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Published on May 31st, 2012 | by Andrew


Peru, South American Nations Turn to Reverse Auctions to Accelerate Renewable Energy Development

May 31st, 2012 by  

Graphic courtesy: Peru Ministry of Energy & Mines

Peru and other governments in South America, including Brazil and Uruguay’s, are making headway as they strive to develop renewable energy resources that reduce CO2 and greenhouse gas (GHG) emissions and environmental degradation while at the same time boosting economic activity and jobs growth. In doing so, they’re turning to reverse auctions, as opposed to Feed-in Tariffs (FiTs) or other incentives, as a market-based mechanism to foster growth of renewable energy capacity.

Demand for energy in Peru is growing at 9% per year, with total required energy capacity estimated to increase to 6,140 MW between 2012-2020, according to a 2011 energy market analysis conducted by consulting company CINYDE S.A.C. for World Bank Group member the International Finance Corp (IFC). That’s the equivalent of building a new 500-MW generation plant every year.

Meeting growing energy demand will require investments of between $10.83 billion to $13.32 billion in Peru over this period, according to the IFC report, and Peru’s government is looking to renewable energy investments to be a substantial portion of that.

Renewables and Peru’s Growing Energy Demand

Source: Peru Ministry of Energy & Mines

Peru has set a goal of renewable energy supplying 33% of the Andean nation’s electricity by 2021. It’s also set a 15% energy savings goal between 2009-2018. That’s relative to 2018’s projected demand across the residential, industrial, services, public, and transportation sectors, the IFC explains.

There’s a lot in the way of renewable energy potential in Peru. It’s estimated that the Andean nation is currently tapping into just 4.7% of hydro energy potential, 0.65% of wind energy potential, 6.1% of biomass potential, and only 1% of solar energy potential.

Table 1
Generation Potential with Renewable Energy – Projection 2012-2020

Source Cum.Demand Installed Investment Cost Total Investment Potential    (MW) ($MM/MW) ($MM)

Solar PV        540                          2.5 – 3.0                           1,350 – 1,620
Wind           1,800                          1.8 – 2.0                           3,240 – 3,600
Hydro         2,000                         1.5 – 1.8                            3,000 – 3,600
Biomass     1,800                          1.8 – 2.5                           3,240 – 4,500
TOTAL        6,140                          N/A                                 10,830 – 13,320

* Source: IFC CINYDE analysis, based on information from the MINEM, KFW study (cited in footnote 3), and projections of future energy auctions.

As of 2011, Peru relied on hydropower for 56% of its electricity needs. Natural gas and oil derivatives-fueled power plants met the remaining 44%. A signatory to the Kyoto Protocol, Peru has pledged to cut CO2 and greenhouse gas emissions by reducing fossil fuel use and ramping up renewable energy.

On the demand side of Peru’s energy ledger, industrial and mining sectors consume the vast majority of electricity. Some 100 such companies consumer nearly 80% of Peru’s total electricity generation. That makes them primary players in Peru’s efforts to reduce CO2 and GHG emissions by making use of renewable energy and increasing energy efficiency.

Peru is producing natural gas from offshore wells and using that to generate electricity. These are being subsidized by the government, resulting in artificially low prices and the distortion of energy market prices. That’s hindering the development of alternative, renewable energy resources, according to the IFC.

Moreover, energy prices in Peru are forecast to increase. Its current sources of natural gas are projected to be depleted in roughly 20-30 years, and natural prices will rise significantly once the full costs of exploration are included in the market price.

Reverse Auctions & Emergence of Peru’s Renewable Energy Ecosystem

A varied mix of organizations has come together to forge a renewable energy “ecosystem” in Peru. Seminal to this has been the involvement of the World Bank Group, which has served as the thin edge of a wedge that has established the mechanism through which Peruvian renewable energy projects can qualify for UN Framework Convention on Climate Change (UNFCCC) Clean Development Mechanism (CDM) funding.

Initiatives undertaken in concert with Peru’s government and the latter’s own legislative initiatives have established the legal and operational framework for Peru’s private sector renewable energy industry to develop.

Joining a growing number of developing countries turning to reverse auctions as the preferred means of meeting their renewable energy development goals, Peru conducted its first renewable energy auction tender in 2010, giving local private sector project developers and banks the opportunity to participate in new investment opportunities. In the 2010 auction, Peru’s Ministry of Energy and Mines, working through regulatory supervisor OSINERGMIN, awarded contracts to install a total 411.7 MW of clean, renewable energy: three wind energy (142 MW), four solar energy (80 MW), two biomass (27.4 MW), and 17 small-scale hydro power projects (162 MW). Another contract for an additional small-scale hydro power project of 18 MW was awarded in a second round auction later that year.

The average offer price for the reverse auction tender came in at a much lower than expected 8.12 cents/kilowatt-hour. Tenders to supply hydroelectric power (6.02 cents/kWh) and biomass (6.35 cents/kWh) were the lowest rates. Wind energy tenders averaged 8.04 cents/kWh, and solar 22.11 cents/kWh, OSINERGMIN reported.

Peru’s Legislative Decree 1002 of 2008 established renewable energy resource development as a national priority, setting targets for their contribution to the nation’s total domestic electricity consumption. The law also affords renewable energy priority in grid energy dispatch and established power purchase agreements (PPAs) of up to 15 years, along with a take-off tariff applicable throughout the term of the PPA.

Peru’s latest 2011 renewable energy auctions resulted in awarding contracts to build hydro projects (680GWh/yr), wind energy (416GWh/yr), solar energy (43GWh/yr) and biomass (12GWh/yr).

Last week, Spanish renewable energy project developer and construction company Montealto announced it had begun installing 62 wind turbines at two wind farm sites where rated capacity is to total 110 MW. The two wind farms, one in Cupinisque and another in Talara, will generate electricity sufficient for more than 240,000 homes while avoiding some 241 tons of CO2 emissions. 
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About the Author

I've been reporting and writing on a wide range of topics at the nexus of economics, technology, ecology/environment and society for some five years now. Whether in Asia-Pacific, Europe, the Americas, Africa or the Middle East, issues related to these broad topical areas pose tremendous opportunities, as well as challenges, and define the quality of our lives, as well as our relationship to the natural environment.

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