At the start of the 1990s, Peru’s electricity system was broken. The system suffered recurring power shortages, an investment drought and mismanagement by the vertically integrated state-owned utilities. Together, these issues created a crisis in the power sector which demanded significant structural changes.

Following models adopted by Chile and the UK at the time, the reform of the Peruvian power generation sector was accomplished in 1992, liberalising the market and establishing new rules to attract investment in transmission and distribution, while unbundling and privatising state-owned assets.

Despite the need for additional legal adjustments along the way, Peru’s power sector has seen major growth since the 1992 reform. For example, by 2021, transmission line mileage and installed generation capacity had approximately tripled, producing a clean power mix composed mainly of hydro (57%) and combined cycle gas turbine plant (34%), which can provide the necessary flexibility for the integration of renewable technologies such as solar and wind. Furthermore, major international players such as Engie, Enel and Statkraft settled in the country, making multimillion-dollar investments.

Peru also pioneered renewable energy auctions in a developing economy, holding its first process in 2009. Even though these auctions, which were held up to 2016, have not yielded a dramatic increase in the share of solar and wind generation (which together accounted for only about 5% of the total energy produced in 2021), the country boasts a vast renewable potential that is still untapped. According to energy regulator Osinergmin, Peru has the potential to generate up to 70 GW from hydroelectric sources, 77 GW from wind, and about 3 GW from geothermal sources, as well as having very high solar irradiance (especially in the south of the country).

The Peruvian Ministry of Energy recently issued a legal reform proposal that could support new wind and solar projects by unbundling energy and capacity transactions and introducing hourly blocks into distribution companies’ long-term supply tenders. Although there are several regulatory hurdles that the government must still address, this proposal and the industry-wide discussion it is sparking, are positive moves toward the energy transition. Plans are also underway on the regulatory agenda for green hydrogen production and electric mobility, potentially backed by major players.

Likewise, the appearance of large subsidy-free renewable generation projects is a positive signal. This started with a corporate power purchase agreement (PPA) signed in 2021 between Engie and Anglo American to supply up to 187 MW of renewable power to Anglo’s new Quellaveco copper mine. Engie is using this deal to back construction of its new 260 MW Punta Lomitas wind plant.

More recently, Enel and steelmaker Siderperu agreed on a contract to build a 500 kW solar plant on site, while also contributing to construction of Enel’s new 177 MW Wayra Extension (wind) and 122 MW Clemesi (solar) plants. These examples suggest that some renewable developers trust the stability of the Peruvian market and have found ways to balance their risks through private mechanisms, which could be a signal for more developers to start realising new project pipelines.

Another initiative has come from Electro Ucayali and Electro Oriente, public electricity distribution companies in the Peruvian Amazon, which are working with private companies selected through competitive auctions, to upgrade existing diesel-based microgrids with hybrid systems composed of solar panels and batteries. These projects aim not only to avoid carbon emissions but also to improve service quality and were developed in line with regulations that establish mechanisms to encourage investments in off-grid areas.

Thanks to this, two hybrid systems are already operating in the Ucayali region, while more than eight others are in development in the Loreto region. On top of that, a 100 MW/100 MWh solar plus storage project is being rolled out in Iquitos, the world’s largest isolated electric grid.

The new regulatory framework in Peru has encouraged investments in non-conventional renewable generation, motivated by its economic competitiveness and environmental benefits compared to conventional power generation technologies.

In conclusion, given the country’s great renewable potential, the Peruvian government should intensify its efforts to work together with industry actors to design and approve constructive regulatory changes. These policies could consolidate new routes-to-market for renewables, such as energy-only PPAs, and provide incentives to catalyse parallel activities such as electric mobility and green hydrogen development. These initiatives will help meet international environmental commitments and boost the country's economy by attracting new investments.

The views and opinions expressed in this article are strictly those of the authors only and are not necessarily given or endorsed by or on behalf of the Energy Institute.