Ties that bind: Connecting energy infrastructure could create new opportunities

While in the short term energy supply may be under considerable pressure due to rising demand caused by the rapidly growing economy, Peru’s wealth of natural resources bodes well for its long-term energy security, as well as the country’s potential to become a major energy exporter. With energy costs in neighbouring countries significantly higher than domestic prices – electricity prices in Chile are roughly three times Peruvian rates – there are several avenues the country could pursue given its common borders with Ecuador, Bolivia, Colombia and energy-starved Brazil. In total, neighbouring countries, excluding Brazil, share electricity demand of 175,000 GWh, which is expected to grow at a pace of roughly 4-6% over the next 30 years, according to the New Sustainable Energy Matrix (Nueva Matriz Energética Sostenible, NUMES).

Mutual Support

Currently, the Peruvian and Ecuadorian electric grids are connected via a 220-MW transmission line along the northern border between Machala and Tumbes. However, the line’s limited capacity means it is reserved for emergency use and has been used only twice. The two countries are now considering upgrading the connection to a high-tension 500-MW transmission line. While the scope for exporting energy to Ecuador is limited due to financing restrictions, especially when other energy-hungry neighbours such as Chile and Brazil are considered, there is motive for seeking further integration between the two nations due to contrasting water levels and high rates of hydroelectric use. Extending interconnection transmission capabilities would allow Peru to send excess supply to Ecuador during its peak season and vice-versa, lowering costs and improving efficiency in both grids.

Peru and Ecuador are also considering linking their crude oil resources. In August 2012, Petroperú and EP PetroEcuador, the nations’ state-owned oil companies, announced plans to connect their respective pipelines to export southern Ecuadorian oil via the Norperuano pipeline, currently running at roughly half its capacity. They signed a $300m agreement that would see Ecuadorean crude sent to Peru’s Bayovar port, with transportation costs estimated at $10 per barrel.

New Revenues

While collaboration between Peru and Ecuador could be described as helping complement each country’s capacity, any potential for integrating energy resources with Chile is strictly business. Peru’s excess supply of energy resources and Chile’s dearth have sparked the notion of exporting power via isolated thermoelectric projects along the southern border.

Despite the seeming abundance of options to increase energy integration with neighbouring countries, challenges also abound. Firstly, the internal market needs to be secured in the long term. Although a potential bottleneck is approaching in two years’ time, if the government can attract sufficient investment to the energy sector, the resources will be available to secure the country’s supply in the long term. In particular, investment in the abundant hydroelectric resources – currently Peru only uses roughly 4-5% of its hydroelectric potential – will enable the use of natural-gas-fired thermoelectric plants for export.

Drop In The Bucket

Even if Peru is able to secure its internal market, there are reservations about exporting to an energy-hungry giant like Brazil, whose proximity to Peru’s hydraulic resources in the Amazon basin has been seen as a reason for jointly developing hydroelectric plants. Guillermo Castillo Justo, general manager of Protecna Consultores and chair of the Peru member committee on the World Energy Council, told OBG, “Exporting energy to comparable energy markets such as Chile and Ecuador is justifiable, but Brazil’s demand is so great, roughly 20 times that of Peru, that any export-oriented energy project will hardly make an impact in closing Brazil’s energy gap, though it could have an impact on our own energy matrix.”

Finally, such agreements between governments are often victim to the political desires of the respective parties. Despite these challenges, however, Peru’s surfeit of energy resources demonstrates the potential to boost the country’s role in the regional energy market.