Hydropower has been the major source ofelectricity in Peru, traditionally supplying more than 80percent of electricity requirements, and serving as a sourceof independent generation for major mines and industries.With the development of natural gas in the early 1990s, andthe opening of the Camisea pipeline, the Government ofPeru's (GOP's) attention turned to providingincentives for the use of natural gas in power generation.This resulted in a virtual moratorium on hydropowerdevelopment as a result of the very low price of natural gas(below economic cost). With the development of exportmarkets for gas and increased attention to the impacts ofclimate change, the Government has recently begun to payrenewed attention to hydropower. Recent developmentsinclude: (a) introduction of accelerated depreciation forhydropower investments; (b) introduction of a"discount" to permit hydropower to compete withgas-fired plants in auctions; and (c) announcement of aspecial hydropower auction to be held in 2009 byProInversion, the state agency for promoting privateinvestment. The intention of this report is to assist theGOP in assessing the potential role of hydropower in thesector and the measures that could be taken to encourage itscontinued development as appropriate. The study was done ata particularly challenging time. First, there wasconsiderable volatility in energy prices and investmentcosts, which needed to be incorporated into the analysis.Second, financial markets were in disarray and it wasdifficult to predict when conditions were likely tonormalize. Third, the GOP recently introduced many newpolicies and regulatory measures through supreme decreesthat are changing the regulatory system and may interact inunexpected ways.
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