By: Tim Harwood
OPIC Board approval today of $193 million in financing for the first large-scale wind project on Peru’s power grid means that when the project’s power generation commitment is added to that of two solar projects that the Board approved in 2011 and 2012 OPIC will have supported more than half of the power generated by private sector responses to Peru’s first renewable energy auction.
Peru’s Ministry of Energy and Mines announced in 2010 that it would auction off 500MW of renewable energy capacity to private sector developers, giving them and financial institutions the opportunity to invest in the country’s vast wind and solar energy resources. Ultimately it awarded contracts to install nearly 330MW through wind, solar, biomass and small-scale hydropower projects. Of that total, OPIC-supported projects will generate 194MW.
The move was in keeping with Peru’s consistent macroeconomic policies of the past decade, but ultimately spoke to the inability of energy investment to keep pace with the country’s rapid economic growth: between 2000 and 2010, electricity demand in Peru grew by more than 70 percent but installed capacity grew by only 40 percent.
Energy demand in Peru continues to grow by nine percent annually, requiring an additional 6,140MW of capacity by 2020 – and investments of between $10 billion and $13 billion, according to the International Finance Corporation.
As part of its energy strategy, Peru means to make the most of its renewables potential, aiming to have the sector provide 33 percent of its electricity by 2021. But so far the nation has only exploited about five percent of its hydro energy potential, 0.65 percent of its wind potential, and less than one percent of its solar potential. Hence the 2010 auction, since followed by two more.
Bill Pegues, the OPIC Structured Finance Director who shepherded the project through its Board approval, said, “I can appreciate Peru’s approach to renewable energy.
“The government and electricity system operator are trying to determine how to integrate this power onto the grid in a stable manner and they’re being cautious – the first two auctions have amounted to about five percent of the country’s power generation capacity,” he said. “That’s a prudent way to begin. If this integration goes smoothly, they’ll likely hold further auctions.”
Peru’s use of the auction as a market-based mechanism to elicit investment in renewable power generation, given the waning popularity of feed-in tariffs (FITs), is “also attractive to the power generators because the structure of these contracts are generally more robust than those relying on FITs,” Pegues said.
From OPIC’s perspective, working with an established American energy company such as ContourGlobal – already sponsoring groundbreaking OPIC projects in Togo and Nigeria – eased the process significantly, he said. ContourGlobal has a strong track record of developing, constructing and operating power projects in developing nations around the world and is currently building its first wind project next door to Peru in Brazil.
“OPIC’s financing of this project fulfills one of our central policies: bringing renewable energy to an underserved market such as Peru.” Pegues said. “Combined with our two previous solar projects in Peru the wind project puts OPIC at the leading edge of renewables deployment there. That’s really exciting for us.”