Peru Energy Situation

Poverty situation

The Human Development Index for Peru is 0.773, which gives the country a rank of 87th out of 177 countries. Around 40% of the population has to live with less than 2 USD (1,34 EURO) a day. Poverty is widespread especially in rural areas, where mostly indigenous people live. In rural areas of the Arequipa regional state for example a family owns only 100 to 300 Soles per months, equal to € 25 to 75. It is estimated, that 95% of the population in the remote areas of Arequipa are poor, out of them 25% extremely poor. Main reasons for the poverty are the limited access to natural resources such as land and water, lack of productive and public infrastructure and inefficient production technologies. The problems are even aggravated by deforestation caused by a high consumption of firewood. Poor families have generally no access to modern energy services (see table below).
In addition, the living conditions of poor families in the Andean regions are affected by natural disasters such as earthquakes, drought, and land¬slides. In 2001, an earthquake destroyed part of the infrastructure of Arequipa and left many households without shelter. The same happened to many households in the regional states Ica, Lima y Huancavelica on August 15th, 2007 when one of the strongest earthquakes in the last 50 years shaked the country. The supply of water and electricity was interrupted and could be partially restored. In addition hundreds of social institutions, such as health centres and schools were seriously damaged.

Energy situation especially in rural areas

Energy for electricity generation

The gross electricity gene¬ration of Peru is currently around 27,000 GWh, based on a installed generation capacity of 6,7 GW. The annual electricity consumption is around 22,3 billion kWh. Power is generated by thermal plants using gas or oil (52%) and hydroelectric plants (48%), with a negligible share of other renewable sources. Even though installed capacity is evenly divided between hydroelectricity and conventional thermal, 72 percent of Peru’s total electricity generation generally comes from hydroelectric facilities: conventional thermal plants generally operate only during peak load periods or when weather factors dampen hydroelectric output.
Peru is producing some oil, but it is not sufficient to cover domestic demand. Besides, natural gas has started to be exploited for domestic and industrial use in Lima and for exporting. The electricity sector of Peru is quite dynamic with an estimated 9.3% increase in generation during 2007, which is expected to reach 30 TWh. This increase is mainly due to the existing positive conditions for thermal generation through the use of natural gas in new plants and also to an increase in hydroelectric generation due to the availability of hydrological resources in the existing hydroelectric facilities.
Peru has an electrification rate of 78,7% on national level. However, 60% of the rural population (more than 6 Mio. people) does not have access to this service, which is one of the lowest rural electrification rates in Latin America.
The service quality in the electricity sector is relatively good. In 2005, the average number of interruptions per subscriber was 14.5, while duration of interruptions per subscriber was 18.3 hours. Both numbers are very close to the averages of 13 interruptions and 14 hours for the Latin-American region. Distribution and transmission losses in 2006 amounted to 11% of total production. Distribution losses were 6.3%, down from 22 % a decade before and below the 13.5% average in Latin America. Transmission losses for the same year have been estimated at 4.7%.

Energy for cooking purposes

In rural areas the predominant energy source is biomass, which is used for cooking. Out of the total of Peruvian households, 42% (around 9 Mio people) use biomass (firewood, charcoal, dung, agricultural waste) to cook. In Arequipa and some other regional states the percentage is lower (25%), as 72% of the 1.3 Mio inhabitants live in the city of Arequipa, where the predominant cooking energy fuels are kerosene, gas and electricity. But also in these regional states rural families use almost exclusively firewood for cooking. In most cases they cook with traditional open fire stoves. Thus, 90% of Andean families use this resource intensive technology.
Since the weather is cold and windy in the Peruvian Andes, women generally cook in kitchens with small windows and almost no air circulation, causing a serious and constant threat for the health of their families. Very often the level of indoor air contamination recommended of WHO is exceeded by far because of the inefficient burning of biomass. Hence, respiratory infections are quite common among poor and rural people. Studies carried out by the Pan American Health Organization in Peruvian districts, have shown direct correlations between respiratory infections and the years of exposure to smoke from traditional fires. Usually women and young children are affected mostly. Exposed to thick smoke they spend minimum five hours daily in the kitchen, which has a serious impact on their health. The older the women the more they have been exposed to this indoor air pollution and the more they suffer from respiratory illnesses as bronchitis and cough. Further, it was proven that the risk of chronic bronchitis is connected with the exposure to smoke from biomass burning in the childhood. Especially infants under 5 years are affected by acute respiratory infections (ARI), which is responsible for almost 20% of all deaths in this age group.
The WHO published the IAP National Burden of Disease Estimates in 2007. To compare, globally in 2000, indoor air pollution was responsible for more than 1.5 million deaths and 2.7% of the global burden of disease (GBD). For Bolivia the GBD is 1,9%, Guatemala 3,1%, Colombia 0,4% and Ecuador 0,1%. In Peru the percentage of national burden of disease attributable to biomass fuel use is 0,9 %.
Fuel from biomass is scarce and firewood is becoming a commodity. There is a growing energy crisis, most of all in areas over 3.800 meters above sea level, where the key source of energy for families is wood. Instead they have to use dry grass, dung and yareta, an almost extinguished plant that needs 850 years to grow. Biomass resources are exploited with consequences like erosion and decrease of plant species.
Energy for social infrastructure resembles the families’ situation, both for cooking and for hot water availability. In 90 % of the health care centres in the Andean area of Arequipa exists a lack of warm water that is required for patient care instruments and material handling.

Institutional set up and actors in the energy sector

Peru’s energy sector was privatised in the 90s and concessions were granted for power generation, transmission and distribution. Nevertheless, the Peruvian government still maintains an important position within the sector. While investment in generation, transmission and distribution in urban areas is predominantly private, resources for rural electrification come solely from public sources.

Public institutions

The National Electricity Office (DGE - Dirección General de la Electricidad), under the Ministry of Energy and Mines (MEM), is in charge of setting electricity policies and regulations and of granting concessions. It is also responsible for elaborating generation and transmission expansion plans and has to approve the relevant procedures for the operation of the electricity system.
The Energy and Mining Investment Supervisory Body (OSINERGMIN - Organismo Supervisor de Inversión en Energía y Miniería), is in charge of enforcing compliance with the Electricity Concessions Law (LCE) of 1992 and is also in charge of ensuring the electricity public service. OSINERG is as well the body responsible for enforcing the fiscal obligations of the license holders as established by the law and its regulation. Finally, it is responsible for monitoring compliance of the System Economic Operation Committees (COES) functions and for determining biannually the percentages of market participation by the companies.
In 2000, OSINERG was merged with the Electricity Tariffs Commission (CTE), currently known as Adjunct Office for Tariff Regulation (GART). Together, they are in charge of fixing generation, transmission and distribution tariffs and the tariff adjustment conditions for the end consumers. They also determine the tariffs for transport and distribution of gas by pipeline.
As for rural electrification, the National Rural Electrification Office (DGER) is in charge of the National Rural Electrification Plan (PNER), which is framed under the policy guidelines set by the Ministry of Energy and Mines. DGER is in charge of the execution and coordination of projects in rural areas and regions of extreme poverty.
Finally, the National Institute for Defense of Competition and the Protection of Intellectual Property (INDECOPI) is in charge of monitoring compliance with the Anti-monopoly and Anti-oligopoly Law of 1997.

Electricity companies

Power Generation:
In 2006, 38 companies generated electricity for the market, while 78 companies produced electricity for their own use. Among the 38 companies supplying energy to the market, four of them accounted for 70% of the total capacity:
• EDEGEL S.A.A.: 1,574MW
• Electroperú S.A. (ELP): 1,032 MW
• Energía del Sur S.A. (ENERSUR): 725 MW
• EGENOR: 522 MW
ELP dominates hydroelectric production, with 32% of the total, while EDEGEL leads thermal generation also with 32% of the total.
Private companies dominate the generation sector. In terms of participation, state companies hold 31% of generation capacity, with the remaining 69% in private hands. Production percentages are 40% and 60% for the public and private companies respectively.
The single largest generating company in Peru is Electroperu, majority-owned by the Peruvian government, which operates the Mantaro hydroelectricity complex, the largest hydroelectric facility in the country.
The main electricity producer of Arequipa is the enterprise “La Empresa de Generación Eléctrica de Arequipa S.A. – EGASA”, which is running 6 hydroelectric and 4 thermal plants.

Transmission:
In Peru, 100% of the transmission activities are in private hands. In 2006, there were 6 purely transmission companies that participated in electricity transmission in Peru: Red de Energía del Perú S.A. (REPSA), with 28% of the transmission lines; and Consorcio Energético Huancavelica (CONENHUA), Consorcio Transmantaro S.A. (S.A. Transmantaro), Eteselva S.R.L, Interconexión Eléctrica ISA Perú (ISAPERU) and Red Eléctrica del Sur.S.A. (REDESUR), with 15% of the lines. Generation and distribution utilities and the companies that generate electricity for their own consumption operate the remaining 57% of the transmission lines. The largest electricity distributor in Peru is Edelnor, a subsidiary of Endesa, which operates in Lima and the surrounding area. Peru has two main power transmission grids, one covering the north and centre parts of the country, the other serving the south. An interconnector runs between the two along the Pacific coast. The largest transmission company in Peru is the Colombia-based ISA Group, which controls over half of the transmission grid in the country through its subsidiaries Red de Energia del Peru and Interconexion Electrica ISA. Peruvian law ensures that all generating and distributing companies have fair, non-discriminatory access to the national transmission grid.

Distribution:
In 2006, 63% of the electricity was commercialised by 22 distribution companies , while the remaining 37% was commercialised directly by generation companies. The companies that stood out for their sales to end-consumers were: Luz del Sur (21%), Edelnor (21%), Enersur (9%), Edegel (8%), Electroperú (5%), Hidrandina (4%), Termoselva (4%) and Electroandes (4%).
Public distribution companies supply electricity to 55% of the existing clients, with the remaining 45% in hands of the private utilities. However, in terms of electricity distributed, private companies have the lead with 71% of the total as opposed to 29% for the public ones.
The main distribution company in Arequipa Is SEAL (Sociedad Eléctrica de Arequipa Ltda). SEAL is mainly state owned (84% of the shares) with 15% private shareholders. It is also running 6 power plants (3 hydropower and 3 thermal plants).

Policy framework

Energy policy

After the power sector reform in the early 1990s, rural electrification in Peru has been limited to direct investment by the central government, without any additional funds from communities, regional governments or service providers. One important issue deterring electricity distribution companies from investing in rural electrification is the fact that they hold concession areas concentrated in small areas around urban centres and are only under the obligation to meet service requests within 100 meters of the existing network. In order to expand coverage, the Government of Peru is implementing the “plan nacional de electrificación rural 2005-2015” which defined as objective to achieve a national electrification rate of 93,1% till the year 2015 and a reduction of the electrification gap, aiming to increase rural coverage from 30% to 75% by 2013. The investment requirement are calculated to be US $ 928,9 million (€ 623 million) benefiting 4,8 million people. The plan is backed by a Rural Electrification Law, which states that electrification of rural areas, and isolated localities in the country are a national need and are publicly required.
The government has been spending an average of US$ 40-50 ( € 27-34) million per year in the last ten years for electrification. These investments were carried out through social funds (e.g. FONCODES – Cooperation Fund for Social Development) and, to a larger extent, by the Executive Office for Projects (DEP), a division of the Ministry of Energy and Mines (MEM). The DEP, which is currently in the process of being absorbed by the National Rural Electrification Office (DGER), which is in charge of planning, designing and constructing the rural electricity systems. The EMPRESA DE ADMINISTRACION DE INFRASTRUCTURA ELECTRICA S.A. ADINELSA is the main implementing company in the field of rural electrification. It is a state owned company, which administers publicly funded rural electrification activities outside the concession areas in rural areas.
Once they are finalized, the rural electricity systems are handed over for operation either to state-owned distribution companies or to a specially created state-owned asset-holding company that manages the systems under operation contracts with state-owned companies, or municipalities.
In addition to funds for projects the government created an Electricity Social Compensation Fund (FOSE). This Fund established a cross-subsidy system among consumers that benefits users with monthly consumption below 100kWh through fixed and proportional discounts. The fixed discount applies to consumers between 30 and 100 kWh and the proportional discount is targeted to those with consumptions below 30 kWh. The amount of the discounts is financed through a surcharge in the tariff paid by the regulated consumers with monthly consumptions above 100 kWh. The number of households that benefit from this scheme is over 2.4 million (out of the 3.6 million connected households at the national level). In July 2004, the FOSE was extended to cover up to 50% of the bill in the National Interconnected System (SEIN) and 62.5% in the isolated systems for the users with consumption below 30kWh, including as well a special focus by geographic location (rural-urban).

Key problems hampering access to modern energy services in rural areas

Obstacles for grid based rural electrification

Several factors handicap rural electrification in Peru:
a) insufficient financial resources for investments in grid extension and installation of minigrids. Private companies generally don’t invest in this sector as cost of providing access are high due to remoteness of the sites, dispersed nature of the populations and difficulty of the terrain. Local communities don’t dispose of sufficient proper financial resources to make infrastructure investments in their community. Consequently, only the central government and NGOs are left for this kind of investment. NGOs are specialized on small systems whereas the MEM is involved in middle size systems.
b) Difficulty to operate mini-grid profitability due to the low purchasing power and the low energy demand of rural clients.

2.5.2 Obstacles for off grid energy technologies and services
a) Insufficient financial resources to carry out dissemination programs for off-grid technologies due to reasons described under 2.4.1.
b) Insufficient availability of micro-finance schemes for energy technologies in rural areas. Large parts of the country have almost no access to institutional micro-finance services and must rely largely on moneylenders, suppliers, family and friends for short-term seasonal loans. There are no secure liquid savings options available to these households, which would enable them to build assets over time. Existing micro-finance institutions often have a narrow credit product line, limited experience in rural markets and a lack of access to best practice information and technical tools.
c) Lack of a marketing and maintenance structure for energy technology devices in rural areas. Almost all retailers are established in cities with no outlets in rural communities. Thus, clients have to travel to cities to purchase energy devices and for repair orders, which is difficult for most rural families. Establish rural outlets are considered not to be profitable due to the high costs for transportation and mobilization, the dispersed nature of the populations and the low income and low demand of the local population.

EnDev-Peru