Development of Renewable Energies in Peru

Current situation: non-conventional energies

In Peru, the promotion and development of generation projects using non-conventional renewable energies began in 2008 as part of the Peruvian government’s commitment to reducing greenhouse gas emissions under the Kyoto Protocol. As an initial step, the government issued Legislative Decree No 1002 – Act on Investment Promotion for Electricity Generation Using Renewable Energies (DL 1002), making it the first law to focus on eliminating barriers to the development of such projects and the diversification of the country’s energy matrix, which at that time consisted of conventional energies: 61% hydroelectric production and 39% thermal production (natural gas, oil, coal, diesel oil and residual oil).

DL 1002 introduced four measures to promote projects using renewable energy resources (RER):

• defining RER to include energy resources from biomass, wind, solar, geothermal, tidal, and hydroelectric sources up to 20 MW;
• declaring the development of new electricity generation using RER to be a matter of national interest and public necessity;
• prioritising RER plants in the daily dispatch by the COES (operator of the Peruvian electricity system); and
• implementing RER auctions using a Feed-In-Tariff model.

In the same year, Supreme Decree No 050-2008-EM approved the Regulations on Electricity Generation using Renewable Energies in order to establish the provisions necessary to promote the development of RER projects and RER auctions. However, subsequently, in 2011, Supreme Decree No 012-2011-EM approved new regulations to include the experience gained from the RER auctions. Based on the above-described premises, four RER auctions were carried out from 2009 to 2016, resulting in the incorporation of 1,024 MW into the National Electric Power Grid (SEIN).

As a consequence, the holders of the awarded RER projects signed power purchase agreements with the Peruvian State and undertook to deliver energy to the SEIN for up to the awarded volume, in exchange for a guaranteed income. Such remuneration had two components: the income from the production valued at the marginal cost in the Spot Market (regular regime); and, if the guaranteed income is not covered, a subsidy known as “RER Premium”, financed through a regulatory charge that was included in the electricity rate paid by the final users.

While the Peruvian Ministry of Energy and Mines (MINEM) has not organised any new RER auctions since 2017, development continues on power plants using non-conventional energies (which account for almost 10% of the entire production at this date). In 2022, the Peruvian government also reaffirmed its interest in developing these technologies by issuing Supreme Decree No 003-2022-MINAM. As part of Peru’s efforts to combat climate change, this decree requires a progressive increase in the market share of renewable energy generation to 20% by 2030.

It could be stated that Peru has a fairly clean energy matrix, given that, as of 2022, it is made up as follows:

• 50.79% for hydroelectric power plants;
• 43.68% for thermal power plants:
1. 42.99% natural gas;
2. 0.53% diesel oil and residual oil; and
3. 0.16% coal;
• 3.44% for wind power plants;
• 1.46% for solar power plants; 
• 0.49% for bagasse power plants; and
• 0.14% for biogas power plants.

Potential in Peru and applicable regulatory framework

Studies by the MINEM and other institutions have estimated the exploitable potential of wind generation in Peru at 20 GW, primarily in the regions of Piura, Lambayeque, Ica, and Arequipa; the exploitable potential of solar generation at 25 GW, concentrated in the regions of Ancash, Arequipa, Lambayeque, Moquegua, Puno, and Tacna; and the potential of geothermal generation at around 3 GW in the southern part of the country (Arequipa, Tacna, Moquegua, and Puno).

In view of this potential, the Peruvian government has continued to promote the development of non-conventional energies through regulatory measures. Initially, the regulatory framework set the firm capacity (power that can be supplied by a generation unit with a high degree of certainty) of non-conventional RER (wind and solar) plants at zero. In Peru, an electricity generator’s capacity to contract is conditional upon the recognition of firm capacity (no generator can sign contracts for the sale of more power than its firm capacity). This meant that the owners of RER plants could not enter into power purchase agreements. Thus, investors who won RER auctions have the certainty that, as long as their plant produces energy during the supply period, they will receive payment at a rate that conceptually covers all fixed and variable costs associated with the project.

This criterion was corrected by Resolution No 144-2019-OS/CD, which instead opted for a methodology for calculating the firm capacity of RER plants based on the system’s average energy production at peak hours (from 5pm to 11pm) during the last 36 months. This benefited generators using solar and wind technology by allowing them to earn income from power, and to enter into power purchase agreements with electricity distributors and free users (users with a consumption in excess of 2.5 MW per year, or users with a demand of 0.2 MW to 2.5 MW who chose to be classified as free users). It is worth noting that the aforementioned firm capacity calculation method benefited wind projects, above all.

In 2019, the MINEM created the Multisectoral Commission for the Reform of the Electricity Subsector (CRSE) to identify the main opportunities for enhancing the regulation of the electricity subsector with a view to making RER generation technologies more competitive and providing more incentives to use them, among other objectives.

In this connection, the CRSE identified a limitation on the development of greater competition in the generation sector, given that, unlike generation plants using conventional energies, most plants using renewable energy resources only have firm energy or have firm energy and very low firm capacity, which does not enable them to earn income through power purchase agreements.

In view of the above-mentioned situation, by Ministerial Resolution No 227-2022-MINEM/DM, the MINEM proposed several amendments to Law No 28832 – Act to Ensure the Efficient Development of Electricity Generation. Such proposal was submitted in 2023 to the Congress of the Republic under Bill No 4565. The proposed measures include the separate sale of capacity and energy and their sale in hourly blocks to electricity distributors, which would allow the RER projects to enter the generation market more easily and to compete with conventional technologies. The bill has been approved by the Congress’s Energy and Mines Committee through a final decision and its debate in a plenary session of the Congress is still pending at the time of this Guide’s publication (July 2023).

New projects

According to the information published by the MINEM, temporary concessions have been granted to conduct feasibility studies for electricity generation projects with a projected installed capacity of 5,297 MW, of which 65.6% correspond to wind projects, 9.8% to solar projects and 24.6% to hybrid projects (solar and wind).

On the other hand, according to the Pre-Operational Studies approved and under evaluation by COES, there are approximately 20,000 MW of new RER projects that will enter into commercial operation between 2023 and 2028: 46% (of this MW figure) corresponds to wind projects, 44% to solar projects, 6% to hydroelectric projects, 1% to mini hydroelectric projects (with an installed capacity equal to or less than 20 MW) and 3% to thermal projects. The above shows that the growth of Peru’s energy matrix will inevitably be led by non-conventional energies.

At the same time, battery electric energy storage systems have been developed to capture, store and release energy when required according to the demand on the electricity system. Specifically, these storage systems are expected to help manage the intermittent nature of RER plants (which depend on natural resource availability at certain times of day) and guarantee the security and reliability of the electricity supply. At present, there is only one battery energy storage system (BESS), located in Ventanilla. However, according to publicly available information from Pre-Operational Studies, the commencement of commercial operation of two additional BESS projects has been approved for 2023: the C.T. Kallpa BESS and the C.T. Chilca 1 BESS.

In Peru, there is now some discussion about green hydrogen, which has been carving out a significant space as one of the technologies able to produce zero-emissions electric energy, thanks to the fact that it is obtained via water electrolysis using renewable energy. Green hydrogen is attractive not only as an energy vector, but also as a raw material for the chemical, petrochemical, and metallurgical industries. In fact, Bills No 3272-2022/CR and No 3267-2022/CR were submitted in October 2022. The first bill seeks the approval of a Green Hydrogen Act and the promotion of the country’s industrialisation through green hydrogen; and the second bill seeks that the promotion of hydrogen be declared a matter of public interest and national necessity. Likewise, this year, the MINEM created a Multisectoral Work Group to identify, assess and propose regulatory and promotional alternatives that should boost and make viable the development of projects using green hydrogen in the country.

Challenges

The future of Peru’s energy matrix is clearly trending towards an increased share of non-conventional energies. Generation companies have plans to develop new RER projects, and large consumers in the electricity market want to have their own RER plants or work with companies that can guarantee the supply of RER-generated energy.

It is thus important that the Peruvian State continue to improve regulations that will allow for the competitive development of non-conventional energies, ie, by providing access to the same markets under the same conditions as conventional energies. Above all, it is critical not to repeat past mistakes. The subsidy scheme (RER Premium) has meant that, to date, end users must pay over USD1.6 billion, and potentially up to USD3 billion in the next ten years.

Moreover, it is vital that the growth of RER plants’ share of energy production go hand-in-hand with the protection of SEIN’s security. Given that the plants scheduled to begin operating in the near future are based on wind and solar power, it is important to plan for the fluctuations that tend to be caused by these types of plants because of their intermittent nature, which affects the security and reliability of supply at the SEIN. There is thus an urgent need to develop an ancillary services market that is able to support new RER projects and guarantee compliance with technical and commercial standards.

Finally, considering that RER plants are usually located in remote areas, work for the reinforcement of the transmission system must continue. The Peruvian government already performs periodic studies on the transmission equipment requirements needed to maintain or improve the quality, reliability, and security of the SEIN, based on which it issues a Transmission Plan. Nevertheless, regulations that shorten the amount of time it takes to obtain permits for the implementation of this infrastructure would guarantee its availability on a timely basis, as well as its readiness for the incorporation of non-conventional energy projects.