Having undergone significant changes over the last 15 years, Peru’s electricity industry is welcoming a wave of new companies looking for opportunities. After a series of reforms, access to electricity has shot up from just 45 percent in 1990 to almost 90 percent in 2011.
Although evenly divided between thermal and hydroelectric energy sources, for many years the country relied heavily on hydropower. Now, one of the region’s key hydroelectricity players has begun developing new projects, helping to boost the country’s renewable energy mix. Odebrecht Organisation, a Brazilian conglomerate, has looked to Peru for new opportunities in hydroelectricity.
Founded in Brazil
Founded in Salvador, Brazil, in 1944, Odebrecht is one of the largest private organisations in Latin America, with consolidated gross revenues over $43bn and approximately 192,000 employees worldwide. Odebrecht has a significant pipeline of projects in the electricity generation sector in Peru and, with over 52,000 MW-worth of hydroelectric power plants built around the globe, it has significant experience in hydro construction.
Odebrecht’s first experience in Peru was the construction of Charcani V Hydroelectric (135MW) in 1979; a power plant built over 3,000m above sea level inside a volcano in the Peruvian Andeans. 34 years later, with extensive experience in infrastructure projects in the country, the company is building a 406MW hydroelectric plant called the Chaglla Hydroelectric Project that, once in operation, will be the third-largest power plant in the Peruvian electric system.
A modern energy mix
The Peruvian electricity system has a 7,116MW capacity, of which 44 percent comes from hydroelectric generation and 56 percent from thermoelectric units. The electric generation sources are highly concentrated geographically, with more than 76 percent of the total capacity installed near the centre of the country.
Over the last 10 years, Peruvian energy consumption has doubled and, based on the high growth rates of the economy, will require new infrastructural additions in the near future. To manage this increasing demand, the electricity sector shifted the generation mix in 2003 (86 percent generated by hydroelectric power plants) to a more balanced 56 percent generated by hydroelectric plants and 44 percent from gas-fired power plants. This has, however, created a more expensive generation system.
To foster competitiveness, and with the aim of ensuring economic growth, the Peruvian Government designed and has put in place incentives, such as tax benefits and long-term power purchase agreements auctions, to promote the construction of hydroelectric power plants.
A closer look at the Chaglla project
In December 2009, Empresa de Generación Huallaga (EGH), an Odebrecht group subsidiary specifically incorporated under Peruvian law to develop the project, was awarded a concession contract by the Ministry of Energy and Mines of the Peruvian Government to build, own, and operate the Chaglla Hydroelectric Power Plant. This plant would be a 406MW greenfield run-of-river hydropower project, located on the Huallaga River in the Huánuco region.
The Chaglla Project
Area of dam
EGH hired Construtora Norberto Odebrecht, Odebrecht’s construction arm, on a turnkey lump sum contract, to build the project over 57 months, starting in May 2011. The EPC contract scheme has a single point of interface between EGH and the EPC contractor, avoiding the usual clashes generated by subdividing infrastructure projects in multiple sub-contracts.
The Chaglla project consists of two power houses, one of 6MW for maintaining the ecological flow at the bottom of a 202m-high concrete face rock-filled dam, and another one that has two Francis turbines of 200MW each, at the end of a 15km headrace tunnel. The headrace tunnel was specifically design to be built in eight work fronts at the same time as a strategy to mitigate geological risk.
The dam is being built inside a narrow canyon in a small flooded area of only 4.5 square kilometres, reducing the social and environmental impacts and allowing the project to offset over 1.8 million tonnes of carbon dioxide per year.
The project also includes a 127km 220kV transmission line to connect it to the Peruvian national grid and 23km of access roads that integrates 15 villages, improving access to education, health and trade for almost 6,000 villagers. As of January 2014, the project is more than 60 percent complete, with more than 3,000 workers aiming for a possible early completion.
Odebrecht successfully sold 284MW of its production in March 2011 to Electroperu, a publicly owned electricity company, for a 15-year term that starts in October 2016. This was done on a competitive auction conducted by Peru’s Private Investment Promotion Agency. The aim of these auctions is to facilitate the development of large-scale electricity projects by securing an off-take for the energy generated by the project while reducing the volatility in revenues.
The 15-year power purchase agreement (PPA) contract, one of the longest tenures available in the Peruvian electricity market, is denominated in US dollars, with the price escalated by combined US and Peruvian inflation adjusted by the USD/PEN exchange rate.
The power generation of the project in excess of the PPA will be sold in the spot market, and Odebrecht has hired experienced consultants with specialised knowledge, such as Danish Hydraulic Institute (DHI), BA Energy Solutions and PSR, to support the power generation analysis and production tied to the PPA.
After the PPA signing in May 2011, EGH contracted a bridge loan with BNP Paribas, Société Générale and BBVA, which later was shared with DNB Bank ASA and Sumitomo Mitsui Banking Corporation. A new bridge loan was also provided by Deutsche Bank fronting the funds from the Peruvian Development Bank, COFIDE.
Concurrently with the bridge loans, a thorough due diligence assessment of the project was being conducted to address all risk analysis and required mitigation for structuring a long-term financing under a project finance mechanism with limited recourse. The due diligence process included reviews on legal, engineering, commercial, economic, safety, environmental, social, health, tax and insurance aspects, among others.
The engineering characteristics of the project, including its hydrological data series, were further validated by Mott MacDonald, a leading engineering firm hired by the lenders to audit the project during the due diligence process. Additionally, EGH retains the services of an expert panel comprised by globally recognised engineers who periodically provide key advice in the construction methodology.
Committing to the community
Odebrecht’s excellent track record in carrying out large infrastructure projects, while ensuring the mitigation of social and environmental adverse effects, meant that the design and implementation of the project was carried out under international standards for sustainable procedures. Therefore, development banks, such as the Inter-American Development Bank (IDB), Brazilian Development Bank (BNDES) and COFIDE, found the financing structure appealing.
Odebrecht also launched the CREER training programme in the communities surrounding the project, which is designed to develop and improve the skills of the local labour force in fields such as carpentry, masonry, welding, hostel services, health and safety, without cost to the participants. Today, the project employs over 600 of the 1,286 graduates from the CREER programme and has already started its advance stage for training in heavy machinery operations.
[Odebrecht] trained local farmers in better practices to increase and improve the productivity of their agricultural lands
Besides the CREER programme, Odebrecht designed and put in place different plans to foster the development of the local population promoting agreements between local producers to sell their products to the project’s food provider and national chain stores. The company also trained local farmers in better practices to increase and improve the productivity of their agricultural lands, as well as facilitating the delivery of the Peruvian Government’s social programmes on health, education and empowering local citizens in decision making processes.
As part of the social and environmental impact assessment, a comprehensive hydro-biological study was performed, which included monitoring upstream and downstream of the project location during both the dry and wet seasons. This was done as part of the efforts to ensure that the project would not endanger present species. The project also involves the monitoring of key native fauna and flora species, and the construction of a greenhouse that hosts a collection of about 9,000 orchids.
After several months of negotiations, Chaglla Hydroelectric Project successfully reached financial close in July 2013. The debt funding reached $774m, and was provided by IDB, BNDES and Deutsche Bank (fronting COFIDE) as senior lenders and by Société Générale, BBVA, DNB Bank ASA, Sumitomo Mitsui Banking Corporation and Credit Agricole as participants in the IDB’s loan. In addition to the security package, a financial model was built to facilitate the credit analysis of the lenders. This allowed for the analysis of different hydrology scenarios over the credit metrics of the project; the DSCR of the project must observe two levels at the same time, one under a base case scenario and another under a break-even scenario.
The Chaglla Hydroelectric Project experience has helped Odebrecht establish good practices in developing all aspects of a big project, and provided a deep knowledge of the Peruvian market, as well as proving Odebrecht’s ability to structure a large project financing. This transaction will certainly set the benchmark for the other new projects that Odebrecht is developing in the energy sector in Peru.