Sustainable energy production from biomass waste in Peru NAMA proposal November 2015

Foreword This document presents a proposal for a NAMA in “sustainable energy production form biomass waste” in Peru. The proposal was developed by NewClimate Institute, Ecofys and Peruvian experts through the MitigationMomentum project financed by the International Climate Initiative of the German government. The development of the proposal was undertaken in a consultative process involving key governmental, private sector and civil society stakeholders building on existing knowledge and initiatives in the sector as well as the government’s immediate and longer-term policy and development objectives.

This report is prepared and published as part of the MitigationMomentum project. The project is part of the International Climate Initiative. The Federal Ministry for the Environment, Nature Conservation and Nuclear Safety supports this initiative on the basis of a decision adopted by the German Bundestag.

Table of contents 1

2

3

4

5

The Peruvian context for developing a biomass waste-to-energy NAMA

6

1.1

Greenhouse gas (GHG) emissions profile of Peru

6

1.2

National energy demand and supply

8

1.3

Key stakeholders

10

1.4

National policy framework

11

1.5

Biomass waste-to-energy generation in Peru

18

1.6

Barriers to sustainable energy production from biomass waste

25

NAMA Proposal

29

2.1

Objective

29

2.2

Scope & pipeline

29

2.3

NAMA design

32

2.4

Institutional set-up for the NAMA

44

2.5

Timeframe for NAMA implementation

45

Impact assessment

46

3.1

Impact on GHG emissions

46

3.2

Sustainable development benefits

47

Finance and support needs

50

4.1

Finance needs for the capacity & market support component

51

4.2

Finance needs for the financial support component

51

Monitoring Reporting and Verification (MRV)

56

5.1

General framework

56

5.2

Impact indicators

57

5.3

Progress indicators for NAMA objectives

62

5.4

MRV process

63

6

References

Appendix I. Appendix II.

65 Energy access and waste-to-energy potential in six regions of Peru Methodological approach for the financial mechanism

68 71

Table of figures Figure 1: National GHG inventory 1994, 2000 and 2010 (MINAM, 2014) ........................................ 6 Figure 2 Distribution of GHG emissions by sector in 2010 (MINAM, 2014) ...................................... 7 Figure 3 GHG emission projections for Peru (2000-2050). Source: Stadelmann and Eschmann (2011) ....................................................................................................................................... 7 Figure 4 Peru and its three geographical areas - Costa, Sierra and Selva ..................................... 21 Figure 5 Distribution of primary energy resources by type of waste per region. Source: own elaboration based on data from Gianella Silva (2013) .......................................................... 22 Figure 6 Distribution of primary energy resources by region per type of waste. Source: own elaboration based on data from Gianella Silva (2013) .......................................................... 23 Figure 7 Distribution of primary energy resources from major agricultural waste sources. Source: own elaboration ..................................................................................................................... 24 Figure 8 NAMA scope ............................................................................................................. 30 Figure 9: Number and size of installations by technology type .................................................... 32 Figure 10: Number and size of projects by sector...................................................................... 32 Figure 11: Schematic NAMA design ......................................................................................... 33 Figure 12: Support activities – Large scale projects ................................................................... 38 Figure 13: Schematic view of support scheme for large scale projects ......................................... 39 Figure 14: Support activities – Self supply projects ................................................................... 41 Figure 15: Average LCOE of project pipeline ............................................................................. 43 Figure 16: Average LCOE by project ........................................................................................ 43 Figure 17: Institutional set up ................................................................................................ 44 Figure 18: Cumulative installed project pipeline ........................................................................ 45 Figure 19: Yearly GHG emission reductions according to project pipeline ..................................... 47 Figure 20: Investment costs per year ...................................................................................... 52 Figure 21: Investment costs by project .................................................................................... 53 Figure 22: Cost implications of different financial support scenarios ............................................ 54 Figure 23: MRV Framework .................................................................................................... 57 Figure 24: Process diagram showing the displacement of greenhouse gases by the generation of power and heat from biomass residues. ............................................................................. 62 Figure 25: MRV system .......................................................................................................... 64 Figure 26: Overview of approach to calculating LCOE of electricity for cogeneration plants ............. 73 Figure 27: Weighted Average Cost of Capital (WACC) composition and important assumptions ....... 74

Tables Table 1 Renewable energy potential in Peru ............................................................................. 10 Table 2 Results of auctions for electricity generation projects (1st and 2nd auction) ........................ 15 Table 3 Annual availability of crop residues (tonnes) - average of 2005-2011. .............................. 19 Table 4 Key barriers to the implementation of waste-to-energy projects ...................................... 25 Table 5: Expected co-benefits................................................................................................. 48 Table 6 Summary of finance needs for incentive schemes .......................................................... 50 Table 7: Estimated costs for the capacity & market support component ....................................... 51 Table 8: Overview proposed low cost credit line ........................................................................ 54 Table 9 Impact indicators ....................................................................................................... 59 Table 10: Progress indicators ................................................................................................. 63 Table 11: Input parameters, description and assumptions made for the calculation of the project LCOE ............................................................................................................................. 75 Table 12: Assumptions in the calculation of the weighted average cost of capital (WACC) (Equation 2) ..................................................................................................................................... 76 Table 13: Detailed scenario assumptions used .......................................................................... 78

1

The Peruvian context for developing a biomass waste-to-energy NAMA 1.1

Greenhouse gas (GHG) emissions profile of Peru

Peru has experienced extensive economic growth over the last years. Over the last decade, the Gross Domestic Product (GDP) increased on average by 4.5% annually (MINAM, 2014). Coupled with this growth the country experienced an increase in national GHG emissions of about 35% between 2000 and 20010 (MINAM, 2014). Figure 1 shows national GHG emissions by sector in the years 1994, 2000 and 2010.

Figure 1: National GHG inventory 1994, 2000 and 2010 (MINAM, 2014)

Noticeable is the increase of GHG emissions in the energy sector by 60% between 2000 and 20010. This increase is not only the result of an overall increase in energy consumption, spurred by a growing population and economy, but also due to the incorporation of natural gas into the national energy matrix. The exploitation of national natural gas resources, which started in the mid-2000s, and its distribution at artificially low prices, have displaced hydropower to a certain extend and slowed down the development of new renewable energy projects (mainly hydro power) which would have otherwise been implemented to meet the growing demand for energy. In 20010, Agriculture, Forestry and Other Land Use (AFOLU) contributed around 56% of national GHG emissions. The largest source were emissions from deforestation which is driven by migratory agriculture and cattle ranching. The energy sector (including transport) contributed 33% of national emissions (Figure 2).

6

Figure 2 Distribution of GHG emissions by sector in 2010 (MINAM, 2014)

Different projections on future GHG emissions under a business-as-usual scenario indicate that emissions in Peru will almost triple by 2050, compared to emissions in 2000 (Figure 3). In the two sectors with the largest projected increase, agriculture and energy, emissions will triple as well. By 2050, annual emissions in the agricultural sector will result in 74 MtCO2e and in 71 MtCO2e in the energy sector.

Figure

3 GHG

emission projections for Peru (2000-2050). Source: Stadelmann and Eschmann (2011)

7

1.2

National energy demand and supply

Over the last decades, strong economic growth in Peru has led to a substantial rise in energy demand, creating new opportunities to invest in energy infrastructure. The primary energy demand is currently met by fossil fuels including crude oil and natural gas as the main source of primary energy supply as shown in Figure 4. The country has a diverse set of renewable energy resources; however, in the last decade, the evident increase in the use of natural gas has had an adverse effect on renewable energy technology deployment (IRENA, 2014).

Figure 4 Total primary energy supply by fuel (IRENA, 2014)

In line with the substantial increase in energy demand over the last decades, it is expected that the growth in electricity demand will rise fourfold by 2030. Electricity demand is driven by industrial sectors, which represented over 55% of total electricity demand in 2010. Electricity generation, on the other hand, is dominated by hydropower plants, accounting for almost 55% of total production in 2012; 43% of the remaining electricity is generated by thermal sources; and finally, renewable energy provides 1.83% as can be observed in Figure 6 (IRENA, 2014).

8

Figure 5 Electricity demand by sector (MINEM, 2010)

Figure 6 Electricity production by technology, 2012 (IRENA, 2014)

The rapid changes in the electricity market have provided an opportunity for Peru to further diversify its electricity mix to create a sustainable, cost-effective and environmentally sound generation matrix. Renewable energy could play a significant role in this process, as there are significant solar, hydro, wind, biomass and geothermal resources that remain largely unexploited (Table 1). In the case of energy production with biomass, it is estimated that the country has the potential to install 177 MW in conventional biomass power plants and 51 MW in biogas plants. These calculations are based on 2009 values for agro-industrial and forestry residues for electricity production with bioenergy (OSINERGMIN, 2012).

9

Table 1 Renewable energy potential in Peru

Source

Share of total potential (%)

Potential

Used

(MW)

(MW)

Hydro

70,000

3,118

5%

Wind

22,000

142

1%

Solar

Not defined

80

-

Biomass

228

27,4

12%

Geothermal

3000

0

0%

Source: Mitma Ramirez (2012)

1.3

Key stakeholders

The electricity market framework consists of 57 public and private companies engaged in generation, transmission and distribution and a regulatory body, OSINERGMIN. In contrast to other countries in the region, it also includes a private entity that manages the national grid, COES. Of the 57 companies, almost half are engaged in generation, 10% in transmission and 40% in distribution (MINEM, 2012a).

1.3.1 Public sector The Ministry of Energy and Mining (MINEM) is the cornerstone of the institutional framework for renewable energy. It grants concessions and regulates the energy market. Of its eight Directorates, there are two more closely related to the aim of this NAMA: -

-

The Electricity General Directorate grants rights to carry out electricity related activities. This includes the performance of studies and the construction of electric infrastructure in coordination with the General Directorate of Energy-Related Environmental Affairs. It also promotes electric power projects, governs the central government policies on the development of the electricity subsector, and proposes electricity standards for the Peruvian technical rules. The Rural Electrification General Directorate plans and promotes rural electrification works according to a plan in coordination with regional and local governments, and specialised private and public entities. In poverty and extreme poverty areas, these works are subsidised by the State.

In addition to MINEM as the national authority responsible for promoting renewable energy projects, regional governments can also promote the use of renewable energy resources within their territory.

10

Regional governments are responsible for formulating, implementing, evaluating, monitoring and managing energy plans and policies within their own boundaries, in line with national policies and sector plans. Other governmental entities also involved in the electricity sector are the COES and OSINERGMIN. The Committee for the Economic Operation of the National Interconnected System (COES) coordinates the operation of the National Interconnected Electric System (SEIN) at a minimum cost, ensuring security of the system and the best use of power resources. It includes all stakeholders of the SEIN, generators, transmission companies, distributors, and free users. The Supervisory Agency for Energy and Mining Investment (OSINERGMIN) on the other hand, establishes the benchmark electricity rates based on the rate policy set by the Electrical Concession Law. It also supervises and monitors the performance of electric concession agreements, and, in general, electric power activities of companies (MINEM, 2012). Specifically for the bioenergy sector, in 2009 the Government established the Multisectorial Bioenergy Commission (Comisión Multisectorial de Bioenergía) to improve inter-ministerial cooperation in the area of bioenergy (Decree Nº 075-2009, 2009). The commission includes members from MINAM, MINEM, the Ministry of Agriculture (MINAG) and the Ministry of Production (PRODUCE). The commission has set up technical groups on various issues such as food security and poverty, policies and technology options. It is regarded as a platform to formally articulate intersectoral policies and to convene other public institutions that work on bioenergy or related topics (FAO, 2010).

1.3.2 Electricity market Today, the electricity market comprises 57 major companies operating in the electricity generation market, including both private and state-owned. 27 out of which are engaged in generation, 7 in transmission, and 24 in distribution. Likewise, there are self-generation industries that operate power generation plants to fully or partly supply the electricity demand of their own industrial activities (MINEM, 2012). There are several state-owned companies engaged in electricity generation, transmission and distribution. The National Fund of State Financing (Fondo Nacional de Financiamiento del Estado FONAFE) is the institution that gathers public institutions in order to conduct and govern the state business activity. It also includes ADINELSA, the state-owned company that manages rural electrification infrastructure subsidised by the State. The main electricity market is regulated and tariffs are set according to the rate policy set by the Electrical Concession Law. Large consumers have the option to opt out and set up separate over the counter contracts or power purchase agreements (PPAs).

1.4

National policy framework

The government aims to promote sustainable development by shifting the national economy onto a low-carbon development path. The provision of renewable energy has a central role in this transition.

11

Over the last years, the government has developed a number of programmes, plans and actions which pave the way for low-carbon development. Some of the milestones on this path are presented in the following sections, focusing on their link to renewable energy development.

1.4.1 National climate policy Climate change policy is led by the Ministry of Environment (MINAM). MINAM also acts as the focal point for NAMAs as well as the Clean Development Mechanism. A number of strategies, plans and activities are in place or under development to respond to the challenges of climate change, both on the mitigation as well as adaptation side. The main key national climate policy documents and processes are outlined in the following.

National Strategy on Climate Change (updated 2014) The Peruvian National Climate Change Strategy was first approved in 2003, updated in 2014 and it is currently undergoing validation. The strategy recognizes the importance of managing GHG emissions in order to achieve sustainable low carbon development. It works as a guideline for all climate change policies and actions at a national scale and has the main aims to reduce the GHG emissions through renewable energy and energy efficiency programmes across the different productive sectors.

Action Plan for Climate Change Adaptation and Mitigation (APCCAM) Peru’s Action Plan for Climate Change Adaptation and Mitigation (APCCAM), presented by the Ministry of Environment (MINAM), identifies and outlines the countries’ priorities in terms of contributions to global climate change mitigation. The plan promotes the inclusion of actions that address climate change in investments and activities carried out at the sectoral and regional level; provides guidance for national efforts to obtain international technical and financial support for the implementation of climate change activities; and contributes to setting the basis for national sustainable low carbon development. With regard to the energy sector, the APCCAM proposes, among other measures, the diversification of the national energy matrix through the development and inclusion of renewable energy (MINAM, 2010).

National Plan for Environmental Action In 2011, the Government of Peru released the National Plan for Environmental Action 2011-2021 (MINAM, 2011). The plan is a national planning instrument that outlines environmental targets to be reached over a ten-year period. One of seven strategic areas covered is climate change. The plan includes targets regarding the management of natural resources for sustainable energy generation.

Planning for Climate Change (PlanCC) PlanCC (Planning for Climate Change) is a process launched in 2012 that involves the public sector, the private sector and civil society to analyse the implications and feasibility of transitioning to a lowcarbon economy. In its first phase, the project aimed to generate the technical and scientific evidence

12

base to evaluate sectoral mitigation options, assess their costs, emission reduction potentials and cobenefits in order to build national mitigation scenarios. The second phase (Planning phase) aims to develop plans, policies and instruments that are “climate compatible”. The third phase (Implementation phase) focusses on creating the right enabling environment for low-carbon investments.

Agendambiente 2015/2016 In December 2014, the country published its Environmental Agenda. The document shares the commitments and achievements made regarding climate change, biodiversity, environmental governance and environmental quality. The climate change section emphasizes the relevance to develop Nationally Appropriate Mitigation Actions (NAMAs) in the waste management, transport, energy efficiency and waste-to-energy sectors.

NAMA development In submissions on NAMAs to the United Nations Framework Convention on Climate Change (UNFCCC) in 2010 and 2011, the Peruvian government expressed its “firm willingness to strengthen the collective action to mitigate climate change through the development of a sustainable and low-carbon economy (UNFCCC, 2013)”. Peru is currently developing 10 NAMAs including in the waste sector (1), transport (1), energy (2), buildings (1), agriculture (3) and livestock (1). The two NAMAs in the energy sector include the bioenergy NAMA presented here as well as a broadly scoped NAMA supported by the Global Environment Facility (GEF) which aims to diversify the energy matrix to include non-conventional renewable energy sources and advance energy efficiency across key sectors of the economy. (MINAM, 2014).

1.4.2 Renewable Energy Policy The Ministry of Energy and Mining (MINEM) is the cornerstone of the institutional framework for renewable energy. It grants concessions and regulates the energy market. The Supervisory Agency for Investment in Energy and Mining (OSINERGMIN) is the public institution in charge of regulating and supervising the electric, hydrocarbons and mining enterprises. OSINERGMIN sets the fees and compensation rates and ensures that the MINEM regulations are complied. In addition to MINEM as the national authority responsible for promoting renewable energy projects, regional governments can also promote the use of renewable energy resources within their territory. Regional governments are responsible for formulating, implementing, evaluating, monitoring and managing energy plans and policies within their own boundaries, in line with national policies and sector plans. The government has set up a framework of policies, programmes and plans that promote the development of a renewable energy sector. It targets different producers and end users of renewable energy. One set of policies is designed to promote and regulate large-scale renewable energy projects

13

for grid connection, while the other set aims at increasing energy access in rural areas of Peru. Both areas contribute to the national goal of reaching universal energy access by 2021. The goal is a core element of the National Energy Plan 2014-2025. The following section presents an overview on the main policies and laws of both target areas.

1.4.3

Policy framework for on-grid renewable energy projects

Law for promotion of investment in electricity generation from renewable energy (L.D. Nº 1002) and its amendment (D.S. Nº 012-2011-EM) The law defines renewable energy as biomass, wind, solar, geothermal and tidal energy as well as hydroelectric facilities with an installed capacity below 20 MW. It determines that the Ministry of Energy and Mines (MINEM) will set a target every five years for the percentage contribution of renewable energy (except large hydro) to total electricity production. For the first five-year period starting in 2011, this target was set to 5%. The law also states that electricity from renewable energy is given priority in the dispatch. Producers sell the renewable energy based electricity in the market and receive a fixed price, determined in auctions carried out by the Energy and Mining Regulator of the government (OSINERGMIN). Special contracts and financing for renewable energy projects are established in the form of 1) a thirtyyear concession under a 30% income tax regime; 2) tax exemption for all goods and inputs required to develop the resources under the concession, provided such goods and inputs are included in a specific list prepared by the MINEM; and 3) an annual maximum 20% accelerated depreciation regime for income tax purposes for plant and equipment used to produce electricity after June 2008. The law defines that the National Council on Science, Technology and Technological Innovation (CONCYTEC) should provide the framework for research on renewable energy and promote the participation of universities, research institutes and development organizations in research activities (MINEM, 2010).

Renewable Energy Auction Peru operates technology specific pay-as-bid, sealed-bid energy auctions (IRENA, 2013). OSINERGMIN determines a cap on the generation and a price ceiling for each auction and technology, above which no offer would be accepted. The price ceiling is determined according to a project’s estimated capital and operating costs with an expectation to yield a rate of return of 10% per year over a contract period of 20 years, taking other factors into consideration such as the size of the project and estimated connection costs (IRENA; 2013). The need to hold auctions is reviewed by the government every two years. Bidders are required to deposit several guarantees, including a bid bond of USD 20,000/MW of capacity installed (that is lost if the bid is won but the bidder fails to sign the contract), and at a later stage, a performance bond of USD 100,000/MW of capacity installed. The winning projects are granted priority dispatch and access to transmission and distribution networks. Power purchase agreements are set for

14

a period of 20 years but for a limited amount of energy produced annually. Electricity produced above that cap is sold at market price, and projects that produce less than the amount specified in the bid are penalized by a reduction in the tariff (IRENA, 2013). The first auction period was announced in 2009 for the provision of 1,814 GWh/a through biomass, small scale hydro, wind and solar. Competitive bids for wind and solar were received and awarded, yet only 18% of the allocation for biomass was awarded. The second auction announced in 2011 for 1,981 GWh/a followed a similar pattern; bids for solar, wind and hydro were highly competitive and significantly lower than those of the first auction period, whilst just 2% of the 828 GWh biomass allocation was met (Table 2). Table 2 Results of auctions for electricity generation projects (1st and 2nd auction)

Technology

Year

Volumes auctioned (GWh/year)

Volumes contracted (GWh(year)

Success rate (%)

Average contract price (USD/MWh)

Ceiling price (USD/MWh)

Small hydro

2009/2010 (first call)

500

160

32%

60.2

74

18 MW

5%

64

-

2009/2010 (second call)

Solar PV

Wind

Biomass and waste

2011

681

681

Almost 100%

53.2 (-11%)

-

2009/2010

181

173

96%

221.1

269

2011

43

43

100%

119.9 (-46%)

-

2009/2010

320

571

178%

80.4

110

2011

429

473

100%

69.0 (-14%)

-

2009/2010

813

143

17.6%

63.5

120

2011

828

14

2%

99

-

Source: IRENA (2013)

The wind and solar allocations in both auction periods were mostly met by international bidders, whilst bids for biomass energy were predominantly from domestic entities. The third auction was announced in 2013 for the provision of 1,620 GWh/a of which 1,300 should be allocated to hydropower and the remaining 320 GWh/a to biomass; solar and wind were not allocated

15

budgets for this auction. In the endbids were only received and allocated for small hydro technology. A forth auction has recently been announced for 1,300 GWh/a. Aside from the lack of uptake for biomass energy, the auction system is regarded as a success on account of the USD 1.8 billion inward investment that the programme attracted, the large volume of energy generation capacity installed, and the 4,400 MWh of renewable energy that has been allocated so far (OSINERGMIN, 2014).

Grid connection for renewable energy The present design of the national grid and transmission structure is optimised for conventional and centralised power generation. Key issues for the connection of renewable energy to the grid are technical feasibility of injecting renewable energy generation into the grid (MINEM is currently executing a study to estimate the maximum amount of renewable energy that can be connected to the grid between 2013 and 2017), and the economic feasibility of grid connections. The latter has a detrimental effect on the overall investment risk of distributed renewable energy projects. Whilst grid connection costs are of less significance to large conventional power plants and large scale hydro projects, the remote location of some renewable energy projects demands much higher investments for transmission, and these costs are increasingly prohibitive the smaller the project is. Delays in grid connections are also likely incurred by small scale projects due to the higher volume of connection requests for multiple small scale facilities administered by the authorities.

1.4.4

Energy access in rural areas

Rural electrification policy Peru has made remarkable efforts to improve its national electrification rate which increased from 55% in 1993 to 87.2% in 2012. However, electrification remains a challenge in rural Peru, where terrain is often difficult for infrastructure construction and communities are often in remote locations. Low energy demand as well low purchasing power of people in these communities compounds to the problem and makes rural Peru unattractive to potential private sector investors. The National Rural Electrification Office (DGER) of MINEM alongside regional government are responsible for policy and programmes related to rural electrification, while the Electrical Infrastructure Administration Enterprise (ADINELSA) is the coordinating agency traditionally responsible for the provision and management of rural electrification infrastructure (IRENA 2014). The Law of the creation of the Social Electric Compensation Fund (Nº27510, 2001) assigned powers to OSINERGMIN to determine concessionary rates for electricity in rural areas (Tech4CDM 2009). The National Law of General Rural Electrification Nº28749 came into force in 2006, giving DGER full authority to develop and enact a national strategy for rural electrification, and establishing renewable resources as priority energy sources for rural electrification (Tech4CDM 2009). The latest 2013-2023 National Rural Electrification Plan aims to provide electricity access, including from renewable energy

16

sources, to 6.2 million people in rural, isolated and border regions within the next decade (IRENA 2014). The plan was developed by the Rural Electrification department of MINEM. It seeks to promote sustainable development in rural areas, to improve the livelihoods of the rural population and to increase the use of energy for productive purposes (MINEM, 2012). The major activity components under the plan are grid extension into rural areas, and the development of renewable energy mini-grids in areas where grid extension is not possible. By 2014, DGER-MINEM were already overseeing 437 rural electrification projects that would benefit 1.2 million people, with a total forecast investment of USD 418 million (IRENA 2014).

1.4.5 Additional incentive schemes to promote renewable energy In addition to the auction scheme for grid connected renewable energy projects, there are several financial schemes in place to support investments in renewable energy projects. These schemes typically target renewable energy projects across all technologies. There is no dedicated scheme to support bioenergy projects in particular.

“Bionegocios” Programme of COFIDE The Corporación Financiera de Desarrollo S.A. (COFIDE) operates as a second-tier and has established the programme “Bionegocios” to promote changes in the national energy matrix as well as the sustainable use of natural resources including energy efficiency and the production and distribution of non-conventional renewable energy (wind, solar photovoltaic, thermal, geothermal, biomass, and hydro power up to 20 MW). Funders of the “Bionegocios” programme are multilateral bodies and government agencies as well as commercial and local capital market banks. COFIDE channels funding through local banks and financial companies to end users offering loans at discounted interest rates with tenures up to 25 years depending on the project. Terms are negotiated on a project by project basis. In addition, COFIDE provides partial risk guarantees as well as funding for pre-feasibility studies and other technical support including capacity building. The programme is currently funded by KfW (EUR 120mio) and JICA (US$ 100 mio). Less than a quarter of the funds have been disbursed to date, mostly for renewable energy (solar, hydro, wind) and energy efficiency projects. Currently two bioenergy projects are in the pipeline including a combined heat and power (CHP) plant in the rice industry and a municipal waste to energy project1.

Fondo de Inclusión Social Energético (FISE, Social Inclusion Energy Fund) FISE was created by MINEM through Law 29852 in April 2012, with the objective to provide cleaner energy to the most vulnerable parts of the population. One of three target areas of FISE is the funding

1

Information obtained from COFIDE, interview 19 May 2015.

17

of renewable energy projects, for example solar PV and biodigestors. Funding for FISE comes from a surcharge that has to be paid by large consumers of electricity, oil and natural gas. The Fund is administered by OSINERGMIN.

National Rural Electrification Plan The National Rural Electrification Plan seeks to attract private sector investors to rural areas by providing subsidies to the investment costs of rural projects. For example the FONER project during the first phase between 2006 and 2013 (FONER I) was carried out and provided electricity to 110.000 homes totalling investments of USD 130 million. Based on the results of the first phase, a second phase started in 2013 (FONER II) with available funds of over USD 80 million (IRENA 2014). Funding partly comes from FISE. Similarly, a pilot project was undertaken in 2011 for the targeted electrification of rural microenterprises. Grid connections were provided to 5.000 micro enterprises, especially those engaged in pro-poor activities such as agriculture processing and extension services. Whilst the project was considered successful, its lessons are yet to be formally integrated into an overarching national strategy (IRENA 2014).

1.5

Biomass waste-to-energy generation in Peru

1.5.1 Sustainability aspects of biomass waste use for energy generation The use of biomass for energy generation can help to address climate change and energy security while promoting development in rural areas. At the same time, the increasing use of biomass for energy generation leads to concerns about potentially negative impacts on soil fertility, food security and biodiversity protection, among others. Due to these concerns, the production of energy from biomass residues (rather than cultivated biomass), including from agriculture, forestry and connected processing industries, is receiving increased interest as it is considered less detrimental to the environment. The use of biomass waste does not result in direct land use change or in competition for inputs with food production. Furthermore, no additional pesticides and fertilizers are needed since these are attributed to the agricultural product that provides the residues. Removal of residues from agricultural production can also help to control plant diseases and pests. From a socio-economic point of view, local energy provision based on largely “free” biomass resources from residues can help to reduce poverty by increasing access to energy and by creating new jobs. However, the overexploitation of biomass residues can have negative impacts that are residue and site specific (Zeller et al 2012; Giuntoli et al 2014). These include:

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  

Soil quality: depletion of soil organic carbon (SOC) and nutrient content, loss of soil biodiversity and erosion; Biodiversity: habitat loss, negative impacts on soil biodiversity (microorganisms); Water quality: deterioration of water quality due to erosion.

Indirect negative impacts may arise if waste-to-energy projects displace an existing commercial or noncommercial use of agricultural waste. With regard to the GHG impact, well-designed waste-to-energy projects will reduce GHG emissions compared to fossil fuel alternatives. However, the impact will be reduced, if, for example, the removal of residues reduces SOC. The potential negative impact of using agricultural residues for energy generation depend on the amount removed and is residue and site specific. To avoid negative impacts, the amount of residues that are available for sustainable use need to be quantified at regional level. Project specific parameter, such as soil and climatic conditions, existing agricultural management practices and future use of residues, need to be considered as well.

1.5.2 Biomass waste availability Biomass waste from the agricultural sector has a great potential to be converted to energy. This potential is often untapped. For the development of the NAMA proposal, a study on the availability of agricultural biomass waste was conducted (Gianella Silva, 2013). Thirteen crops were identified that produce quantities of waste which are large enough and also technically suited for energy production. The crops produce about 31 million tonnes of biomass waste annually of which most is burned or left to rot on the fields. For the calculation of the available waste volume, the Bioenergy and Food Security (BEFS) Rapid Appraisal (RA) of FAO was used. BEFS RA consists of a set of easily applicable methodologies and tools which allow users to get an initial indication of the sustainable bioenergy potential and the associated opportunities, risks and trade-offs (FAO, 2014). The crops considered include cotton, rice, sugar cane, barley, coffee, asparagus, three varieties of maize, olive, palm fruit, wheat and grapes (Table 3). In the period of 2005-2011, the selected crops covered on average an area around 1.76 million hectares, equivalent to about 60% of the area under agricultural production in Peru. Table 3 Annual availability of crop residues (tonnes) - average of 2005-2011.

Crop Cotton Rice Sugar cane

Residues (tonnes) 572,083 4,172,540 18,967,989

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Coffee

337,486

Barley

236,006

Asparagus

499,400

Maize “Amarillo Duro”

2,904,397

Maize “Choclo”

599,802

Maize “Amiláceo”

915,928

Palm fruit Olive

1,499,188 22,027

Wheat

251,682

Grapes

34,265

Total

31,012,793

Source: own elaboration

The majority of the thirteen crops are produced by small and medium-sized farmers. About 50 percent of sugar cane is produced by farmers with landholdings over 100 hectares. The production patterns indicate that waste-to-energy activities are potentially an interesting option to add value to agricultural production and to increase energy access in rural areas of Peru. The agricultural production patterns – and hence the biomass waste availability - are determined by geographic and climatic characteristics of three distinct regions which also differ with regard to socioeconomic development (Figure 4) (FAO, 2010). The coastal region (“Costa”) is the smallest in size but holds most of Peru’s arable land and has the largest population (53%). Many farmers in the region have access to modern production technologies and infrastructure and focus on the production of export crops such as sugar and coffee. However, agricultural production is highly dependent on irrigation. Most Peruvian farmers are small-scale producers with land holdings between 1-5 hectares. They are located in the Andean highlands (“Sierra”) and practice mainly subsistence agriculture, growing maize, potatoes and plantain. About 36% of the population are located in the Sierra. The Amazon basin (“Selva”) concentrates the largest area and the least amount of population (11 percent). With a few exceptions, agricultural development in the Selva has been slower compared to the other two regions. Farmers mostly grow non-tradable crops. The extreme geography of the Sierra and the Selva combined with poor infrastructure linking these regions to the coast has meant that growth has been confined to Peru’s Costa region (FAO, 2010).

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Figure 4 Peru and its three geographical areas - Costa, Sierra and Selva

1.5.3

Waste-to-energy potential

The three Peruvian regions differ with regard to the types and volumes of waste that are available for energy production as shown in Figure 5Figure 6. In Lambayeque, Lima and Loreto, sugar cane contributes a substantial share to the total waste-to-energy generation potential. In Junín, primary energy is almost exclusively related to cotton, whereas in Amazonas, Puno and Tacna, residues from rice can be an important source of energy. Further detailed information on regional waste availability can be found in Gianella Silva (2013), Garcia Bustamante and Crispin (2013) and Orrego (2013).

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Figure 5 Distribution of primary energy resources by type of waste per region. Source: own elaboration based on data from Gianella Silva (2013)

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Figure 6 Distribution of primary energy resources by region per type of waste. Source: own elaboration based on data from Gianella Silva (2013)

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The energy potential is unequally distributed across regions (Figure 7). Major potentials are found to be along the coast, where most big agroindustries are located. Also, the Amazon region has substantial potential, however more decentralised. Through promotion of waste-to-energy programmes and projects, the total installed capacity of waste-to-energy projects by 2025 could reach around 800 MW.

Figure 7 Distribution of primary energy resources from major agricultural waste sources. Source: own elaboration

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1.6

Barriers to sustainable energy production from biomass waste

According to Climatescope 2014, an interactive report and index that evaluates the investment climate for climate-related investment worldwide, Peru had the best enabling framework for renewable energy investments in South America in 2014 and was ranked on 10th place at the global level. In recent years, several renewable energy projects have been implemented applying mainly solar, wind and hydro technologies. The successes in these sectors have not been echoed in the biomass waste to energy sector. The auction system for larger scale, grid connected systems has not lifted the bioenergy potential with few successful projects in the two auctions. Application and use of medium and smaller scale bioenergy technologies is also not widely spread despite several schemes in place, in particular for small scale biomass digestors for domestic use. The lack of bioenergy projects in Peru points to several barriers which have so far not been lifted by existing policies and programmes. The following section discusses the most important barriers to the development of agricultural waste-to-energy projects which the NAMA will seek to address based on research (García Bustamante, 2013 and Gianella Silva, 2013) and consultation with key stakeholders. Some of these barriers are common to the renewable energy sector as a whole, others are more specific to bioenergy projects as well as specific bionenergy project types or scales. Table 4 Key barriers to the implementation of waste-to-energy projects

Type

Barrier Economic feasibility of projects is affected by low prices of natural gas. Electricity tariffs (including those under the auction – see also below) are too low to ensure long term feasibility of large scale grid connected (CHP) systems.

Financial

Structuring deals for small scale projects is not attractive for commercial banks due to high relative transaction costs. Some banks require min. loan sizes of USD 5 million. Risk premium by banks due to lack of experience with the development of waste-to-energy projects lead to higher borrowing costs and equity requirements compared to other investment projects. Existing available loan volume for renewable energy projects is too low to promote their scaling up at the national level. Opportunity costs for investments in waste to energy projects can be prohibitive especially where there is limited available investment capital in particular among smaller size agricultural producers. Some agricultural residues have a market value – albeit fluctuating and seasonal. Producers often sell the waste on an informal basis. Many esp. smaller scale producers are reluctant to “formalise” the use of the waste.

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Knowledge/ capacity

There is a lack of knowledge among agricultural producers on the benefits and potentials of waste-to-energy projects. Widespread technology scepticism – coupled with a lack of demonstrable projects – prevents the switch from traditional to alternative energy sources. Limited availability of researchers, project developers, technicians and financial experts with knowledge in the field of renewable energy and in particular bioenergy. The scarcity of experts is especially severe in rural areas where a large share of the potential lies. Financial institutions lack staff and expertise to assess the viability of renewable energy projects. In addition, regulations of some banks only foresee investments in technologies that are already established in the market excluding investments in technology innovation or pilot projects. General perception that renewable energy technologies are too expensive and not viable in a developing country context. There is little public information on experiences with existing waste-to-energy projects. Technical data and scientific information that is needed for the assessment of the costs and benefits of renewable energy projects is disperse, obsolete, not available or not adapted to the Peruvian context. Limited availability of biomass in some regions prevents economies of scale for waste-to-energy technologies. Biomass waste sources are often disperse and smaller quantities and require consolidation which adds complexity and costs.

Technical

The national market for renewable energy technologies is still small and highly dispersed. With regard to biomass conversion, technologies are lacking that are needed for source segregation, collection and transportation, waste treatment and energy conversion. There are only two companies offering the materials and installation of small and medium size biodigestors, both located in Lima. Only one company manufactures large scale biodigestors (SNV, 2013). The quality and cross-compatibility of technical equipment available on the market for all renewable energy technologies besides solar is compromised by the absence of stringent technology standards (Tech4CDM 2009).

Legal & regulatory

Limited investment in research on bioenergy in general, and more specifically on waste-toenergy activities. The regulatory framework in place only covers liquid biofuels and biomass use for grid electricity generation not for heat nor for rural electrification. Significant delays and inconsistencies in project authorisation (e.g. Environmental Impact Assessments must be approved for each project by several ministries and agencies independently) processes caused by limited inter-ministerial/agency cooperation, guidelines

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which provide too much discretion for approval on the part of local regulators and lack of comprehensive technological standards. These delays increase project risk and reduce shortand medium-term returns, causing a disincentive to market entry and a higher probability of early project failure. Lack of clarity on land ownership in some rural areas. Land tenure is a crucial step to incentive long term investments

1.6.1 Auction process – specific barriers Although Peru has implemented partially successful rounds of renewable energy grid connection auctions, barriers remain within this process. The biomass subsector in particular has been largely unsuccessful despite being a major component of the auction allocation; just 2% of the biomass allocation was awarded in the second round, whilst other bids for other technologies filled their respective allocations. It is mooted that the design of the auction process does not favour new players and less mature technologies, such as biomass energy, due to several design flaws (Reegle 2014): 





The short term nature of auction allocations presents no clear long term policy goal, and therefore does not attract new foreign investors and foreign equipment manufacturers to the Peruvian energy market. It is notable that bids from more mature technologies such as wind and solar came primarily from international project developers or international-domestic partnerships that often provide turnkey technologies, whilst no international entities were amongst the bidders for the biomass allocation. The application process is likely to deter bids from conservative projects where the balance between the return and the risks are not as clear or take longer to establish: Firstly, the award structure promotes aggressive bidding which creates a mismatch between value and risks and increases the likelihood of project abandonment. Secondly, the time between the bid announcement and the closing date is not sufficient for all projects to complete a comprehensive business case appraisal; again, this is likely to increase the number of aggressive bids where risks are miscalculated and to deter bids from more conservative project developers, especially when applying less mature technologies, which is particularly relevant for the biomass sector. The difficulties faced by biomass projects in realistically determining their business cases is highlighted by the spread of the bids: the highest awarded bid for biomass was 110% higher than the lowest bid, whilst the same figure for wind, solar and smallscale hydro was 33%, 5%, and 27%, respectively (IFC 2011). The requirements of guarantees in the form of a bid bond of USD 20,000/MW of capacity installed (which is lost if the bid is won but the bidder fails to sign the contract), and at a later stage, a performance bond of USD 100,000/MW of capacity installed is a key barrier for project developers.

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

The ceiling price set for the auction, in particular the second auction, of US$50 per MWh for bioenergy projects was too low to ensure the economic feasibility of projects and deterred developers from participating in the auction.

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2

NAMA Proposal

Based on the review of Peru’s policy framework, agricultural waste availability and potentials and the results of the barrier analysis, a range of activities were identified which together will form the NAMA to promote sustainable energy generation from agricultural waste. The NAMA builds on and integrates ongoing activities and initiatives to promote bioenergy projects in order to create a coherent framework of interlinked activities and interventions.

2.1

Objective

The objective of the NAMA “Sustainable energy production from biomass waste in Peru” is to generate energy from agricultural biomass waste to promote rural sustainable development while contributing to achieve the national renewable energy target. Specifically, the NAMA aims to: -

Promote investment in biomass waste-to-energy projects in the farming and agro-industrial sector; Accelerate the development of a sustainable, national biomass technology and services market in Peru; Enhance national capacities to design, implement, monitor and evaluate waste-to-energy generation projects.

The NAMA seeks to remove identified barriers to create an attractive environment for investments into renewable waste-to-energy technologies to improve economic competitiveness, increase rural energy access and energy security and to reduce GHG emissions in the long term.

2.2

Scope & pipeline

Target groups of the NAMA are agro-industrial, commercial and private agricultural producers with an interest to implement biomass waste-to-energy projects to produce electricity for on-grid connection and mini-grids as well as energy (electricity and heat) for self-supply. Eligible are all waste-to-energy conversion technologies such as biomass digesters for the production of biogas, plants for direct combustion of biomass including combined heat and power (CHP), biomass syngas equipment and pelletizers to produce biomass briquettes for clean cooking stoves (Figure 8). The production of biofuels for transportation is outside the scope of the NAMA.

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Figure 8 NAMA scope

Under the NAMA framework small scale as well as medium to large scale projects will be covered. Activities will be structured in a way to support different project sizes and target groups in the most effective way, taking into account specific barriers. Based on the analysis of the current project pipeline the NAMA targets to deliver approximately 330 MW of renewable energy capacity. This includes the spectrum of small to large projects. Medium to large scale projects include projects for electricity generation that have the potential to participate in the renewable energy auction. Many of the industries have already considered installing waste-to-energy projects and have prepared project outlines that could be converted into full proposals. However, bidding rules of the renewable energy auction as well as difficulties in structuring project finance for large scale projects have been preventing the implementation of projects in the pipeline in the past. There is also considerable potential for the use of agricultural waste for self-supply energy systems. In contrast to the large grid connected systems, the potential for self-supply systems is located mainly in smaller to medium sizes agricultural companies. These face particular barriers to investment associated with their often informal corporate structures and lack of capacity within the companies. Smaller companies also find it more difficult to access finance also because the project sizes are less attractive to banks, as well as the perceived high risk of projects. Generally there is a lack of information on the benefits of biomass technologies as well as scepticism regarding their reliability.

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The National Rural Electrification Plan aims to deliver universal energy access at the household level. Target regions of the Plan include Arequipa, Ayacucho, Apurimac, Cusco, Huancavelica and Puno. In the target region, approximately 615,000 families have insufficient access to electricity and/or energy for cooking and heating. According to our calculations, waste-to-energy projects could cover on average about 70% of the unsatisfied demand for electricity of the households in the six regions and approximately 30% of the unsatisfied demand for cooking and heating sources. Barriers include in particular lack of finance as well as lack of access to information and technology. Annex I provides detailed information (on a province and regional level) on the current energy access situation in the target regions and on the waste-to-energy generation potential. The Ministry of Agriculture is currently developing NAMAs in several productive sectors, including coffee, cocoa and palm oil. The activities under this NAMA will be closely coordinated with planned activities by the Ministry of Agriculture in relevant sectors (mainly palm oil) to ensure synergies and mutual benefits. The institutional set up for the implementation of this NAMA (see section 2.4) responds to this need. The below figures (Figure 9 and Figure 10) illustrate the project pipeline for the NAMA by technology type and sector showing the number of projects and total size of projects respectively.

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Figure 9: Number and size of installations by technology type

Figure 10: Number and size of projects by sector

2.3

NAMA design

The NAMA is structured in a way to address the identified barriers to the scaling up of biomass wasteto-energy projects in Peru. The activities proposed under the NAMA are built around existing policies and initiatives which have been put in place to drive renewable energy implementation in Peru. As outlined in the background section of this document, several policies and incentive schemes including financial support mechanisms already exist. However, these have so far not led to a significant increase in biomass waste to energy projects and capacity in the country. In this sense, the NAMA needs to be understood as an umbrella which seeks to combine existing initiatives with additional measures to create a comprehensive, well-orchestrated set of interventions which together aim to remove or reduce the diverse range of barriers. It is important to ensure that individual interventions are not stand alone but part of a strategic, well-coordinated package. Equally, the NAMA will be careful to avoid duplication of activities but rather enhance, scale up and use synergies of existing measures in the most effective way. Figure 11 provides a schematic overview of the NAMA which will be described in further detail in the ensuing sections.

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Figure 11: Schematic NAMA design (grey boxes are not part directly part of the NAMA)

The NAMA centres on a finance component which comprises various schemes to support investment into biomass waste to energy technologies targeting different project sizes from small to large scale. The existing schemes (shown in grey), including the Renewable Energy Auction, the Bionegocios programme of COFIDE and the Fondo de Inclusión Social Energético (FISE) of the Peruvian government are not part of the NAMA but will be complemented or, as in the case of Bionegocios, potentially scaled up (+) with additional incentive schemes: a guarantee fund and associated loan programme mainly targeted at medium and large scale projects and a grant scheme for small and micro scale projects. The finance component will be embedded in a programme of activities to foster the development of a bioenergy market in Peru and to drive the demand for available financial support schemes. Principally this includes a so-called Project Support Centre which will act as a central hub for information and support for project developers and other interested stakeholders. In addition, the implementation and showcasing of demonstration projects, a targeted Education & Training Programme as well as R&D activities are foreseen.

2.3.1 Project support centre The project support centre will act as the central entry point for project developers and stakeholders interested in the development of activities related to bioenergy in Peru. As a central knowledge hub on biomass waste-to-energy projects and technologies it will provide direct assistance and information to project developers and other market participants throughout all stages of project development and

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implementation. The project support centre comprises a help desk and an information platform. Initially it can be set up as a programme or department within the Ministry of Energy. In the medium to longer term the establishment of an independent centre or agency for the promotion of renewable energy systems, including and beyond bioenergy, is foreseen. This would then cover the breadth of renewable energy technologies as well as potentially also energy efficiency.

a) Virtual help desk A technical help desk will be set up to provide direct technical support to project developers on questions related to technologies, project development and regulatory and legal matters. In particular the help desk will provide support and advice in the following areas: -

Project preparation and feasibility (economic and technical) Selection and application of different technology options Developing business plans Structuring finance and investment including setting up of Power Purchase Agreements (PPAs) Operation and management of waste to energy projects

The help desk will operate as a virtual space and can be contacted either electronically or via telephone.

b) Information platform Information on agricultural waste-to-energy projects is scattered and therefore difficult to access. An information platform in form of a website will be established to provide technical and commercial information that is needed to plan, implement and evaluate waste-to-energy projects in a systematic and user-friendly way. The platform will include the following elements: -

-

-

Library of information on waste to energy technologies and systems as well as information on regulatory aspects, relevant laws and regulations and studies on potentials of different options by region. Information on case studies building on the experiences gained through the implementation of projects under the NAMA. Each case study will include information on the main features of the project, technology, installed, capacity, contact information etc. The case studies will be presented in form of a regional map. A database of consultants, technical experts, projects developers and financing institutions which support waste to energy projects during the different project stages.

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2.3.2 Capacity & market support component The objective of the capacity and markets support programme is to develop and enhance national capacities to design, implement, monitor and evaluate agricultural waste-to-energy projects and to drive a long-term market for waste-to-energy applications in Peru. The programme targets all segments of the economy at the national, regional and local level, including project developers, energy service professionals, the financial service industry as well as relevant government officials. Activities will be designed to the specific needs and knowledge gaps of different stakeholder groups. The capacity and market support component will be coordinated by the Project Support Centre. It includes three main pillars: Education & training, Demonstration projects and Research & Development (R&D).

a) Education & training The scaling up of waste-to-energy projects in Peru will require significant capacity building efforts at all levels. This will include very specific training courses targeted at individual stakeholder groups as well as broader information and education campaigns to communicate benefits and opportunities associated with waste to energy technologies in the different sectors and regions. The target groups for the activities will range from experts from agricultural companies, project developers, sector and industry representatives, energy service and technology providers, government officials, finance institutions as well as civil society. Courses will be accompanied by guides and training materials on the specific topics which will be made available to a broader audience. An overview of specific topics of the education and training programme is outlined in the table below. Topic

Target group

Format

Project development and investment planning

Project developers

Biomass waste to energy technology options

Industry

Seminars, workshops, knowledge exchanges Guidance and tools

Regulatory and administrative issues associated with project operation/ electricity grid connection

documents

Monitoring and reporting of bioenergy projects Technical, legal and financial evaluation of projects Design and implementation of monitoring systems

Technical and financial evaluation of bioenergy

National, regional, local government and implementation agencies of the NAMA

Seminars, workshops, knowledge exchanges Guidance and tools

documents

Financial institutions

Seminars,

workshops,

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projects

knowledge exchanges

Opportunities and investment risks

Guidance and tools

documents

Financial support programmes and incentives Bioenergy potentials and technology options Project design, construction, operation and maintenance of bioenergy projects Financial support programmes and incentives

Engineers, technical operators

Seminars connected to university programmes and other professional training Manuals, educational material

In addition to specific training and education activities, a broader awareness campaign will be implemented to raise public awareness on the benefits and opportunities associated with waste-toenergy applications. The programme will target policy makers, entrepreneurs, researchers, industry representatives and the general public to increase awareness about the opportunities offered by the bioenergy sector. Activities to be carried out under the programme include: -

Information campaigns on the economic and environmental opportunities of bioenergy; Presentations (“roadshows”) on new technologies and successful examples; Organization of round tables at provincial and local level to bring together relevant actors interested in promoting and implementing projects for the generation of energy from biomass to generate energy from biomass.

b) Demonstration projects The number of agricultural waste-to-energy projects in Peru is still low. Due to the lack of experience, little data is available for a thorough assessment of the performance of waste-to-energy projects. This leads to uncertainty and high risk of investments in renewable energy technologies. To generate more information, the NAMA will support the establishment of pilot projects and demonstration sites in the three geographical regions of Peru. Projects and sites will be selected to be representative of different waste and technology types, project scales and environmental conditions. The selection will include demonstration projects for grid connection and self-supply. Existing waste-to-energy installations will also be considered as they can provide valuable lessons learned from project development and implementation. Demonstration sites of successfully proven technologies could be established in cooperation with research institutes and universities for the longterm monitoring of performance and impacts and for capacity building of different audiences.

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c) Research & Development (R&D) In order to create and develop a local technology market and advance the applicability and effectiveness of current bioenergy systems the NAMA will support ongoing and new R & D activities. R & D support will be planned in collaboration with universities and existing research centres in Peru. In addition to research support a number of studies are planned in order to improve the current data and knowledge on biomass potentials in the country. These include the development of bioenergy strategies at the regional level in connection with existing development policies.

2.3.3 Finance component Experiences with biomass waste-to-energy activities are limited in Peru. More examples are needed that demonstrate the economic, technical and environmental viability of projects in this field to scale them up on a national level. However, at the early stage of market development, there are a number of barriers to the investment in such projects. The barriers include higher up-front capital costs for renewable energy projects compared to conventional options, limited access to finance, higher local technology costs due to immature markets and risk aversion of potential investors and financiers due to limited experience and knowledge of the technologies and their potential. The limited number of implemented bioenergy projects in Peru leads to high risk mark ups by financial institutions which significantly increase the cost of finance. The lack of experience with the technology in the country leads to increased investment costs that can be reduced overtime through increased implementation of reference projects Small-scale renewable energy projects face further challenges given the level of due diligence required as a proportion of the overall investment size. At the early stage of market development, focus of the financial support scheme will be on restocking the provision of risk mitigation measures to incentivize commercial investments in waste-to-energy projects and on financial subsidy instruments to make smaller projects financially viable that have a strong sustainable development impact in particular in rural areas. Financial support will be provided at the pre-investment and the investment stage with the mix of instruments addressing the finance needs at both the demand and supply side of project finance. There are already several initiatives in place in Peru to support biomass waste to energy projects including the mentioned renewable energy auction and loan schemes, for example, through the Bionegocios programme of COFIDE. These existing schemes will be embedded in the additional financial incentives to be funded through the NAMA.

Supporting large scale projects

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For large scale, grid connected projects the main barriers to investments are high upfront capital costs well as long term financial viability of the investment. The latter is partly addressed through the existing electricity auction run periodically by the Peruvian government, although to date a limited number of bioenergy projects has been implemented as a results. In order to address the remaining barriers to investment several incentives are proposed which support investments along the different stages of project development. These include grants for pre-feasibility studies, a preferential credit line as well as a guarantee scheme to facilitate commercial bank loans at attractive rates. Combined with existing support schemes the proposed activities are designed to support the implementation of bioenergy projects during the different stages of project development as illustrated in Figure 12 (note this also includes technical support measures described earlier).

Figure 12: Support activities – Large scale projects

Figure 13 outlines schematically how different mechanisms would support the financing of large scale projects. Projects would generate income through the auction scheme or individual power purchase agreements (PPAs). Equity coupled with an investment loan – either through a direct credit line from a public bank or through a private bank facilitated through a guarantee fund – would provide project finance. NAMA funding would be used for the credit line, to capitalise the guarantee fund as well as cofinance pre-feasibility studies alongside or integrated with existing activities carried out by public banks in Peru.

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Figure 13: Schematic view of support scheme for large scale projects

How each support mechanism operates is described in the following. Grants for pre-feasibility studies Paying for pre-feasibility studies can be a high financial burden for project developers, especially if the outcome is uncertain. In early stages of market development, grants will be made available to cover part of the costs of pre-feasibility studies for waste-to-energy projects to reduce the risk associated with investments. It is expected that the grant fund will only be necessary during the initial phase (2016 – 2020) of NAMA implementation until the market has reached sufficient maturity with successfully implemented projects driving demand. Project proponents can apply for co-funding of pre-feasibility studies to the Project Support Centre. The studies will have to be undertaken by service providers that have been approved by the Centre to ensure quality and consistency of delivery under the NAMA. Co-financing for pre-feasibility studies is available to all projects which meet the eligibility criteria. Eligibility criteria will cover technology type, waste sources, and financial feasibility and sustainability safeguards. These will be set by the Project Support Centre to ensure that only quality projects with a high potential to be implemented will benefit from this support scheme. Project developers can apply for co-financing of up 50% of the total cost of the study or a maximum of US$ 10.000 per study. Credit line/ loan programme One of the main barriers to the implementation of bioenergy (and other renewable energy) projects is the high cost of capital. In general, this is the result of high commercial interest rates driven by high risk mark ups and short loan terms offered by banks.

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A credit line or loan programme will be established which provides loan finance at attractive terms both with regards to interest rates and tenure. A credit line can provide finance directly to project developers. This could be administered through a national development bank with first and second tier funding from international and national sources. The existing Bionegocios programme run by COFIDE already offers loans to renewable energy project developers. The loan terms are negotiated on an individual project by project basis depending on specific project characteristics and finance needs. This existing scheme could either be scaled up using additional NAMA funding or a separate credit line specific to bioenergy projects could be set up to run alongside the Bionegocios scheme. It is intended that the credit lines operates in Peruvian soles with indicative interest rates of 2,25% and terms of up to 15 years in order to improve the profitability of projects and their access to funding. The loan will cover a maximum of 80% of the total investment costs requiring an equity share of a minimum of 20% from the project developer. Projects that meet all general eligibility criteria and that submit a feasibility study prepared by a company approved by the loan facility are eligible to apply for a concessional loan. The Project Support Centre will be responsible for the technical evaluation of projects in close coordination with the financial institution in charge of the management of the credit line. Guarantee fund In the medium to long term the aim is that developers of bioenergy projects can obtain debt finance through regular commercial banks. In order to enable commercial banks to provide finance to investors at attractive terms a guarantee fund will be set up. The fund would be structured as a “first-loss tranche”, assuming a majority share of the default risk of project loans provided by commercial banks. This measure will reduce the lending risks of banks and thus reduce the cost of finance. In particular renewable energy projects applying less proven technologies are perceived as high risk resulting in high risk premiums imposed by banks. The guarantee fund is proposed to be managed by a second tier bank (e.g. national development bank). The default risk can be assumed either directly by the fund or through a third party that would provide re-insurance to cover some or all of the default risk. In this case NAMA funding can be used to pay for the insurance premium.

Supporting small to medium scale projects for self-supply Smaller and medium scale projects for self-supply energy use typically face the barrier of high capital investment costs and associated opportunity costs given limited capital resources at the company or household level. This is coupled with a general lack of access to finance in particular of smaller businesses and households in rural areas. Limited economies of scale lead to higher costs of small projects compared to large scale ones. Potential end users/ investors in systems for self-supply tend to have less resources and income available to develop and carry out such projects. Hence additional support will be required to develop a project pipeline at the national level, to build capacities as well as

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support the investment in bioenergy systems more directly. A key motivation is to increase security of energy supply in particular in regions with unreliable grid electricity and to extend electricity access to a larger share of the population. In some cases finding alternative uses for waste products which are subject to environmental regulation is also a motivating factor. Similar to the support available for interconnected projects, smaller projects will be supported throughout the different stages of project development (Figure 14).

Figure 14: Support activities – Self supply projects

Grants for pre-feasibility studies As described in the previous section grants for pre-feasibility studies will be available for projects for self-supply energy use mainly in the agro industry sector. These will cover up to 50% of the cost of the studies up to a maximum of US$ 5,000 per study. Loan programme Similarly, self-supply projects will also be eligible to apply for preferential loans to be facilitated through the national development bank or via commercial banks associated with the guarantee fund. Investment grant scheme The grant scheme will provide financial support for project preparation as well as project finance for self-supply small and medium scale projects. Eligible projects include projects up to 50 kw capacity which can demonstrate strong sustainable development benefits, in particular those in rural and remote areas. Investment grants will be adjudicated on a case-by-case basis. Successful applicants can receive up to 20% of the total investment costs up to a maximum of US$30,000 per project. In terms of implementation, the grant fund will either be used to scale up existing grant schemes run by the national or regional government (e.g. FISE) or set up as a complementary fund. It is expected that investment grants will be phased out as the market for waste- to-energy technologies matures.

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2.3.4 Rationale of the financial scheme In order to better understand the type and level of financial incentive needed to drive investments in bioenergy projects in Peru, several scenarios were developed to understand the impact of different financial mechanisms on project costs. The approach is based on the calculation of the Levelised Cost of Energy (LCOE) of the project pipeline for bioenergy projects in Peru and how it is affected by different financial interventions. The calculation methodology and the specific assumptions are detailed in Appendix II. Here the results are presented and discussed. The analysis is based on five investment scenarios. All scenarios assume an equity share of 20% by the project developer with 80% of loan finance from different sources (public – private). The scenarios include the following (for detailed assumptions please refer to Appendix II). -

-

Private banks: assumes majority (60%) loan finance from a commercial bank with 20% public intervention Private with guarantee: assumes majority loan finance (see above) and that a guarantee fund is available to reduce the cost of lending for commercial banks Phase in of private banks: assumes initial loan finance to be provided by public banks with an increase in lending activity by commercial banks Phase in of private banks with guarantee: assumes initial loan finance to be provided by public banks with an increase in lending activity by commercial banks supported by a guarantee scheme – reflecting the finance scheme proposed under the NAMA. Public banks: assumes majority (60%) loan finance from public banks at reduced interest rates (20% private)

The impact on the LCOE according to the five scenarios is shown in Figure 15 for the full project pipeline. The average LCOE is compared to average generation costs in Peru as well as the average price set by the renewable energy auction in the first and second round.

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Figure 15: Average LCOE of project pipeline

Figure 16 shows the impact on the LCOE on a project by project basis.

Figure 16: Average LCOE by project

It can be seen that where full finance from public banks is assumed the weighted average LCOE is closest to actual generation costs in Peru as well as the price adjudicated in the second auction. Also

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the proposed finance scheme under the NAMA (phase in of private banks with a guarantee scheme) brings project costs down significantly improving the financial viability of a number of projects currently included in the pipeline.

2.4

Institutional set-up for the NAMA

MINEM is the government entity responsible for the implementation of the NAMA. The implementation will be overseen by the Directorate for Energy Efficiency (DGEE) and the Directorate for Rural Electrification (DGRE) in a joint capacity. The proposed Project Support Centre will be subordinate to MINEM and responsible for coordinating the implementation of the activities proposed under the NAMA as well as for the monitoring and reporting of impacts and results (see Section 5). MINAM will have oversight of the overall NAMA to ensure that it complies with national guidelines on NAMA implementation and monitoring. MINAM is also responsible for communicating relevant information of the NAMA to the UNFCCC, for example, in its Biennial Update Reports (BUR) and National Communications as well as nationally under the emerging national monitoring and reporting system (National GHG Registry). Activities of the NAMA directly related to policies and programmes in the agricultural sector under the leadership of the Ministry of Agriculture (MINAGRI) will be closely coordinated with the same. In particular the planned NAMA activities of the MINAGRI in several productive sectors, including palm oil, will be closely coordinated. Also regional governments are expected to play a role in selecting NAMA activities and coordinating their implementation. Figure 17 illustrates the institutional set up for the NAMA.

Figure 17: Institutional set up

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2.5

Timeframe for NAMA implementation

The scaling up of agricultural waste-to-energy activities will take time. Awareness of the potential and benefits of waste-to-energy generation needs to be raised and capacities have to be built to develop, implement and evaluate projects. The implementation of the NAMA activities is expected to start in 2016 until 2025. An indicative cumulative project pipeline is shown in Figure 18.

Figure 18: Cumulative installed project pipeline

During the early stages of NAMA implementation a particular objective is to show case the opportunities arising from waste-to-energy projects, test existing and new technologies and identify further barriers that need to be removed to facilitate the upscaling of projects. Involvement and support of R&D are essential in this phase in order to enhance local capacities and eventually establish a national market in this area of technology. Information gathered in the early phase of implementation will feed into the refinement of financial and technical support activities. The pipeline of waste-to-energy projects for grid-connection, minigrids and self-supply projects will be expanded in parallel. It will help to improve the quantification of the biomass waste-to-energy potentials, define types of projects and determine support needs going forward.

45

3

Impact assessment

This section presents an approach to understanding the link between individual activities of the NAMA, their impacts and the achievement of the overall objectives. The NAMA is part of a set of wider activities in the energy sector in Peru. It is not possible to isolate all the impacts of the NAMA from other on-going initiatives. In general, impacts are assessed along two dimensions: direct and indirect. The assessment boundary for direct impacts contains the individual waste-to-energy projects to be promoted under the NAMA framework. The assessment boundary for indirect impacts is larger and contains impacts that have a plausible connection to NAMA activities.

Direct impacts

The GHG reductions and sustainable development impacts of projects that receive implementation financing from incentive programmes that are part of the NAMA. Direct impacts are described quantitatively.

Indirect impacts

The GHG reductions and sustainable development impacts of long-term, transitional changes in the targeted sector and subsectors. These impacts are assessed when there is a plausible connection to NAMA activities and are described qualitatively.

It is important to note that some of the quantified direct impacts are only possible through activities which also affect long-term indirect impacts (e.g. capacity building). The NAMA will have various types of impacts that range from reductions in GHG emissions to the creation of jobs at project sites. We focus on two general types that best capture the objectives of the NAMA: GHG impacts and sustainable development impacts.

3.1

Impact on GHG emissions

Direct GHG impacts come from the substitution of fossil fuels for electricity and heat generation and from avoided methane emissions from unprocessed waste. Avoided methane emissions are difficult to project since they depend on a large number of factors. At this stage of the proposal, we therefore consider only GHG emission reductions from the substitution of fossil fuels. Starting in 2017, it is assumed that installed capacities under NAMA gradually increase to reach 330 MW installed in 2025. This is expected to lead to GHG emission reductions of approximately 2 MtCO2 per year and total emission reductions of 12.8 MtCO2 between 2017 and 2025.

46

The emission reductions result from the substitution of fossil fuel for electricity and heat generation. Not considered quantitatively in this assessment are reductions from avoidance of uncontrolled anaerobic fermentation of agricultural residues left to rot on the fields.

Figure 19: Yearly GHG emission reductions according to project pipeline

3.2

Sustainable development benefits

Additional to emission reductions and the resulting contribution to climate change mitigation, the implementation of the NAMA is expected to generate important co-benefits in particular associated with activities designed to increase rural electrification and improve rural energy access more generally. The disposal of agricultural residue waste is a serious issue in rural Peru. Much of the material is burned or siphoned into rivers, with major implications for GHG emissions, fire hazards, and pollution of scarce water resources. Professional disposal of waste from agricultural residues is now obligatory. The transaction costs associated with professional waste disposal would be either assumed by poor subsistence farmers, or passed on to the consumer for marketed goods through increased prices. In the former scenario, the improbability of resource poor subsistence farmers to be able to afford such costs is a major barrier to compliance with the law in rural areas, leading to the continued use of poor disposal practices and the subsequent degradation of the local environment, the services of which are essential for the economy and livelihoods of the rural population. The use of agricultural residues for energy generation, as outlined in this proposal, mitigates this issue. Assuming universal compliance with the regulation for waste disposal, the NAMA would pass direct cost savings on to farmers, and in doing so would also encourage their participation in the programme,

47

thereby increasing the potential of its upscaling and replication. In the case that universal compliance with the law is not assumed, the indirect monetary benefits of avoiding local environmental degradation are undoubtedly scales higher than the immediate cost savings indicated. Another important co-benefit of the NAMA is reduced indoor air pollution. The use of solid biomass fuel in unimproved stoves for cooking and heating in households is a primary source of indoor air pollution. It is estimated that up to 85% of Peru’s rural population, as well as the poorest 10% of the urban population, use solid fuels for these purposes on a regular basis. Indoor air pollution is associated with numerous negative health impacts, particularly for women and children who are most commonly occupying polluted spaces. The risk of contracting acute respiratory infection (ARI), chronic obstructive pulmonary disease (COPD) and lung cancer, are up to 2.7, 4.8 and 2.1 times higher, respectively, for those exposed regularly to indoor air pollution (Desai et al 2004). The risk of contracting Asthma or Tuberculosis is also considerably higher. Overall, indoor air pollution from the use of solid fuels is estimated to account for 1% of the national disease burden in Peru, and 0.4% of national GDP. In this regard, Peru carries one of the largest burdens of indoor air pollution, compared to other middle -income countries. The total cost of indoor air pollution from the use of solid fuels in 2007 was approximately 1 billion soles, or approximately 350 million USD. The total number of annual Disability Adjusted Life Years (DALYs) lost due to indoor air pollution from solid fuel use is between 47,900 (WHO 2007) and 62,100 (World Bank 2007). The major component of this burden is infant morbidity and mortality; approximately 1,230 deaths of children under the age of five each year are attributed to acute respiratory infection from solid fuel use in the household each year, in addition to up to 3 million cases of infant morbidity. For adult females, approximately 600 deaths per year are attributed to COPD from solid fuel use in the household, in addition to over 1 million cases of morbidity. In addition to the benefits for rural communities the investment in and development of a bioenergy technology and services market in Peru is expected to lead to additional social and economic benefits. The co benefits are summarised in Table 5 shows a summary of the expected co benefits of the NAMA. Table 5: Expected co-benefits

Co-benefit Social

Description - Improved quality of life of the rural population and vulnerable communities through improved access to energy. - New direct and indirect jobs associated with the emerging technologies and services market

48

Economic

- Reduction of companies’ operation costs due to displacement of fossil fuels and/or electricity from the national grid - Reduced costs for waste management and additional income from adding value to waste - Improved competitiveness of agricultural businesses - Strengthening regional development through the integration of agricultural, forestry and industrial activities and the creation of complementary services

Environmental

- Diversification of the energy mix by increasing the contribution of renewable energy - Improving air, soil and water quality by reducing local emission of air pollutants, effluents and impacts generated by the accumulation of biomass residues - Reduced indoor air pollution - Reduced risk of fires caused by accumulated biomass residues - Controlled disposal of biomass waste

Institutional

- Building capacity across government for the development, implementation and monitoring of strategies for the generation of energy from biomass residues - Improved cooperation among institutions, government and private sector stakeholders

49

4

Finance and support needs

International support will be required to complement national resources in order to implement the activities proposed under the NAMA and to achieve the impacts outlined in section 3. This section outlines the estimated costs for the implementation of the two different components and associated activities described in earlier sections. Error! Reference source not found. provides a summary of the stimated costs distinguishing between grant and loan based support. A more detailed description for each of the activities follows below. Table 6 Summary of finance needs for incentive schemes Component/ activity Capacity & Market support component

Amount (USD) loan based

Amount (US) grant based

-

4,400,000

Financial support component Prefeasibility studies Loan scheme/ credit line

350,000 635,000,000

Capitalisation Guarantee Fund

80,000,000

Investment grants

1,500,000

Total

635,000,000

86,250,000

50

4.1

Finance needs for the capacity & market support component

The costs for the implementation of the activities under the capacity & market support component are summarised in Table 7. Costs are indicative and will need to be verified when defining the detailed implementation plan. Table 7: Estimated costs for the capacity & market support component Capacity & market support - Annual costs in USD Activity

2016

2017

2018

2019

2020

Total

Project support centre

200,000

200,000

200,000

200,000

200,000

1,000,000

Education & Training

200,000

400,000

400,000

400,000

200,000

1,600,000

50,000

150,000

150,000

150,000

150,000

650,000

150,000

150,000

150,000

150,000

150,000

750,000

80,000

80,000

80,000

80,000

80,000

400,000

Demonstration projects R&D Administration of the NAMA MRV system TOTAL

4,400,000

4.2

Finance needs for the financial support component

4.2.1 Prefeasibility studies The cost for co-financing pre-feasibility studies have been estimated based on an indicative number of medium scale projects for self-supply and large scale projects for grid connection. The current pipeline includes ca. 40 projects of which half are assumed to apply for co-funding to undertake pre-feasibility studies. Co funding would be available of up to 50% of the total cost of the study up to a maximum per individual project of US$ 10,000 (see Section 2.3.3). For the self-supply bioenergy projects it is assumed that a total of 30 projects will apply for cofinancing. This is based on the assumption that capabilities have to be developed in different regions in Peru and that the structures of self-supply bio energy project are different from project to project but that there is a threshold after which sufficient knowledge exists. Similarly to the medium to large scale projects, co funding of up to 50% of the total cost of the study up to a maximum per individual project of US$ 5,000 is available.

51

Number of projects

Maximum co- financing USD

Financial support for prefeasibility studies (USD)

20 large scale projects

10,000

200,000

30 self-supply bioenergy projects

5,000

150,000

Total

350,000

4.2.2 Loan scheme/ credit line The requirement for the low-cost loan scheme were estimated based on the project pipeline for Peru. Figure 20 shows the estimated investment costs for all projects currently included in the project pipeline (see Section 2.2). The costs are for illustration purposes only and show a minimum to maximum cost range. Given the limited available information on actual project costs in Peru, the estimations are based on international data sources and benchmarks.

Figure 20: Investment costs per year

Similarly, Figure 21 shows the estimated investment costs on a project by project basis.

52

Figure 21: Investment costs by project

It is proposed that in the beginning 60% of the project funding will be financed by low cost loan schemes in the first year of implementation (2017) and that this number will decrease linearly over the years to reach 20% in the last year of implementation (2025). This scenario assumes a phasing in of private finance. Alternatively one could envision that the share of public financing will remain high (60%) throughout all the years of the NAMA.

53

Table 8: Overview proposed low cost credit line Low-cost loan scenario

Phase in of private financing

Description/ Assumptions

Low cost loan for suggested project pipeline (in US$)

Beginning: 60% public financing, 20%

635,000,000

private financing End: 20% public financing, 60% private financing 20% equity throughout Public financing

60% public financing, 20% private

806,000,000

financing and 20% equity throughout

Figure 22

provides an overview of costs of each of the financing scenarios. In addition to the two proposed financing setups mentioned above (Table 8), the figure also includes scenarios that are primarily dominated by private financing. These scenarios were used to understand the impacts of the proposed loan schemes on the levelized cost of electricity (LCOE) as described in section 2.3.4.

Figure 22: Cost implications of different financial support scenarios

54

4.2.3 Capitalisation of the guarantee fund A capitalization of the guarantee fund of 80,000,000 US$ is proposed (see also Figure 22). With the suggested project pipeline this corresponds to a depletion of the fund in the year 2030, assuming a yearly default loss of 10%. A higher capitalization could be envisioned to allow for postponing the depletion fund further into the future or to allow for a higher yearly default loss.

4.2.4 Investment grants Investment grants will be made available to project developers for small scale projects up to 50 kw capacity with significant sustainable development benefits, mainly targeting rural electrification. Grants will cover up to 20%of the total investment costs up to a maximum of US$ 30,000 per individual project. Number of projects

50

Maximum investment support per Project

Financial support needed for support cofinancing

USD

USD

30,000

1,500,000

55

5

Monitoring Reporting and Verification (MRV)

This section describes the monitoring framework for the NAMA. The MRV system is in line with the concepts and requirements established under the UNFCCC and with the fundamental principles of MRV systems: relevance, exhaustiveness, consistency and transparency. Furthermore, the system adopts and adapts internationally recognised methodologies and guidelines2. The MRV system is designed to be in line with national reporting requirements established by the government of Peru and MINAM. This requires the capture of GHG relevant data at the sectoral level to feed into a national GHG registry which is currently under construction.

5.1

General framework

The MRV system will monitor the impacts of the NAMA as related to the NAMA objectives. These include GHG related impacts and promotion of sustainable (rural) development. The MRV system will also track the progress of implementation of the various components to ensure that these are on track to meet the objectives. The MRV system comprises all NAMA activities included under the two components as described in Section 2.3: -

Individual bioenergy projects which receive support under the NAMA Capacity and market support activities Activities under the financial component

The aim of the MRV system is to measure and report the impacts and results of the NAMA according to its main goals, including: -

Reduction of direct and indirect GHG emissions Enhanced capacity at the national level to undertaken mitigation activities Contribution to sustainable development.

The system includes two types of indicators for monitoring and reporting: -

Impact indicators which measures progress towards achieving the goals of the NAMA Progress indicators which measures the status of implementation of different NAMA activities

2

For example: Guidance For NAMA Design Building on Country Experiences (UNFCC Secretariat, UNEP RISOE and UNEP); Clean Development Mechanism: Standard CDM project methodologies and tools applicable to biomass energy generation projects; and "Institutional Arrangements for MRV" (International Partnership on Mitigation and MRV)

56

The general MRV system framework is illustrated in Figure 23 below.

Figure 23: MRV Framework

Impact and progress indicators are both quantitative and qualitative in nature and are formulated according to the SMART approach: Specific (S), Measurable (M), Accepted (A), Realistic (R), and Timely (T). The specific indicators are outlined in the following sections.

5.2

Impact indicators

Table 9 provides an overview of impact indicators related to the NAMAs objectives. Each indicator includes a description of what it measures, information on the proposed baseline and data collection.

57

58

Table 9 Impact indicators Dimension of impact

Goal measured

Proposed indicator

Definition of the baseline

Data collection

Level

Frequency of measurement

GHG emissions reduction

Tonnes of reduced GHG emissions

- tCO2eq reduced; - thermal and electrical MW installed - Type and amount of biomass (tonnes) consumed by the projects

- Grid electricity replaced by the NAMA projects; - Heat from fossil fuels substituted by the NAMA projects; - Type and amount of biomass (tonnes) residues burned or anaerobically decomposed in the field.

- Energy produced (heat and/or electricity) - Biomass consumption; - Emission factor of the electricity grid - Emission factors of the fuels

Project level

- Annually or less

Improved technical capacity to develop biomass energy projects

- Number of active companies after three years of the NAMA implementation. - Number of trained engineering service companies;

- Number of engineering companies in operation at the start of the NAMA implementation

- Company registry and business associations - Information from the capacity building activities carried out under the NAMA

Programme level

- Annually or every two years.

Improved financing conditions

- Number of commercial banks offering credit lines for biomass energy projects; - Volume of credit distributed to projects by commercial banks

- Business- as- usual scenario of the financial market regarding financing for biomass energy projects.

- Market research - Surveys of commercial banks

Programme

- Annually or every two years

Generation of new capacities and resources to evaluate and monitor NAMA projects at government level

- Number of trained personnel available

- Number of trained personnel at the start of the NAMA

- Human resources information

Programme

- Annually or every two years

Enhanced mitigative capacity

Programme level

59

ENVIRONMENTAL

Sustainable development

ECONOMIC

SOCIAL

Dimension of impact

Goal measured

Proposed indicator

Definition of the baseline

Data collection

Level

- Job creation

- Number of jobs created as a result of the bioenergy projects

- Number of employees in the companies involved in the bioenergy sector

- National statistics - Business associations

Programme/ National

Frequency of measurement - Annually or every two years

- Improvement in the quality of life in rural areas

- Number of rural communities with improved energy access to energy

- Number of communities with poor energy access at the start of the NAMA

- National statistics - Regional government.

Programme/ National

- Annually or every two years

- Reduced energy costs for companies - Reduced biomass waste disposal costs

- Percentage of cost reduction

- Costs of thermal and/or electrical energy - Cost of waste disposal

- Project developers/ companies where bioenergy system is installed

Project/ Programme

- Annually or every two years

- Reduction of imported fossil fuels at the national level

- Amount of offset fossil fuel imports due to biomass energy projects

- Amount of imported fossil fuels used by the companies involved in bioenergy projects under the NAMA, before the NAMA programme.

- Amount of imported fossil fuels substituted by the projects.

Programme/ National

- Annually or every two years

- Participation of biomass in the national energy matrix

- % power generation from biomass in the national energy matrix.

- % power generation from biomass in the national energy matrix before the NAMA.

- Biomass energy produced under the framework of the NAMA.

Programme

- Annually or every two years

- Improved air quality

- Number of households with improved air quality

- Number of households suffering from poor air quality.

- National statistics - Regional government

Programme

- Annually or every two years

- Market prices

60

61

5.2.1 Boundary for GHG emission reductions through generation of energy from agricultural waste The use of biomass residues for generating heat and electricity offsets greenhouse gas emissions from two processes P1: The replacement of fossil fuels (assumed to be the traditional fuel source) for energy generation offsets the carbon dioxide emitted through the combustion of fossil fuels. P2: The use of residues for generating energy offsets the need for traditional disposal processes; biomass decay under anaerobic conditions causes methane emissions. Due to the complexities associated with the calculation of methane emissions these will not be considered for monitoring under this NAMA.

Electricity

Fossil

generation

fuels

CO2 Heat generation

Biomass residues

Disposal

CH4

Figure 24: Process diagram showing the displacement of greenhouse gases by the generation of power and heat from biomass residues. Greyed out boxes and red dashed arrow lines represent existing elements of the chain removed by the new source of power generation, which is represented by the thick blue arrow.

5.3

Progress indicators for NAMA objectives

Progress indicators will be used to measure the implementation of the different activities under the two NAMA components. Specific indicators are summarised in Table 10. All progress indicators will be collected at the programme level.

62

Table 10: Progress indicators NAMA component

NAMA activity

Progress indicator

Data collection / frequency

Capacity & Market support

Project support centre

-

Number of staff resources at the centre Number of inquiries by stakeholders Number of registered companies/ users Number of training Number of training participants (by sector and type) Number of conferences/ outreach activities Number of guidelines published Number of projects set up Number of roadshows and presentations Number of studies undertaken Number of collaboration with research institutes

Biannually

Education & Training

-

Demonstration projects

Financial component

-

Annually

R&D

-

Grants for pre-feasibility studies

-

Number of prefeasibility studies per project type

Biannually or quarterly

Loan scheme/ guarantee fund

-

Number/ volume of grants through public bank per project type Number/ volume of grants through commercial per project type Number of grants Volume of grants ($)

Biannually

Investment grants

5.4

Biannually or quarterly

-

Annually

Biannually

MRV process

As outlined in Figure 25 the MRV system works across several levels. The NAMA coordination office has overall responsibility for the monitoring system and will consolidate the information from the project and programme levels. All organisations participating in the NAMA activities – e.g. project developers which receive funding or participating financial entities – will be required to submit the data needed for the monitoring of the impacts and progress of the NAMA activities. Specific guidelines will be developed by the NAMA coordination office to ensure quality and consistency of data flows. The consolidated information will then be reported to the national focal point which in turn feed information to the international level as required.

63

Figure 25: MRV system

The implementation of the MRV system requires the strengthening of institutional capacities and the development of systems for the management of data and information. The capacity building programme will focus on the following: -

Establishment of institutional and inter-institutional procedures. Evaluation of options and implementation of IT programme for data processing linked to the national registry system Capacity building of the personnel responsible for the implementation of the NAMA at all levels (project, programme, national)

The resources needed for the implementation of the MRV system are included in the cost calculations for the NAMA.

64

6

References

Acciona Micro-energía Perú, 2013. Proyecto Luz en Casa. Available at: https://sites.google.com/a/accioname.org/acciona-microenergia-peru/programa-luz-encasa-sfd/proyecto-lc1700 Carbajal Navarro, M. & Ruiz Mondaca, A., 2013. Evaluación del Impacto de la Electrificación Rural Sobre el Bienestar de los Hogares en el Perú. Available at: http://prec.pr/wpcontent/uploads/2013/04/Electrificacion-rural-Peru-Carbajal-y-Ruiz.pdf Cameron, L et al Biomass Waste-to-Energy Toolkit for Development Practitioners. 2014 FAO, 2010. Bioenergy and Food Security. The BEFS Analysis for Peru. Supporting the policy machinery in Peru. The Bioenergy and Food Security Project. FAO, Rome. García Bustamante, H. y M. Crispin, 2013. Análisis de barreras y estimación del potencial energético de residuos de biomasa a nivel nacional. Informe interno. Proyecto Mitigation Momentum. Gianella Silva, J., 2013. Disponibilidad de residuos agrícolas como fuente de energía primaria para fines de energía comercial. Informe interno. Proyecto Mitigation Momentum. IFC, 2011. Assessment of the Peruvian Market for Sustainable Energy Finance. International Finance Corporation, World Bank Group. Available at: http://www.ifc.org/wps/wcm/connect/78f59b00493a76e18cc0ac849537832d/SEFMarket+Assessment+Peru-Final+Report.pdf?MOD=AJPERES IRENA, 2013. Renewable energy auctions in developing countries. Available at: http://www.irena.org/DocumentDownloads/Publications/IRENA_Renewable_energy_auct ions_in_developing_countries.pdf IRENA, 2014. Peru: Renewables Readiness Assessment 2014. Available at http://www.irena.org/DocumentDownloads/Publications/RRA_Peru.pdf MINAG, 2009. Plan Nacional de Agroenergía 2009-2020. Available at: http://www.minag.gob.pe/portal/download/pdf/novedades/propuesta-plan-nacionalagroenergia-plan.pdf MINAM, 2009. El Perú y el cambio climático. Segunda Comunicación Nacional del Perú a la Convención Marco de las Naciones Unidas sobre Cambio Climático 2010. Available at: http://sinia.minam.gob.pe/index.php?accion=verElemento&idElementoInformacion=245 &idformula=

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MINAM, 2011. Plan Nacional de Acción Ambiental. PLANAA-Perú 2011-2021. Available at: http://sinia.minam.gob.pe/index.php?accion=verElemento&idElementoInformacion=1175 &verPor=tema&idTipoElemento=2&idTipoFuente= MINEM, 2010. Decreto legislativo de promoción de la inversión para la generación de electricidad con el uso de energías renovables. Decreto legislativo Nº 1002. Available at: http://www.minem.gob.pe/archivos/legislacion-9ozj22z9ap5zz33zDL_de_promocion_de_la_inversion_para_la_generacion_de_electricidad_con_el_uso_de _energias_renovables_1002.pdf MINEM, 2012. Plan Nacional de Electrificación Rural (PNER) Periodo 2013 – 2022. Dirección General de Electrificación Rural. Available at: http://dger.minem.gob.pe/ArchivosDger/PNER_20132022/PNER-2013-2022%20Texto.pdf MINAM, 2014. Primer Informe Bienial de Actualización del Perú a la Convención Marco de las Naciones Unidas sobre el Cambio Climático. Ministerio de Ambiente. Diciembre, 2014. Orrego Moya, R., 2013. Oportunidades y barreras para el uso de residuos agrarios en la generación de energía eléctrica a nivel regional. Informe interno. Proyecto Mitigation Momentum. PlanCC, 2012. Actualización del inventario nacional de emisiones de gases de efecto invernadero al año 2009. Proyecto Planificación ante el Cambio Climático, Lima, Peru. Tech4CDM, 2009. Rural electrification in Peru. Available at: http://www.tech4cdm.com/uploads/documentos/documentos_Rural_Electrification_in_P eru_db7943a3.pdf UNFCCC, 2013. Compilation of information on nationally appropriate mitigation actions to be implemented by developing country Parties. Revised note by the secretariat. Available at: http://unfccc.int/documentation/documents/advanced_search/items/6911.php?priref=6 00007348 World Bank, 2006. Project Appraisal Document for a Rural Electrification Project. Available at: http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2006/02/21/00011274 2_20060221120152/Rendered/PDF/32686010PE.pdf World Bank, 2008. The welfare impact of rural electrification: a re-assessment of the costs and benefits. Available at http://siteresources.worldbank.org/EXTRURELECT/Resources/full_doc.pdf

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67

Appendix I.

Energy access and waste-to-energy potential in six regions of Peru

For the estimation of the waste-to-energy potential that could be developed to increase energy access in rural areas, biomass waste availability in the provinces of Puno, Ayacucho, Cusco, Apurímac, Arequipa and Huancavelica was determined based on annual statistics on agricultural and agroindustrial production of MINAGRI. Province level data was then aggregated for each region. The BEFS Rapid Appraisal tool of FAO (2014 a) was used to determine the available waste volume under consideration of sustainability criteria. Principal crops in the target region are corn, sugar cane, coffee, cacao, cotton, oat and oil palm. In a second step, the demand for waste-to-energy projects was analysed, considering the possibility to replace traditional cooking stoves by biomass briquette stoves as well as the unsatisfied demand for electricity. The potential of producing biomass briquettes was analysed with the BEFS Rapid Appraisal sub-module for heating and cooking (FAO, 2014 b). The electricity generation potential was calculated using the tools for gasification and combustion of the FAO tool kit (FAO, 2014 c). The number of households without electricity access was calculated based on annual household level data provided by the National Institute for Statistics and Information (INEI). Based on this information, the following indicators were calculated for each province of the six regions targeted under the sub-programme for increasing energy access ( presents selected indicators):  





Number of families with an unsatisfied demand for electricity and clean cook stove technologies; Annual per-household energy consumption to fulfil basic energy needs (based on the assumption that a family consumes on average 5 kg firewood per day for heating and cooking and 35 kWh of electricity per month); Type and number of waste-to-technology projects that could be installed based on the available waste volume: - Boiler systems (capacity: 10 kW, 40 kW, 100 kW) - Gasification systems (capacity: 10 kW, 40 kW, 100 kW) - Pelletizer (capacity: 4 kg/hr, 40 kg/hr, 400 kg/hr, 3000 kg/hr) Potential (in percent) to cover the unsatisfied energy demand (electricity and clean cook stove technologies) through waste-to-energy generation.

68

Waste-to-energy generation potential in six regions of Peru Región Arequipa Rural electrification Combustion

Province

Heat generation Gasification

Number of installations

Potential of waste-toenergy projects to fill the energy gap (in percent)

Briquette production

Number of installations

Number of installations

10 kw

40 kw

100 kw

10 kw

40 kw

100 kw

4 kg/hr

40 Kg/hr

400 kg/hr

3000 kg/hr

Electricity

Heat

133 484 55 343 173 32 133 111

32 119 13 83 42 7 66 26

11 47 3 33 16 2 26 10

17 1 14 10 21 4 2 14

4 0 3 2 5 1 0 3

1 0 0 1 2 0 0 1

1 336 7943 490 5224 1581 304 13328 1044

131 783 46 514 155 29 1318 102

12 77 4 4 15 2 131 9

1 12 0 8 2 0 23 1

35% 100% 81% 100% 100% 52% 100% 100%

0% 100% 0% 100% 2% 0% 100% 59%

Arequipa Camana Caraveli Castilla Caylloma Condesuyos Islay La Unión Total (number of installations)

1464

388

148

83

18

5

31250

3078

254

47

Total (energy generation)

14640

15520

14800

830

720

500

125000

123120

101600

141000

Región Ayacucho Rural electrification Combustion

Province

Number of installations 10 kw

40 kw

Heat generation Gasification

Number of installations

100 kw

10 kw

40 kw

Potential of waste-toenergy projects to fill the energy gap (in percent)

Briquette production Number of installations

100 kw

4 kg/hr

40 Kg/hr

400 kg/hr

3000 kg/hr

Huamanga Cangallo Huanca Sancos Huanta La Mar Lucanas Parinacochas Paucar del Sara Sara Sucre Victor Fajardo Vilcas Huaman Total (number of installations)

133 67 16 122 141 85 43 71 33 91 69

32 15 3 28 33 20 10 17 7 22 16

11 5 1 9 11 7 3 5 2 8 5

16 8 2 9 9 10 5 9 4 11 8

4 2 0 2 2 2 1 2 1 2 2

1 0 0 0 0 1 0 0 0 1 0

1459 682 164 1393 1720 838 417 644 345 857 688

144 66 15 134 168 82 41 63 33 84 67

13 5 1 11 15 7 3 6 2 8 6

1 1 0 1 1 1 0 1 0 1 1

871

203

67

91

20

3

9207

897

77

8

Total (energy generation)

8710

8120

6700

910

800

300

36828

35880

30800

24000

Electricity

Heat

43% 52% 40% 48% 45% 44% 62% 100% 97% 100% 60%

0% 0% 0% 0% 0% 0% 0% 81% 0% 13% 0%

Región Cusco Rural electrification Combustion Number of installations

Cusco Acomayo Anta Calca Canas Canchis Chumbivilcas Espinar La Convención Paruro Paucartambo Quispicanchi Urubamba Total (number of installations Total (energy generation)

Potential of waste-toenergy projects to fill the energy gap (in percent)

Heat generation Gasification

Briquette production

Number of installations

Number of installations

10 kw

40 kw

100 kw

10 kw

40 kw

100 kw

4 kg/hr

40 Kg/hr

400 kg/hr

3000 kg/hr

67 124 456 314 47 590 271 96 510 301 151 895 176

16 31 112 76 11 147 66 23 124 74 35 220 43

5 11 44 29 3 58 25 9 48 29 13 87 16

8 15 56 36 6 74 32 0 25 37 20 109 22

2 3 14 9 1 18 8 0 6 9 4 27 5

0 1 5 3 0 7 3 0 2 3 1 11 2

624 1145 4215 2984 462 5321 2616 2896 5820 2746 1972 8125 1627

61 112 416 293 44 525 257 286 575 271 192 802 158

5 10 40 28 4 52 24 28 56 26 17 79 15

1 1 7 4 0 9 4 5 9 4 2 13 2

3998

978

377

440

106

38

40553

3992

384

61

39980

39120

37700

4400

4240

3800

162212

159680

153600

183000

Electricity 59% 100% 100% 100% 38% 100% 86% 46% 100% 100% 100% 100% 100%

Heat 0% 36% 100% 82% 0% 100% 0% 0% 7% 100% 22% 100% 58%

69

Región Apurimac Rural electrification Combustion

Province

Number of installations

Abancay Andahuaylas Antabamba Aymaraes Cotabambas Chincheros Grau Total (number of installations) Total (energy generation)

Heat generation Gasification

Potential of waste-to-energy projects to fill the energy gap (in percent)

Briquette production

Number of installations

Number of installations

10 kw

40 kw

100 kw

10 kw

40 kw

100 kw

4 kg/hr

40 Kg/hr

400 kg/hr

3000 kg/hr

Electricity

Heat

168 603 89 567 260 178 357

40 149 22 140 64 43 88

15 59 7 55 25 15 34

19 75 11 71 32 21 44

4 18 2 17 8 5 11

1 7 1 7 3 2 4

2 112 5 482 810 5 103 2 712 2 115 3 356

208 541 79 504 268 207 331

19 53 7 50 26 19 33

3 9 1 8 4 3 5

100% 100% 100% 100% 100% 100% 100%

9% 60% 55% 100% 53% 13% 100%

2 222

546

210

273

65

25

21 690

2 138

207

33

22220

21840

21000

2730

2600

2500

86760

85520

82800

99000

Región Huancavelica Rural electrification Provincia

Heat generation

Combustion

Gasification

Briquette production

Number of installations

Number of installations

Number of installations

Potential of waste-toenergy projects to fill the energy gap (in percent)

10 kw

40 kw

100 kw

10 kw

40 kw

Huancavelica Acobamba Angaraes Castrovirreyna Churcampa Huaytara Tayacaja

61 174 70 16 153 178 178

13 42 16 3 37 44 44

4 16 5 1 14 16 16

7 21 8 2 19 22 22

1 5 2 0 4 5 5

100 kw 4 kg/hr 40 Kg/hr 400 kg/hr 3000 kg/hr Electricity 0 2 0 0 1 2 2

766 1719 702 165 1400 1593 1595

74 169 68 15 137 156 156

6 16 6 1 13 15 15

0 2 1 0 2 2 2

Total (number of installations Total (energy generation)

830 8300

199 7960

72 7200

101 1010

22 880

7 700

7940 31760

775 31000

72 28800

9 27000

25% 100% 58% 21% 100% 100% 83%

Heat 0% 17% 0% 0% 21% 70% 0%

70

Appendix II. Methodological approach for the financial mechanism This appendix describes the approach for estimating the financial needs for bio-energy in Peru. It is based on a calculation of the Levelized Costs of Electricity (LCOE) of future potential bio-energy power plants and a comparison of the latter with the electricity generation costs in the country. The costs are calculated for the specific pipeline that was generated based on planned projects in Peru. The following outlines the calculation approach chosen. Firstly, the LCOE calculation method is described, followed by a description of the calculation approach used to estimate the impact of different financial schemes on the LCOE. Then the data sources and assumptions used in the calculations are presented. Lastly, a number of scenarios of different financial schemes are developed that are used to show the impact of these schemes on the LCOE.

i.

Electricity generation costs (LCOE) calculation

The concept of LCOE is used to assess the financial feasibility of bio-energy power plants in Peru. For that purpose the LCOE was calculated for a pipeline of projects and the results of the calculation were compared with the electricity price in Peru. Comparing these two factors allows to understand the extent to which biomass projects are feasible and could, if implemented, produce electricity at a price that can compete financially with current electricity generation costs. Current generation costs will however differ from future generation costs which should really be used as a benchmark for a new bio energy plant for a number of reasons. Firstly, some of the power plants currently in use will likely be depreciated thus bringing down the average generation costs. Secondly, electricity generation options that were historically available might not be in future as is often the case for hydro power, for example. Thirdly, stricter environmental regulation might increase the cost of electricity generation. Fourthly, technological learning and economies of scale might further bring down the costs for electricity generation. All of these aspects can lead to higher or lower cost, depending on the specific situation in the country. A major problem is that the future electricity generation costs can only be estimated with a relatively high degree of uncertainty. It requires energy systems modelling that is not available in the case of Peru. One way to still give a sense of future generation costs is to use the tendered prices as negotiated in the first and second round of the auction process in Peru as a benchmark. The biomass projects included in the project pipeline will in some cases produce electricity to feed into the grid, in others electricity is produced for auto consumption only. The majority of projects will also produce heat (CHP). In order to allow for a comparison with the current or future electricity price, both the electricity used for auto consumption as well as the generated heat have to be included in the calculation as a source of revenue. This means that both revenue streams (auto consumed electricity

71

and heat) need to be deducted from the calculated LCOE costs of feeding the electricity into the grid. The calculation of the revenue from heat is based on replacing assumed less efficient heat sources with more efficiently generated heat from the CHP system. The revenue associated with auto consumption of electricity is derived from the difference between higher electricity costs for end consumers and the actual generation costs. The following formula is used to calculate the LCOE as discussed above: Equation 1: LCOE cost calculation for CHP power plants (acronyms are explained in Table 11)

Where:

As Equation 1 highlights a number of different factors are relevant for the analysis. These are illustrated graphically in Figure 26. Major input parameters include the up- front investment costs, the operation and maintenance costs, the fuel costs as well as the revenue generate from replacing the current heat source. All costs are included as annual costs and it is assumed that both fuel costs and operational and maintenance costs remain constant throughout the lifetime of the projects. It is assumed that investment costs only arise at the beginning of the project and thus have to be annualized. As the construction of a plant can take several years, capital is frozen without generating any returns during this time. This is reflected in the calculation by assuming that interest needs to be paid over the construction period.

72

Levelized Cost of Electricity (LCOE)

(

Capital expenditures (C)

Capital recovery factor (

Weighted Average Costs of Capital (WACC)

Project lifetime

+

Fixed O&M expenditure

+

Investment costs

Capital costs

Construction interest rate

(Global) learning rate

Constructuio n time

Fuel costs

-

Revenues from substituting heat use

) /

Electricity generation

Share of biofuel type

Heat price

Full load hours electricity

Fuel cost by biofuel type

Efficiency heat and electricity

Capacity electricity

Local markup

Full load hours heat and electricity Heat demand

+

Variable O&M expenditure

Legend Calculated International Source National Source Separate calculation

Figure 26: Overview of approach to calculating LCOE of electricity for cogeneration plants

ii.

Financial mechanism

Financing plays is an important part of the generation cost and is one of the main factors that can be influenced externally through targeted interventions. Project finance can generally utilize three different sources of finance: Equity, private debt financing as well as public debt financing. In the calculations these are captured in the weighted average costs of capital (WACC). For the financial mechanism proposed as part of the NAMA, as Equation 2 and Figure 27 highlight, two instruments are proposed that policy makers/ public institutions can use to influence the costs of financing and therefore the WACC of a project: a guarantee fund, which allows to reduce risk mark ups by allocating part of the portfolio/ project risk to the fund instead of the project, and low cost debt financing. Equation 2: Calculation of the Weighted Average Costs of Capital (WACC)

73

Weighted Average Cost of Capital (WACC)

Opportunity cost/ rate of return equity

*

Share of equity

+

Cost of debt – private financing

*

Share private dept financing

+

Cost of debt – public financing

*

Share public dept financing

Legend Guarantee fund

Portfolio loss allocation

Fund capitalization

Calculated Scenario assumption General assumption

Figure 27: Weighted Average Cost of Capital (WACC) composition and important assumptions

iii.

Data input sources and assumptions

Table 11 and Table 12 provide an overview of the data sources used and assumptions made in the calculations. As can be observed in Figure 26, the availability of national data sources is limited given the lack of experience with commercial scale bio-energy CHP plants in Peru. The calculations are therefore based on literature sources and own assumptions. The data assumptions were discussed with national experts which confirmed the lack of data availability at the national level and the need to use international data sources. In order to reflect the uncertainties that are connected with such an approach cost ranges are used instead of single cost estimates.

74

Table 11: Input parameters, description and assumptions made for the calculation of the project LCOE Input

Description

Unit

Assumptions and Sources

Investment cost at

USD

Calculated based on the capital costs (“overnight” costs) and the

parameter It

point t in time α

Capital recovery

construction interest and duration. 1/a

Calculated based on the WACC and the lifetime of projects

USD/a

Global literature estimates of % share of capital costs (IRENA 2012)

USD/kWh

Global literature estimates for a range of bio-energy technologies.

factor FOM

Fixed Operational and Maintenance costs

VOM

Variable Operational and maintenance

(IRENA 2012)

costs WACC

Weighted average

%

Calculated (see formula)

USD/a

Calculated based on global bio fuel cost estimates and assumptions

cost of capital FT

Total fuel costs

on a) their expected future development and b) the share of feed stock by project (IEA 2012) REV

Revenue generated

USD/a

Calculated (see formula)

A

Typical project lifetime for CHP bio energy plants is used (IPCC

through heat production LP

Project lifetime

2014) – 30 years Ct

Capital “overnight”

USD

costs at point t in

Calculated based on assumptions for global learning and local mark-up for technologies due to immature markets in the country.

time LC

Construction time

A

Assumptions made based on conversation with national consultant – 2 years

E

Experience parameter

-

Defines the inclination of the curve and can be calculated from the progress ratio. The progress ratio is taken from (IEA 2000)

C0

Capital “overnight” costs in year 0

USD

Global literature estimates for a range of bio-energy technologies. (IRENA 2012)

75

X

Cumulative capacity

MW

The global cumulative capacity for biomass that is needed to determine the cost in year t is taken from the IEA WEO global

installed in year t

current policy scenario (IEA 2014)

Table 12: Assumptions in the calculation of the weighted average cost of capital (WACC) (Equation 2) Input

Description

Unit

Assumptions and Sources

Share of equity

%

See scenarios (Table XX)

%

15%, based on a

%

See scenarios (Table XX)

%

Calculated (see Equation 2)

%

See scenarios (Table XX)

%

2.25% (own assumption)

USD

See scenarios (Table XX), calculated based on the total

parameter

financing of total Opportunity costs/ required return equity financing Share of private debt financing Rate of return / interest rate private debt finance Share of private debt financing Rate of return / interest rate public debt financing Contribution by

investment needs given by the pipeline and the share of total

private banks

financing (see above) Contribution by

USD

See scenarios (Table XX) , calculated based on the total investment needs given by the pipeline and the share of total

public banks

financing (see above) Total debt financing

USD

Calculated based on private and public contribution

USD

Calculated (see Equation 2)

contribution Annualized losses for private debt

76

Gross revenue

USD

Calculated (see Equation 2)

USD

Calculated (see Equation 2)

USD

Calculated (see Equation 2)

%

See scenarios (Table XX)

%

10% as default loan lost (own assumptions based on expert

private debt financing Gross revenue debt financing Gross revenue public financing Internal Rate of Return Rate of loans lost

judgement) Tenor of the loan

Years

15 years (own assumptions based on expert judgement)

Share of loan lost

%

See scenarios (Table XX)

allocated to the private debt

iv.

Scenarios

Using the model described above a number of scenarios were developed that represent possible financing options for the activities under the NAMA (Table 13). The scenarios make assumptions on two important factors -

The share of public vs. private financing – This allows to better understand the impact of public low cost financing on the LCOE.

-

The portfolio loss allocation of the proposed guarantee fund – This allows to understand the impact a guarantee fund may have on the LCOE.

The results of the scenarios are discussed in section 2.3.3 of this document. Table 13 presents an overview of the corresponding detailed assumptions made in the calculations.

77

Table 13: Detailed scenario assumptions used

Public banks

5.5 %

Private banks

9.4 %

Portfolio loss allocation

Guarantee fund

Portfolio loss allocation

Interest rate / rate of return

Share end

Share beginning

Share beginning

Share end

Private debt financing

Capitalization (mln USD)

Public debt financing

Rate of return

Share end

IRR

name

Share beginning

Scenario

WACC

Private equity financing

7.4%

20%

20%

15%

60%

60%

20%

20%

10%

100%

80

0%

10.5%

20%

20%

15%

20%

20%

60%

60%

10%

100%

80

0%

9.5%

20%

20%

15%

20%

20%

60%

60%

10%

0%

80

100%

9.0%

20%

20%

15%

60%

20%

20%

60%

10%

100%

80

0%

7.7%

20%

20%

15%

60%

20%

20%

60%

10%

0%

80

100%

Private banks with

8.1

Guarantee

%

Phase in of private

6.6

banks

%

Phase in of private banks with

5.3 %

guaranteee

78