Introduction: New Scenario

A few days after taking office in July 2011, Peruvian President Ollanta Humala faced his first crisis. At the time, one of the world's fastest-growing economies suddenly had an energy shortage. The fledgling government was forced to ration power in the mining-intensive north and import expensive electricity from neighboring Ecuador.

Concerned government officials and industry executives warned that future blackouts were a major risk for Peru's future development, particularly if the energy-hungry mining sector, which would be the first to have its lights turned off, couldn't secure enough power for new projects that would require billions of dollars in investments. The government drew up plans for new power projects as analysts projected a continuation of robust economic growth that would drive demand for electricity.

But four years later, the situation has changed. Like other Latin American nations, the growth of Peru's export-driven economy slowed sharply last year along with China's demand for its commodities. Electricity consumption continues to expand, but far slower than originally expected as a result of the weaker economy.

In 2013, when Peru's gross domestic product rose 5.8%, the country's grid operator COES had projected that electricity demand would increase 10% in 2014. Instead, demand rose about 5.5% that year as the economy's growth weakened to 2.4%, its lowest level since 2009. So far this year, electricity demand has grown about 5%, while GDP has expanded at a sluggish 1.7% in the first quarter.

Over the next five years, COES is officially projecting that demand will grow by about 7%, but the chairman of the grid operator, César Butrón, says it will likely be closer to 5% due to expected delays in some new mines that make up a pipeline of projects worth over US$60 billion. This will provide the country with a cushion between electricity capacity and maximum demand.

"This is the result of the fact that a few years ago we had problems with scarcity and that led to the launch of many investment projects, which are being built and starting to enter into operations and providing a surplus in the generation capacity," Butrón said in an interview. "So it is a combination of there being a lot in construction and demand not growing as we expected."

Large, industrial energy clients like mining companies are benefitting from the over-capacity by signing three or four-year contracts with generators at discounted rates of around $38 per megawatt hour (MWh).

"There is currently strong competition on the part of companies selling their energy and they are willing to provide special prices, or very low, in order to sign energy contracts," said Carlos Herrera, a former mines and energy minister.

But in the long-term, Peru's energy situation isn't as clear. COES estimates that Peru will need to install an extra 400MW of power each year following 2020, when construction of the current pipeline of power projects is complete.

Currently, Peru relies on hydropower and natural gas for electricity, but the country has recently faced challenges in further developing both of those sectors.

The hydro-rich nation has one of the world's biggest renewable freshwater supplies, but building hydroelectric dams along rivers that flow east into the Amazon rainforest has become increasingly difficult due to environmental and social opposition.

Over the past decade, Peru has relied on cheap natural gas from its vast Camisea field, located in a remote corner of the country's south-eastern Amazon, to diversify its energy matrix away from hydro. But the discovery of new deposits in recent years has been hampered by little exploration activity. Drilling that has occurred hasn't produced results matching the government's high expectations.

While hydro and gas will continue to play a dominant role in Peru's energy sector, other sources of generation are also being considered. Renewable energies are taking on a growing, although still modest, role, especially in isolated communities that lack access to the grid.

There is little discussion about nuclear energy, but some experts say that Peru must consider it in the future. Others argue that the country also needs to decide, once and for all, if it wants to become a regional energy hub, which would require generating more capacity in order to export to neighbors like energy-poor Chile and energy-hungry Brazil.

Finally, there is a need for the next government to define clearer regulations that would simplify procedures for companies investing in the sector.

Figure: Peru's Power Usage by Source


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