Gas subsidies and current regulations that do not recognize the particularities of small renewable firms in solar and wind sectors, thus obstructing their growth. A law seeks to change that, but it is stalled due to disparity in criteria between the renewable energy union and the advocates of traditional energies.
With abundant hydroelectric energy and accelerated growth in wind and solar generation, Latin America is heading towards a greener energy future, but in Peru the viability of the law designed to guarantee the efficient development of electric renwable energy for the communities continues to be debated.
The reason is Law No. 28832 of 2006. Said legislation currently requires that electricity distribution companies have power (availability) 24 hours a day. This allows them to market the energy they produce through electricity supply contracts signed with consumers.
However, renewable energies cannot meet this requirement as their power generation depends on the natural resource used. In other words, they are available only during certain hours of the day.
In this context, the Ministry of Energy and Mines proposed bill No. 4565/2022-PE, also known as 'Bill that modifies Law No. 28832, Law to ensure the efficient development of Electric Generation' , with the aim of modifying the structure of tenders for distribution companies.
“[This bill] will eliminate the obligation to be operational during [peak hours] at night to be able to contract energy and proposes the creation of time blocks adapted to the characteristics of each energy resource. This would encourage the entry of new competitors to the market, as well as investment in renewable infrastructure, particularly in decentralized regions of the country such as the north and south,” explained Brendan Oviedo, president of the Peruvian Renewable Energy Association (SPR) to AméricaEconomía.
Approving the project, which seeks to adapt regulation to solar and wind technologies, implies diversifying energy sources, reducing the costs that millions of regulated users pay through distributor auctions, and attracting new investments, according to the SPR.
Along the same lines, Carlos Herrera Descalzi, former Minister of Energy and Mines, confirmed to AméricaEconomía the bill seeks to achieve to exchange all-day availability for a few hours. However, that implies having a law that allows the consumer to buy from “them” (the companies that produce and distribute wind or photovoltaic energy without capacity to operate 24 hours a day) and then from “others” (those who complete the hours of the day that the former were not able to supply.)
“Instead of changing a payment system that is simple, 'they' should change. They are not a true electrical system if they cannot operate 24 hours a day,” he stated.
According to Herrera Descalzi, today, energy generation and distribution companies, such as Enel, Kallpa and Engie, already have wind and solar plants, or are venturing into renewable energies. Therefore, what the Peruvian consumer pays is the marginal cost of a system that works using solar and hydraulic energy that are obtained at 0 cost, natural gas between US$ 30 to 35 MWh, and if this is not enough, diesel at more than US$ 200 MWh.
“The problem is with companies of a different nature, those that are only solar or wind. They intend that with the law the consumer pays them for the power [availability] that they do not have,” stated the former Minister of Energy and Mines.
Furthermore, Herrera continued, they would be requesting the benefit of being considered a priority even if in order to fulfill the entire 24-hour service they need to complement each other through associations with other production and distribution companies, so as not to fragment the system.
Another precedent, as revealed at the end of 2023 by the Economic Operation Committee of the National Interconnected System (COES), is that there is an increase in the costs of generating electricity [up to US$ 212 per megawatt] due to the current dependence on diesel as a source of energy during periods of water scarcity.
The same state agency detailed in December that 47% of the country's energy comes from hydroelectric sources and 46% from fossil sources (coal, oil and gas), while renewable energies represent approximately 5.8%.
“We have wind potential on the Peruvian coast and mountains, while solar energy in the south is one of the best in the world, highlighting regions such as Moquegua, Arequipa, Tacna, Puno and northern Chile,” said Oviedo. “If we have the resources so that the investment can reach the entire country and thus begin the energy decentralization that we so need, why is the project stalled? And why do we have so little renewable energy in the country?” he insisted.
According to the Supervisory Body for Investment in Energy and Mining (Osinergmin), a 16% reduction in the electricity tariffs paid by regulated users would be possible if dependence on fossil sources is reduced. Meanwhile, the SPR considers that, only If the bill they support (which remains stalled at the Economy and Finance Commission) is approved, there would be a positive impact on the tariffs paid by eight million Peruvian families at the end of each month.
GAS IS ENOUGH, BUT NOT UNLIMITED
What worries the former Minister of Energy and Mines is that the Peruvian capacity to distribute gas that generates electrical energy for now is sufficient to replace the hours where the use of renewable energies is not enough. But, in the future “and with greater demand, gas will not be supplied,” Herrera Descalzi predicted.
Furthermore, “it is not true that renewable energy cannot work all day,” he complained. “This is possible through an energy storage system, battery production, or an association with companies that produce and distribute hydraulic energy,” he stated.
He summarized it as an alliance between "the blind and the paralyzed", since renewable energy generators can comply with the entire service, but instead they are asking for privileges that today they can charge to gas.
“Over the last 10 years, the costs of solar energy have experienced a reduction of 90%, while those of wind energy have fallen by 72%. This has made many non-conventional renewable energy technologies viable without the need for state subsidies,” explained Luis Miguel Castilla Rubio, former Minister of Economy and Finance to AméricaEconomía. “Therefore, the Ministry of Economy and Finance (MEF) questions the relevance of continuing to grant subsidies that distort the market and could be used more effectively in other sectors.”
According to Castilla, the progress of renewable energies in the country is stagnant because they need subsidies. That is what Herrera Descalzi points out as the request that the consumer [person or state entity] pay them for the power "that they cannot" offer.
However, for the SPR, the position is incongruent because today, renewable energies do not need subsidies from the state because they are less expensive in both installation and operation, which makes them more competitive.
Moreover, the bill that is being presented to Congress does not create any subsidies nor would it create any “tax benefit” different from that existing for other infrastructure projects, Brendan Oviedo counterargued.
“The proposal to grant new tax incentives to promote the use of renewable energies would generate disorder in the subsidies of the energy sector,” insisted the former Minister of Economy and Finance when asked by AméricaEconomía.
Concerned, Oviedo said that he witnessed how in Congress lawmakers are being “misinformed so that the bill is not approved.” This is because it is being said, among others, that the contracts that would be awarded in future auctions [with the entry of renewable energy competitors] would generate the termination of the contracts signed with the current electricity distribution companies [such as Luz del Sur and Edelnor].
"It's false. There is no conflict between renewable energies and natural gas, even though the former are cheaper,” Oviedo noted in this regard.
In Castilla's words, what he means is that he wants to prevent any “distortion in the market.” What Herrera Descalzi pointed out as "fragmentation of the payment system."
“I emphasize: 'It is not pertinent to continue granting subsidies [asking the consumer to pay a higher marginal cost for their lack of power] that distort the market,'” former Minister Castilla responded directly to Oviedo.
LONG TERM BENEFITS
Each year, Peru consumes 8,000 megawatts (MW) of the 13,600 MW of existing electricity generation. In wind and solar projects the potential is more than 20,000 MW, double the country's consumption according to studies, Oviedo said. The proposal to introduce a mix of natural gas, hydroelectricity and renewable energies in the energy matrix seeks to reduce dependence on diesel and stabilize the costs of the electricity market.
“[Gas and hydropower] are not long-term solutions. The advantage of being aware of our microclimates puts us ahead of Ecuador, Colombia and Chile,” said Oviedo, recalling the potential of wind and solar energy in the provinces.
In addition, Peru's energy matrix stands out compared to that of other countries in the region due to its relative cleanliness by not using coal.
In financial terms, continued the president of the SPR, the transmission costs of fossil energies used to represent around 25% of the total, but now they can be up to 50% higher than those of generation. This means that residential consumers could be paying more to subsidize large traditional energy consumers.
“Although it is important to consider and respect business interests, the long-term interests of the country must prevail,” commented Carlos Herrera Descalzi.
It should be remembered that under the 2015 Paris Agreement, Peru committed to reduce greenhouse gas emissions by 40% and proposed to be carbon neutral by 2050.
Even so, according to Herrera, the Peruvian State would only be beginning to promote this transition by 2030, establishing goals that would extend over a period of 15 to 30 years.
RENEWABLE ENERGY, UNSUSTAINABLE?
Both Castilla and Herrera consider that it would be necessary to increase the cost of traditional energy through carbon taxes or tariffs that reflect the environmental impact to “level the playing field” and thus encourage investment in favor of renewable energies.
“But with this, industries such as mining and manufacturing could become unsustainable,” said Carlos Herrera, in support of Castilla's statements.
The former Minister of Economy and Finance, Luis Miguel Castilla, recalled that since 2010 to date, subsidies have been granted to non-conventional renewable energies for US$ 2 billion, through the RER Premium—an economic incentive mechanism in Peru directed to promote investment in renewable energy projects— borne ultimately by consumers. But this promotion resulted in “hasty regulation” by not taking advantage of the reduction in the costs of new technologies and the supply was increased when demand did not require it.
“We have many tax exemptions and a lack of coherence when trying to subsidize renewable energies and, at the same time, fossil energy sources [through the Fuel Price Stabilization Fund or the return of part of the Selective Consumption Tax of public transporters]”, stated Castilla.
As the statements of the former ministers are reminiscent of the beginnings of the adoption of renewable energies in Chile a couple of governments ago, the Chilean Association of Renewable Energies and Storage (ACERA) was consulted about the path they followed to reach the a 44% share of renewable energies in total electricity generation in the first quarter of 2024. (The Chilean system has the generation, transmission and distribution areas divided.)
Ana Lía Rojas, Executive Director of ACERA , explained to AméricaEconomía that receiving an international and national investment of approximately US$ 20 billion contributed to the entry of new actors and new technologies into the system in the last ten years, leading to a reduction in around US$ 100 MWh in energy prices.
Against this background, Rojas confirmed the bill's potential and also highlighted the importance of state participation to promote diversification and modernization in the energy sector, as well as the development of more sustainable and accessible energy sources for the population.
The renewable energy project stalled in Congress needs the “tax benefit” that the state grants to all infrastructure projects, as Oviedo pointed out above, so that companies that produce and distribute only renewable energy can compete. However, as the former ministers pointed out, their need could be solved if they complemented each other by making alliances with other companies.
Consequently, questions arise. Will the bill be enough to increase the participation of renewable energies in Peru's energy matrix? Or will gas remain, for as long as it can, the cushion for the systems' lack of power generation capacity?
“What is missing in Peru is a figure that prioritizes the interests of the consumer and the country above corporate interests,” said Herrera. “The dependence on Camisea [the largest natural gas field] for energy generation is evident and is reaching its limits,” he concluded.
