The Business Prospect of Green Transportation in Peru

by: Ajaya Kusum, SPI

Why should I read this document?

The face of transportation is changing globally. Businesses and governing bodies are moving towards greener modes of transportation by using renewable energy sources to achieve environmentally friendly and efficient mobility. This may be the beginning of a massive disruption and an overhaul in the transportation sector.

While many countries in Europe have adopted green transportation, Peru still has yet to adopt the concept. The country falls short in implementing electro mobility infrastructures. According to the country's Automobile Association AAP (Asociación Automotriz del Perú), since 2016 only 32 electric vehicles and 519 hybrid vehicles have been imported to the country.¹

This document provides an overview on green transportation with special attention to the global Electronic Vehicle (EV) market and Peru’s current position. The document is specifically designed for:

EU investors who want to further their understanding about business prospect for green transportation in Peru or Latin America; and
Related businesses who operate in the EV market in Peru and elsewhere.

Overview

Efficient transportation helps to improve air quality and is environmentally friendly. It also avoids the emission of CO2 rendering less noise and improved quality of life, thus making the cities safer. For a resilient transportation system, it should not depend on natural resources like fossil fuels, which can have detrimental consequences to the environment. About 24% of global CO2 emissions come from the transport sectors. In Europe, transport accounts for almost 30% of emissions. It is important to instil sustainable transportation, which involves reducing greenhouse gases; thus, taking on one of the world's biggest challenges to protect the environment.²

Improving green mobility recognises the need for policies and strategies that focus on increasing efficiency and reducing the costs of transport, including time, financial cost, and negative environmental and social impacts.³ Globally, many countries have started reforming their transportation infrastructure. In the EV market, which is one of the most reliable forms of green transportation, it appears that the European countries are at the forefront. Germany, Norway, France, the Netherlands, UK, and Sweden are the frontrunners using Battery Electric Vehicles (BEVs) in 2020. In essence, Germany is the leading European market for electric car sales.

In the upcoming levels, you will get a deeper understanding of the Electronic Vehicles in Peru and the prospects of EU investment in the green transportations sector.

¹https://www.livinginperu.com/peru-green-lights-plan-for-electric-vehicles/

²https://www.eni.com/en-IT/sustainable-mobility/green-business.html

³ https://www.oecd-ilibrary.org/sites/9789264264670-6-en/index.html?itemId=/content/component/9789264264670-6-en

Peru – Green transportation

The transport sector remains a vital aspect of Peru’s economic development. Its economic growth increased by 2.30% in 2016, and by an average of 2.26% in the first eight months of 2017.

Over the past two decades, Peru has witnessed significant economic growth. However, urban development has led to an expansion of cities in the metropolitan region, and infrastructural development has not been able to accommodate the rapid growth. The transportation sector is burdened with challenges including slow traffic flow, poor safety standards and high emissions. From a financial standpoint, Peru has an investment and infrastructure gap in the green transport sector. An analysis conducted by the state-run Association for the Promotion of the National Infrastructure in 2016 found that investments of €134 billion were needed to build, maintain and repair infrastructure until 2025. Currently, the government is working to lessen the gaps in infrastructure and is expected to support project funding through the promotion of public-private partnerships (PPPs). This is a clear opportunity for European firms to participate in the transportation sector in Peru.

While the effects on the population and environment are rising, Peru’s transport sector is responsible for 40% of its energy-related greenhouse gas emissions. If necessary actions to reduce the emissions are not put in place, it is plausible that the number might increase by 200% by 2050 due to rising traffic volumes and urban sprawl.⁴ The fact that Peru still has a lot of old vehicles just compounds the issue.

In order to address the concerns and the need for green transportation, Peru has been pursuing the idea of a modern integrated transport system. The government has established a national programme to support cities in building a resilient and durable lower-carbon transportation sector. Especially in the capital, the authorities have placed an added focus on eco-sustainability. The Metropolitano, for instance, is the only Bus Rapid Transit (BRT) in the world that operates on natural gas, thus averting the release of carbo dioxide in the atmosphere. The authorities in Lima also introduced its first ever electric bus in 2018 as part of the country´s plan to combat greenhouse gas emissions, after the country proposed to use electric buses in its commitments to the 2015 UN Climate Change Conference in Paris.

It is evident that Peru wants to transition towards a green transportation system. Given the premise, it is quite convincing for Science, Technology and Innovation (STI) companies to move into the development of sustainable electronic vehicles. The government has shown a positive response by advocating fuel efficient transportation and encouraging investments from foreign companies with interest in green vehicles.

Electric Vehicle market at a glance

The global EV market was estimated to be €136 billion in 2019 and is projected to reach up to €675 billion by 2027, with a Compound Annual Growth Rate (CAGR) of 22.6%. In terms of revenue, Asia-Pacific (includes Peru) had the highest revenue of €71 billion in 2019, and is projected to reach €300 billion by 2027 with a CAGR of 20.1%. North America and Europe are expected to witness considerable CAGR’s of 27.5% and 25.3%, respectively, during the forecast period.⁵

In Latin America, it is estimated that by 2025, the EV market in Latin America will grow by more than 30% from 2018.⁶ In addition, some 114,700 EVs are forecasted to be purchased throughout the region, representing a CAGR of 26%.

Parameters such as demand for low-emission, fuel-efficient and high-performance vehicles, and tight government rules towards vehicle emission foster the growth of the EV market. In addition, the advancement in technology and proactive governance is definitely supporting the growth. While on the other side, higher manufacturing costs and serviceability hinder the growth of the EV market.

Electric Vehicle categories

The EV market can be segmented on the basis of vehicle type and region. Based on the vehicle type, the market segments can be Battery Electric Vehicle (BEV), Hybrid Electric Vehicle (HEV), and Plug-in Hybrid Electric Vehicle (PHEV). Further drilling down, the vehicle type can be classified into two-wheelers, passenger cars, and commercial vehicles. Each vehicle class can be further categorized by mid-priced and luxury class. By region, the market can be separated by North America (U.S., Canada, and Mexico), Europe (Germany, France, UK, Netherlands, Norway and rest of Europe), Asia-Pacific (China, Japan, Singapore, South Korea and the rest of Asia-Pacific), and LAMEA (Latin America, Middle East, and Africa)⁷.

Why move to Electric Vehicles for green transportation?

According to a study conducted by the International Energy Agency (IEA), it is predicted that by 2050 the passenger car ownership could reach to a mammoth 2 billion cars⁸. If the gasoline combustion mobility vehicles continue to be dominant, it could spell disaster to the global environment health and would deplete non-renewable resources. Addressing this challenge, Tesla has been fervently demonstrating model after model of improved vehicles addressing this current problem, which is a clear case study of how EV is becoming a key component of green transportation

During recent years, there has been a resurgence in green transportation due to technological development and increased focus on renewable energy. Unlike the mainstream vehicles that depend on fuel, Tesla has been reshaping the transportation sector by using traction motors for propulsion. In the beginning, Tesla´s competitors like General Motors, BMW and Ford saw Tesla´s mission for green transportation as radical, comical and destined for failure. But for more than a decade, Tesla has pioneered innovations in EV technology and is on the verge of creating a sustainable transportation system. Even their competitors have followed suit.

The road to sustainable green transportation has not been easy for Tesla due to the cost barriers and commercialisation hassles. Tesla initially started with the high-price low volume sports car – Roadster and then subsequently released SUVs and Sedans which encapsulated 64% of the EV auto market in new car sales. To further efficiency, the company also invested in lithium-ion batteries that helped to dramatically slash the cost of the cars. With the prices down, Tesla was successfully able to commercialise its Model 3 EV, which signalled the rise of a new sustainable transportation paradigm. Right now, Tesla holds 60% of the US electric car market⁹ and has succeeded in commercialising EVs, ushering other companies to join in the sustainable transportation.

⁴https://www.transformative-mobility.org/assets/publications/TUMI-Factsheet_Peru_SUTP.pdf

⁵https://www.alliedmarketresearch.com/electric-vehicle-market

⁶https://www.globalfleet.com/en/safety-environment/latin-america

⁷https://www.alliedmarketresearch.com/electric-vehicle-market

⁸https://www.automotiveworld.com/articles/

⁹http://theprotocity.com/teslas-ev-revolution-sustainable-transportation/

Government initiatives

Presently the development of EVs is still in a crude stage in Peru. Its growth has been slowed by higher costs due to the inability to produce in mass and attain economies of scale. Furthermore, commercialisation of electronic vehicles requires a higher dose of support from the government, especially in reference to the necessary support infrastructure.

In order to remedy the situation, Peru has introduced a 2019-2030 National Competitiveness and Productivity Plan, which aims to have charging stations by 2025 and electric buses in full operation in the major cities like Lima, Arequipa and Trujillo by 2030.

In terms of encouraging the EV acceptance, Peru´s Ministry of Energy and Mining has started distributing bonuses to the buyers of these vehicles and forgiving taxes. The recent modification dropped the 10% excise tax applied to EVs to 0%, with the aim of promoting the commercialisation of EVs.¹⁰ The Ministry has also entertained the idea of implementing bonds that subsidizes the purchases of EVs. To advance on this front, the Ministry has published for consultation of a supreme decree bill declaring electric vehicles as national interest. This includes charging stations and power distributors.¹¹ In addition, the companies linked to the local energy sector are seeking long-term regulatory changes and public-private partnerships aimed at harmonizing the basic fundamentals of the industry, including aspects such as developing a standard connection for vehicles wanting to recharge on the electricity grid.

Why should EU firms invest in Peru´s EV market?

Improved governance and promise on bridging infrastructure gap;
High encouragement for EU firms in the EV industry due to friendly investment legislation;
High opportunity for technologies such as flex-hybrids;
Potential for several public and private sector partnerships;
Likelihood of a fast growing market and some of the largest penetration rates of hybrid technologies; and
Government incentives and financing programs to encourage green transportation.

¹⁰ https://cms.law/en/int/expert-guides/cms-expert-guide-to-electric-vehicles/peru

¹¹https://www.globalfleet.com/en/safety-environment/latin-america/features/peru-gears-electric-vehicles?a=DBL10&t%5B0%5D=Peru&t%5B1%5D=electric%20vehicle&curl=1