Why is the power sector key to the country's development?

Juan Manuel López, Commercial Manager of Statkraft Peru, and Andrea Gayoso, Head of Risk Management in Statkraft Peru, wrote an article to be featured in magazine AMCHAM about the relevance of the power sector for the economic and social development of the country.

A society without access to energy is unconceivable nowadays. There are permanent endeavors and measures to increase access to electricity and several studies back up the benefits it brings. However, more than one billion people in the world (17% of the world population) do not have access to modern energy services, and still use candles and batteries to meet their power needs. 

In many countries, the lack of access to adequate levels of energy services highly correlates with high poverty indexes. This situation is not foreign to Peru, where despite the significant growth of energy consumption, the incidence of poverty in rural areas makes evident the importance of including the investment on power infrastructure in the national agenda.

According to the World Bank, the percentage of the population in Peru living in poverty has been decreasing at a sustainable rate, and this improved quality of life has been accompanied by a higher consumption of energy per inhabitant, a clear trend from 2004 until 2014. In 2015, the national energy consumption increased by 5% compared to 2014, which translated into an average annual growth of 7% in the last ten years.

Having significantly more access to energy services in the poorest areas is also healthy. According to the Ministry of Energy and Mines (MEM), since 1993, the electrification ratio went up from 54.9% to 93%, at the national level, and from 7.7% to 78% at the rural level.

The power of electrification

Access to modern forms of energy may not be considered per se as a guarantee to secure sustainable development. To this end it would be necessary to isolate specific policies, which may be difficult as they are a combination of measures also associated with private investment, competition or other reforms. However, according to the evidence, electrification may be deemed a prerequisite to increase productivity and employment, to promote better standards of living through health, education and communication, and therefore to reduce poverty.

In terms of education, access to energy allows for more free time to study outside class hours, and the development of telecommunication services that facilitate transfer of know-how and access to distance learning. In terms of health, electrification also facilitates the storage of medicine and vaccines, provides improved sanitary assistance, reduces injuries related to primary activities, and contributes to the low incidence of combustion-related diseases by using renewable and sustainable sources of energy. 

Industries that are essential for the country’s growth such as mining could not develop without adequate power generation. Furthermore, efficient access to energy sources allows for the creation of related jobs and increased productivity for the usage of machinery and access to increasingly affordable energy options to reinforce the industrial development of the country. 

The power sector in Peru is one of the few in Latin America that has not faced a crisis in the last few years, and has shown a financial and technical development. However, there are still obstacles and opportunities for improvement.

 Energy Architecture Performance Index

An indicator worth considering to assess the contribution of the sector to the country’s development is the Energy Architecture Performance Index, developed by the World Economic Forum (WEF), which measures how successful are the country's energy systems concerning three main objectives: economic growth and development, environmental sustainability and energy access and security.

Of the 126 countries that were evaluated in 2016, the Peruvian energy system is ranked in 20th place. Three criteria are used for this measurement: one criterion is the extent to which the energy system promotes growth and development.  This criterion takes into consideration (i) efficiency measured as GDP per unit of energy use, (ii) energy trade balance, and (iii) price levels and artificial distortions in gas and diesel prices. 

In general terms, in this first indicator and associated variables, Peru is ranked in second place, likely benefited as the index does not take into consideration the serious distortions we have in gas prices, but does take into consideration the distortions in other energy sources that affects other countries. Without taking this into consideration, the structure and price level of the main energy sources are favorable for growth in Peru and contributes to efficient energy usage.

The other two indicators of the WEF’s Energy Architecture Performance Index are not favorable for Peru. In terms of environmental sustainability, we are ranked in 56th place in the index. In the long run, the renewable energy sources, such as hydro, solar and wind, should have a prevailing role. Such renewable energies have reduced costs that allow them to compete at market prices minimizing the percentage of polluting emissions.

This indicator also evaluates the average consumption of fuel for passenger vehicles considering the growing global trend towards the use of electrical cars due to the reduction of costs and energy storage, a trend that is expected to reach the country soon in order to contribute to the sustainable development of the industry.

As for the third indicator of the index, energy access and security, our situation is below the global average, ranking in 74th place. There is a wide gap in energy inclusion and access which is important to bridge, and this is where changes in certain variables of the sector model are required to order to contribute with the country’s growth.

The road to pure energy.

Investments in energy efficiency and renewable energy have a positive impact in the economy, and at the same time they reduce the environmental impact. The improvements of the Peruvian system originate in the sector’s structural design, and others in the energy reform, although there are still international variables that are more difficult to control.

However, there are still certain difficulties that have to be dealt with to prevent problems in the long run and continue contributing to the economic development and the improvement of the quality of life of the population.  Energy policies should focus on universal access to modern and reliable services, promote energy efficiency and usage of renewable energy, while at the same time promote participation of the private sector by providing incentives and information.