This content is from: Local Insights

Financing limitations in the Peruvian energy transmission industry

Thomas Thorndike
The energy industry in Peru is divided into three main sub-sectors: generation, transmission and distribution. The development of energy projects, regardless of the sub-sector, requires the execution of a concession agreement with the relevant governmental agency, authorising the sponsors to develop the project, and establishing the applicable terms.

Such concession agreements set out the technical and contractual conditions of the project, including certain terms and conditions as to how it is to be financed.

Financing terms and conditions have typically included that the concession right, the concession's assets and the proceeds from the exploitation of the concession, may be granted as collateral to finance the development of the project. In the case of energy transmission concession agreements, however, such terms have also typically included that proceeds from the financing secured by such collateral may only be applied to the development of the specific project.

In most cases, this provision basically forces transmission concessionaires to finance their projects through standalone project financing structures, notwithstanding their financial cost or convenience, as opposed to any alternative (such as secured corporate financings or joint project financings for several projects) where a collateral package is shared to finance needs other than the transmission project specifically.

The basis or intention of this provision is that the applicable concession is a vehicle for the provision of a public service, and therefore the general idea is to avoid any event of default not related to the concession itself triggering an enforcement of the applicable collateral rights, potentially contaminating the provision of the public service even if there has been no default under the concession itself.

This provision evidently poses an impediment to transmission concessionaires exploring financing and collateral package alternatives to finance their projects.

Thomas Thorndike

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