Beruflich Dokumente
Kultur Dokumente
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
* 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
10
17
19
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3.
PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa
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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
55
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10.
Main Recommendations
Main Recommendations
78
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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
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)
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
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.
1. Introduction
13
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.
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.
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.
1. Introduction
16
Section 6
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
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.
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
19
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
20
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
21
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.
22
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
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
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
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
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
3. PPPs for Renewable Energy and Challenges in the Development of Renewable IPPs in Africa
27
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.
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,
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.
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
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
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
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
Power Pool
Countries
Installed Capacity
6073 MW
27 347 MW
28 374 MW
49 877 MW
14 091 MW
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
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.
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
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.
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)
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
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
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
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
34
Consents / authorizations;
Regulatory Risk
Commissioning procedures;
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
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)
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.
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.
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
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
39
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
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
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.
40
44 African Development Bank Group (2012). Unlocking North Africas Potential through Regional Integration Challenges and Opportunities.
41
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:
Qualification 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.
42
43
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.
44
Lack of Developers
45
Lack of Developers
Availability of Equipment
46
47
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
48
49
6.
How to Design the Best
Legislative Framework
for Successful IPPs
51
47
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.
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.
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
53
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
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;
55
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
56
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,
approach and deal flow will more than repay the effort expended.
For renewable energy projects a standard form PPA should also be
developed.
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
Administrative coordination
Regulatory Authority
Government Support
Selection of bidder
Project Agreement
Project site/assets/easements
Construction Works
Ancillary Contractual
Arrangements
Termination of PPA
Risk Allocation
58
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.
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
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
59
Insolvency Law
Anti Corruption
60
46 Malgas, I. and Eberhard, A. (2011). Hybrid power markets in Africa: Generation planning, procurement and contracting challenges. Energy Policy, 39, 3191-3198.
61
7.
Green and Climate-Friendly
Investment and Resources
for its Development
63
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.
Experience
Prospects
Generation
Distribution
16 concessions and 17
management or lease
contracts
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:
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.
64
Financial constraints
on Africa over the last few years, a number of which also have a particular interest in renewabl
power.
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
65
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
Morocco
Tunisia
49 UNEP FI & Partners (2012) Financing Renewable Energy in Developing Countries: Drivers and Barriers for Private Finance in sub-Saharan Africa.
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.
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
50 UNEP FI & Partners (2012) Financing Renewable Energy in Developing Countries: Drivers and Barriers for Private Finance in sub-Saharan Africa.
67
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
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.
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
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.
69
8.
Possible alternatives to mitigate
financial challenges
71
72
73
Mezzanine Finance
Trinity International LLP is currently assisting on a renewable power
initiative which is considering the application of mezzanine funding
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
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.
Key Findings
Table 1: Top ten issues respondents feel are barriers to successful delivery of renewable IPPs in Africa
All respondents
Position
10
76
Position
Technology risk
Technology risk
10
77
Position
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
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.
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
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
79
Stability
Regional Cooperation
Context
Annexes
Annex 1
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?
81
Annex 1
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
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.?
83
Annex 1
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?
84
Annex 2
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