Renewed hope: A glance at the long-term potential of renewable energy resources

The fight against global warming has prompted investment in renewable energy resources across the globe and Peru is no exception. Historically, Peru invested vast amounts into its renewable hydroelectric resources and relied on these for as much as 90% of the country’s electricity generating capacity. Gradually, so-called unconventional renewable energy resources are now also being introduced into the national grid. In fact, according to its long-term strategic plan, the Ministry of Energy and Mining ( Ministerio de Energía y Minas, MEM) aims to invest $8.76bn to bring 4321 MW of new generation capacity through renewable resources by 2040.

With a legislative framework in place guaranteeing price stability for renewable generation, two auctions have already occurred, in 2009 and 2011, to promote investment in renewable energy. While initial projects have typically focused on wind, solar and small-scale hydroelectric generation facilities, Peru also boasts potential in biomass and even geothermal resources.

Framework

The legal framework for the renewables industry was created in May 2008 by Legislative Decree 1002, otherwise known as the Law for the Promotion of Investment in Electricity Generation through Renewable Energy. The law defines non-conventional renewable sources, provides the foundations for 15-year power purchase agreements, ensures grid access and prioritises funds for research and development. In March 2011, Supreme Decree 012-2011-EM created the regulatory framework for electricity generation using renewable resources. Other incentives for the market had been laid out in Legislative Decree 793 of March 2007, which established that minimum investments of $5m in renewable energy are not subject to sales tax in the pre-operative stages. Legislative Decree 1058 from June 2008 allows the offset of up to 20% of income tax liability against investments in renewable projects.

The MEM is responsible for setting a moving five-year target for renewable generating capacity, the first target being a 5% contribution of non-conventional renewable resources by 2013. Meanwhile, the industry regulator, the Supervising Organisation of Investment in Energy and Mines (Organismo Supervisor de la Inversión en Energía y Minería, OSINERGMIN) is responsible for auctioning renewable energy projects at least every two years.

The last auction for renewable energy projects was announced in August 2013 and is scheduled to be awarded in February 2014. Tariffs are determined by individual auctions and, though fixed for 15-year periods, vary from project to project. Renewable energy companies must sell electricity at the spot price determined by the market. However, when this fails to reach the income guaranteed by the stability agreements, the government provides compensation by issuing a premium at the end of each year.

Auctions

The 2009 auction awarded three wind power plants with capacity totalling 142 MW, four solar stations generating 80 MW, two biomass generators providing 27 MW and 18 mini-hydroelectric plants totalling 181 MW, providing an additional 430 MW of renewable energy resources – well over MEM’s 5% target. As of April 2013, when the most recent update was issued, 204 MW worth of concessions (47.4%) were operational. The median price for the first auction was $80.46/MWh with solar being priced the highest ($221.09/MWh), followed by wind ($80.36/MWh), biomass ($63.45/MWh) and hydro ($60.33/MWH).

The 2011 auction resulted in the award of seven mini-hydro projects totalling 102 MW, one wind project of 90 MW, one solar plant at 16 MW and one biomass generator with a total capacity of 2 MW. Although only 210 MW was awarded in the second auction, the combined total of both auctions will bring Peru’s total renewable capacity to 640 MW. Average tariffs were lower in the second auction because of the prevalence of mini-hydro projects, which had an average price of $53.21/MWh, compared to wind ($69/MWh), biomass ($99.99/MWh) and solar ($119.90/MWh).

Competitive Pricing

In general, Peru has favourable renewable energy tariffs, a boon to the market’s long-term prospects. When comparing prices from the 2009 auction to a 2009 study published by the European Renewable Energies Foundation (EREF), the price of biomass in Peru topped all European competitors, came in third behind just Estonia and Ireland in wind prices, second to Austria in hydroelectric, and 10th (out of 29 countries) in solar pricing.

Hydroelectric

With an estimated 69,445 MW of potential hydroelectric resources, according to a study conducted by the MEM, Peru’s wealth of hydroelectric power is immense. Just over 50% of electricity supply is derived from this source, a figure which was closer to 90% a decade ago. However, the rise of natural gas-fired thermoelectric plants after the discovery of the giant Camisea gas field has diminished hydroelectric’s share in the grid. According to the government, only hydroelectric projects under 20 MW, referred to as mini-hydro plants, are considered eligible to receive the benefits of renewable energy legislation. Mini-hydro concessions dominate the renewable market, with 283 MW awarded, 44.1% of the total, attracting $530.1m of investment.

Wind

According to OSINERGMIN there is 77,000 MW of wind energy potential, although just 22,000 of that is considered exploitable. While these figures are high, they are estimates and further studies are required to determine usable wind potential. The highest potential runs along the Pacific coast, which receives strong anti-cyclone winds from the Pacific south-west that are then cordoned off by the central Andes Mountain range. The nation’s first major wind power plants are scheduled to come on-line in the first quarter of 2014. Combined with another plant, anticipated for the end of 2014, wind investments total $493.6m and account for 232 MW of potential capacity, enough for 36.3% of renewable generation.

Solar

Solar potential is not as great as that of wind, at least given the current technological limitations. Solar radiation is greatest along the southern coast where average annual radiation is measured at 6.5-7 kWh/square metre (sqm) in some areas (the majority of the country receives less than 5 kWh/sqm).

All four solar concessions awarded in the first renewable auction are operational in the southern provinces of Tacna, Moquegua and Arequipa. Combined with the fifth solar concession awarded in the second auction – expected to come online at the end of 2014 – they will provide 15% of total renewable capacity (96 MW) after an investment of $362.2m.

Biomass

Of the four renewable energy resources being developed, biomass has received the smallest amount of investment, attracting $47.1m from its three concessions. The first biomass power plant came online in 2010, the second in 2011, and the last is expected to be operational in 2014. Altogether they account for 29 MW, or 4.5% of renewable capacity.

Geothermal

The potential for geothermal energy is being explored by a number of companies throughout the Andes Mountains. OSINERGMIN has identified six regions with geothermal potential, including Callejón de Huaylas, Cajamarca and La Libertad, Churín, the central zone, the southern volcanic chain, and Puno and Cusco. The greatest potential for geothermal is found in the southern areas, such as Puno and Cusco, which have consequently been the primary sites for exploratory projects.

Several leading geothermal companies are exploring for geothermal resources, including the Energy Development Corporation (Philippines), Mustang Geothermal (US) and Hot Rock (Australia). Though Peru does not possess any operational geothermal generation capacity, initial reports from the MEM indicate there could be a potential of up to 3000 MW. The MEM plans on exploiting 1500 MW by 2040 through a total investment of $3.1bn, according to NUMES. This would give geothermal energy the largest proportion of all renewables in terms of generation capacity.

Forecasts

Peru’s energy generation could ultimately be derived entirely from renewable resources given its huge hydroelectric capacity, although the country will likely continue to utilise its supplies of cheap and abundant natural gas as part of the mix. By 2040, projected figures from NUMES show that non-conventional renewable power could supply 17.3% of electricity to the national grid through geothermal (1500 MW, 34.7%), wind (1342 MW, 31.1%), biomass (623 MW, 14.4%), mini-hydro projects (496 MW, 11.5%), and solar (360 MW, 8.3%).

In the short-term, figures from MEM show that 348 MW of renewable resources will be added to the national grid between 2012 and 2016, more than enough to maintain the 5% target set in 2008. However, with sufficient investment to reach the previous target, MEM could increase its target range for non-conventional renewable generation in the national grid when revisiting the ideal participation of renewable energy in 2013. Maintaining momentum will provide companies with a clear signal that Peru is committed to further developing the non-conventional segment.