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Publications, 6/1/2001

Evaluation of Diesel Power Plants in Four Countries: Peru

Secwatt Oy, Sergon Oy

Evaluation Report 2001:6
Ministry for Foreign Affairs, Department for International Development Cooperation
ISBN 951-724-355-3
ISSN 1235--7618

Executive Summary

1. This study is the Peru section of the Diesel Power Plant Evaluation in Four Countries. The Finnish involvement in the Peruvian power sector was started with financing rural electrification projects in the Cuzco region and was followed by financing of the extension of Iquitos thermal power plant. Electroperú S.A. (EP) assessed in 1986 the needs and means of expanding the Iquitos power plant. The study concluded that a heavy oil diesel plant was the least cost alternative to meet the electricity demand of the town. EP subsequently asked for international bids with soft financing, without initial success. However, in September 1989 Wärtsilä Diesel Oy of Finland submitted an offer to EP for delivery of the required equipment and work. This resulted into an agreement. Finnish grant financing of FIM 46 million was approved in 1991 after the project formulation and appraisal process. Electro Oriente S.A. (EO) became the end user and the grant was given to the Government of Peru to finance three Wärtsilä generating units of 6,5 MW each with some auxiliaries. The Project contained two subprojects: 1) Rehabilitation of the Existing Power Plant and 2) New Diesel Power Plant. The grant was on-lent to Electro Oriente but the terms were never documented. This loan was recently converted into equity.

2. The Finnish supplier, Wärtsilä Corporation (Wärtsilä), has gone through a substantial transformation since the evaluated deliveries were made. After a restructuring of its business, the main corporate body of the group, Metra Corporation, changed its name recently into Wärtsilä Corporation. This was obviously done because the Wärtsilä Diesels now form the core of its production. The Corporation can be currently described as leading global ship power supplier and a major provider of solutions for decentralized power generation and of supporting services. For the electricity sector Wärtsilä delivers gas and oil-fired power plant solutions from 1 MW to 400 MW. These power plants are used for base load, CHP, load management and gas compression applications. Deliveries include turnkey construction and long-term maintenance and even operation. Wärtsilä and Sulzer are the diesel engine brand names of the Corporation. Wärtsilä's 2000 sales were EUR 2,7 billion and profitability was good. It is listed with Helsinki Stockexchange.

3. The share of commercial energy sources of the total primary energy supply in Peru is almost 70%. The per capita electricity consumption of 653 kWh (in 1998) was the highest among the four countries included in this study. Peru has abundant commercial energy reserves with proven reserves estimated at 467 million toe. The oil reserves are, however, declining and the utilization of natural gas reserves is developing slowly. The Electricity supply includes two interconnected systems due to the country's diverse geographical characteristics. In addition, there are several isolated systems. The installed capacity was 5,515 MW in 1998. The share of hydroelectricity was 47% and thermal generation was 53%. The development of wind generation capacity is at an early stage with 300 kW installed. The southern and northern electricity grids are expected to be connected soon.

4. Electricity subsector has been deregulated since 1990 and the share of private participation has increased considerably. The quality and the reliability of services have improved significantly during the previous decade. The electricity market of Peru is a mix of regulated and unregulated. Customers with electricity demand exceeding 1 MW are able to negotiate prices directly with generation and transmission companies. The Government regulates customers with less than 1 MW demand. The prices are established by the Commission for Electricity Tariffs (CTE) and are based on information provided by a Committee of System Economic Operation (COES) established with in each interconnected system. The selling prices increased until 1996, but started to go down after that and were in 2000 at the same level as in 1992. The Government has at the same time removed subsidies significantly and directed them to support electricity service in rural areas.

5. Diesel power generation has an important role in providing electricity service especially in the rural areas. Thermal generation in isolated power systems totalled 476 GWh representing 75% of the total. The role of natural gas is expected to increase especially in the eastern parts of Peru where the major gas fields are. Electro Oriente S.A. (EO), which operates mainly in Loreto and San Martin regions, has relied almost entirely on thermal generation since the limited hydroelectricity capacity has suffered many problems. The share of diesel power generation has increased considerably after gradual retirement of the low-efficiency steam power plant capacity. In 2000, the generated electricity from steam power plants was already insignificant compared with the 20% share in 1998.

6. The end user of the Project, Electro Oriente S.A. was established in 1983 as a subsidiary of Electroperú S.A. It is responsible for the power generation, transmission and distribution throughout Loreto and San Martin regions, an area covering more than one third of Peru. EO is currently 100% owned by Fondo Nacional de Financiemento de la Actividad Empresarial del Estado (FONAFE), a Government holding company. EO has an organization of 345 employees and a yearly turnover of 90 million Peruvian new soles (PEN), equivalent to roughly US$ 25,5 million or about US$ 73,900 per employee, which is a reasonable figure compared with other developing countries, for example many times better than PLN's per employee performance in Indonesia. The production and distribution cost of EO has been high and profitability low. The Company has not been able to extend its servives to more than just 48% of the population of its operating regions. Only about 15% of the rural population there has access to electricity.

7. Republic of Peru (Peru), population of 25,7 million, is a low-medium income developing country with a GDP - per capita purchasing power parity (ppp) US$ 4,400 (1999 est.). It is the third largest country of South America with the fifth largest population. Its area extends for 2,414 km along the Pacific Ocean between Ecuador and Chile. It has borders also with Colombia, Brazil and Bolivia. Peru is divided by the Andean Mountains into three sharply differentiated zones. The total land area of the country is 1,285,220 km2, more than the size of Norway, Sweden and Finland together. The country has recently entered into a moderate economic recession. However, the lives of the Peruvian people have improved substantially during the past ten years from an almost catastrophic situation in the end of the 1980s. The Developing Country Human Poverty Index (HPI-1) at 16,5 ranks Peru 25th among the developing nations. About 15,5% of population had to survive with under one ppp US$ per day and 49,0% were listed being under the national poverty line. There are, however, large differences within Peru between the regions. The Project location, Loreto Region, is one of the poorest.

8. Gender situation in Peru is uneven but improving. In Lima, the situation is relatively similar to the southern European conditions. Peru's Gender Index (GDI) ranking is slightly better at 70th than its HDI position. The Peruvian female population has made substantial progress in survival compared with the 1975 situation, life expectancy at birth has improved from 55,5 to 72,5 years and the infant mortality rates have come down substantially as well as the under-five mortality rate. This indicates improved health care system. The medium adult literacy rate for women at 84,3 together with relatively high primary and secondary enrolment figures among women indicate the existence of an adequate education system but there is room for improvement. The reality in the remote areas of Peru is quite different from the national average. The Finnish diesel power Project has had very little gender related impacts.

9. The evaluated Project, diesel power plant, is located in Iquitos (population 367,000 in 2000) the largest Peruvian city in the Amazonian rainforests and the fifth largest of all cities (see map in Annex 2.). It is located in the northeastern part of the country in the middle of Loreto region (population 803,000 in 2000) alongside Amazon River. Iquitos, although it is the capital of the largest region (department) of Peru, is an isolated place without road connection to the outer world, nor is it connected to the national electricity grid. Iquitos' history is colourful and eventful. It experienced a phenomenal boom around the turn of the century when the sap of rubber tree, cauchuc, became to great value after invention of vulcanised rubber tires. Even now, the surrounding rainforest provides opportunities for exploitation but is also vulnerable from ecologic point of view. The economy of Iquitos is based on mechanical wood processing, oil refining and agriculture based industries. The area suffers from health problems such as malaria (including the most dangerous P. falciparum variety), other parasites, TB, AIDS and other contagious diseases. Iquitos is the export harbour for timber, plywood and other wood processing products of the Peruvian Amazon basin. It is also the start-up point for tourists visiting the rainforest.

10. At the time of the Project preparation in 1990, electricity supply was severely deteriorating in Iquitos. Electro Oriente had not been allowed to increase the tariffs to maintain and develop its assets. The reliable capacity of the power plant was diminishing and the growing and already unsatisfied demand for electricity was not possible to be met. No big changes have taken place in the role of Iquitos power station since that. The reliability of the electricity supply and the availability of the power station have, however, increased considerably. The efficiency of the power station is far better compared with the situation in 1992. The losses started to grow in 1993 in connection with dramatic price increases, but now EO has taken serious measures to reduce them.

11. The Project preparation included more detailed planning compared with the other studied diesel power plant deliveries. This was mainly because MfFA's then new planning process was used. The project was divided in two Subprojects of which the Subproject 2 included the delivery of the 36,5 MW diesel generators from Finland. The total costs in the Project Document were estimated at FIM 75 million (at current prices) of which Finnish financing covered FIM 46 million. The actual local costs of Subproject 2 were below the estimate.

12. The objectives and indicators defined for the Project were simple to understand and measured more or less the right things. The selection of development objectives and indicators could however have reflected more the economic development of Iquitos. The objectives were concentrated to follow the electricity sector development. The objectives were achieved relatively well in the changing policy and economic environment. High electricity prices and low economic growth caused less demand growth than expected, but this had no major negative impact on the services.

13. From the completed limited consumer survey, the Evaluation Team concluded that the role of electricity among the beneficiaries is indeed meaningful and the consumer in Iquitos is taking reasonably well advantage of the opportunities available because of access to electricity. The high price limits, however, productive use to some extent. Most of the households interviewed had several appliances on top of the regular lighting and TV / radio. The businesses complained somewhat of the high prices and general lack of opportunities. However, the modern communications had come to Iquitos. Cellular service was available and Internet cafés and service points existed practically in every corner. Regardless of isolation all the interviewed businesses considered the district to be a growth area and expected their own business to be substantially or at least somewhat bigger in real term after five years from now.

14. From consumers' point of view it seems that the Project was well received especially near the plant site, namely the noise and pollution of the old Skoda steam power plant was intolerable, now it is only a back-up facility. The Wärtsilä plant was felt to be much quieter and air pollution from it was seldom felt. The Finnish plant also clearly had a positive impact to the availability and quality of electricity service, but to some extent the necessary additional investment did not all come in time to keep the service continuously up to the top standard. One of the reasons for this is the poor profitability of EO.

15. EO's tariffs are comparatively high (on the average 12 US cents), but due to the privatisation process in Peru pricing policy and tariff controls have been substantially relaxed and cost based increases are possible. The current tariffs are not far from what would be adequate to make EO profitable if technical and other losses are cut to normal level and the financing would be reasonably priced. The current clientele is likely to be able to afford somewhat higher tariffs but the planned new connections outside the city will be hurt if real prices go much higher. The small isolated generation locations are a heavy burden to EO's economy.

16. The present technical condition of the Iquitos Power Plant was the best of the evaluated power stations. The capacity has been used effectively and new investments have been carried out according to the demand development, although slightly delayed. The demand has been also managed effectively with the tariffs, which reflect the real costs of generation, transmission and distribution. The three 6,5 MW diesel generating units included in the Project Document were commissioned in 1993. The average yearly operating hours of the units have been more than 5,000 and increased lately due to the diminishing use of the steam power plant. They have supplied electricity to Iquitos as intended in the Project Document. The steam plant has been run during the recent months only occasionally. In 1997, EO purchased a fourth Wärtsilä 6,5 MW diesel generator, which was commissioned in 1998. The new unit has run almost continuously since. The financing was arranged by the Ministry of Energy and Mines from international financial market. EO will again soon purchase a new 6,5 MW diesel generating unit to replace the capacity of the steam power plant and to meet the growing demand.

17. The company has ordered the major overhauls from Wärtsilä. The records of major overhauls show that overhauls have been in some cases done later than recommended. The representative of Wärtsilä Peru S.A. confirmed this. The reasons for the delays could not be clearly defined, but shortage of money and especially previously used bureaucratic procurement rules postponed some of the orders with several months. The next challenge is the 48,000-hour major overhaul of the first three units. It is scheduled for 2001 or in the beginning of 2002. It was not yet decided during the Evaluation Team's visit, if the maintenance work to be ordered, most likely from Wärtsilä, would include upgrading, such as improvement of fuel efficiency and reduction of the nitrogen oxide emissions. The local services of Wärtsilä in Peru have, however been in a key position to safeguard the proper implementation of major overhaul. The local support in spare part procurement has also been important.

18. The Project was a relative success. It achieved most of the set goals and results. The plant has functioned well and the current condition proves that the maintenance and operation staff is well trained and motivated. Most of the problems are related to external conditions. The management has suffered from frequent Government interference, which has resulted to quick turnover of top management. In addition, the department head level has experienced unnecessary changes. The company's special role in electrifying small isolated urban communities in Loreto and San Martin is an obstacle in the privatising process of EO. Such operations need community participation and consumer initiative to be financially viable.

19. The selected project mode was appropriate in the case of Iquitos. The division of responsibilities in the construction phase between the local organisations Electroperú and Electro Oriente worked in practice relatively well although major changes took place in the sector at the same time. The costs of civil works were essentially reduced by using local contractors. Although the completion of the Project was delayed with some months, the Finnish supplier and the Peruvian organisations succeeded well in the construction work given the difficult conditions and the modest transportation facilities of Iquitos. The role of the Finnish supervision consultant was small and did not include the continuous presence at site. The presence of the consultant clearly improved the quality of the work and supported the coordination of the activities of various subcontractors. The supervision consultant pinpointed also the importance of some project components, which were in danger of being neglected during the implementation. These include at least training components, the development of operation and maintenance procedures and the construction of spare part stores.

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Updated 7/20/2006

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