the seriousness and meticulousness of these studies assure the project’s environmental and social sustainability.

How can social conflicts between local groups and mining and energy companies be reduced?

MERINO: Consultants employed by mining companies to prepare an environmental impact study should involve communities and local and national authorities from the outset. That is social inclusion. The EIA should include five baselines – aquiferous, social (both of which are already provided for), agricultural, livestock and labour (which are new). The new baselines should be constructed with the communities helping to define the level and scope of future development and growth with the support of the mining sector. Ultimately, the mining company and the community will jointly present the baselines to the Ministry of Energy and Mining (MEM) for its approval. We believe this participation in the assessment process will reduce levels of community resistance to mining operations.

To determine the aquiferous baseline and other technical measurements, the consultant should request the presence of the national and local water authorities and/or MEM and the Regional Energy and Mining Board professionals to verify the results. MEM is interested in perfecting early information mechanisms for inhabitants of areas in which studies for hydroelectric and mining projects are to be completed to the feasibility stage, prior to making any decision to invest.

The new mining model prioritises guaranteed access to water for domestic consumption and the development and expansion of existing agricultural and livestock activities in a potential mining project’s area of impact. In this way, the state promotes anticipatory and ongoing dialogue, alongside investors, in the communities affected by mining projects. The aim here is to establish a framework that enables clear communication and distribution of information on the project’s scope and benefits, as well as its environmental impacts, precautions and safety measures, on the basis of respect and equality to ensure long-term sustainable agreements. This new approach to mining contributes to and facilitates the objectives of the new law.