The over-installation of capacity could potentially enable Peru to become an electric energy exporter, which would be a very positive development from a technical and economical point of view. “But from a political point of view, it’s a very sensitive issue,” says Pedro Lerner, General Manager of El Platanal Electric LLC (Celepsa), operator of the 220MW El Platanal hydropower plant on the River Canete, who provides some in-depth insight into the sector.
During the past 15 years there’s been a growth dynamic in which Peru has outpaced many countries in Latin America, and this has brought benefits to other sectors of the economy. This economic growth, however, has not been reflected in improvements to the education system. I’d like to know, from your experience, how has this economic growth been reflected in Peru’s energy matrix?
Well, of course, there’s no development without energy. And the entire energy system has had to follow the pace of the country’s requirements for economic growth, and has even had to go ahead of this growth.
It’s important to point out that if this weren’t the case, there could be significant damage to the economy.
I remember in the year of the financial crisis, back in 2008, Peru was growing very rapidly, and it was predictable that the energy infrastructure wouldn’t keep up with that speed of growth. In that sense, the downswing that happened globally allowed energy investments to reach and then surpass the requirements of industry and mining.
This growth had two main parts. The first was the mega cycle of commodities, and the second was based in the strategy the country followed in terms of commercial integration with the rest of the world through NAFTA.
These have been the two large drivers that allowed Peru’s economy to advance quickly.
The State of Peru was able, furthermore, to promote investment in the electricity sector through different promotion mechanisms. They utilized the pro-investment agency to carry out the necessary investments to accompany growth.
And in that respect, development occurred in two categories. One was generation, and the other was transmission, which is basically the infrastructure that allows the source to go from production to consumption.
Now, these investments didn’t necessarily follow exact market signals; rather they followed state-based initiatives to promote investment in specific sectors.
Like, for example, processes of investment in generation, where the government mandates that for a certain year they’ll need to depend on a generation park of a certain size, to guarantee electrical security.
So then they round up whoever wants to invest and at the same time the State ensures prices so they’ll be able to.
It’s not that the State was reflecting a scarcity at that time. It was an anticipatory move on the government’s part, to speed up investment. What’s the risk with this strategy?
Because, on the one hand, it’s reasonable, but on the other hand, intrinsically there’s risk involved. And this risk is that the whole program is based in projections.
So that $7 billion in question got invested with the projection that in time it would bring about acceleration in electricity demand.
When surveys were done to estimate possible growth in demand, different companies were asked what their investment plans were, how a concentration plant or a particular mine might expand, and when they added up the factors, the result suggested that demand in Peru would rise to double digits in 2013, 2014, 2015.
Meaning, a compound annual growth rate approaching 10%. What happened, for reasons outside the energy sector, and the rate at which investment decreased, led to a discrepancy between these investments in energy infrastructure and the growth in demand.
Because of this, what’s coming now is the initial operation of a variety of electrical generation infrastructures, which largely exceeds the country’s current demand, and this impacts some sectors.
And in effect, many sector agents state that in the short-term – 2015, 2016, and 2017 – they’ll be confronted with a surplus. Why? Because many predict that in 2018 the resource could become scarce.
Today, I think if you ask them again, they’ll all say they’re on the right track for 2018 and 2019.
But why are the numbers out of sync between the two sectors, meaning public and private?
It’s not that they’re out of sync, it’s that the COES group bases its projection on declared investment. But these same investments whose projections have been declared might turn out differently down the line.
So investments start getting added to the demand for the coming year. For this reason, what happens when everything starts to go into a downswing is that when it comes time to define what you’re going to do, you start deferring or postponing.
That’s why the COEP group functions differently, since it’s a technical entity and can’t tie itself to statements, and also has to prepare for the worst-case scenario, because that’s precisely the work it’s doing.
There are certain measures that are good when applied accurately, as happens with this issue of investment-promotion processes, but the risk is that, when you think how this is the tool used to substitute market signals for investment, the risk increases exponentially.
And it’s an appealing tool, because it usually works, but it produces problems linked to the overstimulation of supply, as has effectively occurred.
It’s true that for a while now market price signals have been disregarded. Nowadays in Peru the investments being made are not based on these market price signals.
And the electricity market is basically a short-term market. Before, 10 years ago, starting from the implementation of the Electricity Concessions Law, it was predicted that expansion would happen when the market gave the signal.
Meaning, we were facing an articulation of the public sector that centered on the demands of the market, because this would indicate the profitability and capability of the sector.
And the supply and demand projection models were based on the type of projection that says “every time the price reaches a certain threshold, one can assume the market will automatically acquire a new capacity to contain demand.”
Today, investors are used to the government deciding when that new capacity occurs. And so the State ends up needing to guarantee prices when they’re secure, contrary to what the market might indicate at that moment.
And so investors end up depending on the State.
This causes a series of distortions, and once the promotion’s finished, the investments end up losing value.
Wouldn’t that situation open the door to exporting energy outside of Peru?
The over-installation of capacity could make space for that, yes, and that’s a good thing, from a technical and economical point of view. But from a political point of view, it’s a very sensitive issue.
Nowadays you’re hearing about a bunch of people who’ve invested, creating a great capacity for generation in the south, way above demand.
And hopefully it will grow, with the arrival of the South Andean Gas Pipeline, and once it arrives in the south the system will have no way to absorb all that production, because there won’t be demand for all of it.
Naturally, the ideal situation would be to export all the excess energy to northern Chile, which is deficient in that area. The rest depends on successfully making the political sale for electricity exportation.
Here, whenever anyone brought up the possibility of exporting gas, there were a lot of interest groups who would be immediately opposed, employing classic scarcity-based arguments.
When you open the debate on exporting electricity, I’m sure there will be a group of voices firmly rooted in nationalist and protectionist sentiment, who will oppose it accordingly.
This is why I’m not so certain it’s as simple as saying “well, let’s connect directly with northern Chile.” No, I think many people will try to capitalize politically on this measure, as opposition to this type of initiative.
And well, everything will depend on the capability to carry out the measure and win public support.
You said it was necessary to understand the changes interest groups will experience as a result of this undertaking, and to know how to manage expectations. This has to do with those interest groups who don’t want to export energy. It’s necessary, then, to make them understand, isn’t it?
Yes, exactly. Let’s look at the south of the country. Cuzco’s part of the south, as is Arequipa, and they’re all very sensitive about the topic of natural resources, as well as the country to the south, which is Chile.
So we’re facing an issue that has to be worked out very carefully, and requires a campaign to convince people of the benefits of interconnectivity.
And it’s important in particular for the citizens of the south to adopt this idea, to be able to internalize it. It’s necessary to work on this beforehand, not when the connection agreement has already been signed.
Because in a rushed time frame, with commitments involved, the ability to maneuver is always less, and the sense of unrest could eventually escalate.
It’s an issue that needs to be managed correctly; otherwise it could heighten conflict in the south of the country unnecessarily.
You point to this as a learning process, right? For Platanal and other situations.
I think it’s a learning process we’re living as a country. It’s not just Platanal. I mean, we’re facing the possibility of seeing which things work and which things don’t.
And the question is, why aren’t they working?
Perhaps it has to do with lack of awareness…
Well, there we enter the terrain of making value judgments.
But yes, it’s worthwhile learning from all the periods of unrest we’ve had. And the challenge lies in identifying which ones we can avoid.
And as for the ones that were unavoidable, well, the challenge then is to try and manage them a little better.
We don’t have to be naïve. We have to reflect on the situations that we can make use of. Situations that are a warning, that have stopped investment in the country.
Let’s ask the question, why, if this place was one of the best to invest, ahead of Chile, did those investments not happen?
Well, I’d say it was because of poor management of relationships with the local interest groups who didn’t represent the full community.
And well, this created a breeding ground where people with defined anti-system agendas could develop their strategies.
And another thing to bear in mind is that agitators are only successful if they find a place to spread their strategies.
So, if we’re talking about issues of exportation, a lot of problems come up. I think that, when dealing with a non-renewable resource, which would be electricity generated from hydrocarbons, meaning excess gas in the south, a lot of obstacles appear.
And the exportation of energy with renewable resources, like to Brazil, also had big problems. The problem was that Brazil had the demand and Peru had the hydro-energy resources of the Andes, but the environmental impacts of these projects raised a lot of concerns among the interest groups rooted in those areas.
There’s this very ingrained discourse saying that all hydroelectricity is bad. And certainly, there are criteria established at an international level about what a hydroelectric plant can do and how it should operate.
But these criteria mostly concentrate on the dams, not on the plants themselves.
All this discussion ended a few years ago with the establishment of the International Commission on Large Dams, which was sponsored by the World Bank and the World Commission on Dams.
In 2000 they released a document which outlined the criteria they should meet to establish positive cost benefits for the dams. Not just from the perspective of profitability, but all from the social aspects.
And in this way we were able to conclude that not all hydroelectric energy is bad. On the contrary. Absolutely, if you don’t have the proper precautions, this can cause trouble.
Right now, I don’t know if the projects in the works to export to Brazil are considering these criteria. But if they had, the sale would have been much easier with the local interest groups.
And it wouldn’t have generated this conflict with indigenous and native peoples who opposed the energy-exportation projects, which of course were halted because of the resistance.
And you don’t think, in this dynamic, examples like El Platanal, which is the largest hydroelectric power plant in the country…?
[Interrupting] No, Platanal isn’t the largest. Platanal is a development upon Peruvian private capital. After Mantaro, which was the emblematic hydroelectric plant and which 15 years ago supplied half the demand, Platanal was going to be the largest in operation, at that time.
There are larger plants under construction, soon to become operative, but at the time when Platanal started to operate, yes, it represented the greatest effort in the last 30 years.
Platanal is among the latest energy-generation projects constructed without the help of promotion mechanisms, not to mention premiums or subsidies.
Which is to say, it was purely at the investors’ risk, responding to market signals.
Moral of the story? There are lot. In several ways, Platanal is a successful project, one from which we’ve learned a lot. And we’ve seen up close that these things also need a small dose of luck, to turn out well.
But even though it worked out for us because we could identify problems at the right time, experiences like that are still humbling.
I think that’s the principal lesson we can draw from our experience, you have to share. You always have to be humble, to help out, so as not to commit large errors.
Before we began the interview, you mentioned normal conditions. What’s happening in the sector that concerns you?
Let’s see, could you remind me in what context I spoke of normal conditions?
In those contexts where we can’t participate in publicity. You spoke of normal conditions. What were you referring to with this?
Well, maybe the term isn’t very precise. I’d say the sector is undergoing changes, and we have to adapt to them rapidly.
So we have to focus on that, before we seek out institutional positioning or commercial promotion.
I think that, nowadays, the discourse should aim to be more conservative regarding our vision of how the sector and industry will evolve. I’d say it’s a question of prudence.
In what we do, generally we have to apply a lot of prudence. Perhaps more so than in other circumstances, like when the market’s growing.
At this time we need to convey this idea of prudence to our own stakeholds, on an internal level more so than outwards.
You are the General Manager of this company, in a sector that could develop greatly, because 50% of the energy comes from gas, and the rest is from water. As you studied in the United States and you know the technology this country is using to operate, what should the United States know about Peru?
Peru is a country with a lot of potential, definitely. And to develop it we need to take certain precautions. This is a country with a fantastic growth cycle.
There’s uncertainty regarding what will happen in the short term, but the vision of business owners here is optimistic in the medium and long term.
In that sense, we trust the lessons we’ll learn from history, and the knowledge that comes out of interaction between development and society.
And we’ll learn how to make sure social and economic development go hand-in-hand, and when that happens we’ll be back on track for growth.
We’re far from the roof but we have a great foundation laid, that’s why we have to pay attention to and reflect upon recent experiences, to identify the bottlenecks that have stopped growth, and dedicate ourselves to resolving them.