Return To Growth Expected For Non-Hydro Renewables In Peru As Policy Environment Improves

By Fitch Solutions

Key View

Peru’s non-hydro renewables segment will return to growth, supported by an improving policy environment following years of stagnation amid political instability.
Low-carbon power technologies dominate the market’s project pipeline, with non-hydro renewables experiencing lower development risks than planned hydropower and gas-fired power projects.
Non-hydro renewables’ share of the power mix will increase over the coming 10 years in line with government targets. We highlight downside risks stemming from inadequate transmission infrastructure and limited demand.

Peru’s non-hydro renewables segment will return to growth, supported by an improving policy environment following years of stagnation amid political instability. A period of prolonged political instability has driven uncertainty in the market’s power sector over the past six years. Investor sentiment has been eroded by social unrest and a lack of policy continuity from rapidly changing governments. Since 2016, Peru has had six presidents and around 20 different ministers heading the Ministry of Energy and Mines. Additionally, project delays from Covid-19 disruptions, transmission bottlenecks and the existing supply contract regulatory framework have weighed on Peru’s non-hydro renewables growth. We highlight that the government has not held a renewable power project auction since 2015, limiting growth from 2016 to 2022 to just 396MW of new capacity additions during the six-year period.

We expect several non-hydro renewables projects to come online in the coming years, beginning in 2023, supporting stronger growth. This includes 437MW of new wind capacity from the 260MW Punta Lomitas project and the 177MW Wayra Wind Farm extension. As for solar, we expect multiple projects to enter operations this coming year including the 122MW Clemesi Solar plant. In total, we expect 740MW of new non-hydro renewables to come online in 2023 and we forecast an annual average capacity growth rate of 13% to 2032.

Growth is set against the backdrop of an improving policy environment for the segment. Peru has proposed bills over 2022, aimed at accelerating the country’s energy transition. These ranged from new tax incentives for renewable generation projects and support for green hydrogen production. In March 2023, President Boluarte introduced a bill to Congress proposing modifications to the 2006 energy efficiency law, aiming to expand investment in new wind and solar projects. Measures in the newly proposed bill include a simplification of energy auction procedures, allowing power distributors to enter supply contracts independently and establishing a maximum long-term contract period of 15 years. The bill would additionally permit contracts to be designed for specific generation sources using time blocks in order to spur further investment in solar and wind, which is not a contract design available under the existing regulatory framework. These policy developments signal growing government support, creating a more certain investment environment for the non-hydro renewables in Peru.

Low-carbon power technologies dominate the market’s project pipeline, with non-hydro renewables experiencing lower development risks than planned hydropower and gas-fired power projects. Our Key Projects Data (KPD) captures 49 projects currently under development in Peru, with low-carbon power technologies accounting for the majority of planned additions. There are currently 23 hydropower, 16 solar and seven wind projects under development. Hydropower is the largest technology type by capacity with 7.1GW currently in development, followed by 3.3GW of non-hydro renewables.

Projects in Peru’s pipeline on average have lower performing Project Risk Metric (PRM) scores compared to regional peers with an average PRM score of 4.2 compared to the Latin American average of 5.8, indicating higher levels project risk in the market. This is largely a result of the political instability Peru has experienced in recent years and its negative impacts on energy sector policy certainty and operational risk. Non-hydro renewables carry lower development risks than planned hydropower projects as new large hydro installations face environmental and social opposition. Solar and wind projects currently under development have average PRM scores of 5.4 and 5.2, while the market’s planned hydropower plants have an average PRM of 3.1. We expect non-hydro renewables to remain at lower risk in the market as the government pursues policies to promote investment in solar and wind and aims to increase their share of the power mix. We see the potential for the market’s wind and solar pipeline to expand as the government continues to grant concessions for new developments. In March 2023, the Ministry of Energy and Mines established an occupancy easement for Ecorer to conduct feasibility studies for its 40MW Acarí wind project. Within the same month, the government granted a solar concession for the 300MW Hanaqpampa project to be developed by Engie Energía Peru, expanding the total capacity of solar concessions awarded by the government to over 2.0GW.

Non-hydro renewables’ share of the power mix will increase over the coming 10 years in line with government targets. The Ministry of Energy and Mines’ National Energy Plan 2014-2025 aimed to reach 60% total renewable generation by 2025, with 55% from large hydropower and 5% from non-hydro renewables. Furthermore, Supreme Decree No. 064-2010 set a target for 15% non-hydropower renewable generation by 2030. The 2025 goals have been met as non-hydro renewables first reached over 5% of total generation in 2020 when the segment accounted for 6% of total electricity output. While we expect non-hydro renewables to gain an increasing share of the power mix over the next decade, we believe reaching the 2030 target requires more investment and capacity development. We currently forecast that non-hydro renewables generation will account for just over 12% of generation in 2030.

We highlight downside risks stemming from inadequate transmission infrastructure and limited demand. The market’s transmission system will remain strained in the near-term as investments to improve transmission infrastructure from grid operator’s Comité de Operación Económica del Sistema Interconectado Nacional (COES) most recently approved 2023-32 transmission plan are not expected to come online until 2028. The plan includes 20 binding projects totalling USD905mn of investment. Further, COES has warned that slow demand growth could lead to fewer non-hydro renewables projects being developed if proposed regulatory modifications are not passed. We note that the currently pending renewables bill would mitigate some of these risks should it pass through measures that simplify auctions and allow for suppliers to sell to directly distributors. Recovery of demand from the metals mining sector and potential green hydrogen production provide additional drivers to electricity consumption that would support non-hydro renewables growth.