Peru Energy Situation

Poverty situation

The Human Development Index for Peru is 0.6234 that gives to the country a rank of 78th out of 182 countries. Around 34.8% of the Peruvian population is poor.
Poverty is widespread especially in rural areas, 60.3% of rural population is considered poor compared with 21.1% of urban population. According to national statistics, the poorest departments are: Huancavelica (77% of the population), Apurimac (70.3%), Huánuco (64.5%), Ayacucho (62.6%) and Puno (60.8%), all of them are located in the highlands Andean (Sierra).
The main reasons for poverty are: i) the limited access to natural resources such as land and water, ii) lack of productive and public infrastructure and iii) inefficient production technologies. The problems are even aggravated by deforestation caused by a high consumption of firewood. In addition, poor families have generally no access to modern energy services, education, health services and sanitation.
In addition, the living conditions of poor families in the Andean regions are affected by natural disasters such as earthquakes, drought, and landslides, that affects the supply of water, electricity and other public services, in areas where such services are available, and hundreds of social institutions, such as health centers and schools which are seriously damage.
With regard to electricity access, the remoteness and inaccessibility of their locations, reduced power consumption, communities and households widely spread and low purchasing power of the people; limit the expansion of electricity coverage (PNER,2009). It is estimated that 45,000 small communities shown these characteristics.

Energy situation especially in rural areas

Energy for electricity generation

The gross electricity generation in Peru is currently around 30,924 GWh based on an installed generation capacity of 7.2 GW, with a maximum confirmed demand of 4,322.4 MW, including on it energy exports to neighboring countries.
Power is generated by thermal plants using gas or oil (56%) and hydroelectric plants (44%), with a negligible share of other renewable sources. Even though installed capacity is evenly divided between hydroelectricity and conventional thermal, 62.9 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, thus generate 2.8% of the total electricity generation. A recent investment by the Peruvian Government on gas power plants has resulted on the generation of 31% of total energy generation. Finally a minimal 3% of total energy production is generated by carbon power plants.
Peru is producing some oil, but it is not sufficient to cover domestic demand. The electricity sector of Peru is quite dynamic with an estimated 4.8% increase in generation between 1995 and 20091 and demand growth of 8% annually between 2004 and 2009.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. Notwithstanding, 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 access to grid electricity varies across the different regions, the Andean North and Amazon region have the lowest rural electrification rate (22% and 18% respectively) compared to Coastal Central and South regions which are more densely populated and also more easily accessible (60 and 71% respectively).
The service quality in the electricity sector is relatively good. In rural area 80% of households have 24 hour service throughout the year (every month)1. It is considered that the main problems of the electricity grid are outages due to lack in network management and capacity as well as electricity losses. Distribution and transmission losses amounted to 8% of total production.

Rural household energy use

Energy for cooking purposes

In rural areas the predominant energy source is biomass, which is used for cooking. Out of the rural Peruvian households, 84% use fuelwood for cooking, while 24% use animal dung, 11% use agriculture residue, 2% use kerosene and 14% use LPG.Electricity for cooking is not used in the grid connected rural households. The high price of electricity as well as the availability of others inexpensive energy sources, are the main reasons for not used it.
Households located in north and central region of Andean highlands and the Amazon region use fuelwood as main energy source (94%, 92% and 95% of households respectively), due to its availability and its low cost.
Moreover, in rural households located in central and south of the coastal region one of the most cooking energy fuels used is LPG (63 and 53% of households, respectively). But also in these regional states rural families use firewood for cooking (74 and 68% of households, respectively). The use of LPG is associated with households with better incomes since LPG is more expensive, also households considered not poor thus these households have more access to basic services and particularly road infrastructure, which is required to distribute LPG to end users.
Households which use fuelwood, animal dung and agriculture residue as main energy source, predominantly use three fire stone as cooking stove. 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 centre in the Andean area of Arequipa exists a lack of warm water, which is required for cleaning patient care instruments and material handling.

Energy for lighting and other purposes

As mentioned before, grid electricity is used by 39% of rural households. A tiny fraction of households, 0.6% (13,100 households) has generators, and 0.8% (16,700 households) has solar home systems.
Small generators and SHS are commonly used in households without access to grid electricity. The household in-grid connected, which own small generators or SHS, use them due to the lack electricity service reliability. Particularly SHS is used for lighting and communications (radio and TV).
Car batteries are commonly used as off-grid electricity sources, especially in the Coastal region of Peru, where households have more income and car battery recharging is relative easy due to the presence of good roads. It is estimated that 18% (240,000) of off-grid rural household uses it for lighting and running TV`s.

Nevertheless, in rural households without electricity the most common source of energy for lighting comes from kerosene (80% households) and candles (65%).
Rural households in-grid connected consumes less than 30 kWh per month (70% of household), and between 21% and 39% of their total electricity consumption is used for lighting. The remaining electricity consumption is due to the use of domestic appliances such as TV, irons and others. Particularly in these households less than 1% own appliances such as domestic water pumps, electric pump irrigation systems or any other devices which are directly used for income-generating activities.
Domestic small appliances such as radios and flashlights are powered by dry cells (74% of rural households) in both types of households, with or without access to grid electricity.

Household energy expenditure

Although household energy expenditure varies significantly between financially better-off households and poorer households, on average the total monthly cash expenditure for all types of energy used is estimated to be 9.7 percent of total household cash expenditures. Nevertheless poorest households expend 17.1% of total household expenditure on energy than richest which expend 9.7% of total household expenditure.

On the other hand, there are differences among regions. Energy expenditures in the Andean region, in which are located the poorest country´s departments, accounts 10 to 12 percent of total household expenditure, in contrast with households located in the Coastal region where energy expenditure accounts 8 to 10 percent of total household expenditure.

As mentioned before rural households use fuelwood in an extensive way. Regardless their income situation, shown as follow, 81% of rural household in the upper expenditure quintile use fuelwood compared to 87% of rural households in the lower expenditure quintile. Particularly in Peru, not only household expenditure on LPG and electricity rise with income, but also cash expenditures on fuelwood. Approximately poorest households expend 13.63 Soles on buying fuelwood contrary to the richest household which expend 35.98 Soles monthly approximately.

The off-grid use of electricity -generated by diesel generators, car batteries, and others- in the Peruvian rural area is expensive. Although off-grid electricity is of lower quality than that available from the grid, hat much higher cost per energy unity. Thus these households have the potential willingness and ability to pay for modern energy source or better quality electricity service.

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

The electricity sector is regulated by the Law of electricity concessions (Ley de Concensiones electricas, No 25844). After this law became effective the separation of generation, transmission and distribution activities in the electrical sector was carried out. 
Other laws which complemented the mentioned law are:

• Law on the Regulatory Framework on Investment in Public Services (Law No 27332-Ley Marco de los Organismos Reguladores de la Inversion Privada en los Servicios Publicos) in which were set the conditions for further investment into electricity generation and transmission.
• Law to ensure efficient development of electricity generation (Ley para asegurar el desarrollo eficiente de la generacion electrica-No 28832)
• Hydrocarbons Law (Ley organic de hidrocarburos-No 26221) in which elaboration of the sector energy policies is assigned to the MEM.

Beside those laws, additional regulations were adopted, such as:

• Cogeneration regulation (D.S.No.037-2006-EM)
• Efficient development of electricity generation regulation (D.S.No.053-2007)

The Peruvian government also issued the reference plan of electricity from 2006-2015 (Plan referencial de electricidad 2006-2015) which outlines the development of the electricity sector until 2015. The main objectives are the promotion of private investment in the energy sector, monitoring of the energy sector and providing subsidies to rural electrification projects.

 Rural 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.

Obstacles for off grid energy technologies and services
a) Insufficient financial resources to carry out dissemination programs for off-grid technologies

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.

References

EnDev-Peru