Fenix Power recently commenced commercial operations. What lay behind your entry into the Peruvian market, and what makes the market an attractive one?
In 2008 AEI acquired Fenix, which was called Egechilca at the time, and was developed by Panamanian investors, Grupo Lakas. They started the project in 2004, purchasing the gas turbines and securing the requisite permits. The financial crisis of 2007 prevented their strategic investors from completing the project. Under those circumstances, AEI reached an agreement with Grupo Lakas to purchase these assets, and AEI completed the project development, although it took a while to start construction due to a gas and gas-transportation crisis in 2009. The government stepped in with a competitive bid for their gas supply company, which we won. We had already acquired the turbines and related permits, and winning this bid took care of the gas supply. Construction started in 2011, and was completed in early 2014. Commercial operations began in May 2014, but at 50% capacity utilization. From May to December 2014, we were operating at 280 MW capacity, and 2H2014, we received COES approval for a Commercial Operation Date (COD) with full capacity of 570 MW registered on December 24th. With full capacity at our plant, we are now contributing 10% of electricity consumed by Peru. This will push prices in the right direction, reducing consumer prices with the huge capacity we add to the system. Fenix Power is proud of the major contribution it is making to the Peruvian economy by reducing electricity prices, while increasing supply. We also feel proud of our social impact in Chilca, a community of 17,000 where we operate. Fenix Power has built a potable water system at the power plant, of which only 20% is used for our own purposes, including desalinization and potabilization. The remaining 80% is distributed to the local community in Las Salinas, Chilca. This water supply can only gain in importance over time.
Assessing political risk is a crucial factor for companies seeking to invest in foreign markets. How did you carry out that assessment and what challenges did you face?
The political scene has been highly encouraging overall. At the executive level, the government has delivered on all its pledges. In the broader arena, local politics and political associations now and then oppose infrastructure in their regions. Taking these organizations into consideration, we have faced certain problems, especially in the early years when such groups masqueraded as environmentalists to conceal their political agenda. Fenix Power does what it commits to doing, and stakeholders notice and respect our commitment. This is despite the changes seen at the energy ministry over the past few years. Every administration has supported our project, and we have been unhindered in that regard. This is because what we are doing on both the social and economic front is of too much national significance for any official or government to oppose. All in all, I believe that what differentiates Fenix Power from other companies that produce thermal energy using gas-combined cycles is our social commitments and what we give to the local population.
How are you able to provide low prices to the market, and how does your plant compare to other power sources in Peru at the moment?
Fenix Power was not the first energy company to use a combined-cycle power plant, although we were the first to announce that we would build one. When others began putting their power plants into operation, they were open-cycle, simple-cycle plants that came into operation in 2006-2007. But the threat of the new power plants being combined-cycle facilities forced many simple-cycle plants to convert to combined-cycle facilities. Today we have about 2,500 MW in combined cycle plants using natural gas. Various companies converted their simple-cycle plants to these combined-cycle plants, but we did it quicker, since we started out by building combined-cycle plants, whereas others had to undertake the whole conversion process from scratch. The entry of these combined-cycle units is certainly having a major impact by reducing the price of electricity in Peru, although it must be said that the drop in oil prices is also a major factor. That being said, thanks to the combined-cycle power plant, we can generate 40% more electricity without requiring additional fuel. That has led to a huge increase in supply over the past three or four years, which has reduced prices significantly, especially in light of the fact that demand has not grown as expected, with Peru registering GDP growth of less than 3%. In a nutshell, lower demand, higher supply through the introduction of combined-cycle plants, and lower oil prices, have all brought electricity prices down in Peru. We now see spot prices of below $20 per MWH.
What is your outlook for the Peruvian electricity sector, and are you worried that the current economic climate and recent government policies will make it more difficult to pursue new projects?
In the government's efforts to increase gas power-generation they have supported the development of gas infrastructure. The government has also artificially maintained prices at what it calls “ideal" levels. Its model assumes there are no restrictions, and that energy in any amount can be supplied at ideal rates. Although these policies served a purpose a few years ago when the government was keen to diversify electricity supply, setting these artificial price levels with no time limits can create prices that fail to represent the true cost of generation. While this works for short periods of time, extended periods of artificial pricing send a distorted message to the market.