Learning from Developing Country Power Market Experiences: The Case of Peru

# 1. Introduction

The World Bank is seeking to update its understanding on power sector reforms in developing countries, accounting for emerging challenges and new reform directions over the past decade. Implementation of power sector reforms in developing countries has been varied, especially when it comes to power markets, with widely different outcomes. This work forms a part of the World Bank’s project “Rethinking Power Sector Reform”, which was commissioned to analyze the recent experience of developing countries, including a series of case studies on wholesale power markets. These case studies, including the incumbent one for Peru, were developed based on both qualitative and quantitative inputs from experienced consultants of each studied country.

Peru is a relatively small market (with generation of about 49 TWh during 2017), with nodal pricing and central dispatch in a mandatory cost-based pool. Power Purchase Agreements (PPAs) are privately negotiated in the liberalized market and auctioned in the regulated market, typically without sovereign guarantees. Like in Panama and many other countries in Latin America, Peru relies on a combination of PPAs awarded through auctions and capacity payments to secure timely generation capacity expansion. Discos procure their expected demand through auctions 3 years in advance; and transmission expansion is secured through a centralized transmission planning process and establishment of concession contracts.

Table 1-1 Peru power sector summary.

|**Perupower sector sum**|**mary**|
|---|---|
|**Population(2016)**|31 million|
|**Electricity generation(2017)**|49 TWh|
|**Electricity demand CAGR(2005-2015)**|6.7%|
|**Major generation technologies**<sup>**1**</sup>|Hydro: 50%<br>Naturalgas: 45%|
|**Spot electricity price**(2005-2017)<sup>**2**</sup>|39 USD/MWh|

Source: Worldbank, Department of Energy. 1 As share of 2015 energy generation. 2 Average spot electricity prices from 2005 to 2017, expressed in 2015 currency.

The objective of this paper is to document and analyze the experience of Peru with power markets, regarding design, implementation and outcomes of the market. Ultimately, the analysis in this paper is expected to be useful for developing countries which are currently developing or considering the development of a power market. However, the paper does not aim at providing policy or market recommendations for improving the performance of the Peruvian power market. Furthermore, the scope of this paper is limited to assessing competitive power markets, with an emphasis on the generation and supply segment. Hence, retail competition, as well as the transmission and distribution segments, are not the primary focus of this paper. Moreover, the paper does not directly address several power sector reform issues, such as regulation, privatization, and political economy. These and other subjects are addressed elsewhere for each country, as part of the wider project.

This case study is structured as follows. Section 2 describes the basic pre-conditions for power markets, referring to both power system infrastructure and ownership (section 2.1), and to fuel supply (section 2.2). Section 3 describes the power market design. Section 4 describes the implementation of the power market, covering both the governance of the market (section 4.1) and the transitional process towards a 4