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November 2012

Building Public-Private Partnerships


for Climate-Friendly Investment
in Africa

Economic Commission for Africa

Building Public-Private Partnerships


for Climate-Friendly Investment
in Africa

November 2012

Acknowledgments

Acknowledgments
This report is the collaborative effort of the UN Economic Commission for Africa (UNECA), the multi-stakeholder PublicPrivate
Partnership (PPP) working group and Trinity International LLP. From
the outset, we would like to acknowledge Trinity International LLP
including, Mr. Paul Biggs, Mr. Kaushik Ray, and Ms. Ana-Katarina
Hajduka for producing this report. We would also like to acknowledge and thank the Trinity International team for their innovative
approach in addressing this difficult task which includes designing
and conducting a comprehensive PPP implementation assessment
survey, as well as consolidating the outcome in a meaningful way
to inform various stakeholders including policy makers, energy
sector regulators and institutions responsible for the implementation of PPPs.
We would also like to thank the multi-stakeholder PPP working
group, which made substantial contributions during the review of
the first draft at the PPP working group meeting, held in Pretoria

from May 31-Jun 1, 2012*. The contribution of the working group


enriched the content of the report by filling the survey prepared by
Trinity International, as well as in sharing up-to-date information in
the implementation of PPPs in Africa. We would also like to extend
our heartfelt thanks to Ms. Myriem Touhasmi, from UNEP for providing input on best practices in the Northern Africa region.
Finally, the UNECA team lead by Dr. Sam Cho, Chief of Private
Sector and Enterprise Development Section, has worked closely
with Trinity and other stakeholders from conception until the report
took its finally shape. As the Task Team Leader, Dr. Cho has given
invaluable guidance in conceptualizing and framing the research.
The team including Mr. Kaleb Demeksa, Ms. Juliana Gonsalives,
Mr. Senyo Agobohlah, and Mr. Jemal M. Omer, have contributed
substantively. We also like to thank Ms. Abija Yeshneh, Ms. Hirut
Kebede and Mr. Teshome Yohannes for their excellent administrative support in the preparation of this report.

* The PPP working group is a multi-stakeholder group composed of representatives from UNECA, AfDB, IFC, WBI, ICA, UNIDO and Regional Power Pools (SAPP and EAPP)

Executive Summary

Executive Summary
Africa has the potential to use its vast and relatively untapped renewable energy to develop the
energy sector on the continent. This is critical to the continents future development and growth
as energy, especially electricity infrastructure in sub-Saharan Africa is the least developed, accessible
and reliable and on average, highest priced compared to other regions in the world. These
shortcomings are even more heightened in rural areas where access to power lags behind more
urban areas.
Increased expenditure on power generation is required to meet these challenges. According to the
Africa Infrastructure Country Diagnostic (AICD) as much as US$48 billion in new investment is needed
annually to make up the spending shortfalls in all infrastructure sectors. Out of that US$29 billion,
or 61% is needed in the energy sector.1
The need for increased investment in the energy sector in Africa is linked to the need to counter the
impact of climate change on the continent. Estimates of the costs of climate change mitigation and
adaptation in developing countries vary widely, ranging from $170 to $475 billion per year. Africa is
estimated to require $18 billion per year for adaptation alone, in addition to the $29 billion per year
estimated by AICD to be needed over ten years to reach modest energy service delivery levels.2
Furthermore, sub-Saharan African countries on average spend less than 3% of their GDP on the
power sector with about 75% of the spending used as operating costs, suggesting a mere 0.75%
of GDP is used in expanding power infrastructure.
Although often thought of as being capital intensive, today the costs of developing renewable energy
projects compare favorably to other sources of power. However, renewable energy projects must
be bankable in order to attract the necessary finance from the private sector. In response to the
challenges highlighted above, there has been a growing interest in the role the private sector could
play in infrastructure and public service provision, in particular thorough the promotion of publicprivate partnerships (PPPs). It is for these reasons that PPPs are increasingly being promoted
as the most viable way through which to deliver renewable energy to African consumers.
It is worth noting that private participation in renewable energy development in Africa has varied
enormously and produced heterogenous results. In addition, the financial crisis of 2008 and the
consequent fiscal crunch has put pressure on new public and private investments. Consequently
it is ever so important and timely to find innovative solutions for scaling up private sector
participation for renewable energy development on the continent.
To this end UNECA and Trinity International LLP have prepared this study on Building
Public-Private Partnerships to Scale Up Resources for Climate-Friendly Investment in Africa.

1 Foster, Vivien and Cecilia M. Briceo-Garmendia (2010), Africas Infrastructure: A Time for Transformation, AICD Flagship Report, The World Bank, Washington, D.C.
2 Foster, Vivien and Cecilia M. Briceo-Garmendia (2010), Africas Infrastructure: A Time for Transformation, AICD Flagship Report, The World Bank, Washington, D.C.

Main recommendations

Main recommendations
Development Context
Renewable Energy Programs should be integrated in the broader
development context.
Stability
All policy support for renewable energy development should
be stable and predictable.
Context
The use of a particular policy type does not guarantee success.
Each country has unique circumstances and must design and
enact its own set of policies based on needs, competing
interests and available resources.
Improved Investment Climate
Market mechanisms should be encouraged and designed
to ensure long-term viability of the renewable energy sector.
Targeted public sector and donor support that address market
failures and structural deficits can build on market forces and
remove constraints which otherwise impede private sector
involvement.
Legal and Regulatory Structure
Each country should have a conducive legal environment and
regulatory structure allowing for the participation of independent
power producers, introduction of standardized power purchase
agreements and tariff setting procedures that is clear and durable.
The legal and regulatory enabling environment for Public Private
Partnerships (PPPs) should be created and government policies
where possible harmonized through cooperation on cross border
projects and by developing harmonized technical and pool grid
code standards.
Capacity Training
Capacity training for government officials should be provided as
PPP and Independent Power Project (IPP) concepts are not yet
widely understood. Awareness and knowledge, once obtained,
needs to be retained.
Transmission & Interconnection
Transmission and interconnection regulation should go hand
in hand with renewable energy regulation. Early attention to
interconnection across national boundaries is an increasingly
important factor in the overall potential of renewable energy
development.

Regional Cooperation
There should be more regional cooperation for the expansion of
generation, transmission and distribution capacity and it should
be ensured that regional electricity projects are bankable. This
includes raising of tariffs to cost-reflective levels but also may
include establishing a revolving risk capital bridging facility to allow
utilities to make equity contributions to projects and allowing bulk
energy users to be counter parties to Power Purchase Agreements
(PPAs) in addition to host utilities.
Power Pools
The power pools should focus on increased access to electricity,
including the promotion of small cross-border distribution projects
in parallel with the large regional generation and transmission
schemes.
Renewable Energy Technology
Renewable energy technology and in particular solar technology
is now becoming very competitive due to quickly decreasing costs.
Efforts should be made to harness this opportunity across the
continent.
Rural Energy
Governments should try to strengthen and, where appropriate,
establish policies on energy for rural development, including
regulatory systems to promote access to energy in rural areas,
establish financial arrangements to make rural energy services
affordable to the poor and promote capacity-building in local
societies.
Extension of rural energy systems and rural electrification planning
should defined the roles of grid extension vs mini-grids and
stand-alone options. Most importantly, the policies supporting
rural electrification should not be biased towards grid extension
or diesel based systems.

Contents

Contents
1.

Introduction

2. Climate-Friendly Investment and Development



Climate Change and Development

Expected Impact of Renewable Energy Deployment on Job Creation/Economic Growth

Expected Environmental Impact

Rural Electrification

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17
19
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20
20

3.

PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa

23

PPPs for renewable energy development

24

General business framework and risk (or perception of risk)


Developers with risk capital and capability
Capacity and awareness within key stakeholders, host Governments and utility offtakers
Creditworthiness of offtakers
Legal and Regulatory
Political risk issues
Availability of long term debt
Availability of equity
Supply of equipment and technology
Fuel
Transmission connection
Interconnection and Regional Power Pools
Tariffs
Challenges to accessing carbon financing as a support mechanism

24
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27
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29
31
31

4.





Power Purchase Agreements (PPA)


Typical requirements for a PPA
Specific renewable IPP issues in PPAs
Wind
Solar
Hydro
Geothermal

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5.









Case Studies & Best Practice of Renewable Energy IPPs in Africa


Introduction
North Africa
South Africas Renewable Energy Independent Power Project Programme
Overview of projects comprising Case Studies
Cabeolica Wind Farm, Cape Verde
Confidential Solar Farm, South Africa
Lake Turkana Wind Farm
Olkaria III Geothermal Plant
Other examples of grid-linked IPPs in Africa
Conclusions from Case Studies

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6.









How to Design the Best Legislative Framework for Successful IPPs


Gaps in the Legal and Regulatory Framework
Value for Money in a Project
Transfer of Risk
Ensuring Affordability
Infrastructure Funding Facilities
Selection of Appropriate Infrastructure Projects
The Tender Process
PPP structure
Procurement Process
Challenges to the procurement process

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Contents

Contents continued
Public Sector Interface with the Private Sector
Risk Allocation
Delivery of Projects and Pathnders
Approval Process and Politics
Government Support
Standardised Approach to Documentation
Relevant areas of law
Specic Renewable Energy Legislative incentives

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7.

Green and Climate-Friendly Investment and Resources for its Development


The Financing Gap
Financial constraints
Targets
Feed-in tariffs
Quotas
Direct promotion through support programmes for renewable energy.
Indirect promotion by taking away the subsidies for conventional energy sources.
Fiscal incentives and grants
Tenders
CDM market

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8.

Possible alternatives to mitigate nancial challenges


Increasing funding to Multilateral Development Banks (MDB)
Emerging Donors BRIC countries
Low carbon development through Climate Investment Funds (CIFs)
Alternative Feed-in-Tariff programmes
Carbon Initiative for Development
Utility and government support
A new renewable offtaker
Creation of a fund to provide a rst loss tranche of development capital
Increase public nance participation into projects
Mezzanine Finance
A New Green Climate Fund?

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9.

Conclusion and Key Findings


Survey Methodology
Key Findings
Conclusion

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10.

Main Recommendations

Main Recommendations

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Annex 1: Form of Due Diligence Questionnaire


Renewable Infrastructure Laws : General Questions

81
81

Annex 2: Bibliography

85

Glossary of Terms

Glossary of Terms
CDM means Clean Development Mechanism.
CERs means Certified Emission Reductions.
CIFs means Climate Investment Funds.
CTF means The Clean Technology Fund.
DFIs means development finance institutions.
IPPs means independent power projects.
MDB means Multilateral Development Banks.
PPA means a power purchase agreement.
Report means this Report prepared by Trinity International LLP.
SREP means Scaling Up Renewable Energy in Low Income Countries Programme.
SSA means Sub-Saharan Africa.
Survey Trinity International LLP survey relating to building up PPPs to scale up resources
for climate friendly investment and sent to a select list of identified key players in the African
renewable energy space.

1. Introduction

1. Introduction

11

1. Introduction
General Overview
There is little doubt that there is a fundamental and pressing
need for new power production capacity in the African continent.
Although in many jurisdictions base load power from other
sources remains relevant and often required, a number of African
jurisdictions potentially have superior natural resources, in the
shape of high potential capacity factors for renewable energy
power. Whilst the scale of renewable development in Africa is still
very small, renewable energy is expanding in terms of investment,
projects and geographical spread across Africa. As a consequence
renewable energy technologies are making an increasing
contribution to combating climate change, countering energy
poverty and energy insecurity, stimulating green jobs and
meeting the UNs Millennium Development Goals.
The increase in renewable energy investment in Africa is also
part of a wider global trend: according to the Global Status
Report 2011, for the first time more has been spent on
renewable energy in developing countries than in developed
countries with Africa posting the highest percentage increase
of all developing regions outside Brazil, China and India.3
Despite the recession, total global investment in renewable energy
broke a new record in 2010, reaching $211 billion up 32% from
$160 billion the previous year.4

consumption, and hydro capacity is growing steadily from a large


base. All other modern renewables provided approximately 4.9%
of final energy consumption in 2010, and have been experiencing
rapid growth in many developed and developing countries alike.5
As can be seen from the Table 1 below Africa posted a high
percentage increase in renewable energy investment between
2009 and 2010. At the same time however, the table below clearly
indicates that the total new financial investment in renewable
energy in Africa decreased significantly between 2010 and 2011
indicating the volatile nature of this market.

Africa posted the highest percentage


increase of all developing regions
outside Brazil, China and India.

Renewable energy in 2010 supplied an estimated 16.7% of global


final energy consumption. Of this total, an estimated 8.2% came
from modern renewable energy counting hydropower, wind,
solar, geothermal, biofuels, and modern biomass. Traditional
biomass, which is used primarily for cooking and heating in
rural areas of developing countries, and could be considered
renewable accounted for approximately 8.5% of total final
energy. Hydropower supplied about 3.3% of global final energy

Notwithstanding the significance of power sector deficiencies


in Africa and Sub-Saharan Africa (SSA) in particular (and
the consequential effects on health, education, growth and
development), investment by the private sector in the power sector
generally has been low. In SSA private sector investment has been
even less successful in renewable independent power projects
(IPPs) of the recent IPPs closed in SSA over the last few years,
less than five are renewable projects (not including hydro). This is
already in a context where very few IPPs are closed in SSA at all,
irrespective of the fuel source.

Table 1: Total new financial investment in renewable energy, 2004-2011 ($bn)

2004

2005

2006

2007

2008

2009

2010

2011

10.5
5.7
5.1
0.6
1.1
0.6
0.3
0.0

19.0
10.3
11.3
3.1
0.3
1.3
0.1
0.0

29.2
16.7
28.7
5.8
2.2
1.5
1.1
0.2

48.3
24.4
32.0
10.4
2.4
1.7
0.2
0.5

52.0
33.0
36.0
16.5
2.0
1.5
0.5
1.0

42.5
44.9
21.1
10.6
3.6
1.3
0.2
0.2

41.0
58.2
32.0
13.1
2.9
2.6
2.2
3.1

38.4
63.1
46.1
9.4
1.6
1.9
1.7
0.6

EU Europe
Asia
North America & Caribbean
Central & South America
Non-EU Europe
Oceania
MENA
Africa (excl. N. Africa)

Source: Bloomberg New Energy Finance

3 REN 21. 2011. Renewables 2011 Global Status Report (Paris: REN 21 Secretariat)
4 REN 21. 2011. Renewables 2011 Global Status Report (Paris: REN 21 Secretariat)
5 REN 21. 2011. Renewables 2011 Global Status Report (Paris: REN 21 Secretariat)

1. Introduction

12

General Overview continued


Figure 1: Total new financial investment in utility scale renewable

energy in Africa, 2004 2011 ($bn)

The reasons for this lack of private sector involvement are detailed in
this Report together with recommendations for scaling up resources
for climate friendly investment across Africa and in SSA in particular.
Taking into account the fundamentally pressing need for new
power capacity across Africa and the fact that a number of Africas
jurisdictions have superior natural resources, in the shape of high
potential capacity factors for wind power (at least in certain areas)
and strong solar, geothermal, biomass and hydropower energy
resources, there is an urgent need to help develop appropriate
polices for scaling-up resources for renewable energy development
in the region.

Source: Bloombery New Energy Finance

Cost of Renewable Energy Technologies


Looking forward, globally the levelised cost of renewable
technologies is falling, which should lead to a significant increase in
renewable energy deployment across the world. Renewable energy

technologies are approaching grid parity in certain circumstances


with a decrease in generation costs, which in some cases are
almost comparable with conventional generation methods.6

Figure 2: Levelised cost of energy Q1 2012 ($/MWh)

Source: Bloomberg New Energy Finance


Note: Carbon forecasts from Bloomberg New Energy Finance European carbon Model with an average price to 2020 of $33/mtCO2.
Coal and natural gas prices from the US Department of Energy EIA Annual Energy Outlook 2011 and internal forecasts.
Percentage change represents change from Q4 2011.

6 Bloomberg, 2011, Wind Turbine Prices Below 1 Million Euros a Megawatt


Online Available at www.bloomberg.com/news/2011-02-07/wind-turbine-prices-fall-below-1-million-euros-per-megawatt-bnef-says.html (Accessed 18 May 2012)

1. Introduction

13

Trinity International LLP Survey Findings


Even though the costs of renewable energy technologies are
decreasing, according to our survey of challenges in closing
renewable transactions in Africa, technology risk was seen as
the least important factor (out of some 50 factors) as a barrier
to entry. This represents either faith in the strength of the various
technologies already available or that such considerations are
less important in light of the political, legal and regulatory risks
that were also covered by our survey.
According to our Survey the main barriers for parties who have
closed renewable energy transactions in Africa include by order
of priority:
 ack of development or seed capital was seen as the prime
L
reason preventing renewable energy transactions;
 ack of knowledge or capacity in the public sector (general
L
political risks were for all respondents in their top five barriers
to delivery of renewable energy projects);
 arties involved in closed deals placed concerns with public
P
sector corruption as a greater issue than, for example, start-up
costs or a lack of economic availability due to low tariffs; and
 roblems relating to property law (e.g. tribal lands /
P
ownership rights).

17 countries in Africa are in


the top 35 nations in the world
for reserves of solar, wind,
hydro, and geothermal energy.
It is telling that a lack of development or seed capital was noted
as the prime reason preventing renewable energy transactions.
Renewable energy transactions typically have higher capital
costs and lower operational costs than conventional fossil-fuel
technologies. The external financing requirement is therefore high
and must be amortized over the life of the project. This makes
exposure to risk a long-term challenge (which also has political risk
implications in terms of changes in government policy, noted as the
second greatest barrier preventing the development of renewable
energy transactions in Africa).
Since renewable energy projects are typically smaller than those
applying conventional energy sources, the transactions costs
are disproportionately high compared with those of conventional
energy. Any investment requires initial feasibility and due diligence
work and other development stage tasks, as a result of which,
pre-investment costs, including legal and engineering fees,
consultants and permitting costs, have a proportionately higher
impact on the transactions costs. Renewable energy projects will
also often require additional empirical information, which may not
be readily available at any given moment: historic weather-related
data such as wind, solar irradiation, and hydrology all take time
and cost money to undertake.7 For these reasons, the transaction
costs of renewable energy projects, may all be much greater on a
per megawatt capacity basis than for conventional power plants.8

7 UNEP FI & Partners (2012) Financing Renewable Energy in Developing Countries: Drivers and Barriers for Private Finance in sub-Saharan Africa
8 UNEP FI & Partners (2012) Financing Renewable Energy in Developing Countries: Drivers and Barriers for Private Finance in sub-Saharan Africa
9 UNEP FI & Partners (2012) Financing Renewable Energy in Developing Countries: Drivers and Barriers for Private Finance in sub-Saharan Africa

1. Introduction

14

Fossil Fuels
Another common global and African problem for renewable energy
deployment is the problem of subsidies for fossil fuel-based generation,
which artificially limit the competitiveness of renewable energy
technologies. As noted by a recent UNEP report there are many types of
fossil-fuel subsidies: direct budgetary transfers, tax incentives, research
and development spending, liability insurance, leases, land rights-of-way,
waste disposal and guarantees to mitigate project financing or fuel risks.9
Organisations such as the World Bank and International Energy Agency
put global annual subsidies for renewable energy in 2010 at $66 billion
whilst fossil-fuel consumption subsidies were $409 in 2010.10 These large
subsidies for fossil fuels lower final energy prices, but they also distort
competition and put renewable energy at a competitive disadvantage.
The key issue is the commitment at the political level to allow
for sustained private sector involvement, coupled with feed-in
tariff, regulatory environment and sufficient backstop support
from governments for risks that are beyond the control of the
private investor this includes weak offtakers.

In addition, risks associated with fluctuations in future fossil fuel prices


are generally not quantitatively considered in decisions about new power
generation capacity because these risks are inherently difficult to assess.
Greater geopolitical uncertainties and energy market deregulation have
created a new awareness about future fuel price risks. Renewable
energy technologies avoid fuel costs (with the exception of biomass)
and so avoid fuel price risk. However this benefit is generally missing
from economic comparisons and the analytical tools used to make the
comparisons. Further, for some regulated utilities, fuel costs are factored
into regulated power rates, so that consumers rather than utilities bear the
burden of fuel price risk, and utility investment decisions are made without
considering fuel price risk. Therefore, eliminating fossil-fuel subsidies could
bring economic and environmental benefits and since the start of 2010, at
least 15 countries have taken steps to phase out fossil-fuel subsidies.11

Respondent - Trinity International LLP Survey

The Eurozone crisis and the current global economic situation


Any development of renewable energy in Africa should also take into
account the current global economic situation. With the break-up of
the Eurozone no longer a taboo topic, the pervading fear in the market
is that a break-up of the Eurozone could prompt a fall in market
confidence, and trigger a similar contagion to that witnessed after the
collapse of Lehman Brothers in 2008. Such a course of events would
inevitably have repercussions across the African continent. Whilst real
GDP growth across the African continent for 2012 is still envisaged to
be significantly higher than that forecast for most developed countries,
it would be naive to presume that Europes financial problems (and
those of USA / other world markets) are not affecting, and will not
continue to affect, real GDP growth across Africa.

Countries in Africa with a better


legal and regulatory profile...
will attract more investors.
If anything, one consequence of a deepening Eurozone crisis
could therefore be a tightening of credit to African markets and asset
withdrawals by Eurozone banks due to a shortage of bank liquidity
and jittery markets at home. Eurozone bank financing of long-term
projects in 2012 in particular might be put on hold, especially taking
into account that the European banks most heavily involved in project
finance have a combined exposure of around $450bn to Portugal,
Ireland, Italy, Greece and Spain. The first three months of 2012 for
example, saw asset finance for utility-scale renewable energy projects

slump to its lowest level in three years. Although there are a number
of other reasons for this decrease, it is clear that Europes on-going
debt crisis is a major contributing factor. Not only is Europes on-going
debt crisis shaping policy as cash-strapped governments are slashing
subsidies in an attempt to balance their books, but it has also placed
the regions banks under enormous stress.
As a consequence, there is a shortage of debt available and loans
are subject to more stringent terms. This is a particularly important
consideration for renewable energy in Africa, as almost 76 per cent of
outside loans come from European banks12 and as a result renewable
project development might be further hindered by affecting one of the
most important requirements in creating an economic project, being
the cost of finance. Invariably this will mean that countries in Africa
with a better legal and regulatory profile and consequently a more
attractive investment profile will attract more investors.
This retrenchment of certain available lenders could nevertheless
open up opportunities for alternative sources of funding, resulting in
banks, sovereign wealth funds and similar financial institutions from
other emerging regions filling the void left by European lenders, and in
the increased activity of the local banking sector, which has thus far
proven resilient. In addition, debt issuance by African countries was up
17 per cent in 2011, perhaps indicative of the regions lower sensitivity
to fluctuations in global markets as compared to other parts of the
world an attractive quality for investors. However, capital markets in
many African countries are insufficiently deep or liquid to provide such
financing for all projects.

10 World Energy Outlook 2011 Factsheet How will global energy markets evolve to 2035? IEA November 2011
11 World Energy Outlook 2011 Factsheet How will global energy markets evolve to 2035? IEA November 2011
12 Standard Bank, Economy 2012 Report

1. Introduction

15

The Eurozone crisis and the current global economic situation continued
In anticipation of a Eurozone storm and other global economic
challenges, each African country should however ensure
that they have the relevant policies at the national, state and
local levels, giving greater impetus to investment. In addition,
they need to create appropriately attractive conditions for the
private sector and other international institutions interested in
developing renewable energy capacity.

We shall witness more hybrid IPP


structures consequently impacting
on the underlying risk allocation
structure.

T he rise of BRIC economies


should provide African countries
with new sources of finance for
renewable energy development
The rise of BRIC and other emerging economies should also
provide African countries with the opportunity to attract new
sources of finance for renewable energy development. Indeed,
the presence of BRIC countries in the continent so far, especially
of China and India, has been a significant development for African
infrastructure in general in recent years (although not necessarily

applying typical project financing principles or structures).


As noted by a recent Standard Bank report, the relationship
between China-Africa is a structural story, and one therefore
relatively impervious to cyclical forces. Trade between China and
Africa, according to Standard Bank, will surpass USD 155bn in
2012 and this trade draws investment.13 China has financed more
projects in Africa than any other country over the last three years.
This undoubtedly means that we shall witness more hybrid IPP
structures, where finance and other elements such as construction
(and other) obligations, will be performed by Chinese companies,
consequently impacting on the underlying risk allocation structure
in IPP project documentation as we know it.

Overview of Report
The above are all important considerations when preparing
a guidebook for scaling up investments in the African
renewables sector. The structural drivers of Africas GDP growth
remain strong and African countries are well positioned to take
advantage of technological leapfrogging. This should deliver swift
productivity gains in the renewable energy sector.
The global search for better yields will make African emerging
market assets more attractive as developing markets hold rates
low in an attempt to cushion the de-leveraging process. The lack
of any effective market for carbon credits, however, has removed
one of the particular incentives for developers undertaking a
renewable IPP in Africa. The risks inherent in the development and
operation of such a project require a reasonable rate of return (both
for equity and debt) and the lack of any alternative cashflow from
carbon credits will impose (without further
alternative subsidy) pressure on underlying tariffs to be paid
by offtakers in each of the jurisdictions, with such offtakers often
being in a perilous financial state.

13 Standard Bank, Economy 2012 Report

T he global search for better yields


will make African emerging market
assets more attractive.
Any policy solutions must take all considerations listed above
into account and must be tailored to local socio-economic
circumstances within each country in Africa, to the natural
potential for renewable energy in that particular country, to the
best suited technologies and their cost, and to wider national
goals for renewable energy expansion. Lastly, planning for the
development of a renewable power market needs to be sufficiently
flexible to ensure its adaptability to changes in global equipment,
fuel costs and other key parameters. Hybrid power markets
give rise to new challenges and explicit policies, governance
and institutional arrangements need to be developed to assign
responsibility for planning, procurement and contracting of new
power generation capacity. Against this background this Report
will provide a brief analysis of recent developments in climate
friendly investment across Africa.

1. Introduction

16

Overview of Report continued


This Report will be divided into the following sections:
Section 2

Climate-Friendly Investment and Development in Africa will discuss


the need for a climate-resilient growth pattern and development
path in Africa, as well as the importance of rural renewable energy
development.
Section 3

PPPs for Renewable Energy and Challenges in the Development


of Renewable IPPs in Africa will provide a comprehensive analysis
of the challenges in the development of renewable energy IPPs in
Africa.
Section 4

Power Purchase Agreements will evaluate the main features that


make PPAs related to renewable technologies different from PPAs
for conventional IPPs together with a summary of many of the
key similarities applicable to all power projects intended to be
developed in Africa in terms of risk allocation and typical lender
(and equity) requirements. Technology types to be considered
include (i) wind, (ii) solar, (iii) hydro and (iv) geothermal.
Section 5

Case Studies & Best Practices of Renewable Energy IPPs in Africa


will draw on country experiences and some selected projects to
address the main issues discussed in the previous sections of
this study. This section will also build on selected case studies to
highlight innovate practices in promoting greater participation of
private investment in renewable energy.

Section 6

How to Design the Best Legislative Framework for Successful IPPs


and PPPs will identify gaps in the legal and regulatory frameworks
and will highlight the main components of a workable IPP and PPP
implementation framework, including the necessary steps for an
effective implementation. The steps that African countries need to
take in order to develop and implement IPPs for renewable energy
will be spelled out together with recommendations on possible
actions to undertake to fill the gaps and proposed responsibilities
of different stakeholders.
Section 7

Green and Climate Friendly Investment and Resources will review


the determinants of green investment and the policy instruments
available for scaling up resources.
Section 8

Possible Alternatives to Mitigate Financial Challenges will explore


alternative sources of finance, innovative financing schemes and
effective channeling of resources for investment.
Section 9

Conclusion and Key Findings from the Trinity International LLP


Survey will provide a short conclusion of the Report. This section
will also analyze the answers to Trinity International LLPs survey
relating to building up PPPs to scale up resources for climate
friendly investment and sent to a select list of identified key players
in the African renewable energy space.
Section 10

Main Recommendations will set a general list of main


recommendations.

2.
Climate-Friendly
Investment and Development

2. Climate-Friendly Investment and Development

18

2. Climate-Friendly
Investment and Development
Africa had 147 GW of power generation capacity as of January
2011.15 This includes 27.8 GW of renewable energy capacity,
with hydropower accounting for 93% of total renewables capacity,
equivalent to 18% of total power generation capacity. A total of 980
operational hydropower plants have been identified, with an average
capacity of 26 MW. About 392 plants have a capacity of 19 MW or
more and 588 plants have a capacity of less than MW (small hydro).
There are 46 wind farms with an average capacity of 16MW. Finally,
there are 14 geothermal plants with an average capacity of 15MW.16

With current trends, fewer than 40%


of African countries will reach
universal access to electricity by 2050.
At 68 GW, the entire generation capacity of the 48 countries of SSA
is no more than that of Spain. Without South Africa, the total falls
to a mere 28 GW, equivalent to the installed capacity of Argentina.
As much as 25 per cent of these 28 GW of installed capacity are
not currently available for generation owing to a variety of causes,
including aging plants and lack of maintenance. The low level of
power generation is accompanied by correspondingly low rates of
electrification. Less than a quarter of the population of SSA has
access to electricity, versus about half in South Asia and more than
80 per cent in Latin America. Once again, progress in SSA lags
behind other regions, and the gap is widening. With current trends,
fewer than 40 per cent of African countries will reach universal
access to electricity by 2050.
Given the regions low levels of generation and access, it is not
surprising that per capita consumption of electricity averages just 457
KWh annually, with the average falling to 124 KWh if South Africa is
excluded. This is enough to power one light bulb per person for 6
hrs/day. By contrast, the annual average per capita consumption in
the developing world is 1,155 KWh and 10,198 kWh in high-income
countries. Only one in four Africans has access to power.
In addition, power supply in Africa is famously unreliable.
Manufacturing enterprises experience power outages on an average
of 56 days per year. By comparison, a typical power security standard
in the United States is one day in ten years. As a result many firms
are forced to maintain back-up generation capacity. Frequent power
outages result in significant losses for enterprises in foregone sales
and damaged equipment, equivalent to 6 per cent of turnover on

average for firms in the formal sector, and as much as 16 per cent
of turnover for informal sector enterprises that lack their own backup
generation.
Africas chronic power problems affect 30 countries and take a
heavy toll on economic growth and productivity. Many countries rely
on inefficient, expensive, small-scale, oil-based power generation.
Frequent power outages force firms to rely on expensive back-up
generators that cost US$0.40 per kilowatt-hour.
High production cost is just one of numerous inefficiencies; others
include less than full implementation of the fiscal budgets allocated
for investment in energy, insufficient maintenance, inefficiencies and
losses during the distribution phase, and pricing of electricity below
cost as has been the case in South Africa, which encourages wasteful
consumption.
Full cost-recovery tariffs could be affordable already in countries with
efficient large-scale hydropower or coal-based systems, but not in
those relying on small-scale oil-based plants. If regional power trade
becomes a reality (both politically, technically and economically),
generation costs will fall, and full cost-recovery tariffs could be
affordable in much of Africa.

If regional power trade becomes a


reality generation costs will fall,
and full cost-recovery tariffs could
be affordable in much of Africa.
Addressing problems caused by climate change is critical to
economic growth and poverty reduction and is particularly urgent in
the worlds poorest countries, which will suffer the most from these
problems. Estimates of the costs of climate change mitigation and
adaptation in developing countries vary widely, ranging from $170 to
$475 billion per year. Africa is estimated to require $18 billion per year
for adaptation alone, in addition to the $48 billion per year required
over ten years to reach modest infrastructure service delivery levels.17
But the total international public funding raised to date, around $10
billion per year, is less than 5% of projected needs and the European
Commission estimates that 80% of needed funding will come from
private sources.18

15 IRENA (International Renewable Energy Agency), 2012, Prospects for the African Power Sector. Online www.irena.org/DocumentDownloads/Publications/Prospects_for_the_African_PowerSector.pdf
16 IRENA (International Renewable Energy Agency), 2012, Prospects for the African Power Sector. Online www.irena.org/DocumentDownloads/Publications/Prospects_for_the_African_PowerSector.pdf
17 Foster, Vivien and Cecilia M. Briceo-Garmendia (2010), Africas Infrastructure: A Time for Transformation, AICD Flagship Report, The World Bank, Washington, D.C.
18 For more information please see: www.ppiaf.org/sites/ppiaf.org/files/imagesClimate_Change_brochure_Feb2011.pdf

2. Climate-Friendly Investment and Development

19

Climate Change and Development


Whilst the scale of renewable development in Africa is still very
small the renewable energies are expanding both in terms of
investment, projects and geographical spread. In doing so,
they are making an increasing contribution to combating climate
change, countering energy poverty and energy insecurity,
stimulating green jobs and meeting the Millennium
Development Goals.
The wider potential impact on households and communities
of improved access to (renewable) power has been widely
documented. In summary, they include:
 ealth benefits, notably from reducing in-door air pollution
H
from biomass stoves;
 ime savings, for example from reduced urban transport
T
congestion or from households need to collect fire wood;
 ducational benefits from being able to study for longer
E
hours in the evenings;

 roductivity/income benefits from being able to work for


P
longer hours;
 ealth benefits in urban areas from fewer power stations
H
burning coal;
If low carbon technology brings electricity to areas previously
un-served then evidence suggests a range of additional
benefits: it may permit new economic activities and improve
the efficiency of existing ones and provide households with
better quality energy;
 educed deforestation (as a co-benefit of adaptation or other
R
low carbon development activities) can improve eco-system
services (improved flood controls, more sustainable access
to forest products);
Improved waste management allowing both sewage and landfill
waste to be used to create biogas; and
 eduction of gender inequalities (such as impacting positively
R
on women from health and time savings from improved stoves).

Expected Impact of Renewable Energy


Deployment on Job Creation / Economic Growth
Emerging evidence shows that renewable power projects create
new opportunities for job creation on the grounds that low carbon
sources of power employ more people per MW of installed
capacity than more conventional sources, although the evidence
is of variable quality. Overall, there is clear consensus that creating
jobs is a key contribution of the private sector to poverty reduction.
In addition, a crucial contribution expected from further deployment
and support to (renewable) power generation, will be in terms of its
contribution to economic growth, within its countries of operation
and potentially, within the region.
Economic growth is the most powerful means of reducing poverty
and improving the quality of life in developing countries. Growth
accounts for more than 80% of poverty reduction, and since 1980
has lifted 500 million people above the poverty line, while less than
20% came as a result of changes in inequality.19 A typical estimate
from cross-country studies is that a 10 per cent increase in a
countrys average income will reduce the poverty rate by between
20 and 30 per cent.20

In particular, electricity plays a key role in economic growth


and development. Power shortages are a brake on economic
growth and competitiveness and represent a heavy burden
on the economy.
In a 2005 paper21, a group of 40 countries were chosen,
constituting approximately 76% of the worlds population in
order to run selected statistical tests and analyse the correlation
between electricity consumption per capita and key social
and economic indicators. According to this empirical analysis,
electricity consumption per capita has a strong correlation to social
development indices (HDI, life expectancy at birth, infant mortality
rate, and maternal mortality) and especially to economic indices
(such as GDP per capita). Increasing electricity consumption
per capita can directly stimulate faster economic growth and
indirectly achieve enhanced social development--especially for
low and medium human development countries. In most cases,
the threshold for moving from a low to a medium HDI economy
transitions when 500kwh per capita is attained. When this minimal
amount of electricity is used for pumping water, providing light and
refrigerating food and medicines, a community can significantly
improve their living conditions. Therefore, electricity plays a key role
in both economic and social development.

19 Private Sector Development Strategy: Prosperity for all: making markets work, DFID, 2008.
20 See for example Adams, Jr., Richard H., Economic Growth, Inequality, and Poverty: Findings from a New Data Set(February 2002).
World Bank Policy Research Working Paper No. 2972. Available at SSRN: http://ssrn.com/abstract=636334
21 Chi Seng Leung and Peter Meisen, How electricity consumption affects social and economic development by comparing low, medium and high human development countries,
Global Energy Network Institute (GENI), 2005

2. Climate-Friendly Investment and Development

20

Expected Impact of Renewable Energy


Deployment on Job Creation / Economic Growth continued
Renewable Energy deployment is expected to impact on
productivity and economic growth in various ways, depending
on the specific projects it supports, including:
Increased renewable energy production can lead to improved
competitiveness (via energy efficiencies) and greater price
stability through reduced exposure to volatile oil markets;
Increased adoption and diffusion of new technologies may
create opportunities to exploit sources of endogenous
growth via innovation;

Increased renewable generation may assist national grids


over-dependent on centralised distribution to develop
greater robustness and tailor infrastructure power towards
off-grid networks;
Improved productivity and therefore competitiveness
from energy efficiency measures which quickly return financial
savings;
Improved energy security/stability: Unreliable power supplies
impose high costs on many firms in developing countries
either in the form of lost production or the need to buy standby
generation at high kWh unit costs; and
Productivity gains from using new technology.

Expected Environmental Impact


Most of Africas power is currently generated from coal, with less
than 10% of its potential renewable power sources exploited.
Although the bulk of Africas power emissions currently come from
deforestation and land-use changes, a recent study estimates
740 mn tons/yr could be saved through low carbon energy projects.

More renewable energy deployment is expected to play a key role


in helping to mitigate Africas climate change impact by abating
significant amounts of greenhouse gas emissions and paving the
way for greater low-carbon energy development. This abatement
will be realized directly through the projects themselves and
indirectly through enhancement of the wider political, legal and
investment environment.

Rural Electrification
Whilst the majority of this Report focuses on large scale renewable
energy solutions through IPPs for the majority of remote and
dispersed users across Africa, decentralized off-grid renewable
electricity is less expensive than extending the power grid and
has important health and other benefits on a large section of
population. According to the International Energy Agency, a
positive trend has been noted in terms of access to energy in rural
areas of the developing world. The IEA reports that approximately
1.3 billion people lacked access to electricity in 2011, a marked
improvement over the 1.5 billion people without electricity access
in 2010; further, it was estimated that the number of people who
cooked their food and warmed themselves using open fires or
traditional cookstoves reached 2.6 billion, down from the 3 billion
people reported in 2010.22

22 International Energy Agency (2011), Climate & Electricity Annual 2011; Data and analyses

Despite decades of effort and investment in rural electrification


programs Africa, and particularly SSA, is still lagging behind other
developing regions in terms of access to electricity supply by its
population. Lack of access to modern energy services limits the
benefits from other services such as education and health, and
prevents the development of more productive activities. Inefficient
lighting limits students study time, and lack of reliable power
is a major deterrent to productivity increases at the household
level or for small and medium-sized enterprises. Major changes are
taking place in the institutional landscape, with an increasing
trend from monolithic public service provider to decentralized
customer-oriented service businesses. As a result, new business
models are emerging such as energy service companies, leasing
models, and fee-for-service models.

2. Climate-Friendly Investment and Development

21

Rural Electrification continued


Table 1: Challenges in Rural Renewable Energy Development

Legal and Regulatory

Financial and Economic

Market and business risks

Policies that impede establishment


of cost-recovery tariffs

High Investment and transaction costs

Low customer ability to pay

Limited knowledge on regulatory


framework for mini-grids

Inability to access capital/financing

Lack of technical skill for design,


constriction, and O&M systems

Lack of policies and institutional support


for cooperatives and private sector rural
electricity supply systems

Lack of subsidies/incentives that support


renewable mini-grid systems

Insufficient community involvement/


responsibility

Despite this advancement, the IEA estimates that annual


investment in the rural energy sector needs to increase more
than fivefold to provide universal access to modern energy by
2030.23 In many countries across Africa power utilities have
generally failed to provide adequate service to the rural areas,
however recently many countries have made great improvements
in delivering off-grid electricity. For example, in the 15 Economic
Community Of West African States (ECOWAS)countries a regional
response was initiated in order to tackle both climate change and
to supply energy to rural communities through.24 In addition, the
recently agreed targets of ECOWAS makes it the second regional
organization after the European Union to adopt regional green
energy policies.
ECOWAS policies aim at the following objectives:
 round 30% of the electricity consumption in the ECOWAS
A
region will be saved through demand and supply side efficiency
improvements by 2030;
 he share of renewable energy (incl. large hydro) of the total
T
installed electric generation capacity of ECOWAS will increase
to 35% in 2020 and 48% to 2030;
 he share of new renewable energy such as wind, solar, small
T
scale hydro and bioelectricity (excl. large hydro) will increase to
around 10% in 2020 and 19% in 2030. These targets translate
to an additional 2.425 MW renewable electricity capacity by
2020 and 7.606 MW by 2030;

 y 2030 around 50% of all health centers, 25% of all hotels


B
and agro-food industries with hot water requirements will be
equipped with solar thermal systems.25
During 2011, Gambia, Ghana, and Nigeria also enacted policies
to help extend electricity to rural populations.26 In addition, some
countries achieved their proposed targets in 2011, such as
Tanzania, which increased its rate of rural electrification from
2.5% in 2007 to 14% in 2011. In northern Africa, Morocco has
seen a significant increase in the share of people in rural areas
with access to electricity, rising from 20% in 1995 to more than
97% in 2011.27
Governments have on important role to play in putting in place
the appropriate institutional, legal and regulatory frameworks that
encourage decentralization and private sector participation in
rural energy supplies. As a consequence, governments should
(amongst others):
 trengthen and, where appropriate, establish policies on energy
S
for rural development, including regulatory systems to promote
access to energy in rural areas;
 stablish financial arrangements to make rural energy services
E
affordable to the poor; and
 romote capacity-building in local societies and remove
P
barriers in the implementation of policies for renewable energy
development in rural areas.

 o provide universal access to energy services it is envisaged


T
that around 75% of the rural population will be served through
grid extension and around 25% by renewable energy powered
by mini-grids and stand-alone systems in 2030; and

23
24
25
26
27

International Energy Agency (2011), Climate & Electricity Annual 2011; Data and analyses
International Energy Agency (2011), Climate & Electricity Annual 2011; Data and analyses
ECREEE Validation Workshop on Renewable Energy and Energy Efficiency Policies and Scenarios for West Africa held from 25 to 27 June 2012 - Dakar, Senegal.
International Energy Agency (2011), Climate & Electricity Annual 2011; Data and analyses
International Energy Agency (2011), Climate & Electricity Annual 2011; Data and analyses.

2. Climate-Friendly Investment and Development

22

Rural Electrification continued


The choice of technology for rural electrification should be
based on consumer needs, economic viability, technical and
institutional capabilities, and consumers willingness and ability
to pay for the service. It has become increasingly apparent that
people in rural areas are less interested in specific technology,
e.g. solar power, micro hydro, diesel. etc., and more interested
in what could actually be achieved with the technology, such
as lighting, refrigeration, powering radio, water pumping, etc.
In the past, most rural electrification programs have focused on
supplying electricity to rural areas through connection to national
or local grid. However, connecting small, isolated villages to
grid can be expensive because of the necessary investment in
transmission lines, poles, transformers, and other infrastructure.
Current technology developments make efficient decentralized
power generation systems possible using renewable energy
technologies.
As a result it should be understood that extension of grid-based
power and off-grid energy systems are not mutually exclusive
options in delivering electricity services. Rural electrification
planning should clearly define the roles of grid extension vs
mini-grids and stand alone options. What is critical is that the
policies supporting rural electrification not be biased towards
grid extension or diesel based systems.
Renewable energy mini-grid systems can be implemented
through private-sector rural energy service companies at the
community or regional level. However with poor clients, the
projects can rarely survive commercially on their own, so they
will need subsidies. In this situation, some risk mitigation

It should be understood that


extension of grid-based power
and off-grid energy systems are
not mutually exclusive options in
delivering electricity services
support may be needed. Support measures could include market
assessments that help to better characterize the market potential,
development grants that help overcome market barriers by
reducing the cost of the initial systems, and partial risk guarantees
that mitigate long-term financing risks. Such support mechanisms
could include subsidies, the creation of rural electrification funds,
output based aid subsidies for service providers by relying on
financing from the Global Partnership on Output-Based Aid for
example.
Policies affecting electrification in rural areas should also help
establish an environment in which stand alone system service
providers can grow. Therefore a rural electrification planning
framework should clearly define the roles and criteria for grid
expansion, isolated mini-grids and stand alone systems. It is
also important to ensure a level playing field for the stand-alone
service providers to fairly compete with traditional utilities.

3.
PPPs for Renewable
Energy and Challenges
in the Development of
Renewable IPPs in Africa

3. PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa

24

3. PPPs for Renewable Energy and


Challenges in the Development of
Renewable IPPs in Africa
PPPs for renewable energy development
A recent paper by the Collaborative Africa Budget Reform
Initiative titled Ensuring Value for Money in Infrastructure in Africa
argued that there is no clear-cut definition of a PPP. Nonetheless,
it defines a PPP as a business venture which is financed and
operated by a partnership between the government and a private
sector company.28 This arrangement contrasts with traditional
public investment where the government contracts with the
private sector to build an asset that is designed and financed
by the government.
For renewable energy project development a PPP characteristically
takes the form of a Design Build Finance Operate (DBFO)
arrangement. In this type of arrangement the government would
specify the services required and the entity would design and build
a specific asset for that purpose. In addition, the entity finances
the construction and operates the asset for the contracted
period and provides the requisite services.

What is needed is maximum


flexibility, allowing the law to
cater for the full range of existing
structures the market deploys,
and the inevitable evolution
of new ones in the future

Equally, however there is sometimes too much temptation to


provide for a specific set of PPP structures/forms in a concession
PPP/legislation (BOT; BOO; BLT; DBFO, etc.). This is usually
undesirable, in our view. The PPP universe now comprises
a wide spectrum of commercial and financial structures. None
of them are, in fact, capable of being defined in a precise and
clear-cut manner, and attempts to define and provide for them
in a concessions law are generally unhelpful, easily giving rise to
confusion and inflexibility in practice. What is needed instead is
maximum flexibility, allowing the law to cater for the full range of
existing structures the market currently deploys, and the inevitable
evolution of new ones in the future. This can often be achieved
at a definitional level in the elucidation of the expressions
public-private partnership or privately-financed infrastructure.
A typical example of a renewable project PPP is the so-called
independent power producer (IPP) project. This usually involves
the development of a new (greenfield) power generating facility
by a private company that sells the power on a wholesale basis
to a government utility that distributes the power to individual
customers. In the case of IPPs, the assets will belong to the private
company, but the power will be sold to the government
(or a government power utility) for retail distribution as a public
service to customers. For IPPs, the critical form of PPP contract
is the PPA between the private power generator and the
government purchaser of the power.
There are a number of general and specific factors which produce
challenges in the development of renewable IPPs in Africa.
These include:

General business framework and risk (or perception of risk)


Africa is still considered a difficult market in which to undertake
any large infrastructure project. There are few success stories
and the perception is generally that of projects taking too long
to close and, unfortunately, far too many projects failing to make
it to financial close. Although some countries in Africa now have
a legal and regulatory environment which is conducive to private

sector involvement in infrastructure projects, there remains


a level of bureaucracy, lack of transparency and lack of capacity
which restricts the consistent ability to structure a complex set of
documents with all stakeholders in a number of jurisdictions
in Africa.

28 Collaborative Africa Budget Reform Initiatve (CABRI), Ensuring Value for Money in Infrastructure: Lessons From 6 Large African Infrastructure Projects, South Africa, 2010

3. PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa

25

Developers with risk capital and capability


For a successful IPP in Africa what is needed is: cross-ministry
support, strong support from multilaterals, available political
risk cover for lenders, sensible government approach to issues
like termination compensation and agreeing to market terms
for direct agreements with lenders.

Project / technical / market risks

Respondent - Trinity International LLP Survey

IPP developers are still, unfortunately, few and far between. Currently
only the likes of Globeleq, Aldwych International, Contour Global, IPS,
Sithe Global, Africa Finance Corporation, Infraco, Ormat, Copperbelt
Energy Corporation and a few smaller developers in specific countries
(excluding those developers considering the renewable programme in
South Africa) would be possible participants in an IPP in Africa. Save
for a few larger hydro deals, geothermal projects in Kenya and a few
biomass projects across SSA, there have not been many renewable
IPPs undertaken and completed successfully.
To combine the general risks inherent in undertaking an IPP in SSA,
with the specific further issues applicable to a renewable IPP, there
are few developers who have the capital available to undertake
development activities for, potentially, a number of years, and in
addition have the balance sheet or capital available to meet the equity
component of the capital costs applicable in such a renewable IPP.
To combine the general risks inherent in undertaking an IPP in SSA, with the specific further issues

There are a number of skills required to develop such a project applicable


which
to a renewable IPP, there are few developers who have the capital available to undertake
development
activities for, potentially, a number of years, and in addition have the balance sheet or
is, invariably, a jigsaw of components, all of which ultimately need
to
sit together in a completed puzzle. A development team needscapital
to be available to meet the equity component of the capital costs applicable in such a renewable
IPP.
able to pull together all of the land, consents, equipment supply,
civil
works, offtake contracts, political risks and then arrange a suitable
There are a number of skills required to develop such a project which is, invariably, a jigsaw of
debt and equity financing structure.
components, all of which ultimately need to sit together in a completed puzzle. A development
team needs to be able to pull together all of the land, consents, equipment supply, civil works,
offtake contracts, political risks and then arrange a suitable debt and equity financing structure.

Capacity and awareness within key stakeholders,


host Governments and utility offtakers
The public sector should have the required capacity to deal
with renewable energy PPPs. The public sector should be
able to provide sufficient seed capital.
Respondent - Trinity International LLP Survey

A process required to complete any IPP requires individuals within


host Governments (in all applicable Ministries) and utility offtakers
who understand the disciplines and requirements of IPPs and, in
particular, the typical expectations of project finance lenders. A
project financing of an IPP inevitably leads to a particular focus
on cash flow issues in that the only cash flow available is that
through the terms of the PPA itself. As a consequence, the scrutiny
applied to the terms of this document and the capability of the
counterparty to perform in accordance with the terms of the

PPA, is very high. Lenders will require certainty as to the key risk
allocation issues throughout the suite of project documentation
and in particular, the PPA.
11
Solid technical skills and knowledge are prerequisites for effective
design, installation, commissioning, operation and maintenance
of renewable energy plants. Many of the renewable energy related
capacity building projects have focused too much on training
activity that is not well integrated into actual project development
and implementation. A narrow set of capacity building tools, mainly
seminars and workshops, have been employed with little recourse
to practical training and programs based on learning by doing. In
our view, it would be beneficial to invest in pilot scheme projects
through which local government and public authority practical
capacity building could be achieved.

3. PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa

26

Capacity and awareness within key stakeholders,


host Governments and utility offtakers continued

In our view, it would be beneficial


to invest in pilot scheme projects
through which local government and
public authority practical capacity
building could be achieved.

In particular, planning and coordination is an area where


government support can provide indirect assistance to the growth
in the renewable energy market deployment. Support to ministries,
departments, and agencies such as those providing assistance in
renewable energy related planning, energy resource assessment,
rebate, industry development and public awareness programs,
are crucial to the renewable energy industry. Institutional obstacles,
such as limited human resources for implementation of energy
sector plans, can severely limit opportunities to attract long term
public and private sector investments.

Creditworthiness of offtakers
In many jurisdictions in Africa, the creditworthiness of the offtaker
is often poor and not considered sufficient by project finance
lenders. In addition, the tariff itself is, particularly in respect
of more expensive renewable technologies, not sufficient to
cater for the anticipated debt and equity returns, particularly
when these are anticipated to reflect a multitude of risks and all of
the required time and skills required to undertake such a process.
The host utility offtaker should not simply accept the right level
of risks pursuant to the terms of the PPA, but should also have
the means available to actually assume such risks in practice.
Unfortunately, this is often not the case. It is certainly true that
DFIs have, over the last few years, not fully considered whether
the counterparty to the PPA can in fact fully assume the liability
to pay the termination compensation sums which could possibly
be due on default.
This lack of liquidity though within an offtaker is one of the
reasons why commercial banks have been so scarce in financing
such IPPs, as the requirement to fund for a long tenor (which

is necessary to make the project economic), combined with the


sometimes clear lack of the offtakers balance sheet ability to meet
its liabilities makes it naturally hard for any credit committee of a
commercial bank to accept the resultant risk / reward package.
Even a DFI though would typically need to ensure that the tariff due
under the terms of the PPA can be absorbed by the offtaker and
the electricity sector in general. In the context of a renewable IPP,
tariffs are typically higher. The resulting need for an increased retail
electricity tariff for end users in comparison with cheaper coal/fuel
based tariffs is often embroiled in politics and is commonly only
partially implemented and, sometimes, deferred indefinitely.

In many jurisdictions in Africa


the creditworthiness of the offtaker
is often poor and not considered
sufficient by project finance lenders.

Legal and Regulatory


Legal & regulatory frameworks should be clearly defined
for renewable energy PPPs.
Respondent - Trinity International LLP Survey

Private financiers and developers look beyond transaction-specific


characteristics when making investment decisions. In selecting
projects, private developers also consider the wider political,
legal, and economic contexts which govern a project. Targeted
public sector and donor support that addresses market failures
and structural deficits can build on market forces and remove
constraints which otherwise impede private sector involvement. An
improving investment climate extends to policy areas including:

Improving regulatory environments that facilitate


business registration;
Contract enforcement;
Simplified tax codes;
Secure property ownership;
Supplying trained local labour;
 inancial sector reforms which allow convertibility
F
and repatriation of earnings.

3. PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa

27

Legal and Regulatory continued


Please see section 6 below for a detail overview of the legal
and regulatory requirements for renewable IPP development.

Political risk issues

Regulatory / govermental risks

Political risk issues

The presenceOther
of Political
risk
insurance and risk guarantees provide the necessary support for
country
risks
The presence of Political risk insurance and risk guarantees
the various governments to undertake these projects. However these can be added financial
provide the necessary support for the various governments
to on the IPPs in relation to regions where such risks are assessed to be minimal. The
burdens
undertake these projects. However these can be addedpresence
financialof such cover should therefore be dependent on the type of IPP and where it is located.
burdens on the IPPs in relation to regions where such risks
are not be mandatory. Respondent - Trinity International LLP Survey
It should
assessed to be minimal. The presence of such cover should
therefore be dependent on the type of IPP and where itEven
is if an IPP has a PPA that is acceptable to equity and lender investors, there remains a political
risk associated with the potential acts (or omissions) of Government. This hinders the ability for
located. It should not be mandatory.
that PPA to be properly performed in accordance with its terms. The PPA will have little relevance
as lenders and equity investors will normally require that either the enabling legislative environment
Respondent - Trinity International LLP Survey
is sufficient to cater for these concerns, or more commonly it is required that the host Government
Even if an IPP has a PPA that is acceptable to equity andenters
lenderinto a specific agreement with the project company (and often the lenders directly as well)
which
details the obligations of the host Government and what the consequences are if the
investors, there remains a political risk associated with the potential
Government
acts (or omissions) of Government. This hinders the ability for that fails to perform.
PPA to be properly performed in accordance with its terms. The
PPA will have little relevance as lenders and equity investors will
normally require that either the enabling legislative environment
is sufficient to cater for these concerns, or more commonly it is
required that the host Government enters into a specific agreement
with the project company (and often the lenders directly as well)
which details the obligations of the host Government and what the
consequences are if the Government fails to perform.

Availability of long term debt

The economics of an IPP, which typically have a long development period, are such that long term
debt is required to allow for the gradual increase of the retail tariff and the ability to deliver debt
service coverage ratios that are reasonable14
to project finance lenders and economic returns which
are sufficient to justify the risks involved. Such long term debt in SSA in particular has been scarce
anylong
otherterm
institutions
save
for DFIs
and multilaterals.
The economics of an IPP, which typically have a long developmentfromfor
debt for
IPPs
in SSA.
Recently, commercial lenders,

Availability of long term debt

period, are such that long term debt is required to allow for the
gradual increase of the retail tariff and the ability to deliver debt
service coverage ratios that are reasonable to project finance
lenders and economic returns which are sufficient to justify the
risks involved. Such long term debt in SSA in particular has been
scarce from any other institutions save for DFIs and multilaterals.

particularly those from South Africa, including Standard Bank,

Investment Bank, FMO, DEG, Proparco, BIO, IDC and others


have, until recently, been the only club of possible debt funders

commercial) risk insurance coverage, each of which has either time


or cost consequences (or both).

Lenders such as IFC, African Development Bank, EAIF, European Investment Bank, FMO, DEG,
Nedbank,
Rand
Bank,
Chartered
Proparco,
BIO, IDC
andMerchant
others have,
untilStandard
recently, been
the onlyBank
cluband
of possible debt funders
ABSA
have
moves
into participating
again those from South
for long
term
debtallformade
IPPs encouraging
in SSA. Recently,
commercial
lenders, particularly
Africa,
including
Standard
Bank,and
Nedbank,
Rand Merchant
Standard Chartered Bank and
in these
projects
in SSA,
are certainly
active inBank,
financing
ABSA
have all made
movesas
into
participating
in these projects in SSA, and are
renewable
IPPsencouraging
in South Africa
part
of an IPPagain
Procurement
certainly
activewhich
in financing
renewable IPPs
South Africa
part of an IPP Procurement Program
Program
was announced
in in
August
2011.asCommercial
which was announced in August 2011. Commercial lenders, however, continue to require fully
lenders, however, continue to require fully commercial offtakers,
commercial offtakers, sovereign guarantees or full (or nearly full) political (and sometimes
Lenders such as IFC, African Development Bank, EAIF, European commercial)
sovereign
or full (or
nearly
full)has
political
(andorsometimes
riskguarantees
insurance coverage,
each
of which
either time
cost consequences (or both).

15

3. PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa

28

Availability of equity
Insurance schemes for political and guarantee risks
have significant impact on IPPs/PPPs for it reduces
the perceived risk by the private party.
Respondent - Trinity International LLP Survey

Unless a developer of an IPP has the balance sheet itself


to undertake the full equity financing required for a project there

will be a requirement to find further equity to meet the equity


component of the financial plan. Although certain of the DFIs noted
above also provide equity (and/or mezzanine debt) there remains a
lack of equity financing capacity, certainly in respect of equity that
is available pre-financial close. This lack of funding is exacerbated
by the fact that those equity investors who will take these risks
expect an equity return which the PPA tariff on many renewable
IPPs cannot deliver.

Supply of equipment and technology


There is usually a general availability in equipment and applicable
technology in the market. There is, however, again a need for
such entities to accept the typical norms of project financing.
One of the key risks which lenders will not expect the project
company to take is that of achieving commercial operations by
a date certain at a fixed cost. This risk would typically be assumed
by an EPC contractor whereby all construction requirements are
taken by one entity. If this is not the case, lenders would require
further support within the project company itself (imposing further
equity risk on the sponsors). In respect of renewable technologies,
where:
in wind, there is often a divide between turbine supply and
the foundations required for the turbine installation;

in hydro, where ground condition risk and hydrology risk


are often large and are expensive risks to be assumed
by a contractor;
in geothermal projects where the risk of the steam field
reservoir and its extraction is significant;
in solar, where the solar resource is sometimes viewed as

uncertain and the technologies still untested at a large scale;


there is a significant package of risks needing to be addressed
by equipment and technology suppliers and/or otherwise also
dealt with by the project company and its sponsors.

Fuel
The supplies of many renewable fuels used to generate electricity
are often less predictable on an hour to hour and day to day basis
than the supply of natural gas/coal/liquid fuels. Solar and wind

resources have a significant amount of hourly, daily, and seasonal


variation that is difficult to predict with precision in advance.

Transmission connection
A transmission connection that links the project to the grid is
extremely important and even if a connection can be made, high
costs or delays can either modify the scale and scope of the
project or prevent its development. Hence a connection process
that results in a fast and low-cost connection is an essential feature
for a developer. In addition, a transmission service tariff also needs
to be cost-effective. Since wind renewable energy technologies

has a variable output, a tariff based on peak or maximum output


could result in a prohibitive cost per MW hour. Alternatively,
if tariffs are determined based on distance measures, renewable
generation projects far from their off-takers could also face high
transmission costs. In addition to transmission costs, the costs
of any other system wide services should be competitive.29

29 Madrigal, Marcelino and Stoft, Steven (June 2011), Energy and Mining Sector Board Discussion Paper No.26: Transmission
Expansion for Renewable Energy Scale-Up: Emerging Lessons and Recommendations, The World Bank, Washington, DC.

3. PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa

29

Interconnection and Regional Power Pools


Early attention to interconnection across national boundaries
is an increasingly important factor in the overall potential of
renewable energy. In Africa, most of the countries are either
operating a vertically integrated or single buyer electricity market
models, with little or no competition in the generation or the
wholesale segment of the market. Power pools can therefore
be used to promote competition in generation in a larger
interconnected system.30

Regional power generation and


interconnection projects will be
fundamental for the development
of access to electricity in Africa
In SSA in particular, arrangements for inter-utility and crossborder electricity exchange have taken the form of bilateral
trading agreements between vertically integrated power utilities
or transactions on a short term energy market (STEM) within a
regional power pool. With regard to simple, inter-utility bilateral
trading agreements (outside a power pool), the terms and
conditions provided for in the PPAs have not changed over
time, while there was no coordinated planning of power system
expansion. This led to in-supply unreliability due to power

generation capacity constraints which resulted in exporting utilities


inability to meet their export obligations
Despite the problem of inadequacy and unreliability of supply
mentioned above, inter-utility system interconnections and
related cross-border electricity exchange arrangements should
be considered as the building blocks for the formation of
potential power pools within the different sub-regional economic
communities (RECs). In addition to regional economic communities
and national governments, the main actors for implementing
electrification plans are the regional power pools and utilities.
Regional power pools were established under the auspices of
RECs to create competitive markets and improve delivery services
to customers.
They comprise: (i) the Central Africa Power Pool (CAPP) for the
Economic Commission for Central Africa States (ECCAS), (ii) the
Comit Maghrbin de lElectricit (COMELEC) for the Union of
Maghreb Arab (UMA), (iii) the Eastern Africa Power Pool (EAPP)
for COMESA, (iv) the Southern Africa Power Pool (SAPP) for
SADC, and (v) the West Africa Power Pool (WAPP) for ECOWAS,
all at different stages of development. Regional power generation
and interconnection projects will be fundamental for the
development of access to electricity in Africa and a recent report
by the Infrastructure Consortium of Africa (ICA) provides a detailed
overview of the status of the African power sector at the
regional level.31

Power Pool

Countries

Installed Capacity

Central Africa Power Pool (CAPP)

Angola, Burundi, Cameroon, Chad, Congo, Gabon,


Equatorial Guinea, Central African Republic, DRC, Sao Tome

6073 MW

Comit Maghrbin de lElectricit


(COMELEC)

Algeria, Libya, Mauritania, Morocco, Tunisia

27 347 MW

Eastern Africa Power Pool (EAPP)

Burundi, DRC, Egypt, Ethiopia, Kenya, Libya, Rwanda,


Sudan and Tanzania. Potential Member Countries are
Uganda, Djibouti, Eritrea.

28 374 MW

Southern Africa Power Pool (SAPP)

Angola, Botswana, the DRC, Lesotho, Madagascar, Malawi,


Mozambique, Namibia, South Africa, Swaziland, Tanzania,
Zambia and Zimbabwe

49 877 MW

West Africa Power Pool (WAPP)

Benin, Burkina Faso, Cape Verde, Ivory Coast, Gambia,


Ghana, Guinea, Bissau, Liberia, Mali, Niger, Nigeria, Senegal,
Sierra Leone & Togo

14 091 MW

Source: The Infrastructure Consortium for Africa

30 The Southern African Power Pool - Training in Electricity Markets and Power Pools. 20-24 August. Harare, Zimbabwe.
31 The Infrastructure Consortium for Africa (2011), Regional Power Status in African Power Pools Report.

3. PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa

30

Interconnection and Regional Power Pools continued


In order to achieve successful regional power pools across Africa the
current developments in the SAPP should be built on in all other power
pools as most institutional set up and market rules and regulations
have already been implemented in SAPP. SAPP pooling arrangements
have been evolving from loose pool arrangements dominated by
long-term bilateral contracts among vertically integrated utilities towards
a competitive pool in which bilateral contracts are complemented by
STEMs. These represent firm energy markets where electric power
is traded on a daily basis for delivery the following day, with full obligation
to pay, thereby expanding its operations to include more market players.

The SAPP example shows that power pools can only be made
operational in regions with:

SAPP legal and regulatory framework has also involved by the entry
into the relevant intergovernmental agreements granting required
rights and obligations to national utilities and putting in place a
common legal and regulatory framework and a viable multi-country
organizational structure ensuring requirable sharing of responsibilities
for planning, developing and integration of national power grids into
a regional structure.

Where there is a legal framework for cross-border electricity


exchanges.

Fairly developed grid interconnections;


 ufficient trust and mutual confidence among pool members
S
and regional regulation for dispute resolution;
 ere there is adequate generating capacity to meet demand
W
of the pool; and

Benefits of Power Pooling

Major Constraints to Power Pool Development

Reduction of capital and operating costs through improved


coordination among power utilities.

Lack of trust and confidence among pool members.

Optimization of generation resources.

Underdeveloped transmission networks and tie lines.

Improved power system reliability with reserve sharing.

Inadequate generating capacity and reserve margin.

Enhanced security of supply through mutual assistance.

Difficulties of mobilizing investment for power projects.

Improved investment climate through pooling risks.

Lack of legal framework for electricity trading.

Coordination of generation and transmission expansion.

Lack of rules for access to the transmission grid, including


setting wheeling charges.

Increase in inter-country electricity exchanges and development


of a regional market for electricity

Lack or regional regulation and appropriate mechanism


for dispute resolution.

According to the ICA, given the level of investment required, private


sector participation is requested with possible public participation
(under a PPP set up). However, so far, the pace of mobilizing funding
was slow for various reasons and an innovative approach is required
for mobilizing funding for regional projects. According to ICA, for
interconnection projects the funding could be developed through
specific purpose vehicle (SVP) where the concerned utilities could

contribute to the assets, provided that proper wheeling charges


are agreed upon. This solution is already considered in SAPP for
ZIZABONA interconnection project (Zimbabwe-Zambia-BotswanaNamibia).32 In addition, by pooling together the risks in power projects
there should be increased attractiveness of projects to lenders.

32 The Infrastructure Consortium for Africa (2011), Regional Power Status in African Power Pools Report.

3. PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa

Interconnection and Regional Power Pools continued


Generation projects with a regional dimension could also be
developed as an PPP/IPP by providing a minimum set of guarantees
for investors and securing an acceptable level of competition between
the operators of the regional market.33 This, according to the recent
ICA report could lead to the following propositions:
The long-term contract with a single utility is not the only solution;
 he regional market could constitute a sufficient guarantee for future
T
investments;

 n alternative option could have two main components: (i) the first
A
component could consist in establishing a PPA between the PPP/
IPP and the national TSOs through the power pool for part of the
generation output (for example 50%). This is to secure a minimum
revenue guarantee for the promoter, (ii) the second component
would consist in establishing bilateral contracts or in selling on the
short-term market the rest of the generation output (remaining
50%). This is to secure a minimum level of competitiveness in the
regional power market.34

Tariffs
The key issue is the commitment at the political level to allow for
sustained private sector involvement, coupled with feed-in tariff,
regulatory environment and sufficient backstop support from
governments for risks that are beyond the control of the private
investor this includes weak offtakers.

In addition to the issues set out above, one of the other significant
constraints to the successful implementation of renewable IPPs
in Africa is the level of tariffs which can be negotiated with utilities/
Governments. Such tariffs remain significantly lower than what is
usually required for developers to take on the risks of development.

Respondent - Trinity International LLP Survey

Challenges to accessing carbon financing as a support mechanism


There are a number of challenges to a project receiving accreditation
under the United Nations Clean Development Mechanism (CDM). In
our experience, on average it costs 100,000 and takes two years for
a project to be registered under the CDM. This is a major hurdle and
requires the involvement of various professional and public bodies,
with the complexity and costs often preventing otherwise viable
projects even achieving this significant milestone and thereby losing
the ability to generate CERs. Thereafter, the project faces operational
challenges which may impede the generation of CERs and therefore
reduce the expected revenues attributed to a project.

A review of possible alternatives to mitigate the challenges listed


above is set out in Section 8.

33 The Infrastructure Consortium for Africa (2011), Regional Power Status in African Power Pools Report.
34 The Infrastructure Consortium for Africa (2011), Regional Power Status in African Power Pools Report.

31

4.
Power Purchase
Agreements (PPA)

4. Power Purchase Agreements (PPA)

33

4. Power Purchase
Agreements (PPA)
In any renewable IPP being undertaken with project finance
lenders, a PPA will be required. Lenders to such projects only
have recourse to the cashflow to be produced by the IPP and,
as a consequence, such cashflow needs to be robust and secure
and be capable of being such over a long period (certainly a period
to cover the debt tenor). A merchant plant where the IPP has
no designated offtaker but simply takes the market risk that
consumers of the power will be available to purchase the power
in the volumes and price required to cover debt service,
operational costs and equity returns remains rare indeed.
The lack of sophistication in the power markets in Africa and

SSA in particular and deficiency of large energy users (save for


a few mining customers) combined with conservatism of project
lenders renders the likelihood of merchant IPPs a remote and
distant one.
A renewable IPP, if financed applying project finance principles
(without an alternative balance sheet for recourse) will therefore
require a PPA. The PPA will also need to be in a typical format
as lenders have become accustomed to a certain nature of risk
allocation in a PPA which would typically need to be followed for
the PPA to be seen as being bankable.

Typical requirements for a PPA


The key issues and risks which are often encountered in
discussions between sponsors, governments, offtakers and
lenders include the following:

energy production on a state-wide basis. In contrast to natural


gas fuel supply risk, however, uncertainty in renewable fuel supply
is frequently unsystematic, affecting individual renewable plant or
resource areas, but not affecting all plant simultaneously.

Fuel Price Risk

The risk that the price of the fuel used to generate electricity
will exhibit variability, resulting in an uncertain cost to generate
electricity. In contrast to the volatility of natural gas prices,
renewable resources in general have a less variable and frequently
free fuel cost stream, typically resulting in less fuel price risk for
either party to an electricity contract. Hence, it is more common
to have fixed-price contracts for renewable electricity than for
natural gas generated electricity.

Performance Risk

Fuel Supply Risk

Demand Risk

The risk that the fuel supply to a power plant will be unreliable,
resulting in the inability to generate electricity in a predictable
and dependable manner. The reliability of the supply of natural
gas to a power plant depends on both the reliability of the supply
of the gas itself, and the reliability of the transportation of the gas
to the plant. The supply of natural gas to a power plant can be
interrupted due to normal supply and transportation constraints
(e.g. pipeline constraints), or due to catastrophes. The parties to
an electricity contract can usually manage the risk of a normal
natural gas supply or transportation constraint by requiring firm
fuel and transportation contracts. The supplies of many renewable
fuels used to generate electricity are often less predictable on an
hour-to-hour and day-to-day basis than the supply of natural gas.
Solar and wind resources have a significant amount of hourly, daily,
and seasonal variation that is difficult to predict with precision in
advance. Landfill gas and geothermal resources have much less
day-to-day variation, but their supply can be unpredictable over
longer time scales. In some cases, renewable fuel supply variability
is systematic, for example, cloudy weather can reduce solar

Renewable generation technologies are typically more difficult to


dispatch than natural gas-fired generation technologies. Some
forms of renewable electricity may also deliver more power during
off-peak periods than conventional energy sources, and may
not be willing or able to offer fixed blocks of delivered electricity,
preferring, instead, as-available delivery.

The risk that the seller may not be willing or able to deliver
electricity according to the contractually prescribed requirements in
terms of time and quantity. To the extent that renewable generation
is based on a variable underlying fuel stream (e.g., wind), some
renewable contracts clearly cannot have the same requirements for
energy delivery as a contract for natural
gas-fired generation.

Environment Risk

The financial risk to which parties to an electricity contract are


exposed, stemming from both existing environmental regulations
and the uncertainty over possible future regulations. Renewable
and gas-fired electricity contracts have different environmental
compliance risk profiles. If new environmental regulations are
enacted, parties to fossil fuel based contracts will likely bear
additional costs not imposed on parties to renewable contracts.
The laws and regulation governing the environmental impacts of
electricity generation are likely to change within the term of many
of the conventional fossil PPAs, as will the cost of compliance
with existing environmental regulations. These environmental

4. Power Purchase Agreements (PPA)

34

Typical requirements for a PPA continued


compliance risks can impose potentially large costs on the parties
to an electricity contract. Some possible future environmental
regulations include a carbon tax (or other form of carbon
regulation), a renewables portfolio standard, and further regulation
of sulphur dioxide, nitrogen oxides, fine particulates, and mercury
emissions.

Consents / authorizations;

Regulatory Risk

Commissioning procedures;

The risk that future laws or regulations, or regulatory review or


renegotiation of a contract, will alter the benefits or burdens
of an electricity contract to either party. Both renewable and
non-renewable contracts face similar regulatory uncertainties.
Sometimes gas fired electricity contracts contain clauses designed
to both prevent regulatory action, and to mitigate and allocate the
consequences of a new regulatory requirement. In contrast, most
renewable contracts attempt to prevent regulatory review of the
contracts.
Termination Compensation/Force Majeure/Grid Issues

Any PPA, if the Project is to be project financed, will require


consistency with certain norms in terms of particular key issues
termination compensation will need to be payable (at least to repay
debt) in nearly all circumstances, a force majeure (FM) regime will
need to be detailed to ensure that the project company can be
relieved from its construction/operation obligations if an FM event
arises (with a need to arrange insurance coverage to meet any
incremental costs or loss of revenues due to such FM event) and
also the PPA will need to fully detail how the power plant is to be
commissioned, tested, owned and operated in a manner which
allows the project company to be in control of its own performance
risks.
There are a number of key risk issues which would typically need
to be properly reflected in a PPA with an offtaker for the capacity /
energy from the renewable power project. These would include:

Obligations to get to financial close by a date certain;


 equirement to achieve commercial operations date by a date
R
certain;

 onnection issues (particularly an issue in the context of


C
renewable IPPs where, quite often, the generation resource is
a large distance from the load centre leading to significant new
transmission infrastructure being required);
 ariff structure is there a capacity and energy charge, or is it a
T
take-or-pay energy only PPA?
 orce majeure as there is no alternative cash flow, a force
F
majeure event leading to non-payment needs to be covered by
insurance, otherwise both lenders and equity will be exposed;
 olitical risks is the host government prepared to assume
P
political risks in an Implementation Agreement / Government
Guarantee?; and
 ermination compensation as noted above, as there is no
T
alternative cash flow available to meet debt service, and the
underlying power station assets are generally of little intrinsic
security value save for use in that particular project, there is a
need to ensure that the host utility (and/or host Government)
is prepared to (and preferably is able to) accept that on
termination of the PPA due to a default by the offtaker (and
possibly in a force majeure circumstance) that a reasonable
termination compensation sum is paid which, at least, covers all
amounts outstanding to lenders and also repays equity for the
amount invested and usually an element of equity return. The
market has recently changed a little such that project finance
lenders are now more prepared to accept the risk that if the
project company itself defaults under a PPA that there is not
an immediate obligation on the offtaker to still pay out a sum
equivalent to the debt outstanding, but lenders would certainly
anticipate stepping in through the terms of a direct agreement
with the offtaker to work out the situation with the host utility or
Government as best as possible.

Specific renewable IPP issues in PPAs


A PPA which is used in a renewable IPP (applying project financing)
would be required to have the characteristics of any bankable form
of PPA which would not be required on a gas, coal or diesel fired
power plant. There are though certain typical differences which
are applied due to the variation in fuel source instead of the

project company contracting with a gas/ diesel or coal supplier,


the project company, when undertaking a wind, solar, hydropower
or geothermal IPP, would have to structure the risk of ensuring the
adequacy of the fuel source.

4. Power Purchase Agreements (PPA)

35

Wind
Wind power capacity increased by 20% in 2011 to approximately
238 GW by year-end, seeing the greatest capacity additions
of any renewable technology. As in 2010, more new capacity
was added in developing countries and emerging markets than
in OECD countries.35 During 2011, an estimated 40 GW of wind
power capacity was put into operation, more than any other
renewable technology, increasing global wind capacity by 20%
to approximately 238 GW.36
Recent experience in wind PPAs is that wind risk has been
assumed by the project company with a tariff being structured
as a pure energy tariff rather than a capacity based tariff as a
consequence if the wind is not sufficient to generate the power
anticipated the utility would not pay as great a tariff and both
equity and debt would be at risk of covering their costs. The
addition to a wind resource onto a grid system is not necessarily
an easy task in many jurisdictions in Africa as the variability of the
energy being despatched onto the grid system leads to careful
management and despatch criteria to allow the wind to be
applied along other power sources successfully.
Wind PPAs will have to take into account the fact that wind
resources have a significant amount of hourly, daily, seasonal
and even annual variation that is difficult to predict accurately
in advance. In addition, individual contacts for electricity from
solar and wind resources generally cannot reduce fuel supply
risk without using back-up generation or storage. In addition, in
Africa there is a general lack of data on wind variations according
to seasons. Clearly, there are many potential issues associated
with the format of a wind PPA and other associated documents.
However, a key feature of most wind energy PPA tariffs are that
they are generally wholly energy based rather than being a mixture
of capacity and energy payments. The lack of a guaranteed
payment element within the tariff structure which is sufficient to
repay the debt financing is a key feature of wind projects (and is

a reason why Governments / offtakers have a greater sympathy


with wind IPPs on the basis that the power is paid for only if it
is there) but this presents a number of challenges from a due
diligence perspective. Save for the obvious need to demonstrate
likely capacity factors and outputs (with quality wind speed and
density information available for a reasonable period of time), it will
also be important to ensure that the PPA is structured around a
must take obligation by the purchaser, so that if a wind power
project generates energy, the purchaser must take and pay for it.
However, to represent a bankable solution, this obligation must
address curtailment issues associated with conditions within the
grid system.

A key feature of most wind energy


PPA tariffs are that they are
generally wholly energy based rather
than being a mixture of capacity
and energy payments
This is particularly the case in African jurisdictions where the
reserves available within the system are limited. If this were to
happen post financial close it could lead to a curtailment of the
project output by the system operator to ensure system stability
and security. To be considered bankable, the PPA must therefore
address these situations and others where dispatch instructions
reduce the output of the project. In some cases as a consequence
of these issues, a deemed available concept has been necessary
to ensure that risks are properly allocated between the IPP
company and offtaker.

Solar
Solar PV saw another year of extraordinary market growth.
Almost 30 GW of operating capacity was added, increasing
total global capacity by 74% to almost 70 GW. The trend
towards very large-scale ground-mounted systems continued,
while rooftop and small-scale systems continued to play an
important role. More than 450 megawatts (MW) of CSP was
installed in 2011, bringing global capacity to almost 1,760 MW.37
A solar IPP typically works in a very similar way to a wind IPP
in both its impact on a grid system and the way in which the
PPA itself would be constructed. A solar PPA would often be
an energy only based arrangement with the project company

35 REN 21. (2011). Renewables 2011 Global Status Report (Paris: REN 21 Secretariat)
36 REN 21. (2011). Renewables 2011 Global Status Report (Paris: REN 21 Secretariat)
37 REN 21. (2011). Renewables 2011 Global Status Report (Paris: REN 21 Secretariat)

A solar PPPa will have to take into


account the fact that solar resources
have a significant amount of hourly,
daily, seasonal and even annual
variation that is difficult to predict
accurately in advance

4. Power Purchase Agreements (PPA)

36

Solar continued
assuming all solar risk. A solar PPA will have to take into account
the fact that solar resources have a significant amount of hourly,
daily, seasonal and even annual variation that is difficult to predict
accurately in advance. In addition, individual contacts for electricity
from solar resources generally cannot reduce fuel supply risk
without using back-up generation or storage. In solar IPP the fuel
supply variability is also more systematic, for example, cloudy
weather can reduce solar energy production on a regional basis.
In addition the recommended solar PPA elements include
characteristics of different solar technologies as well as aspects
that may be applicable to projects in developing countries, such
as concerns over transmission and distribution system reliability,
offtaker credit strength etc.
The best practice for solar PPAs is to include a fixed dispatch
agreement that allows the project to deliver power whenever the
solar resource is available (subject to transmission constraints).
The risks associated with an intermittent resource with a variable
dispatch agreement would make it particularly difficult to finance
the project. As thermal storage systems mature, allowing longer
storage times and more control over when the power can be
delivered, it is recommended that any concentrating solar thermal
(CST) PPA be structured as a fixed or as-available dispatch
agreement to help minimize revenue risk.
The risk allocation of curtailment should be addressed by the PPA
as well. If the buyer has responsibility for the transmission system,
the buyer should bear at least some (if not all) of the risk that
the project would be curtailed because of transmission system
constraints or problems. This is especially important in developing
countries because of limitations with respect to transmission and
distribution systems, and the seller may not have control over
those issues.

PPAs for projects in developing countries may need several forms


of adjustment to protect both the buyer and the seller from large
operating costs, exchange rates, and interest rate changes. It
can be recommended that adjustment clauses in CST PPAs use
indexes that track the cost of labour, if available, since it is typically
the greatest component of CST operating costs.

T he best practice for solar PPAs


is to include a fixed dispatch
agreement that allows the project
to deliver power whenever the solar
resource is available (subject to
transmission constraints).
Solar PPA agreements normally do not contain capacity payments,
since fuel is free and therefore, if a capacity payment covering
the majority of the projects fixed costs was included in a CST
PPA, the seller would have less incentive to produce any energy.
However, having some portion of the fixed costs covered by a
capacity payment guaranteed by a PPA would serve the purpose
of reducing project risk and increasing the likelihood of securing
financing. As a result, the inclusion of capacity payments that pay
for a portion of the upfront fixed costs should be considered by
both the seller and the buyer.

Hydro
An estimated 25 GW of new capacity came on line in 2011,
increasing global installed capacity by nearly 2.7% to approximately
970 GW. Hydropower continues to generate more electricity than
any other renewable resource, with an estimated 3,400 TWh
produced during 2011.38
Hydropower can be a similar resource to that of wind / solar but
equally can be different due to the fact that water can, to a degree,
be stored. It can sometimes be the case that the same stretch of
river where the hydro power plant is to be located also hosts a
number of other hydro power plants or dams which are operated
by the state offtaker or government. It may as a result be difficult
to simply allocate full hydro resource risk to the power developer
when the resource is itself vulnerable to the manner of application

38 REN 21. (2011). Renewables 2011 Global Status Report (Paris: REN 21 Secretariat)

by others. Similar issues as those listed under wind and solar PPA
will also have to be dealt with in a hydro PPA. A key specific area
of concern will be the treatment of hydrological risks and ground
conditions risks. The hydrological risk issue should be examined
both from a construction perspective and also from a revenue
perspective to ensure that it has been appropriately mitigated.
In terms of the ground condition risks, this should be assessed
in light of the nature of the works to be undertaken in order to
complete the Project. To the extent that these works are sensitive
to rock quality grades encountered at the project site, this needs
to be reviewed in the context of how an EPC contract can mitigate
the risks, and, if necessary, alternative structures need to be
proposed to mitigate the risks arising.

4. Power Purchase Agreements (PPA)

37

Geothermal
Geothermal energy provided an estimated 205 TWh (736 PJ)
in 2011, one third in the form of electricity (with an estimated 11.2
GW of capacity) and the remaining two-thirds in the form of heat.
Geothermal resources provide energy in the form of direct heat
and electricity, totalling an estimated 205 TWh (738 PJ) in 2011.39
As the geothermal power market continues to broaden, a significant
acceleration in the rate of deployment is expected, with advanced
technologies allowing for development of geothermal power
projects in new countries. Drought in East Africa has renewed
interest in geothermal electricity to improve reliability in a region
dependent predominantly on hydropower. The high cost of
exploration has dampened the growth rate in the region, but
plans are progressing for significant growth in the East African
Rift Valley.40 Kenya, which has about 200 MW of existing capacity,
aims to meet 50% of its electricity needs with geothermal by 2018,
while Djibouti, Eritrea, Ethiopia, Rwanda, Tanzania, and Uganda
are at varying stages of geothermal development.41

A recent example of where an


African government has attempted
to facilitate the development
of more geothermal projects is
the creation of the Geothermal
Development Company in Kenya
A geothermal power plant relies on the constant and certain
delivery of steam from the associated steam field. The exploration
for such steam is similar to the process involved in the oil industry
the costs and risks are high and, as a consequence, a number
of developers can be put off from assuming such a high risk.
A recent example of where an African government has attempted
to mitigate this risk and facilitate the development of more
geothermal projects is the creation of the Geothermal Development
Company (GDC) in Kenya. The intent is that GDC will undertake
all exploration activities required for a geothermal IPP in Kenya
with any successful find then leading to a sale of steam to an IPP
developer which would then come in at a later stage, therefore
assuming less risk. This structure has yet to be tested on a
completed IPP and, possibly, could have some challenges in that
any IPP company would always need to be able to fully rely on
the fuel source available and, as such, would need to pass on the
risk as to availability of steam to GDC. It is unclear whether GDC
is able or willing to assume this level of risk on an IPP when the
termination costs involved are so high.

A geothermal power plant is normally a baseload provider


of capacity in any despatch order due to the virtually zero cost
of fuel associated with it and the ability for the plant to be certain
of meeting any despatch instruction (unlike wind / solar which
would be subject to the vagaries of that period of time). As a
consequence the PPA for a geothermal IPP is typically a capacity
/ energy PPA with all fixed costs being paid through a capacity
tariff, with the small variable costs being paid for through an
energy tariff linked to specific despatch instructions.
A geothermal resource differs from other energy sources in
that it is both renewable and reliable. PPAs often include offramp provisions that enable one or both parties to terminate
the agreement without penalty (e.g. a partys inability to obtain
a key agreement or permit). Termination rights require careful
negotiation, and both parties will want to limit the other partys right
to terminate. Furthermore, a PPA should carefully define a delivery
point at which energy will be sold. The PPA may also require a
seller to deliver energy to a specific point on the transmission
system, in which case the seller will be responsible for obtaining
transmission to the delivery point. Transmission ancillary services,
which can be costly, should be specifically allocated in the PPA.
Geothermal plants differ from wind and other resources in that
they may have significant station service requirements for
extracting, re-injecting, processing, or otherwise using the
geothermal resource. A PPA may further require a seller to
guarantee that a project will meet certain performance standards.
For instance, an output guarantee requires a seller to pay a buyer
if the output during a specified period fails to meet a minimum
level. A sellers data regarding the projects geothermal resource
will be crucial in determining the right level for an output guarantee.
If the resource is expected to degrade, the PPA may adjust
performance standards downward during the term. If a guarantee
is not met, the PPA calculates damages owed to a buyer as a
result of this shortfall. A shortfall is usually multiplied by a price
per megawatt hour determined by reference to an index or other
objective price. The PPA may also include an adjustment to
account for an assumed value of environmental attributes. The
amount of liquidated damages is usually determined periodically,
and a seller will often press for annual or aggregate damages caps.
The PPA for a geothermal plant will resemble a PPA for any other
generating facility, and the metering, invoicing and boilerplate
provisions from a conventional PPA can be readily imported into
a geothermal one.

39 REN 21. (2011). Renewables 2011 Global Status Report (Paris: REN 21 Secretariat)
40 IRENA (International Renewable Energy Agency), 2012, Prospects for the African Power Sector, available at:
www.irena.org/DocumentDownloads/Publications/Prospects_for_the_African_PowerSector.pdf
41 IRENA (International Renewable Energy Agency), 2012, Prospects for the African Power Sector, available at:
www.irena.org/DocumentDownloads/Publications/Prospects_for_the_African_PowerSector.pdf

5.
Case Studies & Best Practice
of Renewable Energy IPPs
in Africa

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

39

5. Case Studies & Best


Practice of Renewable Energy
IPPs in Africa
Introduction
Whilst discussions abound in relation to the delivery of renewable
energy IPPs in Africa and despite the clear deficiency in power
production on the continent and its attendant effects on the wider
economy (as well as health and education delivery), a very small
number of renewable energy IPPs have reached financial close and
are delivering power to the grid.

In this section of the Report, we will take an overall look at the


state of renewable IPPs on the African continent by describing
the current status of renewable energy market in North Africa and
South Africa and by analyzing case studies in each of North Africa,
South Africa and East Africa.

North Africa
As noted in our introduction, with the financial crisis in most
developed countries in the near future most African (and other)
countries will increasingly compete for capital. In North Africa,
the rapid economic growth in the region prior to the global
economic crisis triggered a rapid increase in energy demand,
particularly electricity consumption, and most countries are short
of power generating capacity. It is estimated that North African
countries need to double their power generating capacity by 2020,
requiring an additional 45,000 MW to the installed capacity.42

part of the European energy market. Therefore the proximity


of North African countries to Europe and the growing electrical
grid interconnections between these regions might trigger a
stronger interest in renewable energy development in North Africa
compared to other African regions. For example, the European
Economic Recovery Plan has earmarked an unprecedented Euro
3.98bn for energy projects, a cornerstone of whose allocation is
the development of green energy which is likely to have a spill-over
effect on the energy programs in North Africa.43

With most renewable energy sites far from the power grids the
development of renewable energy projects will require dedicated
transmission lines to evacuate power to the grid which will in
turn affect the overall transmission capacity and the possibility
of electricity export for a number of North African countries. For
example, Egypt alone is planning to add more than 7,000 MW
of wind energy over the next 10 years which coupled with EUs
de-carbonization policy might reinforce the value of interconnecting
with North Africa. In addition, initiatives such as the Mediterranean
Solar Plan, the Euro-Mediterranean partnership, the bilateral
agreements between the EU and some countries in North Africa,
When it comes to investment and competition for capital necessary or initiatives launched in the context of the AMU (COMELEC
for North African renewable energy projects it needs to be taken
The Maghreb electricity Committee) as well as those launched by
into account that the development of renewable energy in North
the Arab League are all indications that compared to the rest of
Africa could have a significant impact on Europes energy mix as
the continent the North African region might be in a better position
well. Therefore it is envisaged that the North African region, at least to attract the relevant finance needed for wind renewable energy
when compared to other African regions, will find it easier to attract development.
finance as the region is increasingly seen as being an integral

With the financial crisis in most


developed countries in the near
future most African (and other)
countries will increasingly
complete for capital

42 African Development Bank Group (2012). Unlocking North Africas Potential through Regional Integration Challenges and Opportunities.
43 African Development Bank Group (2012). Unlocking North Africas Potential through Regional Integration Challenges and Opportunities.

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

40

North Africa continued


In particular, the wind speeds and wind reliability in North African
countries rank amongst the highest in the world and the renewable
energy targets recently implemented across different North African
countries are ambitious, notably with Egypt setting a renewable
energy target of 20% of electricity generation by 2020 (with wind
energy expected to contribute 12% of this renewable energy). In
Morocco the government has set its renewable energy target at
20% of electricity generation by 2012 and Tunisia has set a wind
energy target of 180 MW by 2011.44
This abundance of renewable energy resources in North Africa
is expected to attract a significant amount of investment in
the short to medium term, particularly in more economic and
politically stable markets. In addition many countries in the
region are seeking to significantly increase the proportion of
renewable energy in their generation mix as they look to diversify
their predominantly hydrocarbon fuel supply and to meet the
ever-increasing consumer demand. In order to encourage
renewable energy development many countries in the region
are also working on their legal and regulatory policies which is
proving to be a critical factor in investment decisions with financiers
and developers looking for clear long-term targets/timeframes and
energy policy and incentives that establish investment conditions
that are bankable.
Whilst all countries in North Africa have potential, the most
interesting and most important sites for wind renewable energy
development are in Egypt and Morocco. In Algeria, the promising
sites are in the Adrar region, to the South, northwest of Oran,
the region extending from Meghress dBisrka in the East and the
region extending from El Kheiter to Tiaret to the West. Compared
to Morocco, Tunisia and Egypt however, Algeria is still at stage
of developing a pilot project for 2012-2013, with an investment
of 30 million Euros for building the first wind farm with a capacity
of 10 MW(10 tranches) in Adrar, in the southeast of the country.
In Morocco for example the renewable energy projects are
undertaken on a PPA basis with some done by the national stateowned utility and others by tender. The government has also
recently set targets for renewable energy development, which,
if implemented, would mean that renewable energy sources would
represent 42% of the total installed capacity and provide more
than 20% of the countrys total electricity consumption by 2020
(with 14% derived from wind energy). Half of the 2,000 MW of
wind energy is planned to be installed by the national utility ONE,
with the other half coming from private investment through the
EnergiPro initiative. As part of this initiative, ONE guarantees
access to the national grid, and the purchase of any excess

electricity produced at an incentive tariff, with different tariffs for


each project. The Moroccan Parliament adopted legislation for the
promotion of renewable energy, including for authorising electricity
generation from renewable energy sources.

T he proximity of North African


countries to Europe and the growing
electrical grid interconnections
between these regions might trigger
a stronger interest in renewable
energy development in North Africa
compared to other African regions.
In Egypt, the government target of 20 per cent by 2020
(including around 7.2 GW of wind) is expected to be derived from
international tenders. In 2003, a detailed wind atlas was published
for Egypts Gulf of Suez coast, concluding that the region has
an excellent wind regime with wind speeds of 10 m/s, and the
potential to host several large-scale wind farms. This atlas was
expanded in 2005 to cover the entire country, indicating that large
desert regions both to the east and the west of the Nile River, as
well as parts of Sinai, have average annual wind speeds of 7-8
m/s. Large areas with high wind potentials are already earmarked
for wind power development on the west of the Gulf of Suez and
along the Nile River. In 2008 the Egyptian government approved an
ambitious plan to produce 20% of total electricity from renewable
energy sources by 2020, including a 12% contribution from wind
energy (around 7,200 MW). In order to achieve this target, the
government has earmarked 7,600 square kilometers of desert
land for implementing new wind energy projects.
For solar renewable energy development in North Africa, the
Desertec project, backed by several European energy and
industrial companies and banks, plans to generate renewable
electricity in the Sahara desert and distribute it through
a high-voltage grid for export to Europe and local consumption
in North-Africa. Plans are widely ambitious and the project
remains in early development stage.

44 African Development Bank Group (2012). Unlocking North Africas Potential through Regional Integration Challenges and Opportunities.

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

41

South Africas Renewable Energy Independent Power Project Programme


South Africas National Energy Regulator (NERSA) announced
on 31 March 2009 the introduction of a system of feed-in tariffs
in respect of renewable power in the country. The feed-in tariffs,
differentiated by technology, were designed to be paid for
a period of 20 years.

South African Legal and Regulatory Regime

NERSA said in its release that the tariffs were based, as in most
European countries, on the cost of generation plus a reasonable
profit. The tariffs for wind energy and concentrating solar power
are among the most attractive worldwide. NERSAs revised
program followed extensive public consultation. However, the
feed-in tariff was abandoned shortly before being promulgated in
favour of a competitive bidding process launched on August 3,
2011. The proposed bidding process (now in existence)
comprises two steps:

South Africa has the benefit of a well-established PPP/project


finance framework, which has produced a robust consultation
and bidding. We would encourage other African governments
to standardize, to the extent possible, the risk-sharing balances
and PPA standards negotiated in SA instead of appointing
advisers to start from scratch.

Qualification phase

Projects are assessed based on structure of the project,


black empowerment, legal, land acquisition and use, financial,
environmental consent, technical, economic development and
the existence of a bid guarantee; and
Evaluation phase

where compliant bids are then evaluated based on: (1) price
relative to a ceiling provided in bid documentation, accounting
for 70% of the decision, and (2) black empowerment and
economic development, accounting for 30% of the decision.
The first round of bids was due in November 2011 and the South
African government announced bid phase 1 preferred bidders in
December 2011. PPAs for this round are expected to be in place
by June 2012 and projects should be in commissioning by June
2014, except CSP projects which are expected by June 2015.
The second bid round began in the first quarter of 2012 and bid
phase 2 preferred bidders were announced in May 2012.
Although the two-year lead up to the issue of the request for
proposals (RfP) resulted in widespread criticism of the process,
the quality of the RfP itself - and particularly the bid-form project
documents (notably the PPA and implementation agreement)
- was of a very high standard. This did much to increase the
confidence of the market and resulted in 53 bids being submitted
on the first bid submission date (4 November 2011) and 79
bids on the second submission date (5 March 2012). The third
submission date remains scheduled for May 2013.

Unlike many other African nations, South Africas statutory and


regulatory regime is well-developed, including in respect of
renewable energy. That is not to say that the framework is perfect
but it exists and is generally clear.

South African respondent - Trinity International LLP survey

There is an independent regulator, NERSA, and the unbundling


of the power sector has commenced (though with Eskom holding
each of the roles in transmission, distribution and as offtaker
currently, this unbundling is something of a fiction). There is no
single statute which regulates renewable energy in South Africa,
however. The relevant legislation includes the National Energy
Regulator Act 40 of 2004, the Electricity Act 41 of 1987, the
Electricity Regulation Act 4 of 2006, the National Energy Act
34 of 2008. In addition, a number of regulations exist including
the Electricity Regulations on New Generation Capacity that
were published in 2011 and provide for the procurement of new
generation, including renewables.
There is something of a blot on the regulatory landscape, however,
as draft regulations for the licensing and registration of electricity
generation, transmission, distribution and trading published in
2006 have never been finalized. It is not clear when or if they will
be brought into force.
As South Africa has not had a track record of IPPs, the first wave
of wind (and other renewables) projects will test the regime.

Standard Bank estimates that more


than $12 billion was raised in
South Africas first two bid rounds
under the governments renewable
energy program which is a clear
indication that adopting principles
of public-private partnerships
attracts global investment.

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

42

South Africas Renewable Energy Independent Power Project Programme continued


Certain issues are coming to light as a result of the ongoing
REIPPPP process, including in respect of the form of the
generation licence granted under the Electricity Regulation Act.
The first form of the licence that was released by NERSA was
unbankable for a number of reasons but the latest iteration
is addressing some of those issues. Hopefully this demonstrates
that the regulator and the South African Department of Energy
(DoE) are listening to the views of the developers and their lenders
and are attempting to ensure a balanced and acceptable legal
regime for wind (and other) projects.
The fact that Eskom has been effectively a monopoly in power
generation, transmission and distribution in South Africa,
generating 95% of the countrys electricity (and 75% of the entire
African continents), presents some challenges to the development
of wind (and other) IPPs.

A political tension between DoE, Eskom and NERSA has been


palpable at times. Commentators have attributed the delays before
the issue of the REIPPPP RfP and the delays to financial close
of the first round deals to this issue.
In comparison to every other country in Africa, South Africas
renewable programme - and particularly the number of wind
projects it has attracted - has shown that South Africa is
a completely different market. It is possible to count the number
of credible developers of wind projects in SSA countries on
one hand. The huge interest that REIPPPP has generated
amongst international and national developers as well as global
manufacturers and contractors, puts South Africa on another level
entirely. In addition, the fact that the South African market seems
to be paving the way for full turnkey EPC contracts for wind
projects (moving away from the traditional turbine supply and
separate civil works package approach of Europe and other
jurisdictions) shows how keen the suppliers and contractors
are to enter the market.

Overview of projects comprising Case Studies


In this section of the Report, we will analyze four case studies in
each of North Africa, South Africa and East Africa. The intention in
relation to these case studies is to draw on country experiences
and selected projects. We will use these projects (two closed
projects and two projects in the course of development), to
address the main issues identified in discussed in the previous
sections of this Report.

In particular, these case studies will aim to highlight innovate


practices in promoting a greater participation of private investment
in renewable energy. Our approach in this case study is to take
a bottom-up review of renewable IPPs on the continent: i.e. to
look at what has actually been delivered and analyse the regulatory
environment that has assisted that delivery as well as any other
extraneous factors that have assisted these projects in reaching
financial close. This practical approach we believe delivers stronger
lessons to all stakeholders than simply discussing ideal scenarios.
We set out below in a series of tables, a summary of the identified
projects analyzed importantly, by project sponsors in light of
the risks identified in Section 3 above as hindrances to successful
delivery of IPPs.

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

43

Cabeolica Wind Farm, Cape Verde


Cabeolica is the first commercial-scale, privately financed, PPP
wind farm in SSA. The project won the renewable energy project
of the year award in 2011 after being developed, commissioned
and put into operation by InfraCo Africa. It is now managed by
a special purpose company, Cabeolica SA, established in 2009
by its founding partners: the Government of Cape Verde, Electra
(the government owned utility company), and InfraCo Africa. The
US$78m project reached financial close during 2010. It has been
financed by a combination of debt supplied by the European
Investment Bank and the African Development Bank, and equity
from the African Finance Cooperation (the principal shareholder,
an African private equity firm in West Africa), Finnfund and the lead
project developer, InfraCo Africa.
Cabeolica Wind Farm, Cape Verde Analysis against
identified risks of delivery with input from project sponsors
General Business Framework

Including the Government and the state-owned utility as


shareholders in the project company gave government an
additional incentive for them to see the project succeed. The
individual stakeholders within the Government and the offtaker
also sat on the Board of the project company, giving them a
personal stake in the project. The individuals involved were
knowledgeable and had the authority to push matters through.
Lack of Developers

The developer was InfraCo, part of the PIDG group of


companies. InfraCo was specifically set up to tackle the risks
associated with early stage project development risks that
the private sector typically would not accept. In fact InfraCo is
prohibited in its constitution from competing with the private
sector. It is unlikely that the project would have succeeded
without this availability of early-stage risk capital.
Issues with Offtaker

The offtaker itself was not sufficiently creditworthy to support a


20 year PPA, but the government support structure we put in
place was acceptable to both the investors and the lenders.
Political Risk

Cape Verde has one of the most stable political systems in Africa
so political risk was relatively low. For example a presidential
election was held in the midst of financing (July 2011), which had
no adverse effects on the development schedule.

Availability of Long-Term Debt

DFIs were happy to provide financing to the project, as it had


great developmental value and was a landmark transaction in
the African renewable energy sector
Availability of Equity

Equity monies were made available by InfraCo through the


auspices of the PIDG Trust (representing development finance
interests of several Western European governments) and
through the Africa Finance Corporation, who are the majority
shareholder.
Availability of Equipment

The project benefitted from an equipment supplier/contractor


that was keen to expand its operations in the region, that had
the capability and experience to build this challenging project (i.e.
relatively few turbines on 4 separate islands) and that could offer
a full EPC package. This was one of the most important factors
that allowed us to obtain suitable financing for the project.
Other Innovations

The Government of Cape Verde entered into Establishment


Convention giving the project company certain tax and foreign
currency benefits. Key legislation was also in place (Public
Partnerships Act, Electricity Regulations Act and Land Law).
Cabeolica Wind Farms Outcomes

Total investment in infrastructure committed: US$78m.


Cabeolica is expected to provide 25% of the countrys energy.
The cost of generating power about 20% less than before.
 he Cabeolica Wind Farm is fully built and commissioned; the
T
biggest of the four sites on Santiago island (with 11 turbines)
was the first to go on-line and began generating power from
September 2011.
It benefits 95% of the population or 425,000 people with more
reliable, cleaner and cheaper power, and benefits an additional
50,000 Cape Verdeans with connections to the national
electricity grid.
It is expected to substantially reduce oil imports by up to 20,000
tonnes saving the country 12-15m a year.
It has established a model for large-scale renewable power
projects with private investment, which can be replicated
elsewhere in Sub Saharan Africa.45

45 For more information please see: www.infracoafrica.com/projects-capeverde-cabeolicawind.asp

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

44

Confidential solar farm, South Africa


Analysis against identified risks of delivery
with input from project sponsors
General Business Framework

Despite a good suite of draft documents for bidders to bid


against, there have been several issues with the delivery of the
programme:

Availability of Long term Debt

No shortage, in bid round 1 of debt from South African banks,


awash with liquidity primarily due to increased capital adequacy
requirements imposed by the South African Reserve Bank and
limited exposure to sub-prime assets affecting many other
Western banks.
Availability of Equity

The follow up, by way of briefing notes, has been inconsistent;


The messages from the Department of Energy and ESKOM
have often been contradictory; and
ESKOM has been slow in releasing the documents
(e.g. generation licence) that were not in the original bid
package.
In addition, the ancillary documentation, such as the Grid Code
and the Market Rules pose some issues for developers and
lenders alike. Several DFIs have also questioned the public
procurement rules in South Africa (i.e. who was authorized
to issue the RfP and whether the procurement was in fact in
accordance with South African law).

Not an issue in bid round one a number of parties banks,


funds, DFIs etc. have provided equity.
Availability of Equipment

Major international players are present in the South African


market and have set up business there for the REIPPP
programme.
There is however a comparative lack of sub-contractors, which
given the local requirement issue, may be an issue in terms of
timing of delivery of the projects. Connection works in particular
will need to be done by local sub-contractors.
Other innovations

Lack of Developers

There appears to be an abundance of developers with (i) risk


capital; and (ii) the capability to deliver such projects.
Issues with Offtaker
ESKOMs multiple roles is at best confusing. There has been
no unbundling like in other electricity markets. The question of
responsibility of grid access is in particular of concern.
Political Risk

Economic development obligations are burdensome


on developers. The BBBEEE and ownership requirements
are complex and difficult to understand and implement.
Risk of nationalization or expropriation (cf. mining sector
in South Africa)

Form of documents the fact that government took international


and local advisors on board to produce standard form
documents created a package significantly improved from the
norm. Very aggressive timelines for all bid rounds.

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

45

Lake Turkana Wind Farm


The Lake Turkana Wind Power (Turkana) aims to provide 300MW
of reliable, low cost wind power to the Kenya national grid,
equivalent to approximately 20% of the current installed electricity
generating capacity. Turkana is of significant strategic benefit to
Kenya, and at Ksh75 billion (584 million) will be the largest single
private investment in Kenyas history. The wind farm site, covering
40,000 acres (162km2), is located in Loyangalani District, Marsabit
West County, in north-eastern Kenya. The financing is targeted for
completion in 2013. Turkana will comprise up to 365 wind turbines
(each with a capacity of 850 kW), the associated overhead electric
grid collection system and a high voltage substation.

monopoly with regard to the distribution of electricity; however


the Energy Act (the Energy Act) No.12 of 2006 does provide
for the licensing of other electricity distributors. The Energy
Act came into force on 7th July, 2007 and is the overarching
statute regarding the energy sector. There is no standard form
prescribed by legislation. There have, however, been a number
of IPPs in recent years (Tsavo, Rabai, Olkaria) and the form of
PPAs negotiated on these projects have, in general, large points
of similarity and it is likely such a form of PPA would be utilised
for any further IPP in the country (as is currently the case in a
number of IPP negotiations ongoing in Kenya).

The Kenya Electricity Transmission Company Ltd (KETRACO),


with concessional funding from the Spanish Government, is
constructing a double circuit 400kv, 428km transmission line to
deliver the Turkana electricity along with power from other future
plants to the national grid. Equity for the project is comprised
of KP&P Africa B.V., Aldwych International Limited (Aldwych),
the Danish Industrial Fund for Developing Countries, and the
Norwegian Investment Fund for Developing Countries. The
project company, whose shareholders are noted above, is solely
responsible for the financing, construction and operation of the
wind farm. Aldwych, an experienced power company focused on
Africa, will oversee the construction and operations of the power
plant on behalf of the project company. Vestas will provide for the
maintenance of the wind turbines. The power produced will be
bought at a fixed price by Kenya Power (KPLC) over a 20-year
period in accordance with a PPA.

Lack of Developers

Financing of the project is to be provided by a series of DFI and


commercial lenders. African Development Bank, Standard Bank
of South Africa Limited and Nedbank Capital Limited are the
mandated lead arrangers for the project.

Lake Turkana Wind Farm, Kenya Analysis against


identified risks of delivery with input from project sponsors

KP&P no history / track record of wind projects but experience


generally in Kenya and have been able to create a consortium
with other partners including Aldwych.
Issues with Offtaker

KPLC has closed several IPPs and as far as African offtakers


is concerned, has a decent credit record, although with 600MW
of power slated to come on line by 2014 in Kenya, credit
support in some form is likely to be required by project finance
lenders.
Political Risk

Some form of insurance coverage is likely to be available to


mitigate offtaker and/or political risk. The Government of Kenya
has put in place a Letter of Support in relation to political
risk relating to all power projects that are currently being
independently procured.
Availability of Long-Term Debt

Both development and commercial lenders have been


mandated to raise finance for the Lake Turkana project.
Availability of Equity

Two DFIs form part of the shareholding of the project / other


equity likely available.

General Business Framework

Electricity generation and distribution in Kenya used to be a


monopoly that fell under the KPLC. The generation of electricity
has since been liberalized and as a result several IPPs have
surfaced on to the market. There are currently a handful of
IPPs operating in Kenya: though just one is for wind, and
only for 5MW. At present the largest electricity generator is
the Kenya Electricity Generating Company Limited (KenGen)
which is a public listed company and majority owned by the
Government of Kenya. All public generating power stations
are run by KenGen and by virtue of this arrangement KenGen
produces 80% of Kenyas electricity. On the whole, KenGen
produces 80% of Kenyas electricity as a result of the fact that
it runs all public generating power stations. KPLC is currently a

Availability of Equipment

Vestas has undertaken significant upfront work on all logistics


aspects for turbine delivery. The turbines will need to be
delivered to a remote part of Northern Kenya with consequent
transportation risks along unreconstructed roads form port
to project site.
Other Innovations

As part of the commercial discussions, it is likely that the turbine


supplier will take an equity stake in the project as part of its
payment terms.

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

Lake Turkana Wind Farm continued


Turkana Wind Farm Expected Outcomes

Largest single wind farm in sub-Saharan Africa;


 ptimal site location: According to the National Wind Resource
O
Atlas, as compiled by the Ministry of Energy, Marsabit West
County is generally gifted with exceptional wind resources;
 eliable wind: The site lies between 450m at the shore of Lake
R
Turkana and 2,300m above sea level at the top of Mt. Kulal.
The area around the site has a unique geographical
phenomenon whereby daily temperature fluctuations generate
strong predictable wind streams between Lake Turkana (with
relatively constant temperature) and the desert hinterland (with
steep temperature fluctuations) and as the wind streams pass
through the valley between the Mt. Kulal and Mt. Nyiru ranges
(2,750m above sea level) which effectively act as a funnel
causing the wind streams to accelerate (known as the Turkana
Corridor low level jet stream). The Turkana wind phenomenon
stems from the East African jet stream which stretches from the
ocean through the Ethiopian highlands and valleys to the deserts
in Sudan in a south-east direction all year round; and
 ata collected and analyzed since 2007 indicate that site has
D
some of the best wind resources in Africa, with consistent
wind speeds averaging 11 meters/second and from the same
direction year round.

46

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

47

Olkaria III geothermal plant


The Kenyan government put the Olkaria III field out for tender
1996. Two companies submitted bids and, after evaluation,
Ormat International was awarded the right to develop Olkaria III.
Olkaria III Geothermal Power Plant is situated in the Olkaria
geothermal steam field, which is located in Hells Gate National
Park in the Rift Valley Province, roughly 100 km northwest of
Nairobi. The Project follows a Build-Own-Operate-structure
(BOO) and was implemented in two main phases:
 hase I (which has been fully operational since December 2000),
P
consisted of the development of the geothermal field (incl. drilling
of wells with a capacity of 58 MW) and the construction and
implementation of a 13 MW facility;
 hase II essentially involves an increase in the generation
P
capacity by 35MW to 48MW; and
 Phase III is currently in development, to expand the plant
A
by a further 36MW.
The project contributes very positively to the targets of international
climate change policies with the generation of renewable energy
and according to the companys sources, can replace 120,000
tons of imported oil and mitigate approximately 200,000 tons
of CO2 emissions per year.
The borrower, Orpower 4, Inc. is wholly-owned subsidiary
of Ormat Technologies, Inc. On September 22, 2011, MIGA issued
a guarantee of US$99 million to Ormat Holding Corporation
of the Cayman Islands for its equity investment in OrPower 4, Inc.
The guarantee is for a period of up to 15 years and covers the risks
of transfer restriction, expropriation, and war and civil disturbance.
This guarantee replaces an earlier MIGA guarantee that covered
investments into the first and second phases of the project.
The new guarantee also covers an additional equity investment
of $110 million for phase three of the project.

Olkaria III Geothermal plant, Kenya Analysis against


identified risks of delivery with input from project sponsors

Kenya environment.
Whether difficulties were driven by lack of capacity, excess
bureaucracy and/or internal conflicts of interest within the power
sector players, the sponsors cannot say. Nonetheless, all of the
causes have a similar negative impact on development efforts.
Lack of Developers

Ormat, the US-Israeli sponsor, was fortunate enough to carry


exploration, construction and operation activities on its own
internal resources, however our base case assumption is that
debt financing at reasonable commercial terms will be available
once a resource is proven and before construction is complete.
Issues with Offtaker

This issue, was eventually mitigated by delivery of a Standby


Letter of Credit.
However, sponsors would note that the project benefitted from
first mover advantage and future IPPs in Kenya cannot simply
rely on a letter of credit (mainly due to cost, expense and impact
on offtakers balance sheet).
Political Risk

As noted above, an equity PRI policy is maintained with MIGA.


Availability of Long Term Debt

Sponsors would note that there is limited appetite for long-term


non-recourse financing in Kenya but that debt availability
is improved for strong sponsors.
Availability of Equity

As noted in the section, Lack of Developers, the sponsors


base case assumes that debt financing is available once the
resource was proven and before construction is complete.
The initial stages of construction were financed by equity,
thereby significantly reducing construction risk for debt
providers.
This in itself one of the key elements that enabled the project to
reach financial close.
Availability of Equipment

General Business Framework

Risk perception in the geothermal business is a combination


of geothermal risk, political risk, offtaker credit risk, financing risk
(of not being able to debt finance) and various regulatory risks
that may cause hassles such as licensing, environmental, etc.
not on political grounds.
For Kenya, the sponsors geothermal risk perception improved
over time and also their sensitivity and exposure to political risk
diminished as they got more familiar with the government of

Ormat has in-house drilling, design, manufacturing (including


proprietary turbines), construction and operations capabilities.
Other Innovations

Government of Kenya Support Letter was put in place in respect


of political risk.

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

Olkaria III geothermal plant continued


Olkaria III Outcomes

 lkaria III was the first privately funded and developed


O
geothermal project in Africa;
 eothermal projects avoid the need to import fossil fuels
G
and instead utilise a locally available resource which will
improve Kenyas power supply;
 he project contributes very positively to the targets
T
of international climate change policies with the generation
of renewable energy and is expected to qualify for the provision
of carbon credits within the Clean Development Mechanism
of the Kyoto-Protocol; and
 he initiative meant that the cost of power to the end user
T
is less than that generated from fuel oil or other alternative
energy sources. This in effect assists in holding down the cost
of electricity to consumers as well as for the industry.

48

5. Case Studies & Best Practice of Renewable Energy IPPs in Africa

49

Other examples of grid-linked IPPs in Africa


Rwanda/Solar

In terms of solar power, the 250 kW Kigali Solaire station


in Rwanda (photovoltaic), though in construction phase, supplies
around 325,000 kWh of solar electricity per year, with a peak
output of 250 kW. The utility company feeds the electricity
generated into the grid of the state energy utility Electrogaz.
The project is sponsored by the German public sector entity
GIZ - Deutsche Gesellschaft fr Internationale Zusammenarbeit
but its impact, whilst major in terms of parts of rural Rwanda,
is minimal in light of the continents overall needs.
Rift Valley/Geothermal

In terms of geothermal power, so far only Kenya has exploited


the geothermal potential of the Great Rift Valley. Kenya has been
estimated to contain 2000 MW of potential geothermal energy
and has twenty potential drilling sites marked for survey in addition
to three operational geothermal plants. Kenya was the first country

in Africa to adopt geothermal energy in 1956, and is home to


the largest geothermal power plant on the continent, Olkaria II,
operated by Kengen, who also operate Olkaria I. Our case study,
Olkaria III, is privately owned and operated. Olkaria IV, another
private sector plant, is in the early stages of development. Ethiopia
is home to a single binary-cycle geothermal plant but a legal and
regulatory framework exists in order that Ethiopias capacity
in this regard can be vastly expanded. 1000MW of geothermal
power are in the early stages of development in the country.
We have learned that Zambia has several sites planned for
construction but their projects have stalled due to lack of funds.
Eritrea, Djibouti and Uganda have undertaken preliminary
exploration for potential geothermal sources but have not
constructed any type of geothermal power plant as yet.

Conclusions from Case Studies


Each project has its own specific issues and challenges but a
number of consistent themes emerge in allowing a project to be
successfully undertaken; such as:
 xperience in the public sector - Kenya has has a number of
E
IPPs in the last few years and capacity experience on relevant
issues and processes has been retained to allow speedy
implementation of required documentation;

 he project finance model requires substantial due diligence,


T
large transaction costs and significant periods of time. Either the
model needs to change or measures need to be undertaken to
minimize these impacts; and
A quality resource usually leads to a quality project.

6.
How to Design the Best
Legislative Framework
for Successful IPPs

6. How to Design the Best Legislative Framework for Successful IPPs

51

6. How to Design the Best


Legislative Framework
for Successful IPPs
Gaps in the Legal and Regulatory Framework
The lack of a legal and regulatory framework is often cited as the
main barrier to renewable energy investments in Africa (and, based
on feedback to the Trinity questionnaire, appears to remain so).
The lack of a legal framework for selling power makes it difficult
(or impossible) for project developers and investors to plan and
finance projects on the basis of known and consistent rules.
Investors and developers alike require certainty when it comes
to projects within this sector. Arbitrary changes to rules, and/
or addition of new rules results in a level of regulatory risk that
deters participants in this area. The misapplication of rules, excess
regulatory discretion in price reviews, discriminatory grid policies
prevalent in most African countries de-incentivise investors and
developers alike. Other certainty and stability concerns include
the disorganised or opaque tendering processes that result in
cancelled, postponed or dubious tenders and the possibility
of nationalisation or expropriation of utilities and projects.
A significant issue in some countries is also the lack of
independent or impartial regulators.

Key factors for sucessful PPP framework

For a successful IPP what is needed is: (i) public sector


officials with experience of doing a deal before; (ii) international
advisors to government/offtaker; (iii) existing, accepted
precedents; and (iv) political support at high level.
Respondent - Trinity International LLP Survey

Depending on the country, technology and project location, grid


infrastructure development may be required, resulting in delays in
connection time as well as the risk of the necessary structures not
being built and connected. There are also issues specific to certain
technologies, for example, wind offshore has to contend with a
lack of sufficient and developed grid infrastructure due to intensive
capital costs, geographical factors and environmental costs. In the
majority of African jurisdictions there is an absence of a framework
that provides for transmission access for renewable energy
resources which can be located away from centres of demand.

47

6. How to Design the Best Legislative Framework for Successful IPPs

52

Framework for Successful IPPs Gaps in the Legal and Regulatory Framework
As noted in our introduction the impact of the current global
economic climate might hinder renewable project development by
affecting the most important deliverable being the cost of finance.
Invariably this will mean that countries with a better legal and
regulatory profile and consequently a more attractive investment
profile will attract more investors.
We present in this section what we feel are the most relevant
considerations to be taken into account by host governments
in developing PPPs and renewable energy legal and regulatory
frameworks for renewable energy development.

We list below what we feel are the most important general gaps
and implementation tools for all African governments to consider/
introduce in order to make their legal and regulatory frameworks
more attractive to the private sector. In this respect we start with
a general overview of what is needed for a successful PPP legal
framework for renewable energy development.

Countries with a better legal and


regulatory profile will attract
more investors

Value for Money in a Project


Ensuring value for money (VfM) in an infrastructure project should
be at the core of the public sectors decision to engage in a PPP
project. Essentially, a PPP is a considered a VfM transaction if it
generates a net profit for a public institution in terms of quantity,
quality of service or facility, cost

and risk transfer during various stages of the project life cycle.
Hence, the VfM prognosis of a PPP plays a fundamental role in the
decision whether a public institution would be willing to enter into
PPP agreement.

Transfer of Risk
The public sector in most countries has shown a lack of capacity
to finance and manage the multi-faceted risks associated with
renewable energy projects. PPPs are a more suitable vehicle for
risk management and mitigation in large scale projects as opposed
to the traditional means of public procurement.

This is given that risk identification, allocation and mitigation is at


the heart of a PPP arrangement which is based on the project
finance model. In addition, the private sector has the requisite skills
and capacity to manage the complex risks associated with project
development and execution.

Ensuring Affordability
The concept of affordability is premised on the notion that a PPP
arrangement should be designed to stay with the limits of the
governments budgetary ceiling. It is important to note, that many
public sector services in Africa are underfunded as a consequence
the budget forecast figures on their own may underestimate the
cost of the provision of these services. Therefore, if a project is not

Infrastructure Funding Facilities


The lack of adequate public sector funding has been identified as a
significant constraint to infrastructure development in Africa.

accurately defined, it is likely to be deemed unaffordable under


a ministrys existing budget allocations. Nevertheless, external
funding provided in the form of grants or concessional lending
is vital to lowering the public sector expenditure and ultimately
reducing the costs of the end-users.

6. How to Design the Best Legislative Framework for Successful IPPs

53

Selection of Appropriate Infrastructure Projects


One of the challenges faced by institutions is the ability to discern
the suitability of an infrastructure project for the PPP model. This
suggests that the notion of one size fits all is not applicable
to infrastructure projects. Governments should heed the fact

It is vital that a strong legal and


regulatory framework is established
to govern PPP transactions, however
governments should heed the fact
that PPPs are not a panacea for
all infrastructure development
initiatives

that PPPs are not a panacea for all infrastructure development


initiatives. It is therefore crucial that in the planning phase to select
infrastructure projects that would be well suited to the PPP model
as it would be more likely to ensure the success of a project.
It is vital that a strong legal and regulatory framework is
established to govern PPP transactions. In view of the nature and
the lengthy time frame of such projects it is imperative that the
interests of both the public and private sector are protected by
law. It is evident an established legal framework governing PPP
transactions creates an incentive and an enabling environment
for prospective investors. For countries that do not have a legal
and regulatory framework governing PPP arrangements, it is
recommended that they embark upon such reform as this would
create an incentive for prospective investors.

The Tender Process


It is suggested that VfM is more likely to be realized when the
tender process is competitive, transparent and fair to all bidders.
This would imply a degree of divergence from the traditional
tendering process used in most Africa countries which includes
fragmented decision making, lengthy tendering processes, and

political interference. It is prudent that the government conducts


a formal market test in order to determine that there are no
other formidable competitors because competition is the best
determinant of value.

PPP structure
Private sector participation in PPP projects should have a clear
basis in policy with broad government support throughout
government institutions.
Respondent - Trinity International LLP Survey

Our experience has taught us that lack of funding is not often the
reason why a number of countries in the region fail to capture the
attention of the private sector in the development of infrastructure.
What is required is an approach that dispels the widely held belief

that for many African countries it is just too difficult to structure


projects over the long-term. Therefore, for a PPP process to deliver
value for money for the public sector, there needs to be a sufficient
amount of private sector entities willing to participate in the
procurement process. Accordingly, it vital that the structure that is
created encourages the private sector to participate in the process.
The following comments are therefore aimed at how this could be
achieved within the framework of a PPP policy.

6. How to Design the Best Legislative Framework for Successful IPPs

54

Procurement Process
A robust procurement procedure for PPPs must be developed.
The importance of this cannot be over-emphasised. Too often
in numerous countries around the world, little thought has been
given to the quality of tender documents or the process they
attempt to describe. From an international investors perspective,
this creates a poor image from the outset. Well structured and
clearly considered tender documents are therefore a minimum
requirement. Specifically, the tender documents should:
 learly identify the tender process that will be followed, including
C
each process that needs to be followed and the approvals
required in order to take the project from start to finish;
 et a realistic timetable for the process needs to be established.
S
Too often the quality and robustness of a project is jeopardised
by an unrealistic assessment of the amount of time required
in order to procure PPPs. If the time period in the tender
documents is too short, this will almost certainly cause private
sector developers to think twice about participating as it
demonstrates an unrealistic expectation within government.
A balance between a desire for speedy delivery and a realistic
procurement horizon needs to be struck based on experience;

Identify the objectives of the public sector and the evaluation


criteria supporting these objectives for the PPP must be clearly
established;
Identify the agency, ministry or other procuring authority in
charge of the procurement process and the entity that will
execute the PPP agreement with the private sector. As stated
above, the points in the process when approvals from other
entities will be required should be highlighted, as should the
jurisdictional limits of the procuring entity;
 et out the proposed terms and conditions of the concession
S
agreement or other PPP documentation. Thought should also
be given to appropriate forms of direct agreement with lenders.
Provided these documents are of a sufficiently high quality and
demonstrate a balanced and realistic approach to risk allocation,
private sector developers will be encouraged to take part in the
process.

Challenges to the procurement process


It will be a negative factor for private sector participation in a
procurement process that there are many and varied opportunities
for disappointed bidders to seek to challenge the procurement
process. Ideally, any challenges need to be addressed swiftly in
order to ensure that delays to the completion of the project are
minimized to the maximum extent possible. In addition, there
needs to be clarity and consistency in relation to when a court or
procurement authority will declare the award of a particular project
illegal and declare the contract void. If at all possible, except in the

It is absolutely vital that there is


no bureaucratic contest for control
of projects and that the role of
each individual entity is clearly
established.

most extreme cases of mismanagement, remedies to disgruntled


bidders should be limited to the award of damages against the
procuring authority. This should allow developers and financiers
the opportunity to continue to develop the project (and to incur
significant development costs in doing so) without fear that the
contract could be declared void.
In addition, it should be remembered that creating a
comprehensive bid for a PPP scheme involves a substantial
commitment from the private sector. The private sector partner will
have to commit a significant amount of resource to preparing its
tender in a manner that satisfies the requirements of the procuring
authority. This is particularly the case for early projects where a
track record or precedent cannot be relied upon. Consideration
should be given to the possibility of compensating some of the
bid costs of unsuccessful bidders who have submitted a fully
compliant tender. This will also encourage the private sector to
tender, which will create a competitive tension in the process, and,
ultimately, deliver value for money for the public sector.

6. How to Design the Best Legislative Framework for Successful IPPs

55

Public Sector Interface with the Private Sector


It is absolutely vital that there is not a bureaucratic contest for
control of projects and that the role of each individual entity is
clearly established. The key issues for the private sector are:
 hat there is a clear route map for obtaining all of the necessary
T
consents for a project;
 hat a realistic timetable is set for the obtaining of these
T
consents and that the timetable is delivered;
 hat the number of gateways and consents is minimized to
T
the maximum extent possible; and
 hat the negotiating parties are clearly authorized to make the
T
necessary decisions to drive the project forward and will not be
overruled in an arbitrary fashion.
Overall, consistency and predictability of approach is required. In
addition, it will be vital to ensure that the procuring authority has
the necessary legal authority and capability to enter into the PPP
with the private sector.
On a more practical issue, the government needs to ensure that
it has the capacity to negotiate and then implement the schemes.
This has been a key issue facing all governments desiring

to implement PPP programmes. In addition, our comments


below in relation to the identification of pathfinder schemes and
standardization of documentation should assist. At least in the
early stages of the programme, the expertise and capacity of
host government should not be spread too thin. Efforts should be
concentrated on the successful delivery of a few key schemes.
Thereafter, as knowledge and practice becomes more widespread,
the programme can be expanded.

At least in the early stages of


the programme, the expertise and
capacity of host government should
not be spread too thin. Efforts should
be concentrated on the successful
delivery of a few key schemes.
Thereafter, as knowledge and
practice becomes more widespread,
the programme can be expanded

Risk Allocation
From the legislative standpoint, the most helpful advice is perhaps
expressed in negative terms. It is important that the host countrys
legal system contains as few restrictions as possible on the ability
of the parties to a PPP to achieve the most appropriate allocation
of risks for the purposes of any individual project.
Legislators drawing up relevant laws may sometimes be tempted
to try to prescribe patterns of risk allocation in the law, in one
form or another. This is usually inadvisable. Risk assessment and
allocation is an intricate subject in reality, as much an art as a
science and attempts to provide for it at an abstract level in
advance in legislation will usually be counter-productive. Legislative
provisions are not the appropriate tools to deal with it. Contracts
are, on the other hand, and it is equally important to avoid
including in any laws any restrictions on the terms of a concession
or project agreement that are not clearly essential (see further
below). Flexibility has to be the rule.
No pattern of risk allocation is ever truly identical, as between
any two or more projects. Variations, subtleties and unique
circumstances have to be allowed for. For that reason, our advice
would normally be to say as little as possible about the assumption
or imposition of risk in legislation, but to ensure that the parties
have the freedom to define and allocate it as they think appropriate
in the context of each individual project.

On the other hand, a PPP law can sometimes play a useful part
in removing unwanted restrictions on risk allocation. The existing
law may contain (perhaps outdated, and perhaps scattered or
incoherent) rules or regulations relating to for example the
structure of charges, design and construction approvals, the
content of specifications, governmental power to control the
operation of a facility or contractual terms that are not compatible
with the new PPP structures and the freedom to share risks
appropriately described above. The new PPP laws could be used
to modify or overturn limitations of this kind.
As stated above, success breeds success in the PPP market.
In most jurisdictions where PPPs have been successfully
implemented, there was an evolution of the risk allocation in the
PPP contracts as competition within the private sector increased
and deal flow established. We therefore strongly recommend that
the government does not kill the market before it has been created
by demanding a risk allocation in the contractual arrangements
that is not suitable for a developing market. We have seen a
number of European based advisers try to transplant complex risk
structures from the well-developed European PPP market into
African jurisdictions. As far as we are aware, there has yet to be a
single successful procurement of a PPP scheme in Africa on this
basis. Instead, the key will be to deliver a number of schemes to
demonstrate deal flow. Once a number of clear precedents have
been established, then it will be possible to push the market for

6. How to Design the Best Legislative Framework for Successful IPPs

56

Risk Allocation continued


better and better terms. The development of the IPP market in
Kenya is a clear example of this the successful conclusion of one
IPP has led to the completion of a further number of IPPs in the
country.

Success breeds success in the


PPP market.

However, most African jurisdictions are still trying to establish their


PPPs processes and they must compete against each other to
catch the attention of the private sector. In addition, we are all
aware that lending markets have tightened in recent years and
what was once possible in the European PPP market 5 years ago
may no longer be possible. We therefore strongly recommend that
a realistic approach to risk transfer and allocation is adopted from
the outset in order to secure the participation of the private sector
in the process.

Delivery of Projects and Pathfinders


In line with the theme of success breeds success we believe
that the host government needs to be the main driving force
for the implementation of the PPP programme, at least for the
early stages of the programme. We also believe that the host
government should focus on afew high profile projects early in the
programme. At the outset of the programme, the private sector is
probably going to be unwilling to spend its resources on a project
that is sponsored by a local or municipal entity at the outset of the
programme. This is because there will be a perception (whether
or not true) that entities outside of central government do not
have the capacity to deliver PPP projects. There will also be
concerns about the legal powers of such entities to enter into
PPP transactions, their creditworthiness and the interface with
central government in the process.

We therefore strongly suggest that the early implementation of the


programme be taken forward by central government. In addition,
we suggest that a pathfinder scheme be identified and used as a
demonstration case to prove the structures for the delivery of PPP
projects. Focussing on a single project and delivering it on a basis
that permits financing by local and international financiers on a
limited recourse basis will showcase the countrys PPP processes
and capabilities to international developers and lenders alike.

We suggest that a pathfinder


scheme be identified and used as
a demonstration case to prove the
structures for the delivery of PPP
projects

Approval Process and Politics

The private sector craves a predictable


and transparent process that follows
consistently applied rules and
regulations. In other words, the
politics needs to be taken out of
the process to the maximum extent
possible

There needs to be much more clarity in relation to the approval


process for PPP projects. The private sector craves a predictable
and transparent process that follows consistently applied rules
and regulations. In other words, the politics needs to be taken out
of the process to the maximum extent possible. Once a scheme
has been identified by the relevant government as being viable for
PPP, then the politics should end at that point and rational decision
making based on economics and commercial objectives should
take over. This is a key issue for the private sector. No-one will
want to invest in a long-term project that is likely to be disowned
by an opposing political party once it gains power. This means, for
example, that a legal opinion issued by the Attorney-General (or
any other relevant person/ministry) in respect of a project should
be binding on the new government taking over power and should
not be declared as invalid simply because the project is regarded
as being the old governments project.

6. How to Design the Best Legislative Framework for Successful IPPs

57

Government Support
Legislators should also carry out a thorough analysis of the
question of whether the law needs to be changed to allow for
certain forms of government support that may be necessary or
appropriate in the context of PPPs. There are no hard-and-fast
rules about what these might be. Apart from the straightforward
government undertakings contained in any concession or project
agreement, there may be a need (for example) for public sector
funding or guarantees, equity investments, asset contributions, taxexemptions or concessions, subsidies, revenue support, protection
from competition, and other forms of government assistance,

designed to facilitate a projects successful implementation. If the


law incorporates inappropriate restrictions on the use or availability
of any of them in the area of PPPs, those restrictions may have
to removed or at least modified. One has to be particularly careful
of budgetary and fiscal rules and procedures in this context,
for example. What the PPP laws can easily do is to confirm the
availability of certain types of government support for PPP projects
where there may otherwise be doubt about it (particularly on the
part of investors).

Standardised Approach to Documentation


We would strongly encourage the relevant government to take
steps to establish standard form PPP contracts, as soon as
possible. This is a time intensive process and the up-front costs
can be high, however, the benefits in terms of consistency of

approach and deal flow will more than repay the effort expended.
For renewable energy projects a standard form PPA should also be
developed.

Relevant areas of law


There are potentially many areas of law that have to be considered
before making any attempt to design an optimal legislative and
regulatory framework for successful renewable energy IPPs. IPPs
will touch on many of these areas, quite apart from the contents of
any general legislation that may be introduced to facilitate their use.
These will typically include, for example, commercial contract law,
company law, taxation law, employment law, competition law, the
law of finance and security, insolvency law, infrastructure sectorspecific laws, property law, environmental law, foreign investment
protection law, intellectual property law, public procurement law
or rules, laws relating to expropriation and compulsory property
purchase, and many others. The existence of adequate legal
provision in these and many other laws is paramount as serious
deficiencies in any of them could potentially represent insuperable
obstacles in the way of the effective implementation of IPPs.
In order to create a stable legal environment that will attract private
investors to IPPs, governments need to review their existing
legislation and may have to amend, repeal or adopt certain laws
and regulations.

It would go well beyond the scope of this Report to discuss all the
aspects in which these diverse areas of law might prove deficient
or what might have to be done to reform or modify them in order
to make them more conducive to the successful implementation
of IPPs. One fundamental area of course concerns the rule of law
and the reliability and partiality of the courts and judicial system
(even where international arbitration is specified in the PPA, as it is
likely to be). An adequate (or notionally adequate) legal framework
is of little use if no proper mechanism for the implementation and
enforcement of laws is in place, and there is insufficient judicial
reliability to enforce legal procedures and contracts, pursue
remedies and recognise and execute court decisions.
Annex 2 contains a questionnaire which is designed to help
legislators and investors to make those judgments about the
principal areas. It is broken down into some 85 specific questions,
categorized under the following headings:

General legislative/institutional
framework

Scope of authority to award of


rights

Administrative coordination

Regulatory Authority

Government Support

Selection of bidder

Project Agreement

Project site/assets/easements

Finance and Security

Construction Works

Operation of the Facility

Ancillary Contractual
Arrangements

Tariffs and Settlement


of Disputes

Duration and Termination


of PPAP

Termination of PPA

Risk Allocation

6. How to Design the Best Legislative Framework for Successful IPPs

58

Relevant areas of law


A brief discussion of some of the following main areas
of law follows below.
Commercial Contract Law;

corporate form with liability limited to the capital value of the private
investors shares in the companys capital. If the project company
is to raise any of its finance in the debt securities market in the host
country, the adequacy of local company law for this purpose will
also have to be assessed.

Company and Tax Law;


Tax Law

Property Law;
Environmental Law;
Investment Protection Law;
Intellectual Property Law;
Anti-Corruption Law;
Finance and Security;
Insolvency Law;
Dispute Resolution; and
International Treaties and Agreements.
Commercial Contract Law

The host countrys domestic commercial contract law should


be sufficiently robust, clear, flexible and reliable to cater for
the full range of commercial contractual needs of the different
parties involved in a IPP, including the project developer, its
contractors, subcontractors, suppliers, lenders, investors, jointventure partners, off-takers (where relevant), insurers and other
participants, both national and international. Any IPP (just like any
project-financing) will be structured, defined and implemented
through a complex matrix of contracts. A sufficiently reliable system
of contract law to allow this to be put in place confidently will
therefore be the sine qua non of any attempt at a IPP programme.
Even though international arbitration will often be used to resolve
disputes under the key agreements, local law will often govern their
terms. If there is any material doubt about its efficacy, the project is
unlikely to get off the ground. Confidence in judicial enforceability
of contractual obligations and adequate remedies for breach of
contract will (inter alia) be essential for this to be discussed.

Tax law will also play an important part in the wider assessment.
The private sector normally assesses the overall transparency
of the domestic taxation system at an early stage, including the
degree of discretion exercised by the taxation authorities, the
clarity of guidelines and instructions issued to taxpayers, and the
objectivity of criteria used to calculate tax liabilities. There will have
to be sufficient confidence in the stability of the system and the
manageability at the applicable taxation levels. Appropriate tax
incentives and relief may also be critical to the financial viability
of a particular project. The ability to deduct construction and
other expenses, adequate double tax treaties with investors
countries, the absence of withholding tax on interest or dividend
payments, exemption from corporate tax for the concession
period, reductions in real estate tax, exemption from or reductions
in import duties on equipment, raw materials and components for
the construction and operation and maintenance of the project, tax
concessions on royalties and the other suitable tax incentives may
all be relevant.
Property Law

Security of property rights is obviously essential for fostering private


investment in any country. Ideally, there should be no restrictions
on foreign or private ownership which could be prejudicial to
private-sector or cross-border investment. Property laws should
contain adequate provision (and above all sufficient clarity) on
the ownership and/or use of land and buildings, movable and
intangible property, and further ensure the concessionaires ability
to use (license) and (where appropriate) to purchase, sell and
transfer the property comprised in the project. This may call for an
effective property registration system in the host country. Both the
developer and its lenders will need a high degree of confidence
that title to the land and the assets will not be subject to dispute by
third parties.

In addition, the legislation on compulsory acquisition by the


host country should be assessed with a view to ascertaining
its compatibility with the needs of large infrastructure projects.
Company Law
All countries reserve the right to expropriate property for public
In IPP projects involving the development of new renewable
purposes and investors will also need to understand the conditions
infrastructure, project promoters will usually establish the project
for expropriation, e.g. any compensation payable, whether the
company as a separate legal entity in the host country. The detailed
rights to expropriation are limited in scope or subject to judicial
structure, powers and obligations of project companys may vary
review, etc.
considerably from jurisdiction to jurisdiction. It is essential that
the company (and partnership) laws in the host country contain
Environmental Law
clear, reliable and practicable provisions on essential corporate
Appropriate environmental laws are of course critical for the
matters such as establishment procedures, corporate governance,
sustainable and successful development of IPPs. It is important
issuance of shares and their sale or transfer, the ability to borrow
that obligations arising from environmental laws are sufficiently
and grant security, accounting and financial statements, protection
clear for their impact on IPP investors and lenders to be properly
of minority shareholders and so on. Perhaps the most fundamental
assessed, as they could have a direct effect on infrastructure
requirement for private sector investors is the availability of a

6. How to Design the Best Legislative Framework for Successful IPPs

59

Relevant areas of law continued


projects at various levels. In addition, it is important for the private
sector to understand the documentary and other environmental
requirements they need to meet, the conditions under which
licences are to be issued and the circumstances that justify their
denial or withdrawal. Environmental and IPP policies should
be mutually supportive; effective governmental procedural
coordination is also important from this perspective. The legislation
should also be clear on the range of penalties (if any) that may
be imposed and the parties that may be held responsible for
any damage. Investors will need to know if the law requires
environmental impact studies and the potential liability for past and
future environmental damages must be clearly defined.
Investment Treaty Protection

It is important and, indeed, now commonplace when structuring


(or re-structuring) an investment (particularly a high value one) in
a foreign country, to consider whether and how the investment
should be covered by the protections offered by a bilateral
investment treaty or multilateral investment treaty. This can be
highly effective in protecting the investment when properly planned
and executed including an IPP involving FDI.

insurance proceeds, bank accounts, receivables and an


assignment of the benefit of the project contracts. Lenders also
require security that is readily realisable and expect local security
laws to provide for its effective enforcement. Security over property
which remains public property - conceded assets - may not in fact
be permissible at all see further below.
Where the IPP projects are to be financed by project finance
the lenders will take the most wide-ranging package of security
measures that they can over the project assets. If the agreement is
terminated, the ability and right of the sponsors and the developer
to generate the cash flow on which the lenders will depend for
repayment will be lost; the collapse of the other project contracts
is likely to be triggered as well. For that reason, the lenders will
regard it as essential to keep the agreement alive, as it were, and
give the project company (or a substitute entity) an opportunity
to cure the default. Step-in rights are designed to achieve this.
Almost invariably, however, these rights prove controversial. For
government bodies that have not encountered them before, the
underlying principle can require a great deal of explaining and
justification. The feasibility of step-in rights in the host country will
usually be fundamental to the success of IPPs.

Intellectual Property Law

IPP projects frequently involve the use of new or advanced


technology, and private investors will need to be reassured
that the intellectual property laws of the host country contain
adequate provision for the protection and enforcement of the
main legal interests in the assets involved. In addition, the wider
legal framework should contain appropriate provisions addressing
possible concerns in the areas of privacy, security of information,
confidentiality and piracy, all of which have become potentially
major obstacles to technological advancement. At least to some
extent, the host country may be able to provide the necessary
legal framework for the protection of such rights by adherence to
international agreements.

Insolvency Law

The insolvency laws of a host country also need to be carefully


assessed. Questions such as the ability of secured creditors
to foreclose on security despite the opening of bankruptcy
proceedings; whether secured creditors are given priority for
payments made from the proceeds of the security; and how
claims of secured creditors are ranked, all need to be answered.
In addition, the ranking of creditors, the relationship between the
insolvency administrator or officer and creditors, legal mechanisms
for reorganisation of the insolvent debtor and other matters will
need to be considered.
Dispute resolution

Anti Corruption

Corruption hampers the business climate and fair competition


which as a result restricts private sector involvement. The host
country should adopt a viable anti-corruption strategy and take
effective and concrete action to combat illicit practices. A good
step for countries in transition is to incorporate international
agreements and standards on integrity in the conduct of public
business.
Finance and Security

The wider legal framework should allow and encourage structures


that provide for protection of the rights of lenders under the
relevant security documentation, especially in the event of the
termination of a the project. The most important question is
whether the lenders will be able to take sufficiently broad and
effective security over the assets of the concessionaire. Such
security usually extends to real property, buildings, equipment,

The dispute resolution laws and procedures of the host country


also need careful analysis. Sponsors and lenders have to obtain
a clear understanding of the mechanisms that will (or will not) be
available to them for protection and enforcement of their rights
in the event of a dispute. Lenders are usually not comfortable
relying on the enforcements of any rights that may exist under a
concession agreement exclusively in the courts of the granting
authority. In most cases they require that such disputes be
resolved in accordance with an international arbitration regime
outside the relevant country. However, extensive due diligence
still needs to be done on the local courts (and perhaps arbitral
systems) as local enforcement considerations, in particular in
relation to arbitral awards and certain security interests of the
lenders, will need to be taken into account. They will have to be
perceived as sufficiently reliable, impartial and predictable, if crossborder investment on a large scale is to be attracted.

6. How to Design the Best Legislative Framework for Successful IPPs

60

Relevant areas of law continued


International Treaties and Agreements

International treaties and agreements may also affect privately


financed infrastructure project in the host country. Membership
of multilateral financial institutions such as the World Bank, the
International Development Association, the International Finance
Corporation, the Multilateral Investment Guarantee Agency and
the regional development banks such as the African Development
Bank may have a direct impact on privately financed infrastructure
projects. For some projects the host countrys membership in
those institutions may be a requirement necessary for the host
country to receive financing and guarantee instruments provided
by those institutions.

For example, all countries reserve the right to expropriate


property for public purposes and investors will also need to know
the conditions for expropriation, i.e. what standards apply to
compensation? Will they be compensated at all? Are the rights to
expropriate limited in scope? Are the rights to expropriate subject
to judicial review? If the perceived risk of expropriation is high the
Multilateral Investment Guarantee Agency (MIGA) insurance against
expropriation may be required. We note that, MIGA also insures
against the following risk: foreign currency transfer restrictions,
breach of contract, war and civil disturbance.

Specific Renewable Energy Legislative incentives


Legal and regulatory environments should directly support
renewable energy projects in order to accelerate market
deployment of renewable energy systems and equipment. Policies
to be considered for implementation at the national level are:
regulation measures (i.e., performance standards, equipment
standards, etc.); subsidies and financial incentives (feed-in

In selecting appropriate policy


options, it is important that these
policy options be evaluated for their
environmental impacts and cost
effectiveness; distribution aspects;
institutional feasibility; and
suitability to the local context.
tariffs, rebates, grants, loans, production incentives, government
purchasing agreements, insurance) that are targeted and have
a clear sunset clause; and voluntary agreements (e.g. between
government and private sector). At regional and sub-regional
levels, policy measures that have been successful and can be
considered for development in Africa include focused use emission
targets and trading systems; technology co-operation; and
financial systems (ODA, FDI, commercial bank loans). In general
however the legal and regulatory framework should facilitate the
development of renewable energy generation and help fund and
subsidize relevant technologies.
Many countries in SSA have by now introduced legislation to allow
for private generation but few have actually formulated and realized
a clear and coherent policy framework for procuring IPPs. Nowhere
in Africa is the standard reform model for power sector reform

being adopted fully, namely, unbundling of generation, transmission


and distribution and introducing competition and private sector
participation at the generation and distribution level.46
When preparing the legal and regulatory framework for renewable
energy development relevant authorities should recognize that
there should be a simultaneous review of the grid and transmission
access in the relevant jurisdiction as well. This might also cause
specific local problems depending on the level of understanding
that dominant local utilities have and the level of support local
utilities are willing to give to renewable energy deployment in the
country. The legislative and regulatory framework should also
anticipate for different financing models in its design and the
underlying framework should be sufficiently flexible to adapt to the
changing landscape of renewable energy financing solutions.
Most importantly, there should be a clear regulatory framework
governing the licensing and other procedures relevant for
development of renewable energy projects. Such procedures
should be sufficiently clearly set out and should provide a clear
indication of the relevant prices, charges and tariffs applicable,
ensuring that the licensee is able to recover the cost of its activities
with an attractive rate of return.
At an early stage of renewable development it should be decided
whether the tariffs should be allocated to each renewable energy
technology based on real cost of generation, a buy-back electricity
price, the avoided cost of generation or possibly the external
cost of fossil fuel based generation, or whether a general tariff
for renewable energy generation is more applicable. Generally,
different price levels for different types of qualified renewable
electricity sources/technologies, depending on their level of market
penetration should be taken into account. Tariffs normally also vary
in design based on a set of key characteristics of the generator
such as location issues, timing of supply to the grid, state of the
local grid etc.

46 Malgas, I. and Eberhard, A. (2011). Hybrid power markets in Africa: Generation planning, procurement and contracting challenges. Energy Policy, 39, 3191-3198.

6. How to Design the Best Legislative Framework for Successful IPPs

61

Specific Renewable Energy Legislative incentives continued


However, the licensing procedures and tariff structures need
to be kept simple and easily understandable in order to give
certainty and confidence to investors and developers. An overly
complicated and sophisticated framework might not be applicable
in most circumstances due to the administrative and capacity
constraints of the public sector at the initial stage of renewable
energy development. Therefore a learning-by-doing approach
through a well-designed but easily understandable (and not to be

The underlying legislation should


ensure that utilities are required to
connect renewable power to existing
utility lines and that new utility lines
are prepared
subject to continual review) licensing and tariff scheme is highly
recommended at an initial stage of renewable development.
Further considerations to be taken into account:
Tariff equalization principles;
Avoided costs calculations;
 lear and flexible procedure for revision of tariffs to allow for high
C
investment security;
Tariff degressions (if any);

Incentives for demand orientation (if any);


 ransparent procedures for access to the grid and payments for
T
grid connections;
 ecision on a fixed or premium tariff. (A top-up or premium
D
tariff is generally more appropriate to liberalized electricity
markets);
 Standard power purchase agreements should be provided and
should be sufficiently clear in order to reduce uncertainty and
improve predictability. The PPA can be used to clarify the roles
of the participating players including the national power utility,
independent developers and producers; and feed in tariffs;
Introduction of explicit targets for the share of renewable energy
sources in the electricity generation mix;
Introduction of quota mechanisms (noting that a risk of
speculation has to be considered);
 ender schemes to consider introduction of a tender scheme
T
for individual and initial renewable energy projects. Under
tendering systems, government specifies the capacity or share
of total electricity to be generated from each renewable energy
source over time and the maximum price per MW. The most
recent example of a tendering scheme can be seen in South
Africa as per our review above;
 ybrid mechanisms a hybrid mechanism might be more
H
relevant depending on the context in any particular African
jurisdiction. This consists of a mixture of support mechanisms
which might allow investors to choose schemes that are in line
with their strengths.

7.
Green and Climate-Friendly
Investment and Resources
for its Development

7. Green and Climate-Friendly Investment and Resources for its Development

63

7. Green and Climate-Friendly


Investment and Resources for
its Development
The Financing Gap
According to the AICD 2010 report47, Africa needs 7,000 MW of
new power generation capacity, more than five million new power
connections each year and the construction of an extensive
transmission network. Addressing Africas power problems and
implementing regional transmission networks will require an
estimated spending spending of US$41 billion per year.48
Reducing the operational inefficiencies of power utilities through
institutional reforms would save US$3.3 billion a year. Reforming
poorly designed power sector subsidies, that today are largely
failing to reach the poor, would capture a further US$2.2 billion
a year that could be used for power infrastructure development.
Using the AICD figures, a financing gap of US$23 billion per year
remains, which can only be bridged by additional funding. The
private sector could be a key player in meeting this gap.

Strong, viable feed in tariff; bankable off-take agreement with sufficient


payment security; strong political will. This is what is needed.
Respondent, Trinity International LLP Survey

Funding in the future will need out of the box thinking. A large
portion of the financing in the future is expected to come from
project finance structured deals to minimise the impact on the
developers/utilities balance sheet. Many innovative funding
options have been developed in recent years as regulatory
environments in many countries are progressing towards a more
open market. These changes in regulations attract investment from
independent power producers, which can take a significant portion
of the funding. Furthermore, some countries have developed public
private partnership frameworks and units, which facilitate power
infrastructure project development. and facilitate the development
of regional expertise through training programs and research.

Private Sector Investment


Extent of private sector
investment

Experience

Prospects

Generation

34 IPPs invest US$2.5bn to


install 3,000MW of capacity

Frequent renegotiations, costly


to utilities

Likely to continue given huge


capacity needs

Distribution

16 concessions and 17
management or lease
contracts

One quarter of contracts


prematurely cancelled

Likely to continue given


significant improvements in
performance that have resulted

As the table above shows, investment by the private sector in the


power sector has been low. It has been even less successful in
renewable IPPs. Only a handful of privately owned IPPs have been
built using renewable energy technologies in sub-Saharan Africa.
The scarcity of renewable IPPs is particularly striking.

 ifficulties in agreeing cost-reflective tariffs between project


D
developers and power offtakers;

Market failures which hold back all African IPPs, are especially
pronounced in the case of renewables. These market failures,
which often combine and reinforce each other, include:

 ore stringent demands of lenders to finance renewables


M
(compared to conventional technology) arising from integration
risks resulting from the novelty in the region of the technology
and carbon finance, to which project developers and power
offtakers are often unable to accede; and

 imited credit-worthiness of many project developers and power


L
offtakers;

47 Foster, Vivien and Cecilia M. Briceo-Garmendia (2010), Africas Infrastructure: A Time forTransformation, AICD Flagship Report, The World Bank, Washington, D.C.
48 Foster, Vivien and Cecilia M. Briceo-Garmendia (2010), Africas Infrastructure: A Time for Transformation, AICD Flagship Report, The World Bank, Washington, D.C.

7. Green and Climate-Friendly Investment and Resources for its Development

64

The Financing Gap continued

In many SSA jurisdictions there is an unwillingness or inability


Each of the identified constraints on the development of renewable
in the host government or power utility to pay cost-reflective
power projects in Africa is further detailed in Section 3.
tariffs. Further, lenders to such projects, including development
finance institutions and commercial lenders, continue to require
fully bankable structures with substantial mitigation of key risks
longer tenor
in construction, technology, operation and tariff support.
Such than currently available in the local debt markets (where the average longest tenor i
to 7 years). Equity is similarly hard to source even for a well structured projec
mitigation measures are often very difficult to be currently
structured close
(at
least in an economic way).
although it is relevant to note that a number of venture capital and equity funds have started to focu

Financial constraints

on Africa over the last few years, a number of which also have a particular interest in renewabl
power.

As mentioned in our introduction; currently there is limited access


to international credit markets, and limited international public risk
capital instruments/funds for renewable energy development in
Africa whilst at the same time the domestic capital markets are
under developed and private sector participation, whilst increasing,
is still low. Furthermore the bulk of the private sector financing
is international, both in terms of equity and debt. Commercial
lenders operating in the market are now even fewer in number
and predominantly are those commercial lenders in South Africa
which continue to look outside their own borders (Standard Bank,
Nedbank, RMB, HSBC, Citibank, Standard Chartered Bank, in
particular).

Financing / development financing risks

The MLAs/development finance agencies still are critical and


dominate the market. These entities remain however, in their
expectations of structures and returns, similar to commercial
banks. Although there are a few small pockets or genuine grant/
development capital, the bulk of the debt to be sourced from
such institutions will be granted on commercial terms albeit with a
significantly longer tenor than currently available in the local debt
markets (where the average longest tenor is currently close to 7
years). Equity is similarly hard to source even for a well structured
project, although it is relevant to note that a number of venture
capital and equity funds have started to focus on Africa over the
last few years, a number of which also have a particular interest in
renewable power.

The challenge remains to combine the necessary development and


technical skills of a developer plus access to development capital
plus long term debt on reasonable terms to facilitate reasonable
equity returns all in the context of an Africa IPP with an uncertain
regulatory regime, an offtaker usually with a questionable balance
sheet and a long development period with all of the inherent
risks that creates. Another challenge is the lack of involvement of
institutional investors for renewable energy development generally.
Any strategy to boost green and climate-friendly investments
should therefore include considerations relevant for strengthening
the local financial markets; improvements to the local
Thebanking
challenge remains to combine the necessary development and technical skills of a develope
sector; and should include considerations and structures
for to development capital plus long term debt on reasonable terms to facilitate reasonabl
plus access
phasing out obstacles to international capital investment.
equity returns all in the context of an Africa IPP with an uncertain regulatory regime, an offtake

usually with a questionable balance sheet and a long development period with all of the inheren
risks that creates. Another challenge is the lack of involvement of institutional investors fo

7. Green and Climate-Friendly Investment and Resources for its Development

65

Financial constraints continued


The suitability of a particular scheme cannot be recommended for
all countries as this depends upon different factors such as: the
current market stage of the technologies, the budget available or
the means of finance, the anticipated targets for that country, the
feasibility of the technology mix in relation to the conditions in the
country, and the ability of that country to attract private finance etc.

Financing / development financing risks

We differentiate six categories of support instruments: targets,


feed-in tariff, quota obligation, investment grants, tax exemptions
and fiscal incentives.

Targets

renewable energy development generally. Any strategy to boost green and climate-friendly
investments should therefore include considerations relevant for strengthening the local financial
to the local
banking
sector;and
and should
include considerations
and structures
According to the recent UNEP report49 on financing renewable markets; improvements
overall renewable
energy
strategy
the framework
within which
out obstacles
to international
capital
investment.
energy in developing countries renewable energy targets are for phasing
incentive
mechanisms,
such
as feed-in
tariffs or quotas, are placed.

considered key as they provide the backbone of any countrys The suitability of a particular scheme cannot be recommended for all countries as this depends upon
Country

Algeria

Eritrea

Gabon

different factors such as: the current market stage of the technologies, the budget available or the
means of finance, the anticipated targets for that country, the feasibility of the technology mix in
Target
of renewable
energy
relation to the
conditions
in the country,
and thepower
ability of that country to attract private finance etc.
We differentiate
six2017
categories of support instruments: targets, feed-in tariff, quota obligation,
5% by
investment grants, tax exemptions and fiscal incentives.

20% by 2030

50%
(no target date)

According to the recent UNEP report 49 on financing renewable energy in developing countries
70% by
2020
renewable energy
targets
are considered key as they provide the backbone of any country's overall
renewable energy strategy and the framework within which incentive mechanisms, such as feed-in
tariffs or quotas, are placed.

Ghana

10% by 2020

Mali

25% by 2020

Mauritius

Targets

49
UNEP FI & Partners (2012) Financing Renewable Energy in Developing Countries: Drivers and Barriers
for Private Finance in sub-Saharan Africa.

35% by 2025

8
Nigeria

18% by 2025
20% by 2030

Egypt

12% of electricity and 7,200 MW by 2030

Morocco

20% of electricity generation by 2012

Tunisia

1,000 MW (16%) by 2016; 4,600 MW (40%) by 2030

49 UNEP FI & Partners (2012) Financing Renewable Energy in Developing Countries: Drivers and Barriers for Private Finance in sub-Saharan Africa.

7. Green and Climate-Friendly Investment and Resources for its Development

66

Feed-in tariffs
The results of the recent UNEP survey showed that respondents
consider feed-in tariffs (FITs) to currently be the strongest policy
instrument in leveraging private investment and finance for
renewable energy.50 The advantage of tariffs, compared to quota
obligations (see below), lies in the long-term certainty of receiving a
fixed level support, which lowers investment risks considerably.
The costs of capital for renewable energy investments observed
in countries with established tariff systems have proven to be
significantly lower than in countries with other instruments that
involve higher risks of future returns on investments. Also, the
weighted average costs of capital are notably higher in countries
with quota obligations, compared to tariff-based systems.

The higher effectiveness in case of


fixed feed-in tariffs is mainly due to
the certainty for investors, while other
mechanisms include a significant
market risk.

By guaranteeing the price and providing a secure demand, feed-in


tariffs reduce both the price and market risks, and create certainty
for the investor regarding the rate of return of a project. The lower
cost for the investor result lower average support cost for society.
The cost-efficiency of tariffs for society decreases when policy
makers overestimate the cost of producing renewable electricity.
This is because the level of tariffs is based on future expectations
of the generation cost of renewable electricity. When these turn out
to be lower than expected, producers receive a windfall profit. It
is therefore important that tariffs are reviewed regularly in order to
adjust the system to the latest available generation cost projections
and to stimulate technology learning. Furthermore, payments
should be guaranteed for a limited time period (approx. 15-20
years) that allows recovery of the investment, but avoids windfall
profits over the lifetime of the plant.
The higher effectiveness in the case of fixed feed-in tariffs is
mainly due to the certainty for investors, while other mechanisms
include a significant market risk. Feed-in tariffs can show the
strongest reduction of investments risks by giving long-term price
guarantees. In general, the risk of feed-in premium can be higher
than that of feed-in tariffs, in case that the overall remuneration
depends on the electricity market price.

Quotas
In countries with quota obligations, governments impose minimum
shares of renewable electricity on suppliers (or consumers and
producers) that increase over time. If obligations are not met,
financial penalties are to be paid. Penalties are recycled back to
suppliers in proportion to how much renewable electricity they
have supplied. Obligations are combined with renewable obligation
certificates (ROCs) that can be traded. ROCs therefore provide
support in addition to the electricity price and are used as proof of
compliance. A ROC represents the value of renewable electricity
and facilitates trade in the green property of electricity.
Another related advantage of quota obligations compared to
feed-in tariff and premium systems, is the fact that support is
automatically phased out once the technology manages to
compete. Tradable certificates represent the value of the renewable
electricity at a certain time. When the costs of renewable

technologies come down through learning, this is represented


by the adjustment of the price of certificates. On the other hand,
this might be a challenge for plants already in operation that did
not profit from this technological learning. Furthermore, certificate
prices are volatile to other market influences (e.g. exercise of
market power). Uncertainty about the current and future price
of certificates increases financial risks faced by developers. This
uncertainty can have a negative impact on the willingness to invest.
Because producers do not only sell their electricity on the market,
but also their certificates, the risk on the certificate market is added
to the risk on the electricity market. T his uncertainty increases
the level of risk premiums and cost of capital. As these costs are
usually transferred to consumers, the societal costs of renewable
electricity support are usually higher than under feed-in tariff and
premium systems.

50 UNEP FI & Partners (2012) Financing Renewable Energy in Developing Countries: Drivers and Barriers for Private Finance in sub-Saharan Africa.

7. Green and Climate-Friendly Investment and Resources for its Development

67

Direct promotion through support programmes for renewable energy.


Investment subsidies are believed to be more effective at the
demonstration and market introduction phase, than during
the deployment phase with a larger emphasis on stimulating
production of renewable energy. Investment grants could be

converted in to equity (government participation) or debt after


successful commissioning of a project. In doing so, the effect on
the national budget can be kept to a minimum.

Indirect promotion by taking away the subsidies for conventional energy sources.
Another common global and African problem for renewable energy
deployment is the problem of subsidies for fossil fuel-based
generation, which artificially limit the competitiveness of renewable
energy technologies. As noted by a recent UNEP report; there are
many types of fossil-fuel subsidies: direct budgetary transfers, tax
incentives, research and development spending, liability insurance,
leases, land rights-of-way, waste disposal and guarantees to
mitigate project financing or fuel risks.51 Organisations such as
the World Bank and International Energy Agency put global
annual subsidies for renewable energy in 2010 at $66 billion whilst

Organisations such as the World


Bank and International Energy
Agency put global annual subsidies
for renewable energy in 2010 at $66
billion whilst fossil-fuel consumption
subsidies were $409 in 2010

fossil-fuel consumption subsidies were $409 in 2010. These large


subsidies for fossil fuels lower final energy prices, but they also
distort competition and put renewable energy at a competitive
disadvantage.
In addition, risks associated with fluctuations in future fossil fuel
prices are generally not quantitatively considered in decisions
about new power generation capacity because these risks are
inherently difficult to assess. Greater geopolitical uncertainties
and energy market deregulation have created a new awareness
about future fuel price risks. Renewable energy technologies
avoid fuel costs (with the exception of biomass) and so avoid
fuel price risk. However this benefit is generally missing from
economic comparisons and the analytical tools used to make the
comparisons. Further, for some regulated utilities, fuel costs are
factored into regulated power rates, so that consumers rather than
utilities bear the burden of fuel price risk, and utility investment
decisions are made without considering fuel price risk.

Fiscal incentives and grants


Tax incentives can be applied either to the investment costs or
to the electricity produced. Grants and rebates such as capital
subsidies are other types of public support mechanisms that
promote the mobilization of private finance for renewable energy.
By reducing the tax costs of projects, these incentives increase
the profitability of a given project and/or technology and thus the
returns on investment for any given level of investment risk. The
potential of grants and rebates is well recognized, and a total
of 17 countries in Africa, 11 in sub-Saharan Africa, had some

types of financial incentives for renewable energy projects at the


end of 2010.52 The effectiveness of tax incentives on the further
deployment of renewable energy technologies in developing
countries was also confirmed by the views of those energy
financiers who participated in the UNEP FI survey on Financing
low carbon energy technologies and infrastructure in developing
countries.53

51 UNEP FI & Partners (2012) Financing Renewable Energy in Developing Countries: Drivers and Barriers for Private Finance in sub-Saharan Africa.
52 REN 21. (2011) Renewables 2011 Global Status Report (Paris: REN 21 Secretariat)
53 UNEP FI & Partners (2012) Financing Renewable Energy in Developing Countries: Drivers and Barriers for Private Finance in sub-Saharan Africa.

7. Green and Climate-Friendly Investment and Resources for its Development

68

Tenders
A call for tender for renewable energy projects can be issued by a
national government or other institutions, asking project developers
to submit bids to develop renewable energy projects. Tenders
usually specify the capacity and/or production to be achieved and
can be technology- or even project/site-specific. Winning parties
are usually offered standard long-term purchase contracts while
the price is determined competitively within the tender procedure.
Thus, the support itself can be compared to feed-in tariffs/premium
tariffs, while the level of support is determined by the market.
Tendering also allows for incorporation of additional conditions,
e.g. regarding local manufacturing of technology.
Tender systems can reduce the risk substantially depending
on the detailed design. Strongest risk coverage is reached in
generation-based tendering involving long-term contracts for the
electricity produced. Higher risks typically occur in investment
based tendering schemes. Even for generation-based tenders
the risk level during the project planning phase can be higher
than for feed-in tariffs due to the uncertainty of the outcome of
the tender. Linking the security for investors to financing issues,
project finance lenders clearly prefer a long-term contract that
ensures a relatively consistent and guaranteed revenue stream.
However, the attractiveness of this scheme may vary according to
country-specific design, and to potential changes in the regulatory
framework (policy risks) as recent decreases in FIT schemes in
several countries show. Long-term predictability of tariffs seems to
be the key demand from market players here. International market

players also ask for a greater coordination across countries.


The following design aspects can influence the risk profile and
hence the access to and costs of capital:
Penalties

A penalty for non-compliance can be implemented in order to


avoid unreasonably low bids. Penalties can also be applied to
projects exceeding deadlines;
Remove/Share part of the price risk

By incorporating corrections for inflation, currency exchange


rates and market prices of key commodities (e.g. steel,
biomass) between tender closure and realisation of the project,
a significant part of the financial risk can be transferred from the
project developer to the tendering body;
Continuity of calls

Long-term continuity and predictability of calls should be


ensured in order to avoid stop-and-go development of the
renewable industry;
Streamlining of interacting policies

Other policies affecting the realisation of winning projects, like


for example spatial planning, should be streamlined in order to
ensure the tendered capacities can actually be realized.

CDM market
The Clean Development Mechanism (CDM), recognised through
the Kyoto Protocol allows the offset of emissions in developed
countries by investment in emission reduction projects in
developing countries. Under the CDM, projects such as windfarms
or solar farms in developing countries are awarded carbon credits
for every ton of carbon reduction. These credits are bought by
polluters in richer countries to count towards their emissions
reduction targets.

 upporting the concept of sectoral CDM. The new sectoral CDM


S
approach would allow countries to shift from a project-based to
a sector-based approach by establishing sectoral baselines and
granting carbon credits for emission reductions relative to these
sectoral baselines (e.g. geothermal); and
 trengthen the institutional and technical capacities of African
S
countries to better engage in the CDM process.

The impact of the CDM in providing adequate financial support for


mitigation activities in Africa has been limited. Therefore, African
governments should capitalize on carbon market opportunities to
increase the flows of carbon finance needed for Africa to meet the
challenges of climate change and sustainable development.

Current Status and Outlook for the CDM Market

It would be important therefore to broaden the CDM approach to


increase Africas potential share of CDM transactions through:

The centerpiece of the talks was an agreement to work towards a


new international climate treaty encompassing major developing
economies, such as China, India, and Brazil, as well as the
developed nations currently obligated under the Kyoto Protocol.
The countries also agreed to extend the existing Kyoto Protocol
until at least 2017, as they work to craft the successor treaty.

 ncouraging simplified methodologies for sectors with high


E
potential in Africa, which would include simplified rules for
determining baselines, monitoring carbon emissions, enforcing
offsets and broadening the list of eligible projects to include
deforestation and soil carbon sequestration;
Encouraging expansion of types of projects eligible for CDM ;

United Nations climate negotiations in Durban, South Africa


concluded on Sunday 10th December 2011, with agreements to
move forward with international efforts to reduce concentrations of
greenhouse gas emissions.

Important progress was also made in the CDM market, setting


up the Green Climate Fund, and confirming a role for the private
sector.

7. Green and Climate-Friendly Investment and Resources for its Development

69

CDM market continued


Impact on Global Carbon Markets

The decisions made in Durban will have little short-term impact on


the predominant carbon market, the European Unions Emissions
Trading Scheme (EU ETS), which is currently setting rules for its
third phase to run from 2013 to 2020. Durban will not change the
near-term demand picture in the EU. If anything, the result of the
negotiations should keep EU policy makers on track to implement
Phase III, although it may revise an EU-wide debate on increasing
the reduction target to 30% by 2020 from the current target of
20%. Should the EU decide to extend its target to 30%, this may
result in support for the CER price during the 2013-2020 phase.

Respondents to the UNEP FI 2012


survey seem to perceive the role of
the CDM, at historic and current
CER prices, as rather secondary and
auxiliary
Long-term, the agreement in Durban sets in motion a process
to create by 2015 a new climate treaty for implementation from
2020. The EU was the biggest driver of this policy, and it provides
more certainty of the EU ETS extending beyond 2020. Importantly,
developed and developing nations will take post-2020 caps.
The caps will be set by each nation as agreed outcomes with
legal force. The U.S., which is not party to the Kyoto Protocol, is
committed to this process. So are major developing nations such
as China, India, and Brazil.

The decision to extend the Kyoto Protocol to either 2017 or 2020


also sets aside an underlying debate on whether the CDM can or
will continue after 2012, when the treaty was set to expire. The
CDM will continue to generate offsets for use in compliance in
the EU ETS, but unrelated to Durban negotiations are the EUs
restrictions on the use of certified emission reductions (CERs)
from the CDM. Restrictions remain on the types of credits that
can be used and where they can be created; specifically, the
EU has stated that CDM projects registered after 2012 will only
be accepted under the EU-ETS if these are located in Least
Developed Countries (LDCs).
It must be noted that the CER market price has come under
significant pressure in recent months, largely due to market
concerns over the Eurozone debt crisis. However, a number of
market participants expect that the CER market will stabilize and
likely rise over time, once the Eurozone crisis is resolved. This is
due to a projected shortage of CERs relative to demand in the
EU-ETs from 2015 onwards, as well as additional demand from
emissions trading schemes in Australia and South Korea (both
of which will accept CERs). The EU has also stated an intention
to support carbon prices over the longer term by setting aside
surplus EUA credits and restricting certain types of CERs (i.e. HFC
and potentially large hydro).
The CDM market is therefore set to continue at least until 2020,
at which time it may be extended when a new climate agreement
comes into force, or it may be grandfathered into a new marke
tbased scheme. Demand and supply fundamentals point towards
a strengthening of price over time, once near term macroeconomic
conditions stabilise.

8.
Possible alternatives to mitigate
financial challenges

8. Possible alternatives to mitigate financial challenges

71

8. Possible alternatives to mitigate


financial challenges
In considering the objective of increasing renewable power projects in Africa, a number of alternative solutions can be considered.

Increasing funding to Multilateral Development Banks (MDB)


The poor availability of credit for private investment in the low
carbon energy sector makes securing finance very difficult. To
address this market failure, it is possible that an increase in the
availability of credit through the MDBs could be applied. MDBs
can provide vital concessional capital for high-risk projects, as well
as technical assistance and onsite monitoring to help mitigate the
added risks associated with project development in developing
countries. The MDBs could increase the funds they are able to
allocate to climate-related investment and lending through receiving
additional shareholder/donor contributions. These could be through
one of three forms:
Additional shareholder capital;
Additional donor funds for core MDB replenishments; and
Additional donor funds for trust funds.
There are issues concerning the terms, effectiveness and
transaction costs associated with MDB climate finance relative to
private sources. For example, country preparedness to borrow
from the MDBs will depend on; lending terms/instruments
available; the relative priority a country attaches to borrowing for
climate versus other priority areas for development finance may
be an issue; country exposure limits and allocations in specific
sectors; and MDB governance and effectiveness issues affect how
a country sees the political mandate and performance of MDBs in
climate finance.

Trinity International LLPs view in respect of this alternative is that


there are, in fact, a number of MDBs which exist with funding
available but with such funds only being capable of application to
bankable projects which have:
An economic and reasonable tariff;
A creditworthy offtaker;
Host government support; and
Construction risks reasonably mitigated.
It is this package of risks which MDBs can do little to assist with
whereas the recommendations proposed in this Report would
mitigate these risks. The ability for MDBs to mobilize quickly and
efficiently is also sometimes questioned, particularly by sponsors.
The MDBs support can however be fundamental. For example, the
Development Bank of Southern Africas (DBSA) involvement in the
tender specification documents in South African renewable energy
programme has made it easier for investors to identify potential
funding sources. In addition, strong participation from the Industrial
Development Corp. and recent activity by the Public Investment
Corp. of South Africa also greatly assisted lenders and investors.

Emerging Donors BRIC countries


The rise of BRIC and other emerging economies should also
provide African countries with the opportunity to attract new
sources of finance for renewable development. Indeed, the
presence of BRIC countries in the continent so far, especially of
China and India, has been a significant development for African
infrastructure in general in recent years (although not necessarily
applying typical project financing principles or structures). As
noted by a recent Standard Bank report54, the relationship
between China-Africa is a structural story, and one therefore
relatively impervious to cyclical forces. Trade between China and

54 Standard Bank, Economy 2012 Report.

Africa, according to Standard Bank, will surpass USD 155bn


in 2012 and this trade draws investment. China has financed
more projects in Africa than any other country over the last
three years. This undoubtedly means that we shall witness more
hybrid IPP structures, where finance and other elements such as
construction (and other) obligations, will be performed by Chinese
companies, consequently impacting on the underlying risk
allocation structure in IPP project documentation as we know it.

8. Possible alternatives to mitigate financial challenges

72

Low carbon development through Climate Investment Funds (CIFs)


Either of the Climate Investment Funds, the Clean Technology
Fund (CTF) or the Strategic Climate Fund, through its Scaling Up
Renewable Energy in Low Income Countries programme (SREP),
could potentially through the reduced cost of capital approach offer

a platform to deliver an ambitious level of clean energy generation


capacity in target countries in Africa. It is, however, limited to a
smaller number of countries, and currently a pilot-based approach.

Alternative Feed-in-Tariff programmes


In recent years there has been a growing trend to explore the
opportunities to support private sector low-carbon investments in
developing countries by boosting prospective revenues rather than
reducing financing requirements. There has been growing interest
in donors complementing conventional approaches to encouraging
low-carbon private sector investment in developing counties i.e.
loans, grants, with approaches that, instead, increase and/or
make more certain the revenues that projects can expect upon
successful delivery of a product (so called results-based financing).
For instance, the recent report of the Transition Committee of the
Green Climate Fund explicitly notes that the: Fund may employ
result-based financing approaches, including, in particular for
incentivizing mitigation actions, payment for verified results where
appropriate. The Deutsche Bank GET FiT programme is another
initiative in a similar spirit. This involves the countries adopting the

programme agreeing to implement feed-in tariffs and, to the extent


this involves a need to raise consumer tariffs so that the offtaker
has sufficient revenue to pay its suppliers, the provision of donor
support for a transitional period to mitigate the extent of immediate
increases and phase in the necessary rises over a longer period.
Trinity International LLP understands that GET FiT is currently
assessing a potential pilot project in Indonesia, and is also actively
considering a number of projects in Uganda.
Although these approaches will not necessarily succeed in
leveraging private sector investment in all situations they represent
an important innovation and an opportunity to explore the best
ways to leverage much-needed private sector low-carbon
investment.

Carbon Initiative for Development


Another initiative is the so-called Carbon Initiative for Development
being promoted by the World Bank. The fund is intended to
provide up-front finance for emission reduction projects. We
understand that the first $10 million in finance will be used to
help fund capacity building, the drawing up of methodologies,
while a further $50 million of upfront financing will be used to
kick-start projects in areas where getting projects up and running

is often difficult. Trinity International LLP understands the fund is


relatively small and focuses only on least developed countries.
We understand further that the World Banks investment criteria
extends beyond renewable energy and will likely target a smaller
portion of the market (decentralised small-scale projects like fuel
efficient cookstoves), which have gained popularity in Africa of late.

Utility and government support


Funding could be directed to assist with the development of
projects through advisory support to supporting governments
and state-owned utilities. This approach would require assistance
on the legal, technical and financial aspects of a project at the

governmental level with the intention that it would facilitate


investments being made by the private sector. However, clearly this
alone will not be sufficient to facilitate more renewable IPPs.

8. Possible alternatives to mitigate financial challenges

73

A new renewable offtaker


It is theoretically possible for a new entity to be created to be a
wholesale offtaker of renewable power in certain markets. Two real
concerns exist on this concept (at least for the foreseeable future):
In nearly all jurisdictions in Africa there is a dedicated wholesale
purchaser of power which then distributes the power to a
distribution company or direct to consumers. For an alternative
purchaser of power to be created under a given PPA would typically
require amendment to energy legislation in each of the countries,
revisions to the regulatory system, amendments to the nature of the
regulator itself and various other legal/tax consideration;

 he risk profile for the new entity in being a counterparty


T
to a PPA would be significant. The PPA is the key cashflow
producing document in a renewable IPP and as such the new
entity would be under a large degree of scrutiny from project
finance lenders. The new purchaser would need to demonstrate
the legal, technical, commercial and financial capability to
meet the requirements of servicing a 20-30 year PPA in that
jurisdiction and would need to secure all necessary wheeling
rights for the power and create for itself the consumers for the
electricity it is itself purchasing.

Creation of a fund to provide a first loss tranche of development capital


A structure could be created whereby a public/private partnership
is implemented to allow a first loss tranche of capital is provided
by the PPP to provide general risk enhancement to a renewable
IPP in Africa. Similar to the first loss tranche of capital provided
by PIDG in the establishment of EAIF, which facilitates private
sector debt capital, so the new PPP could facilitate private sector
capital for renewable IPPs in SSA. The PPP can either provide
this instrument on a project by project basis, making it specific
for use on each project, or it could perhaps be a general tranche
of capital which is then leveraged by allowing partner DFI /

commercial lenders to consider providing complementary loans


to PPP Lender which would then have a significant amount of
capital available to it, this potentially providing a real opportunity
to accelerate renewable IPPs in SSA. There are a number of DFI
institutions with which Trinity International LLP works which are
keen on mezzanine instruments and, with the right focus and
management, this could be an attractive proposition.
The variability of applicable projects and their associated financial
status necessitates flexibility in the application of solutions.

Increase public finance participation into projects


 overnment participation can provide a significant amount of
G
capital, either equity, (subordinated) debt, or mezzanine finance;

 indfall profits can be avoided or reduced. Via the government


W
participation part of these flow back to the treasury;

 roject financing will be achieved easier and at lower cost. The


P
percentage of project initiatives that actually will be realised will
increase. This will strengthen the confidence of the market;

 y participating in projects, the government gets a better


B
insight in the challenges and barriers that the market is facing.
This allows the government to pro-actively develop supporting
policies, e.g. for mobilising the industry supply chain; and

 y reducing the regulatory risk, the cost of capital can be reduced


B
significantly (see example for offshore wind in the text box);

 state-owned entity responsible for this type of participation can be


A
a safeguard for ensuring a stable renewable energy policy.55

Mezzanine Finance
Trinity International LLP is currently assisting on a renewable power
initiative which is considering the application of mezzanine funding

at attractive rates which will facilitate projects being developed by


allowing a reasonable equity rate of return.

A New Green Climate Fund?


Bloomberg New Energy Finance (BNEF) has shown that the cost
of finance is of critical importance in determining the cost of clean
energy. In order for the cost of finance to be decreased another
option recommended recently by BNEF could be to implement
a New Green Climate Fund and framework whereby guarantees
are provided so as to facilitate private investment in infrastructure

projects by enhancing the quality of projects and reducing the risks


to the private sector. For detailed information on the proposed
New Green Climate Fund and Framework please see: BNEF Towards a Green Climate Finance Framework at:
www.bnef.com/WhitePapers/download/46

55 Eberhard, Anton, and Katharine Nawaal Gratwick (2010), IPPs in Sub-Saharan Africa: determinants of success, MIR Working Paper, Management Programme in Infrastructure Reform & Regulation,
Graduate School of Business, University of Cape Town.
56 Bloomberg New Energy Finance, Green investing 2011: reducing the cost of finance, World Economic Forum, April 2011. http://www.weforum.org/reports/green-investing-2011

9.
Conclusion and Key Findings

75

9. Conclusion and Key Findings

9. Conclusion and Key Findings

Survey Methodology
As part of its research and preparation for this Report, Trinity
International LLP distributed a questionnaire relating to building
up PPPs to scale up resources for climate friendly investment to a
select list of identied key players in the African renewable energy
space. The questionnaire was sent to representatives from the
public and private sectors, from development nance institutions,
law rms, sponsors and multilateral agencies.

The questionnaire asked, based on the respondents experience


and/or knowledge, which using a scale of 1 to 5 were the
greatest challenges in closing renewables deals in Africa. The risks
were divided into:
Regulatory and governmental risks;
Project, technical and market risks;

The focus of the delivery of the questionnaire was to parties to


renewable energy transactions in Africa that have reached nancial
close and/or are in operation. Responses were collated and
additionally weighted in favour of those parties who had direct
involvement with a closed or operating IPP.
Respondents include representatives from the following
institutions: UNECA, Trinity International LLP, African Development
Bank, Herbert Smith LLP, Fieldstone Capital Partners, European
Investment Bank, Ormat, DBSA, Contour Global and Aldwych
International Limited (among others some respondents chose to
remain anonymous).

Financing and development nance risks;


Legal, taxation and economic risks; and
Other country risks.
In addition, the questionnaire asked, again based on the
respondents knowledge and experience of deals in other sectors
and countries, which on a scale of 1 to 5 were the key
elements for a successful PPP framework that would encourage
investment in a particular sector or country.

Key Findings
Table 1: Top ten issues respondents feel are barriers to successful delivery of renewable IPPs in Africa
All respondents

Position

Weighted to closed deals

Lack of legislative or regulatory framework

Lack of development/seed capital

Lack of development/seed capital

Issues relating to government support (guarantees etc.)

Lack of knowledge/capacity in public sector

Other governmental interference

General political risk

Lack of knowledge/capacity in public sector

Issues relating to government support (guarantees etc.)

General political risk

Other governmental interference

Lack of legislative or regulatory framework

Lack of sector-specic/enabling legislation

Lack of sector-specic/enabling legislation

Uncertain regulatory framework (changes in government approach)

Concerns with public sector corruption

Lack of economic viability (start-up costs/low tariffs)


government approach)

Uncertain regulatory framework (changes in

Concerns with public sector corruption

10

Issues relating to property law (e.g. tribal lands/


ownership rights)

76

9. Conclusion and Key Findings

Key Findings continued


Parties involved in closed deals place concerns with public
sector corruption as a greater issue than, for example, start-up
costs or a lack of economic viability due to low tariffs.

Findings in relation to the top ten barriers to delivery

From the above, the following can be gauged:

All respondents, whether they have been involved in closed


renewables deals or not, believe that a lack of development or
seed capital is one of the prime reasons preventing renewables
deals in Africa.

Issues relating to property law are also of great importance to


parties who have closed deals for all respondents, this was
much lesser of a concern.

In addition, the lack of knowledge or capacity in the public


sector and the general political risk are for all respondents in
their top ve barriers to delivery of renewable projects in Africa.
Table 2: Issues respondents feel are the least important barriers to successful delivery of renewable IPPs in Africa
All respondents

Position

Weighted to closed deals

Technology risk

Technology risk

Issues with setting up businesses

Unclear/unsatisfactory security/insolvency laws

Existence of a dominant player in the electricity market

Existence of a dominant player in the electricity market

Issues with recognition/enforcement of international arbitration 4

Issues with setting up businesses

Unclear/unsatisfactory security/insolvency laws


suppliers / EPC Contractors etc.)

Availability of suitable counter-parties (technology

Availability of suitable counter-parties


(technology suppliers / EPC Contractors etc.)

Unclear/multiple sources of environmental laws

Uncertainty around tax status of project company


exemptions

Uncertainty around tax status of project / site /


company / site / exemptions

Lack of tax or foreign direct investment incentives

Issues with convertibility of foreign exchange

Unclear/multiple sources of environmental laws

Uncertainty around feed-in tariff

Uncertainty around feed-in tariff

10

Issues with recognition/enforcement of


international arbitration

Findings in relation to the top ten barriers to delivery

From the above, what is interesting to note is that:

Technology risk is seen as the least important factor (out of


some 50 factors) as a barrier to entry. This represents either faith
in the strength of the various technologies available or that such
considerations are less important in light of the political, legal
and regulatory risks that appear in Table 1.
Issues for parties who have closed deals include those relating
to the convertibility of foreign exchange a practical issue which
respondents who have not been actively involved in closed deals
may not have come across.

Security, that is collateral granted to lenders in respect of their


lending, is surprisingly of limited importance to those who have
closed deals. This is telling, particularly in light of the heavy legal
due diligence that is involved in creating a security structure for a
deal. It may be that lenders typical security (e.g. share pledges,
direct agreements and assignment of proceeds/bank accounts)
are sufciently established in those jurisdictions where deals
have closed that this is not seen as a key issue.
Equally, issues relating to arbitration are seen as less of an issue
for those transactors who have closed deals compared to all
respondents. Again, this may be due to faith in the existing
legal protections (e.g. most countries being signatory to the NY
Convention on the Enforcement of Arbitral Awards), but may
simply be that this is seen as less of an issue relative to the other
identied risks.

77

9. Conclusion and Key Findings

Key Findings continued


Table 3: Top 5 elements for a successful PPP framework
All respondents

Position

Weighted to closed deals

PPP process has sufcient political support across


ministries

PPP process has sufcient political support across


ministries

Private participation in PPP projects has clear basis in policy,


government support

Private participation in PPP projects has clear with broad


basis in policy, with broad government support

Bidders given proper information to enable submission


of proposals

Basis for private sector participation in PPP


is clearly dened

Transparent procedures specied for all stages


of the PPP process

Bidders given proper information to enable submission


of proposals

Competitive tendering process is transparent in practice

Transparent procedures specied for all stages of the


PPP process

Findings in relation to top 5 elements for a successful PPP framework

For all respondents, weighted or otherwise, key to a successful PPP framework is that the process has sufcient political support across
ministries. This, married with the second key element that relating to private participation in PPP project has clear basis in policy, with
broad government support indicates the importance of a well formed legal and regulatory framework. In addition, transparency and
communication are also key concerns for all respondents whilst for those who have closed deals, the need to understand the basis for
private sector participation (e.g. a PPP Act) is paramount.
Table 4: Importance placed on renewable energy IPPs within the relevant institution
All respondents

Position

Weighted to closed deals

21/25

21/25

It is clear that all respondents, whether or not they have closed deals in renewable power in Africa, believe that renewable energy
projects in Africa are of prime importance for their institution.

Conclusion
The global search for better yields will make African emerging
market assets more attractive as developing markets hold rates
low in an attempt to cushion the de-leveraging process. In order
to attract sufcient nance for renewable energy development
however the legal and regulatory frameworks have to be in place
together with the relevant policy solutions as detailed in this
Report.

development of a renewable power market needs to be sufciently


exible to ensure its adaptability to changes in global equipment,
fuel costs and other key parameters. Hybrid power markets
give rise to new challenges and explicit policies, governance
and institutional arrangements need to be developed to assign
responsibility for planning, procurement and contracting of new
power generation capacity.57

Any policy solutions should also be tailored to local socioeconomic circumstances within each country in Africa, to the
natural potential for renewable energy in that particular country, to
the best suited technologies and their cost, and to wider national
goals for renewable energy expansion. Lastly, planning for the

This Report has attempted to provide a detailed analysis of the


necessary implementation tools in order to ensure successful
scaling up of resources for climate friendly investment across
Africa.

57 Gratwick, Katharine Nawaal and Anton Eberhard (2008), Demise of the Standard Model for Power Sector Reform and the Emergence of Hybrid Power Markets, Energy Policy, 36.

10.
Main Recommendations

10. Main Recommendations

79

10. Main Recommendations


Development Context

Transmission & Interconnection

Renewable Energy Programs should be integrated in the broader


development context.

Transmission and interconnection regulation should go hand


in hand with renewable energy regulation. Early attention to
interconnection across national boundaries is an increasingly
important factor in the overall potential of renewable energy
development.

Stability

All policy support for renewable energy development should be


stable and predictable.

Regional Cooperation
Context

The use of a particular policy type does not guarantee success.


Each country has unique circumstances and must design and
enact its own set of policies based on needs, competing interests
and available resources.
Improved Investment Climate

Market mechanisms should be encouraged and designed to


ensure long-term viability of the renewable energy sector. Targeted
public sector and donor support that address market failures
and structural deficits can build on market forces and remove
constraints which otherwise impede private sector involvement.
Legal and Regulatory Structure

Each country should have a conducive legal environment and


regulatory structure allowing for the participation of independent
power producers, introduction of standardized power purchase
agreements and tariff setting procedures that is clear and durable.
The legal and regulatory enabling environment for Public Private
Partnerships (PPPs) should be created and government policies
where possible harmonized through cooperation on cross border
projects and by developing harmonized technical and pool grid
code standards.
Capacity Training

Capacity training for government officials should be provided as


PPP and Independent Power Project (IPP) concepts are not yet
widely understood. Awareness and knowledge, once obtained,
needs to be retained.

There should be more regional cooperation for the expansion of


generation, transmission and distribution capacity and it should
be ensured that regional electricity projects are bankable. This
includes raising of tariffs to cost-reflective levels but also may
include establishing a revolving risk capital bridging facility to allow
utilities to make equity contributions to projects and allowing bulk
energy users to be counter parties to Power Purchase Agreements
(PPAs) in addition to host utilities.
Power Pools

The power pools should focus on increased access to electricity,


including the promotion of small cross-border distribution projects
in parallel with the large regional generation and transmission
schemes.
Renewable Energy Technology

Renewable energy technology and in particular solar technology is


now becoming very competitive due to quickly decreasing costs.
Efforts should be made to harness this opportunity across the
continent.
Rural Energy

Governments should try to strengthen and, where appropriate,


establish policies on energy for rural development, including
regulatory systems to promote access to energy in rural areas,
establish financial arrangements to make rural energy services
affordable to the poor and promote capacitybuilding in local
societies.
Extension of rural energy systems and rural electrification planning
should defined the roles of grid extension vs mini-grids and standalone options. Most importantly, the policies supporting rural
electrification should not be biased towards grid extension
or diesel based systems.

Annexes

Annex 1

Annex 1: Form of Due


Diligence Questionnaire
Renewable Infrastructure Laws : General Questions
General Legislative and Institutional Framework

1 Does the constitutional, legislative and institutional framework for the implementation of privatelyfinanced renewable infrastructure projects ensure transparency, fairness, and the long-term
sustainability of projects?
2 Are there undesirable restrictions within that framework on private-sector participation in
renewable infrastructure development and operation?
3 If so, how can they best be eliminated?
Scope of Authority to award projects

4 Does the law clearly identify the public authorities of the host country (including, as appropriate,
national, provincial and local authorities) that are empowered to award privately-financed
renewable infrastructure projects (PPPs) and contracts for their implementation.
5 Is there a clear allocation of such powers as between national and local authorities?
6 Is it clear that these powers extend both to the construction and operation of new facilities and
the maintenance, modernization, expansion and operation of existing facilities?
7 Does the law identify with sufficient clarity the sectors or types of renewable infrastructure in
respect of which PPPs may be granted?
8 Does the law address questions of geographical extent and exclusivity relating to the jurisdiction
of the relevant authorities with sufficient clarity, and the resolution of overlapping jurisdictions?
Administrative Co-ordination

9 Have adequate institutional mechanisms been established to co-ordinate the activities of the
public authorities responsible for issuing approvals, permits, licences and consents needed for the
implementation of the renewable project?
Regulatory Authority

10 Is there a clear separation of authority between the regulator and the entity providing the services?
11 Has regulatory competence been entrusted to functionally independent bodies sufficiently
autonomous to ensure their decisions are taken without political interference or inappropriate
pressures from operators and service providers?
12 Are the rules governing regulatory procedures publicly available?
13 Is there an obligation to provide reasons for regulatory decisions, with sufficient access for
interested parties?
14 Are there transparent procedures whereby regulatory decisions can be appealed to and
reviewed by an independent and impartial body, and clear criteria applicable thereto?

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Risk Allocation

15 Are there any unnecessary statutory or regulatory limitations on the ability of the contracting
authority and the developer/investor to agree on an allocation of risks in the project agreement
that is best suited to the project?
Government Support

16 What feed in tariffs (if any) are available for the project?
17 Is there any direct promotion through governmental support programmes for the project?
18 Are there any other subsidies, quotas applicable or soft loans available by the government
for the project?
19 Are there any fiscal incentives and/or grants and rebates for the project?
20 Were any renewable energy targets adopted by the government?
21 Does the law make it clear which public authorities may provide financial or economic support to
the implementation of the project (where needed) and what types of support are they authorised
to provide?
Selection of the IPP developer

22 General: Are the laws selection procedures sufficiently transparent and efficient, and well-adapted
to the particular needs of privately-financed renewable infrastructure projects?
23 Are there clear and well-structured procedures relating to:
pre-selection
single and two-stage procedures (as appropriate) for requesting proposals
from pre-selected bidders?
the content of final proposals?
requests for clarification and modification?
appropriate evaluation criteria?
accepting and evaluating proposals?
final negotiation and project award?
award of the project without using competitive procedures (and the circumstances
in which this can be done)?
the treatment of unsolicited proposals?
confidentiality of submissions and negotiation?
publication of final award?
maintenance of records of selection and award proceedings and scope of public access thereto?
the right to appeal against or seek review of the contracting authoritys acts?
Project Agreement

24 Does the law allow sufficient scope and flexibility for the parties to agree on the contents of the
project agreement as best suited to the needs of the project?
25 Does it contain any unnecessary constraints in this context?
Project site, assets and easements

26 Is the law sufficiently flexible in terms of the controls it permits to be vested in the developer over
the use and ownership of the site and the assets comprised in the project? (For example, can
clear distinctions be made (if necessary) between public assets and private property? Can the
developer be obliged to transfer some assets and retain others at the end of the project?
27 Does the law make it possible for the developer to obtain/enjoy ancillary property rights
(easements etc.) related to the project as necessary for the performance of its obligations e.g. to
enter upon/transit through property of third parties?

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Annex 1

28 How satisfactorily will any compulsory purchase powers work?


are they available to the conceding (or other) authority?
are the relevant powers sufficiently clear and reliable?
will they operate efficiently enough?
will the project be adequately insulated from third party claims?
can acquisition costs be allocated appropriately?
Tariffs

29 Does the law enable/allow the contracting authority (or other government body) to pay the
developer for its services where appropriate?
30 Where needed, does the law contain adequate regulatory controls over the developers charges
and tariffs?
Finance and Security

31 Does the law allow the developer to raise and structure the finance it needs for the project (with
sufficient flexibility in terms of sources, mixture, use and application etc.)?
32 Does the law enable the developer to grant adequate security over the project assets for the
purposes of raising such finance, including:
(a) mortgage/charge over its property (immoveable and moveable);
(b) pledges of shares in the project company;
(c) a charge over proceeds and receivables;
(d) an assignment of contractual rights and claims;
(e) any other suitable security?
33 Are there restrictions in the law relating to the grant of security over any public assets
comprised in the project? Are these prejudicial to the developers ability to finance the project?
34 Does the law allow for the creation of appropriate step-in rights in favour of lenders
where required?
35 Does the law make it possible for a controlling interest in the project company to be transferred to
a third party where appropriate?
Construction Works

36 Does the law contain any unnecessary restrictions relating to the parties ability to agree on
suitable provisions for the design and construction of the project works (including (a) the drawing
up, review and approval of construction plans and specifications; (b) the preparation of the
design; (c) the contracting authoritys right to monitor construction; (d) the contracting authoritys
power to order variations where appropriate; (e) procedures for testing, inspection, approval and
acceptance of the facility; (f) latent defects and liability)?
Operation of the Facility

37 Does the law contain any (unnecessary) restrictions relating to operation of the completed facility
and the parties ability to agree on suitable provisions relating thereto (including, for example:
continuity of service provision;
non-discriminatory access and availability;
provision of information and progress reports;
the contracting authoritys right to monitor performance;
the contracting authoritys right to exercise appropriate emergency step-in and operation powers;
the making (and publication) of rules governing use and operation?)
Ancillary Contractual Arrangements

38 Does the law contain any (unnecessary) restrictions on the developers freedom to agree the
terms of the various project and other contracts with third parties necessary to give effect to the
project (e.g. construction/O&M/shareholders agreements)? For example, are there (unnecessary)
requirements to obtain government approvals, apply local law, restrictions on delegation etc.?

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39 Does the law contain other (unnecessary) restrictions relating to the parties freedom to agree on
other fundamental provisions of the project agreement such as:
suitable performance guarantees;
suitable insurance arrangements;
modifications for events of force majeure/changes in law/stabilisation provisions,
and the payment of compensation where appropriate?
extensions of time for completion/extension of the term of the PPA?
remedies for default.
Duration, extension and termination of Project Agreement

40 Does the law prescribe a (maximum) duration for the project and the PPA?
41 Does it allow the conceding authority sufficient flexibility to agree an appropriate term?
42 Does it permit the term to be extended in appropriate circumstances (e.g. completion delay due
to force majeure/government suspension of the project/compensation for change in law)?
Termination of PPA

43 Does the law contain any (unnecessary) restrictions on the parties freedom to agree on
termination rights and procedures that are best suited to the project. The law will often provide for
termination rights, of course. But are these:
sufficiently flexible to be developed/modified in the agreement as appropriate?
sufficiently clear and balanced (and fair to the developer)?
subject to a public interest termination right? If so, will these be acceptable to the developer
and its lenders (this will often come down to the payment of adequate compensation)?
sufficiently broad to allow for force majeure/suspension/frustration terminations?
44 Does the law allow adequate step-in rights to be granted to lenders (see above)?
45 Does the law deal adequately with the subject of compensation payments on termination?
In particular:
will the parties have sufficient flexibility to provide for this in detail in the project agreement?
is it possible to deal appropriately with the full range of termination events and categories of loss
(including the fair value of works performed/lost return to shareholders/payment out of debt)?
are any restrictions consistent with international norms and the expectations of lenders?
46 Does the law contain any (unnecessary) restrictions relating to:
the transfer of technology required for operation of the facility?
the training of the contracting authoritys personnel?
the provision of O&M services and spare, if required, for a limited period after termination?
Settlement of Disputes

47 Does the law allow the parties to the project agreement sufficient freedom/flexibility to agree on
dispute-resolution mechanisms which are best suited to the needs of the project (including choice
of law/international arbitration/mediation and panel mechanisms etc.)?
48 If not, how prejudicial could any restrictions be?
49 Does the law contain any unnecessary restrictions on the developers freedom to agree on
the most appropriate dispute-resolution mechanisms with its third party contractors (including
shareholders/lenders/contractors/operators and suppliers)?
50 Are special dispute resolution mechanisms needed/allowed for in relation to disputes with
customers/members of the public in connection with use of the facility?

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Annex 2

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