Alternative Energy & Power 2020

Last Updated July 22, 2020

Peru

Law and Practice

Authors



Uribe & Leyva Asesores de Energía is an energy consulting firm that specialises in the development, management and regulation of energy markets. In addition, the firm has provided advice on legal proceedings, administrative contentious processes, civil law consultations, as well as advice on labour matters and corporate law. Uribe & Leyva advises well-known private companies and public entities in the Peruvian energy industry. Recent work includes advising Electroperú S.A. in the Arbitration of Conscience against the electricity system operator, related to secondary services; advising the Ministry of Energy and Mines in the preparation of technical and legal reports for the development and modification of the energy legal framework, such as distributed generation; collaborating with the Free Users Committee in the revision of the regulations about the wholesale electricity market; and advising Ergon Peru S.A.C. in the development and commissioning of an important photovoltaic project in Peru.

Since the beginning of the 1990s there has been three activities regulated in Peru’s power industry: Generation, transmission and distribution. In each of the above-mentioned activities, several companies participate, among which we find some state-owned and some private investor-owned.

As for the generation segment, there is only one state-owned company, ELECTROPERÚ SA, but nowadays it has only a small share of the market. Regarding the most important transmission lines, there are only private investor-owned companies. However, it is the opposite in the distribution segment because most of the companies are state-owned, but the two most important distributors, which share the supply of Peru’s capital, are private investor-owned companies.

Partially, the current structure of the market reflects the spirit of the Constitution of Peru, which empowers the free market, but assigns a subsidiary activity to the state. The subsidiary activity could be executed through regulation, either by improving competition or regulating monopolies, or through direct participation in the market via state-owned companies. This constitutional economic policy is called “Social Market Economy”.

Privatisation

Nevertheless, there is a pending process of privatisation, especially for the state-owned distributors. At the beginning of the 1990 decade, Peru started an aggressive privatisation process, not only in the power sector, but also for all state-owned companies. This process has been frustrated due to social problems.

The most important laws in Peru’s power industry are:

  • Decree Law N 25844 (LCE by its Spanish acronym), which contains the vast majority of rules about the electricity industry, and Supreme Decree No 9-93-EM, Rules for the LCE (RLCE, by its Spanish acronym). This LCE has been amended numerous times; the Legislative Decree 1221 made the last deep reform.
  • Law 28832. This law restructured several rules of the LCE to enhance competition in the power industry.
  • Legislative Decree 1002, which created new mechanisms to promote renewable energy.

According to the latest report by the Ministry of Energy and Mines (MINEM by its Spanish acronym), the most important generation companies in terms of capacity are: Engie Energía Perú S.A. (20% participation), Kallpa (13%), Enel Generación Perú (11%) and Electroperú S.A. (7%). All of them are investor-owned companies except Electroperú S.A.

Regarding the energy transmission subsector, the investor-owned companies Consorcio Transmantaro S.A. and Red de Energía del Perú S.A. are the main participants with a 35% of the market share, followed by the companies Abengoa Transmisión Norte (3%), ABY Transmisión Sur (3%) and Red Electrica del Sur (2%). All of them are investor-owned companies.

Finally, regarding distribution activity, all distribution companies are state-owned companies, except the companies Enel Distribution, Luz del Sur and Electrodunas. However, Enel Distribution and Luz del Sur are of significant importance since they supply the 59% of the national market.

The Peruvian legal system does not differentiate between national and foreign investors; both have the same obligations, guarantees and risks. In addition, the legal system facilitates and allows them to participate and develop projects in almost all economic sectors, including the power industry.

It is necessary to highlight, that one of the most important means to promote private investment is Public Private Partnerships (PPP), regulated by Legislative Decree No 1362. Through PPPs, the risks of the projects are allocated between the investors and the stated, most of them to the private sector.

In addition, the Peruvian Constitution has recognised the legal figure of the Contract Law, which provides guarantees to the investors that the rules of the concession agreements will be comply by the government. Moreover, Contract Law figure means that any future law is not able to modifying signed contracts.

Furthermore, Legislative Decree 757 states specific regulations about the Contract Law, specifically through the creation of the Legal Stability Agreement. According to the Legislative Decree 757, the Legal Stability Agreements have a law status, so the government cannot unilaterally modify or leave without effects their contracts.

Law 26876 regulates the previous approval (ex-ante) of those transactions deemed as vertical or horizontal concentration acts in the electricity sector. INDECOPI is the public entity responsible for the process. The Law classifies as concentration acts the following:

  • Mergers.
  • The incorporation of a shared company
  • Direct or indirect acquisition of control over other companies through the purchase of shares, participations, contracts or another legal figure that confers that kind of control, like joint venture agreements or any other similar business collaboration contract with similar consequences
  • Acquisition of productive assets of any company that carries out activities in the electricity sector
  • Any other act, contract or legal mechanism by means of which companies, associations, equity interests, trusts or assets are concentrated among competitors, suppliers, clients, shareholders or other economic agents.

Moreover, the law states that horizontal concentrations occur when the power companies involved (ie, generation, transmission and/or distribution companies) have, before or after the concentration act, jointly or severally, a market share equal to or greater than 15% of the relevant market.

As for vertical concentrations, it happens when one of the power companies involved has, prior to or after the concentration act, a market share equal to or greater than 5% in any of the relevant markets.

INDECOPI Evaluation

As part of the procedure, INDECOPI must evaluate, among others, the following:

  • The position of the companies in the market
  • The structure of the market
  • The possibilities of choosing suppliers, distributors and users
  • The existence of barriers to the market
  • The evolution of supply and demand
  • The evolution of technical or economic progress, and
  • The effect of the agreement in the different relevant markets in the short and long term.

According to the result of its analysis, INDECOPI might deny it, accept it without conditions, or accept it under certain conditions. The conditions vary according to the circumstances of each transaction.

Urgency Decree No 13-2019

In addition, it should be noted that in 2019, Urgency Decree No 13-2019 was issued, which regulates the vertical and horizontal concentration acts for all economic sectors, including the power industry. Therefore, Urgency Decree No 13-2019 will derogate Law 26876. However, Urgency Decree No 13-2019 is going to be in force from March 2021.

Finally, Urgency Decree No 13-2019, in general terms, is similar to Law 26876. However, its mechanism to analyse the existence concentration is different, as it is based on a minimum limit of annual sales or annual gross income.

In Peru, there is not a governmental body responsible for planning the power sector. The LCE believed in the market and the economic regulation (ie, demand, offer and price signals). For this reason, planning bodies were almost forbidden. Nevertheless, along the years since the issue of the LCE, the necessity of some plans was more evident every time.

Consequently, some improvements were incorporated into the legal framework: 

  • the government has intervened in the generation activity through a renewable law (up to 5% of the market) and PPPs for the development of hydroelectric and thermoelectric generation projects.
  • regarding transmission plans and investment plans, the first one is approved by the MINEM, and the latter by OSINERGMIN. There are specific rules that create incentives to comply with them. 
  • while distribution was never a planned activity until the creation of the investment plan in distribution, this is under application for only state-owned companies.

Even though Peru does not have a central planning authority, it has an independent system operator with some planning functions. The Committee for the Economic Operation of the National Interconnected Electric System (COES by its Spanish acronym) is in charge of co-ordinating the short, medium and long-term operation of the National Interconnected Electric System (SEIN by its Spanish acronym) at the minimum cost, preserving the security of the system, the best use of energy resources, as well as planning the development of the SEIN transmission and managing the Short-Term Market.

The COES is in charge of public interest functions, in accordance with Law 28832, as follows:

  • Prepare the Transmission Plan proposal for approval by the MINEM
  • Prepare the procedures regarding the operation of the SEIN and administration of the Short Term Market, for approval by OSINERGMIN
  • Ensure the access of the interested parties to information on the operation of the SEIN, the planning of the transmission system and the administration of the Short-Term Market
  • Ensure competitive conditions in the Short-Term Market, and
  • Seek technological improvements that ensure the efficient fulfillment of its functions.

Furthermore, the COES is made up of generation, transmission, and distribution companies, as well as free energy users. COES’s budget is covered by its members.

During 2019, there were some important changes to the legal framework:

  • OSINERGMIN amended the COES Technical Procedure PR-26 “Firm Capacity Calculation” to establish the rules for calculating the capacity for wind, solar and tidal generation technologies.
  • Supreme Resolution No 006-2019-EM created a Multisector Commission that has temporary nature, responsible for proposing modifications to the electricity legal regulations.
  • As already indicated in 1.4 Principal Laws Governing the Sale of Power Industry Assets, the government issued Urgency Decree No 013-2019, which regulates the previous control of the transactions deemed as vertical and horizontal concentration acts.

Distributed Generation in Peru

Law 28832, Legislative Decree 1002 and Legislative Decree 1221 regulate distributed generation in different ways. For instance, Law 28832 regulates the distributed generation connected to distribution grid, for all kinds of technology, while Legislative Decree 1221 states that distributed generation comes from exclusively non-conventional technologies.

In this context, in August 2018, the MINEM published Ministerial Resolution No 292-2018-MEM/DM with a regulation proposal for distributed regulation. Even though there has not been progress with this proposal yet, the government is committed to improving the regulation of distributed generation.

Energy Storage Systems

The current legal framework does not regulate energy storage activities (SAE, by its Spanish acronym) yet. However, according to international standards, SAE should be deemed as an independent activity (ie, Different from generation, transmission or distribution).

The government is committed to improving the legal framework regulating SAE, since this technology is not only complementary with renewable energy, but also it offers different benefits to the whole power industry.

Capacity and Energy Supply Contracts

Nowadays, the aim of the supply contracts, known as Power Purchase Agreements, is the joint sale of capacity and energy. This contractual standard limit the participation of only energy suppliers, such as solar energy plants. Therefore, it is necessary to issue new regulations to separate energy contracts from capacity contracts.

The Peruvian electricity market has three strong pillars, which should attract foreign investment.

There are several mechanisms of guaranteed payment and/or long-term contracts, which facilitate the development of greenfield projects. For instance, distributors who make auctions are able to fix the term of the power purchase agreements until a 20-year-old period.

The annual interest rate for economic regulation is 12%. It is attractive since the real Weighted Average Cost of Capital - WACC that power companies face is considerably lower. This interest rate has been the same for almost 30 years.

Finally, Peru has a strong transmission system, which facilitates the connection of new generators, and the supply of the new consumers with important demand, such as mining companies.

The COVID-19 pandemic has had an immediate effect on the Peruvian electricity market; one of the main consequences has been the reduction of the demand. According to COES data, during March 2020 the decreased demand had a significant impact on the prices of the Short-Term Market. While the demand has recovered, it is still below historical levels. Most forecasts estimate recovery by next year.

Since the beginning of the 1990s, Peru has had a Short-Term Market (MCP by its Spanish acronym) in which only generators participate. It was in 2018 that the Wholesale Electricity Market (MME by its Spanish acronym) started its operations. The MME is made up of the complementary services market and the MCP.

Complementary Services

Complementary services are those required to support the efficient operation of the electric system, and allow the supply of quality electricity to final users, safely and reliably. The regulation has created the following complementary services:

  • rotating reserve;
  • frequency regulation;
  • voltage regulation and/or local supply of reagents; and
  • emergency quick start groups (cold reserve).

MCP

As for the MCP, generators inject all their energy into the common bag known as the "pool". Only generators are authorised to sell (ie, inject) energy in the MCP. The COES determines which generators must inject energy in order to attend the demand, in accordance with the minimum cost principle. However, those authorised to buy the electricity injected by the generators are:

  • generators, the owners of generation units in commercial operation, to attend the demand of their consumers;
  • distributors for up to 10% of their free users demand; and
  • large Users for up to 10% of their maximum demand. Large Users are free users with a minimum demand of 50 Mw.

In the MCP, the energy is valued according to the marginal-cost pricing model. It means setting the price of a product to equal the extra cost of producing an extra unit of output. COES within the entity are responsible for calculating the marginal cost and publishing the payment obligations in the MCP.

The Andean Community of Nations (CAN by its Spanish acronym) is an international organisation with the objective of achieving comprehensive, balanced and autonomous development through South America with Bolivia, Colombia, Ecuador and Peru as member countries, and Argentina, Brazil, Chile, Paraguay and Uruguay as associated countries.

The CAN has been in charge of ensuring compliance with the objectives of the electrical interconnection of the Andean region with different decisions, including Decision No 536, which allows the electrical interconnection with Colombia and Ecuador with the approval of the “General Framework for the sub regional interconnection of electrical systems and intra-community exchange of electricity”.

Decision No 757 created a temporary regime for electricity exchanges, under application only for Colombia, Ecuador and Peru, which was regulated in Peru by Supreme Decree No 011-2012-EM. Later on, Decision No 789 extended the term of this temporary regime. In the year 2017, the CAN issued Decision No 816, which created the Short-Term Regional Andean Electricity Market, with the exchange of surplus energy.

In Peru, the export and import of electricity is regulated by Supreme Decree 049-2005-EM (RIEE by its Spanish acronym), which establishes the rules applicable to the import and export transactions of electricity between the electrical national system and other electrical systems belonging to countries from the CAN.

According to COES statistics, in 2019 the total production of energy was 52,889.14 GWh, where hydraulic plants injected 57.04%, thermoelectric plants 38.41%, solar plants 1.44 % and wind plants 3.11%.

As for the type of fuel consumption during 2019, it was observed that 98.22% of the thermoelectric generation burned natural gas, 0.36% diesel and residual oil, 0.18% coal, 0.92% bagasse and 0.32% biogas.

As already indicated in 1.4 Principal Laws Governing the Sale of Power Industry Assets, the previous control of the vertical and horizontal concentration acts is regulated, nowadays, by Law 26876. However, next year a new law is going to be in force for all Peruvian markets.

No other means of regulation of corporate structures exist in Peru nor the electricity industry. 

To begin with, there is a first perspective to protect competition in the market; it is through a previous control (ex ante) of the vertical and horizontal concentration acts. The regulation for these processes has been explained in 1.4 Principal Laws Governing the Sale of Power Industry Assets and 2.4 Principal Laws Governing Market Concentration Limits.

In addition, the most traditional means to protect competition in the market is by a posterior control (ex-post), where the competition agency conducts surveillance to detect anti-competitive behaviours. This second option is regulated in Peru by Legislative Decree No 1034, with the following details:

  • The competition agency is INDECOPI.
  • Legislative Decree No 1034 establishes two kind of prohibitions: absolutes and relatives. The difference between them is about how INDECOPI determines that something is illicit. As for absolute prohibitions, it is enough that the authority verifies that an agent executed the typified behaviour. For relative prohibitions, in addition to the presence of the typified behaviour, it is necessary to demonstrate that it has had a negative effect for the competency and consumer welfare. 
  • There are two categories of anticompetitive behaviours: Abuse of a Dominant Position and Anti-competitive Agreements. According to the Peruvian Law, Abuse of a Dominant Position occurs when an agent in the market holds a dominant position and uses it to restraint competition. As for Anti-competitive Agreements, they are agreements in which the target is to distort competition by cooperating with competitors, fixing prices or dividing the market up so that each one has a monopoly in part of the market.
  • In front of anticompetitive behaviours, INDECOPI can impose sanctions according to the following qualification:
    1. in cases of soft infringement, the fine must not exceed 500 UIT;
    2. if it is a severe infringement, the fine must not exceed 1000 UIT; and
    3. if it is a very severe infringement, the fine must exceed 1000 UIT.

An UIT is about one thousand American dollars.

Global warming and pollution have forced different countries to modify and adapt their regulations to mitigate their damaging effects in the environment. In this particular case, the Environmental Assessment and Enforcement Agency (OEFA by its Spanish acronym) is the public entity in charge of overseeing and sanctioning, in order to preserve the balance between economic activity and environmental protection.

Moreover, the Peruvian electricity sector has not been oblivious to these measures. For this reason, the government has implemented in the regulatory framework different measures to mitigate the consequences of pollution and climate change. The most important regulations are the following:

  • General Environment Law, Law No 28611, which states the legal regulatory framework for environmental protection in Peru.
  • Regulation of Environmental Protection in Electrical Activities, Supreme Decree No 014-2019-EM, which promotes and regulates the environmental management in generation, transmission and distribution activities, in order to mitigate the negative environmental impact, resulted of such economic activities.
  • Resolution of the Directorate 0008-97-EM-DGAA, which regulates the maximum permissible levels for liquid effluents resulting from the activities of generation, transmission and distribution.
  • Law of the National System of Environmental Impact Assessment, Law No 27446, and its Regulation, Supreme Decree No 019-2009-MINAM, which create the National System of Environmental Impact Assessment (SEIA by its Spanish acronym) and establish a process for the environmental impact assessment of investment projects.

To sum up, Peru has issued environmental regulations, which are applied today in the electricity sector, to mitigate the consequences of climate change.

Coal-based electricity generation has not been banned nor there is a mandatory plan for its elimination. However, as was explained in 2.3 Supply Mix for the Entire Market, thermoelectric plants represent the 38.41% of the energy production, where coal participates with only 0.18%. Since coal-based generation is almost zero, Peru does not need new regulation about it. 

The Peruvian energy policy includes the promotion of Renewable Energy Resources (RER by its Spanish acronym) for electricity generation. Currently, the target percentage of participation for electricity generation with RER is 5%; however, since 2017 the participation of RER has exceeded this objective. In fact, in 2019 the electrical production based on RER technologies was 8.52%, while in 2017 and 2018 it was 5.06% and 7.23% respectively.

In Peru, the legal framework for the development of electricity generation projects with RER is contained in Legislative Decree 1002, which considers biomass, wind, solar, geothermal, tidal and hydraulic energy when the installed capacity of the generation project does not exceed 20 MW.

The incentives for electricity generation with RER are the following:

  • all of their electricity production is marketed in the MCP;
  • they have priority in electric dispatch;
  • they have priority for interconnection to transmission and distribution systems; and
  • when they were developed as a result of an auction, their energy is valued at a guaranteed tariff.

Auctions

The auctions are international public tenders organised by the Peruvian government, which bids a certain amount of energy to be provided by the awarded generation projects based on RER Technology, until the energy required in each auction is covered.

The auction winners sign a supply contract with the Peruvian government and have a determined period of time for the construction and commercial operation of their generation projects. The legal framework guarantees to the investor that their energy production will be valued at the price offered in the auction, for the term established in the Contract. Their incomes come from sales of energy in the MCP and a subsidy paid for the electricity consumers, which is added in the electricity transportation toll.

MINEM is responsible for evaluating the need to call an auction every two years. In addition, MINEM defines the energy to be auctioned and the percentage of participation of each RER technology in the auction. OSINERGMIN is responsible for calling and conducting the auction.

The construction and commissioning of electricity generation plants is regulated mainly by the LCE, the RLCE, Law 28832, the National Electricity Code and the COES Technical Procedure PR-20 "Entry, Modification and Withdrawal of Installations in the SEIN”.

In order to develop electricity generation activities for projects with an installed capacity greater than 500 kW, they need to obtain the definitive generation concession, in the case of hydroelectric or RER generation projects; or authorisation, in the case of thermoelectric generation projects. For projects with a capacity lower than 500 kW, these permits will not be necessary.

The definitive concession and authorisation are granted for indefinite terms, unless they are the consequence of public tenders, in which case the term will be the established in the tender itself, being a maximum of 30 years.

In the case of thermoelectric or RER generation projects, where their installed capacity is greater than 500 kW but less than 10 MW, the authorisations and/or definitive generation concessions, as appropriate, are granted by the Regional Government in whose jurisdiction they will be developed. In all other cases, the competent authority to grant the authorisations and/or concessions are the MINEM.

In order to obtain the definitive concession or authorisation, the interested party must meet the requirements established in articles 25 and 38 of the LCE, discussed 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.

As for the legal framework for the operation of generation plants, the mains regulations are the LCE, the RLCE, Law 28832, the regulation of the MME, the Technical Regulations for the Coordination of Real-Time Operation of Interconnected Systems and the different technical procedures of the COES for the operation and co-ordination of the activity of the SEIN agents.

The definitive generation concession and authorisation are the most relevant permits to develop electricity generation activity; however they are not the only ones, the interested party must also obtain the following:

Approval of Environmental Studies

The applicable legal framework is the regulation approved by Supreme Decree No 014-2019-EM, which classifies Environmental Studies applicable to electrical activities into three categories, which are differentiated by the degree of impact that the project represents for the environment. Once the Environmental Study has been carried out, the period for approval can be 30 business days for Category I, 90 business days for Category II and 120 business days for Category III.

The environmental Studies are approved by MINEM, SENACE or the respective Regional Government, according to their competences. The preparation and evaluation of Environmental Studies includes participatory workshops and public hearings for citizens.

Approval of the Preoperational Study by the COES

The applicable legal framework is the COES Technical Procedure PR-20, which indicates that the investors have the responsibility to carry out a Pre-Operativity Study with the purpose to demonstrate that the project does not represent a danger either to the safe operation of the system or the quality of the electricity supply. This study must be approved by COES within 20 business days.

Certificate of Non-existence of Archaeological Remains (CIRA)

The applicable legal framework is the Regulation approved by Supreme Decree No 003-2014-CU. The CIRA is the document issued by the Ministry of Culture of Peru, which certifies that in a certain area there are no archaeological remains. This document must be issued within 20 business days.

Approval of the Hydrological Study

This requirement is under application only for hydraulic generation projects. It consists of a study that aims to certify the existence of water resources, in quantity and quality, appropriate for the generation project. The study is approved within 30 business days by the National Water Authority or by the respective Regional Government, within the scope of its competencies. The accreditation is valid for two years, and it must be renewed until obtaining the Definitive Generation Concession.

Applications

In order to obtaining the concession or authorisation, the interested party must submit an application to the MINEM or the Regional Government, as appropriate, attaching the following requirements:

  • resolution that certifies the availability of water resources, when it comes to generation projects that use water resources;
  • plans and studies of the generation project at the feasibility level;
  • project schedule and budget;
  • specification of the required easements;
  • geographical demarcation of the concession area;
  • resolution approving the Environmental Study;
  • performance bond, for an amount equivalent to 1% of the project budget with a cap of 500 UIT (S/4,300 by 2020);
  • documents that prove the investor's commitment to provide the necessary capital for the generation project;
  • favourable report issued by a risk rating agency on the financial solvency of the investor; and
  • certificate of conformity to the Pre-Operational Study issued by the COES.

Concession applications that comply with these requirements must be resolved within 60 business days, except in the case of generation projects that use water resources, where the application for definitive concession must be resolved within 120 business days. However, authorisation applications that comply with the aforementioned requirements shall be resolved within 30 business days. If during the procedure any observation or incident occurs, these suspends the term for the answer of the administration.

Granting Applications

The procedure for granting the definitive concession and/or authorisation has the following stages:

  • admissibility of the application;
  • publication of the application;
  • verification of concurrence of applications, in which case the MINEM or the Regional Government, if applicable, selects the best alternative;
  • resolution of oppositions formulated by the interested parties; and
  • granting of the definitive generation concession or authorisation.

It should be specified that, prior to the granting of the concession or authorisation, the administration must comply with the prior consultation process, which aims to reach an agreement between the government and the indigenous people of the affected areas, about the right that the State will grant for the development of the electricity generation activity. This consultation process must be carried out within 120 calendar days.

After the grating of the definitive generation concession, the concessionaire and the State sign the concession contract, which includes the investment commitment of the concessionaire, the execution schedule and the provisions about the infringements to the contracts, which allow the MINEM the execution of the performance bond. The concession contract must be registered in the Registry of Concessions for the Exploitation of Public Services.

The rights that enable the development of the electricity generation activity are not definitive and may cease for different reasons.

For definitive generation concessions, effects will cease when:

  • the Concession Contract has not been registered in the respective registry;
  • the concessionaire does not comply with the schedule for the execution of works, except in cases of force majeure qualified by the MINEM;
  • the concessionaire ceases to operate its facilities without just cause for 876 accumulated hours during a calendar year; and
  • the concessionaire does not operate its facilities in accordance with the rules of the COES.

In the case of an authorisation, it shall cease its effects in the following cases:

  • repeated failure to preserve the environment or the nation's cultural heritage;
  • when, after the application of the respective sanctions, the generator continues to fail to comply with the COES coordination rules; and
  • when the holder fails to comply with the construction schedule, except in cases of force majeure duly recognised by the MINEM.

In the legal framework of the development of electricity generation facilities, the LCE and its Regulations establish easement as a means of obtaining surface rights. Thus, the investor must reach an agreement with the owner of the property and pay compensation. In case the parties cannot reach to an agreeing, the imposition must be requested to a governmental authority, because the expropriation is not regulated as an option to obtain rights on the surface of a property.

Considering the explained in the last paragraph, in order to obtain an easement it will be necessary to have a definitive generation concession. The requirements for an easement are in the LCE.

The easements are granted for indefinite period, for the development of electrical activities, or temporal periods, in the case of feasibility studies.

As already explained, the definitive generation  oncession and the authorisation are granted for an indefinite period of time; however, the concessionaire can renounce to the electric right at any time, communicating his renounce to the MINEM with an anticipation of not less than one year, in which case the guarantees granted will be executed; likewise, the concessionaire can lose the definitive concession or authorisation, either by expiration or revocation declared by the authority, as appropriate.

In these cases, the investor has no responsibility for the destination of the assets of the concession, because these are inventoried by the State, auctioned, and, finally, become the property of another concessionaire. The income obtained in the auction is used as follows: First, the cost of the bid process is paid; then, the cost of intervention in the generation plant is paid; and finally, if there is some money left, it will be given to the former concessionaire.

However, the investor, prior to the execution of any measure destined to the abandon of the facilities and/or areas, totally or partially, or when he decides to terminate his activity, must submit a total abandonment plan or partial abandonment plan, as appropriate. The abandonment plan includes commitments to ensure that the environment in which the project was developed reaches similar conditions to the reference ecosystem. The abandonment plan implies the granting of a performance bond for the amount of 50% of the investments involved.

Likewise, for the conclusion of the commercial operation of the generation plant, the licensee must send the COES a request no less than one year prior to the estimated date of withdrawal, and the COES shall issue the Certificate of Conclusion of Commercial Operation.

The construction and operation of electricity transmission facilities is regulated mainly by the LCE, the RLCE, Law 28832, the Transmission Regulations, the National Electricity Code and the Technical Procedure of the COES PR-20 “Entry, Modification and Withdrawal of Facilities in the SEIN”.

When the electricity transmission activity affects public goods or requires the imposition of easements, the interested party must previously obtain the definitive transmission concession, which is granted for an indefinite term, unless they are the result of public tenders, in which case the term will be that set in the tender itself, being a maximum of 30 years. The definitive concession for transmission is granted by the MINEM.

In order to obtain the definitive transmission concession, the interested party must meet the requirements established in article 25 of the LCE, as is the case with the definitive generation concession, see 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities.

Regarding the legal framework on the operation of transmission systems, we mainly have the LCE, the RLCE, Law 28832, the Transmission Regulation, the Technical Regulation for the Coordination of Real-Time Operation of the Interconnected Systems and the different technical procedures of the COES for the operation and co-ordination of the activity of the SEIN agents.

The procedure for obtaining the Definitive Transmission Concession is the same as that for the Definitive Generation Concession; likewise, the requirements for obtaining it is also similar, except for those that are exclusive to generation, given their nature, for which reason we remit to what is indicated in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.

It should be noted that the construction, operation and maintenance of transmission facilities is generally the consequence of international tenders organized by the Peruvian Investment Promotion Agency (PROINVERSIÓN by its Spanish acronym), these tenders are carried out according to the Transmission Plan already explained.

In order for the transmission system to be connected to the electricity system, the licensee must obtain the following authorisations from the COES:

  • the certificate of conformity of the Operational Study and
  • the declaration of conformity of the Commissioning Tests of the installation.

The terms and conditions imposed for the transmission activity are similar to those of the generation, except for those that are exclusive to generation, given its nature, see 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities.

Moreover, it should be noted that transmission concessionaires are obliged to allow the use of their systems by third parties, who must assume the costs of expansion to be made out if necessary and pay compensation for the use.

As detailed in 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights, LCTE and its Regulations establish easements as a means of obtaining surface rights. Thus, the investor must reach an agreement with the owner of the property and pay compensation. In case the parties cannot reach to an agreeing, the imposition must be requested to a governmental authority.

Peru is a country where the transmission activity is not a legal monopoly, since companies are free to request a definitive concession from MINEM anywhere. Thus, the Peruvian electricity legal framework allows the coexistence of various owners of transmission networks.

Response To begin with, the LCE was issued in the year 1992, and it has regulated two different kinds of transmission lines: The Principal Transmission System (SPT by its Spanish acronym) and the Secondary Transmission System (SST by its Spanish acronym). The restructure made by Law 28832 in the year 2006 created two new additional transmission lines: The Guaranteed Transmission System (SGT by its Spanish acronym) and the Complementary Transmission System (SCT by its Spanish acronym).

The SPT was thought as the spine of the power system - the big highway that enables generators to sell their electricity in any part of the Peruvian territory connected to the SEIN. As for the SST, it has had another function. The SST has made possible the connection of the generator to the SPT- these lines are known as SSTG. Then, the SST, committed to allow distributors or big consumers to connect to the SPT- these lines are usually classified as SSTD.

Law 28832

As it was already anticipated, Law 28832 did not eliminate the regulation created by the LCE. On the contrary, it stated that the SPT and the SCT lines are going to keep their status and rights until their decommissioning. Consequently, Law 28832 regulated that all new transmission lines will be classified as SGT or SCT. For this reason, it is often claimed that the Law 28832 has frozen the SPT and the SCT regime.

Furthermore, Law 28832 created the SGT with the same purpose of the SPT. The difference between them lies in the fact that the SGT lines belong to the Transmission Plan. Another important difference is that the concession of the SGT transmission lines are granted through Public Private Partnerships (Hereafter, PPP). The PPP Contracts have important benefits for the concessionaries, such as guaranteed payments.

In addition, the SCT is the new version of the SST. Law 28832 establishes that all new transmission lines that are not part of the SGT will be classified as SCT. Moreover, Law 28832 indicates that for the regulation of the SCT we use the rules for the SST. 

Calculating Tariffs

Regarding authorities who participate in the economic regulatory process, only the energy regulator, OSINERGMIN, is responsible for conducting the processes for calculating the tariffs for the transmission lines. However, the Ministry of Energy and Mines and the system operator, COES, provide some inputs.

The mechanisms for calculating the transmission charges vary according to the type of transmission line.

Principal Transmission System - SPT

The regulation of the SPT has four important features:

  • OSINERGMIN conceptualises the infrastructure based on the methodology of “new replacement value” (VNR by its Spanish acronym), which means to develop a brand-new infrastructure based on the state of-the-art technology and prices.
  • The regulator defines the infrastructure according to the principle of “system economically adapted” (“SEA” by its Spanish acronym). SEA means that the transmission system has to be strong enough to supply the power required for the demand. Therefore, overinvestment is not accepted.
  • The designed infrastructure, in accordance with the VNR and the SEA, is valued following the “efficient costs” principle.
  • The regulation states that generators have the responsibility to pay the cost of the SPT transmission companies; thus, they do not have a demand risk.

As can be inferred, the “real costs” and the stranded costs do not participate in the regulatory process. The regulator elaborates the tolls, in each period, based on an economic model. It is important to mention that there are other topics, as the Tariff Income, in our opinion, less relevant that the above mentioned, which we are not describing because of the space restrictions.

The regulator calculates the SPT tolls for a one-year period, following the process explained above.

Guaranteed Transmission System - SGT

As it was already mentioned, the SGT transmission lines are granted through PPP. The Concession Contracts follow the standards of a BOOT Contract (Build, Own, Operate, and Transfer). The total costs – ie, The Investment cost and the operational and maintenance costs- are equivalent to the bid price. The contracts typically states that the total costs have a guaranteed payment; for this reason, there is a process for income liquidation every year. Therefore, like the SPT, the SGT does not have a demand risk.

Secondary and Complementary Transmission System

The regulatory rules are almost the same for SST and SCT. The main rules vary according to who is the user.

When the users are regulated consumers (SSTD and SCTD)

For SSTD, the regulation states that the tariffs are going to be the same as those fixed in 2006. Each new period, the tariffs are only adjusted to incorporate the effects of inflation and variations in the rate of change.

Regarding SCTD, the regulation has two parts. First, OSINERGMIN approves an Investment Plan (PI by its Spanish acronym) which contains all new transmission infrastructure required by the system. Second, OSINERGMIN calculates the tariff for the infrastructure contained in the PI. The total cost for SST is established at the commencement operation date (COD).

Along the life if the transmission asset, as well as the SSTD, the SCTD is only adjusted for inflation and rate of change. It is important to mention that there is an income liquidation, in order to guarantee the total cost – ie, there is not a demand risk.

When the users are large consumers or generators

For SST, OSINERGMIN fixes the tariffs, for each period, based on the concepts of VNR, SEA and efficient costs.

For SCT, Law 28832 allowed transmission companies and generators or important consumers, such as mining companies, to make agreements in order to develop a new transmission infrastructure. In this case, the parties of the agreement must establish the retribution, so OSINERGMIN does not intervene. However, if a third party wants to use the transmission asset, OSINERGMIN will have to fix the tariff, but this tariff is for exclusive application to the thirds. For the last purpose, the regulation applies the concepts of VNR, SEA and efficient costs.

LCE establishes that transmission concessionaires are obligated to allow the deployment of its systems by third parties. These ones must pay expansion costs, in case it is necessary, and remunerate the concessionaire for the use.

For this reasons, OSINERGMIN approved the “Procedure to Set the Conditions of Use and Free Access to Electric Transmission and Distribution Systems” by the Resolution No 091-2003-OS-CD. This regulation provides the procedures and applications that guarantee the open access to transmission and distribution networks.

The construction and operation of electricity distribution facilities is regulated by the LCE, the RLCE, Law 28832, the National Electricity Code and the COES Technical Procedure PR-20 “Entry Modification and Withdrawal of Facilities in the SEIN”.

Those interested in developing electricity distribution activity, in distribution systems with a demand bigger than 500 kW, must first obtain the definitive distribution concession. The definitive distribution concession is granted for an indefinite term, unless it is the result of a public tender, in which case the term will be the one fixed in the tender, being a maximum of 30 years. The definitive distribution concession is granted by the MINEM.

In order to obtain the definitive distribution concession, the interested party must comply with the requirements established in Article 25 of the LCE, as is the case for the concession of electricity generation and transmission, with the particularity that for distribution a formal energy supply contract is also required.

The process for obtaining the CIRA, the Environmental Studies and the Certificate of Conformity of the Pre-Operational Study, is governed by the rules indicated for the activity of electricity generation, see 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities.

Regarding the legal framework on the operation of transmission systems, we have mainly the LCE, the RLCE, Law 28832, the Technical Standard for the Coordination of Real-Time Operation of Interconnected Systems and the different COES technical procedures for the operation and co-ordination of the activity of SEIN agents.

The procedure for obtaining the definitive distribution concession is the same as for the definitive generation concession; likewise, the requirements for obtaining it are also similar, except for those that are exclusive to generation, given their nature, see 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities.

It should be noted that the distribution activity in a given area can only be carried out by a single owner on an exclusive basis, in addition the concessionaire can carry out extensions to its concession, informing the MINEM, accompanied by a schedule of works execution, a performance bond and the co-ordinates of the expanded area.

The terms and conditions imposed for the distribution activity are similar to those for generation, except for those that are exclusive to the generation, given their nature, see 4.3 Terms and Conditions Imposed in Approvals to Construct and Operate Generation Facilities.

It should be noted that each concessionaire is assigned a Technical Responsibility Zone (ZRT), where they have preference to carry out the electrical distribution activity. It is also their responsibility to plan, promote and supervise the electrification projects that take place in their respective ZRT.

Additionally, distribution concessionaires have the following obligations:

  • supplying electricity to anyone who request it within their concession area or to those who arrive in said area with their own lines;
  • guaranteeing the demand for its regulated users for the next 24 months at least;
  • guaranteeing the quality of the service established by your concession contract and the applicable regulations; and
  • allowing the use of all its systems and networks by third parties.

As detailed in 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights and 5.1.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights, in the legal framework of the development of electrical distribution facilities, the LCE and its Regulations establish the easement as a means of obtaining surface rights.

Peru is a country where the electricity distribution is a legal monopoly. Already explained, MINEM establishes a Technical Responsibility Area for every concessionaire; the objective of this policy is to achieve the full access of Peruvians to electricity service determining geographically defined areas

The distributors in Peru are different from the standard in the world, since they are not only responsible for the grids, but also for the commercialisation to the end users. These activities were granted to the distributors since the LCE. Law 28832 made some changes trying to improve competition, but it did not alter the substance of the original framework. Legislative Decree 1221 made the last deep reform specifically to the tariff mechanism for calculating the distribution tolls.

As for commercialisation, the distributors have the responsibility to contract the electricity and capacity from the generators for their users. Only the distributor is allowed to supply electricity to the regulated users, but this exclusivity does not exist for the free users, since there is a free market in which generators and distributors compete for them. Thus, for the commercialisation activity, the distributors obtain significant incomes, apart from those corresponding properly to the grids.

In the following section we will explain the methodology for the remuneration of the grids.

The distribution toll corresponding to the grids is called Distribution Added Value (VAD by its Spanish acronym). Because of the numerous distribution companies, the regulation used to provide a strong simplification for the calculation of the VAD, through “model companies”, is carried out as follows:

  • a “distribution system” is a geographical area in which some specific characteristics are met, for instance, urban cost;
  • a distribution company can have one or more distribution systems;
  • a “typical sector” is a standard distribution system;
  • the MINEM defined among five to seven typical sectors;
  • all distribution systems belonging to the distributions companies were labelled in one of the typical sectors;
  • among all distribution systems belonging to a typical sector, the regulator selected only one, the most representative for the group; and
  • then, the distribution system chosen was called the model company.

Through the simplified process above explained, the regulator only calculated the tariff for the selected model companies. Once the tariff of the model companies had been calculated, the determination of the tariff for the real companies was simple because it depended on the classification of their real distribution systems.

In order to fix the tariff of the model companies, OSINERGMIN used the concepts of VNR, SEA and efficient costs, already explained. This process is executed every four years.

Nevertheless, there were some claims about this mechanism, since regulated companies indicated that the result was far from their real cost. For this reason, the Legislative Decree 1221 made an important reform to the economic model for companies with more than 50,000 users. For companies with up to 50,000 users, the process is the same. The new process is explained below:

  • the regulation is for each real company. Thus, there is no more simplifications through model companies;
  • OSINERGMIN uses the concepts of VNR, SEA and efficient costs, as well as in the past. This process is executed every four years;
  • there are still distribution systems and typical sectors, but this information is exclusively used by the regulation in order to compare efficient costs only; and
  • there is an Investment Plan in Distribution (PIDE by its Spanish acronym) for state-owned companies. The PIDE works similarly to the PI for the SCTD. The advantage of the PIDE is that along the life of the distribution asset, its value should not be subject to revision, except for inflation and rate of change.

In addition to the PIDE, the regulation provides the existence of a plan for the development of projects related to Technical Innovation and Energy Efficiency (PITEC by its Spanish acronym). The execution of PITEC projects allows the increment up to 1% of the VAD. The PITEC projects must benefit the end users.

Uribe & Leyva Asesores de Energía

Jirón Los Nogales 251
Edificio 3, Piso 12
Departamento 1204
El Agustino
Lima
Perú

+51 1 497 4052

contacto@ulenergia.com.pe www.ulenergia.com.pe
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Law and Practice

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Uribe & Leyva Asesores de Energía is an energy consulting firm that specialises in the development, management and regulation of energy markets. In addition, the firm has provided advice on legal proceedings, administrative contentious processes, civil law consultations, as well as advice on labour matters and corporate law. Uribe & Leyva advises well-known private companies and public entities in the Peruvian energy industry. Recent work includes advising Electroperú S.A. in the Arbitration of Conscience against the electricity system operator, related to secondary services; advising the Ministry of Energy and Mines in the preparation of technical and legal reports for the development and modification of the energy legal framework, such as distributed generation; collaborating with the Free Users Committee in the revision of the regulations about the wholesale electricity market; and advising Ergon Peru S.A.C. in the development and commissioning of an important photovoltaic project in Peru.

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