Renewable Energy Financing Issues in Developing Countries: The Case of Ugandas Renewable Energy Sub-Sector.

By: Atipo Ambrose Peter1 atipoap@gmail.com Abstract: Renewable Energy continues to attract a great deal of global interest. Much as it has already taken root in the developed countries, a lot still has to be done to fully develop and entrench the same in developing countries. RE has traditionally had hydro as the major source category; however, with the recent developments in the sector, large gains have been realized in the other categories as well, which among others include solar, wind, geothermal, biomass and Biofuels. Developing countries have the benefit of skipping the learning phase of RET development and so can analyse all options and chose to adopt what has worked and what is working in the advanced RE markets, and could also be made to work for them. 2 Development of RE is very capital intensive and attracts high initial/upfront costs still yet with high risk profiles specific to the individual categories of RE and specific areas of development, which risk profiles have to be structured and managed effectively. In all this, finance still plays a very major role in the development of RETs and it is for this reason that private and public finance initiatives both have a very big role to play in the development of the subsector. Each of the categories, be it private or public are, on their own, limited in scope and applicability hence the need to have either category complementing the other where shortfalls are imminent. These tools come either in pure private finance or pure public finance or jointly through public private partnerships and other innovative financing tools. Developing countries are faced with several financing challenges for RETs among others.

The author is an international Legal and Policy Expert in the fields of Energy, Oil & Gas and Infrastructure Finance and is currently the Head

of the Energy, Natural Resources and Infrastructure Practice at Kiiza & Kwanza Advocates, a Ugandan Law Firm. He can be reached at atipoap@gmail.com
2

The learning phase is usually characterised by invention with trial and error through experimentation which either proves successful or not. The advantage the new RE economies have is that, they can easily sieve and chose to adopt what works and what has worked as far as RETs are concerned.

TABLE OF CONTENTS Contents Page

2.1 Review of energy sector policies and laws .................................................16 Ugandas electricity sector like several others was unbundled, during the power sector reforms of the 1990s, from the vertically integrated government utility, UEB, that handled the three roles of generation, transmission and distribution simultaneously. It was unbundled into three separate independent functions namely generation handled by UEGCL, transmission handled by UETCL and distribution handled by UEDCL. The generation and distribution functions were concessioned out to, ESKOM (U) Ltd and UMEME, respectively. The independent power regulator, ERA oversees and regulates the countrys electricity sector. All these above mentioned functions have achieved great strides in terms of performance and greatly contribute to the positive development of the sector.. .17 2.2 Different sources of renewable power and estimated Mega watts ................20 2.4 Sources of finance for renewable energy in Uganda.......................................25 2.5 CHALLENGES FACED IN DEVELOPMENT OF RENEWABLE ENERGY IN UGANDA 29 2.5.1 Limited technical and institutional capacity. ............................................29 2.5.2 Weak and inadequate financial sector......................................................30 2.5.3 Limited stakeholder involvement..............................................................31 2.5.4 Lack of standards and quality assurance..................................................32 2.5.5 Lack of proper laws to integrate bio fuels in the economy........................33 2.5.6 Lack of diverse risk mitigation and management tools.............................33

ACRONYMS

ADB BUDS CDM EACA ERA ERT FITs GEF IAs ITC IRR Kw KwH MOEMD Mw Mw Hr PEAP PFIs

African Development Bank Business Development Services Programs Clean Development Mechanism East Africa Custom Act Electricity Regulatory Authority Electricity for Rural Transformation Program Feed in Tariffs Global Environment Facility Implementation Agreements Investment Tax Credits Internal Rate of Return Kilowatt Kilowatt Hour Ministry of Energy and Mineral Development Megawatts Mega Watt Hour Poverty eradication Action Plan Private Finance Initiatives
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PSF PSP PSR PTC PPAs PPP REA RE REA REB REF RETs ROI SCOUL UECCC UNEP UIA URA VAT WB

Private Sector Foundation Private Sector Participation Power Sector Reform Production Tax Credits Power purchase agreements Public Private Partnerships Rural Electrification Agency Renewable Energy Rural Electrification Agency Rural Electrification Board Rural Electrification Fund Renewable Energy Technologies Return on Investment Sugar Corporation of Uganda Limited Uganda Energy Credit Capitalisation Company Limited United Nations Environment Program Uganda Investment Authority Uganda Revenue Authority Value Added Tax World Bank

1. Introduction Ugandas renewable energy policy is quite elaborate and presents a focused and quite robust approach in dealing with the national renewable energy issues. It presents a detailed, integrated and specific highlight of issues, opportunities, challenges, targets and solutions for the local RE sector i.e. power generation, energy efficiency, modern energy services, rural and urban poor electrification access, waste to energy and Biofuels. The policy even goes ahead to create the necessary infrastructure for its implementation. The RE Policy vision is, to make modern renewable energy a substantial part of the national energy consumption by increasing the use of modern renewable energy from 4% at the time of inception of the policy in 2007, to 61% of the total energy consumption by the year 2017.3 This ten year vision presents an achievable but ambitious challenge for Uganda, especially if the prevailing legal, political, social, economic and financial set up conditions of the Ugandan economy, and how they impact on the enablement of RE investment and development at all levels, are to be considered. The policy document terms these conditions, Barriers to Renewable Energy Development.4 These conditions are high upfront costs, inadequate legal and institutional framework, limited technical and institutional capacity, lack of financing mechanisms, lack of awareness, underdeveloped markets, unsustainable use of biomass, lack of standards and quality assurance, lack of sufficient data on resource base, lack of integrated resource planning, limited stakeholder involvement and inadequate attention to research and development.5 Of all these barriers, this paper gives special emphasis to the barriers that directly impact on financing of RE and these are; i) High upfront costs ii) Inadequate legal and institutional framework

MOEMD, The Renewable Energy Policy for Uganda at http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY %20POLIC9-11-07.pdf p.54. The overall objective of this policy is to diversify the RE supply sources and technologies in the country. 4 ibid p.51 5 ibid. Research and development should not only concentrate on technology but also on creation of innovative workable financing structures.

iii) Lack of adequate and appropriate financing mechanisms for such projects iv) Underdeveloped markets for RE v) Lack of sufficient data on resource base and
vi) Lack of integrated resource planning.6

Though not the major hindering factors, these five are very paramount to the development of renewable energy not only in Uganda but internationally because they form the basis of the development and operation stages of the projects.7 The policy highlights certain specific areas of interest for development namely, small RE investment through the creation of a stable and predictable environment using among others the regular publication of FITs and introduction of a standard PPA for the various RE categories8 as measures. This is supposed to go a long way in creating, predictability and stability, in the sector, which conditions many an investor will always seek in an investment environment. The emphasis on small RET development has the potential of having the country get electrified faster than it would ordinarily have, since it is substantially faster to bring these small projects to commissioning stage, and also cheaper than it is for large projects in terms of overall cost though more expensive in terms of unit cost of development. The objective of the government is to have more projects come on board in the shortest time possible, an attribute the big power projects have been seen to traditionally lack.9 In Uganda, just like in other developing countries, majority of small and mini power projects that would ordinarily get commissioned within less than a year or within one and a half years at most, do not fit the above mentioned standard. The reasons for project delays in reaching timely commissioning mainly arise from delays in obtaining approvals10 and sourcing for finance. For large projects, it is even more difficult than it is for small projects mainly because of the stringent terms attached to the conditions of raising equity and debt for projects, which projects in many cases do not ordinarily have a large and reliable market, a factor which often results in several guarantees and subsidies from the government.
6 7

Ibid p.52 These stages provide the basis of the financing mechanism as well. 8 supra 9 Big projects especially hydro usually take no less than two years to commissioning. 10 Delays in obtaining approvals most times stem from a lack of technical and skilled personnel to prepare the project, and if they are there, most project developers find the real professionals expensive to contract.

In Uganda, the strategy of promoting small power development has paid off as five small hydro power projects were being developed by January 201011 and all these have a combined estimated planned capacity of 46.995mw12. Hand in hand with this strategy are the publication of a standardised PPA and the frequent publication of FITs. This frequent publication of tariffs by ERA after consultation with stake holders serves as a confidence booster for investors in the sector and has been going on for some time now. However, some of the promoters of power generation projects have expressed concern about the perceived unfairness and non transparency by ERA in arriving at the FITs.13 This is why ERA, attempts to involve all stakeholders to discuss the tariff review reports prepared by the appointed consultant before effecting any recommendations. This tariff review process is done frequently i.e. every 3-5 years, and always takes into account the development strides the sector has achieved. For developers, the generation tariffs and feed in tariffs are of particular interest. An analysis of the tariffs for the different power projects in the country reveal a difference in tariffs for different power projects. This is mainly due to the different sizes and costs of production that the developers and government taken into account when developing these projects. Generally, the tariffs are high because of the high cost of financing, 14 explaining the heavy subsidies provided by the government especially in rural areas. Attempts to standardise terms have resulted into standardised PPAs. The standardised PPA attempts to create a more predictable environment in regard to the terms of engagement of power producers with the government who is the main off taker, yet different projects would require different conditions of power purchase, and more still, since the PPA is used as a risk management tool often times than not, the standardised PPA should be more of an indicative guide than a rule of thumb strict document imposed on investors. The standardised PPA should thus be promoted as such. The FITs in Uganda have for a long time lacked the backing of an inbuilt escalation clause15 in the PPA to account for variations in costs of
11

ERA, Status of Electricity Projects under Development http://www.era.or.ug/Pdf/Status%20of%20Electricity%20Projects%20under %20Development.pdf pp.2-3 12 ERA, Small Hydro Power Projects http://www.era.or.ug/Pdf/Status%20of%20Electricity%20Projects%20under%20Development.pdf 13 ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.5 14 The cost of financing not only considers the interest rates but also considers the risk element and how it is managed. Because of the high risk profile of developing countries, the cost of financing is generally higher than it is in developed economies. 15 ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.5

production, a factor which discourages investment despite the fact that it may create predictability yet power development and generation is a business and a positive cash flow would serve to attract financiers. Therefore, FIT escalators in PPAs should not be ignored, at least as a risk management tool for the benefit of the financiers, the project sponsors and the project in general. Escalators would serve in improving the bankability of a project. Another strategy is the development of solar energy technologies through the creation and enactment of legislation which will mandate urban dwellers, middle income households and commercial building owners to use solar energy technologies.16 This legislation is to help in creation of energy efficiency and increased use of RETs in low consumption areas. The low consumption areas are mainly the rural areas, urban dwellers, middle income households and commercial buildings as mentioned earlier. Solar energy technology development in Uganda has attracted mainly off grid and stand alone premise based systems which have recorded tremendous success in terms of installation numbers. Several microfinance schemes have developed based on the provision of solar PV stand alone systems for rural based communities, reaffirming the very pivotal role microfinance plays in rural electrification and renewable energy development among others. For large solar systems however, only one licence was awarded in August 2006 to, Energy Systems for Africa Limited for the production of 50mw of solar-thermal generated power yet nothing much in terms of development has been achieved to date, as the licence application process is still incomplete.17 The FITs that have been available for a while now are the FITs for mini hydro and co-generation plants with the evident absence of FITs for solar technologies, hence the assumption that there are no special FITs for solar as is the case with mini hydro and co-generation. This serves to discourage investment in the solar aspect of RE, however, in the ongoing tariff review process, it is hoped that favourable FITs for solar developers will be developed and approved. With regard to mini solar, another company Micro Power Group is in the process of obtaining a licence for 0.24 mw Solar-PV generated power for the districts of Arua, Mbale and Lira as well

16 17

ibid ERA, Solar Licensed Projects http://www.era.or.ug/SolarLicencedProjects.php

as micro-grids in several other places in the country.18 This is an indication that large scale development of solar technologies in Uganda still faces several challenges; however with a law in place that obligates the use of solar for specified low consumption activities, solar would form the base load power for general lighting and the other specified low consumption purposes in all premises countrywide. The law supposed to realise these minimum standard obligations for domestic and commercial premises is yet to be enacted, however, work is going on behind the scenes to ensure the enactment of this law, which would also go a long way in strengthening the national energy efficiency and conservation policy. The development of Biofuels through the establishment of a policy that obligates fuel dealers to blend biofuels while also providing incentives for biofuel producers to increase their investment and production is propounded by the policy as a strategy that can be used to develop the biofuel industry in the country. Further, development of a testing centre at the UNBS and enactment of legislation to obligate a minimum 20% blend of biofuels in all fuel as propounded by the policy is expected to promote the development of biofuels for use in transport and power generation. 19 So far, there is no Biofuel Law in place yet, however, there is a great deal of work going on to have the law come on board sooner than later. With this law, a more predictable and stable investment environment will be created, which stability and predictability would in turn go a long way to attract and encourage investment in the sector. There is great potential for biofuel production from among others the four sugar factories in the country 20, beverage processing plants and paper mills to mention but a few. A biofuel company, African Power Initiative (API) has since 2008 been involved in the planting of more than 2500 acres of jatropha a high yielding biofuel plant which yields up to five times more than soya per hectare. The company is the biggest biofuel plantation owner in the country and has positioned itself as the promoter of biofuel production in the country, with plans to build sub regional plants in all regions where they have plantations and a biodiesel refinery in Kampala the capital and main business district. The residue from the process will be used to generate biomass for power, fertilisers and chemicals.21 The benefits from biofuels are immense
18

ERA, Status of Electricity Projects under Development http://www.era.or.ug/Pdf/Status%20of%20Electricity%20Projects%20under %20Development.pdf p.8 19 ibid 20 SCOUL, Kakira, Kinyara and GM sugar are the only four sugar factories in the country of which only two are producing power under cogeneration. 21 Uganda Bio-diesel refinery opens http://www.greeneconomyinitiative.com/news/226/ARTICLE/1317/2008-12-14.html

even besides the residual benefits such as power production among others, yet a law setting certain minimum blending obligation standards when enacted would result in a predictable environment that would encourage financiers to put their money in the development of biofuel projects, which are also capital intensive and traditionally require heavy equity financing. Fast tracking the process to enact the biofuels law is therefore paramount if investment in the sector is to be realised. Since biomass accounts for 92% of domestic energy consumption, with wood and charcoal for cooking taking up the larger chunk of that, a lot still has to be done to ensure that modern utilisation of biomass is promoted.22 This is the reason why the RE policy moots for formulation of a policy that will encourage the growing of high energy crops in addition to utilisation of biogas and the use of energy efficient stoves and burners for energy efficiency purposes. The policy further advocates for legislation that will ensure that all waste is not just burned but the energy content first extracted before disposal,23 a move that will realise increased availability of modern biomass energy in the country. The potential for modern biomass is high with registered progress in Kinyara Sugar Ltd where there is production of 3mw of power under co-generation using bagasse, and another 18mw produced under the same circumstances by SCOUL.24 Other biomass generation projects are not yet on board with several of them still in permit and license application stage.25 Biomass has attracted other applicants for permits namely Sesam Energy Ltd for a 33mw waste to Energy biomass project in Kampala the capital, Kabale Energy Ltd for 30mw Peat power project in Kabale the Southwest of the Country, and Apac Energy for Agro Processing Centres (U) Ltd. All these projects are in different stages of development 26, however none of them has reached commissioning stage as yet. The potential for biomass power is very high and can be promoted as a waste disposal management system that creates power and adds value to the various companies. Most of the financing under this arrangement would be in the form of adding a co-generation plant unit, hence the high likelihood of corporate finance in the financing of the projects save for the independent ones.
22 23

Uganda National Development Plan 2010/11-2014/15, p.149 MOEMD, The Renewable Energy Policy for Uganda at http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY %20POLIC9-11-07.pdf p.8 24 ERA, Co-generation/Biomass/Waste Projects http://www.era.or.ug/Co_Generation.Php of the 18mw produced, only 6mw are used by the factory and the rest sold to the national grid. There have arisen issues to do with late payments to the generator, however, in the overall, cogeneration has been a success. 25 ERA, Status of Electricity Projects under Development http://www.era.or.ug/Pdf/Status%20of%20Electricity%20Projects%20under %20Development.pdf p.7 26 Ibid p.8

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The policy also addresses the issue of sustainability in the development of RETs in general and highlights the important role of the government in ensuring this sustainability through among others, the continuous acquisition and dissemination as well as publicizing of technical data to create awareness on investment opportunities and consumption options to consumers and investors alike. It also recognises the need to develop institutional capacity and coordination of efforts to develop the sector through the creation of a dedicated department of RE and Energy Efficiency at Ministerial level and National Energy committees at all levels from national down to district level. This establishment of dedicated RE institutions goes a long way in coordinating efforts for widespread RET development and offers coordinated efforts to ensure quick access to financing for RET project development. The Energy Resources Department at the Ministry of Energy currently handles development of energy resources including renewable energy under the RE Division in this department. The continuous acquisition and dissemination of technical information is ongoing, however the information that the government can afford to get is basic and is to be used as indicative information pending further feasibility by the developer. This poses a challenge to small power producers who hope to get financing based on the basic information obtained by the pre-feasibility studies carried out by the government. None of these studies can be used as a basis to obtain finance for the projects hence the need for further research by the prospective developer mainly because the standards set by the government for feasibility studies are below the standards set by the banks and other financiers for projects in the sector. In that regard, aligning the standards with those of financiers would serve to create sustainability in the development of RETs.27 In the promotion of R&D for the RET sector, the policy recognises that innovation is what will drive efficiency while lowering the costs of RETs, a factor that would go a long way in making RETs more acceptable while lowering the costs of set up. Even still, when local manufacturing capabilities are greatly supported, increased widespread development would be expected to follow. The private and public sectors would work well together in this regard to realise maximum gains.28

27 28

This is an area an institution such as ERA or any other, could take up, to ensure smoothness in the process. The Uganda Industrial Research Institute and the Presidential Initiative for Development of Science and Technology would play a very pivotal role in this regard.

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In addition the policy recognises the governments role in adopting and setting up financing mechanisms such as the Credit Support Facility and Smart Subsidies with the objective of scaling up investments in RE and rural electrification.29 Programs such as the WB funded ERT I & II with the BUDS project, REF, and the recently capitalised UECCC Ltd initiative among others, have achieved big gains in terms of rural electrification especially. Under ERT Project, transactional advisory services as well as partial funding of the cost of feasibility studies is provided to RE project developers with projects of under 20mw and with a rural electrification element. The UECCC Ltd initiative involves the disbursement of capitalisation credit to renewable energy projects to enable them achieve a good level of financing to enable the projects proceed in a timely manner. The credit is disbursed through financial institutions at low interest rates in the form of debt. It also provides partial risk guarantees among other risk mitigation tools. This initiative will play a very important role in solving the financing challenge faced by energy project developers and sponsors as well as ensure that projects reach commissioning in a timely period. The company is currently involved in a PSP Hydro joint initiative with GTZ, PSFU and REA to offer financial and technical support to mini-hydro power plants of up to 1mw and with a rural electrification component.30 The success of this initiative can be used to promote the same for projects of up to 20mw. The company will obtain financing and technical expertise from various donors and funds for green financing should not be an exception. The tapping into and utilisation of some of the international green financing resources would play a big role in increasing the available finance for development of RETs locally. It is important to note that the achievement of operationalisation of some of the measures under the objectives of the RE policy could only be made possible with the enactment of appropriate legislation which takes into account financiers interests in sector projects. These categories of legislation would address specific issues as recognised by the policy namely; FITs, compulsory solar for specified low consumption functions, Biofuels production and blending, adoption of

29

MOEMD, The Renewable Energy Policy for Uganda at http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY %20POLIC9-11-07.pdf p.8 30 The support involves providing a 25% conditional grant attainable on completion of the project, 60% low interest rate long term loans and partial risk guarantees.

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alternative technologies, regulation of charcoal production and transportation, institutional frameworks, fiscal and financial incentives for RE investment and environmental protection.31 Therefore, it follows that this paper discusses these aspects in light of the financing aspect of RE projects with special attention to PFIs, PPPs and other innovative fiscal and financial arrangements that could be employed or developed for purposes of making renewable energy development a great deal easier. However, it is imperative to note that because of the complex nature of renewable energy projects, which complexity arises from various factors such as those mentioned above as well as the scattered and isolated nature of the renewable energy sources, the novelty of technology involved and the unreliability and unpredictability of some of the fuel sources used, such as wind and solar among others,32 renewable energy development a couple of years down the road, has not attracted much in terms of tangible alternative renewable energy projects coming on board, save for the traditional hydro at both mini and large levels. The renewable energy categories of wind, solar, biomass and geothermal have not attracted the requisite investment to make them an important aspect of the generation mix due to several factors, important of which include, the high upfront costs, which condition is not made any easier due to a dearth in available financing for such renewable power projects especially in developing economies such as Ugandas. The varied legal, regulatory and technical reasons for underdevelopment of the RE sector are quite diverse. This paper will identify the role of finance, as one aspect, in the promotion of RE projects in developing countries, with special emphasis on Uganda, through both private and public finance initiatives. Chapter two will review Ugandas power sector with emphasis on the potential and challenges facing the sector in light of RE and its connection with Rural Electrification, while emphasizing the abundance of renewable/green energy options as the naturally occurring alternative option due to an abundance in their natural occurrence country wide. Under the same chapter, the existing policies that bear on the development of RE and Rural Electrification will be considered. It will also highlight and analyze the renewable energy policys position on PFIs and PPPs as financing tools for renewable energy development in Uganda. Still under this chapter, the
31 32

Ibid p.10 All these issues are key when structuring a financing package for the project.

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hindrances the policy and the Ugandan situation in general pose, in relation to the use of PPPs and PFIs in the renewable energy sector development, will be considered. Chapter three will analyse the nature of renewable energy highlighting how RE works, the common RE issues, how RE projects are ordinarily financed and the major RE risk issues common to RE projects and how they are ordinarily dealt with. The objective of this chapter will be to identify opportunities and challenges in offering solutions to the existing bottlenecks in the Ugandan power sector, as will be tackled in the subsequent relevant chapter. Chapter four will introduce the concepts of Private Finance Initiatives and PPPs while highlighting their roles in power sector development. Here, the nature of the two tools will be highlighted with emphasis on their possible role in encouraging general power sector development and the role the government can play in ensuring that the same tools are effectively used to encourage sector development while also highlighting their role in RE. Chapter five will attempt to offer solutions to the problems highlighted in the previous chapters while also suggesting alternative financing mechanisms for renewable power projects in light of the hindrances identified earlier in the paper. Under the same chapter, the role of legislation and regulation in encouraging the use of PPPs, PF and other financing tools to encourage development in the sector will be considered. Chapter six will conclude by showing that the two financing tools, though very vital, may also be insufficient and sometimes irrelevant in certain situations as far as renewable power development is concerned hence the need for a mix and match arrangement for RE financing. 1.2 OBJECTIVES OF THE STUDY 1.2.1 General objective To establish issues in Renewable Energy Financing in Developing Countries 1.2.2 Specific objectives 1. To examine the policies and laws on renewable energy financing in Uganda 2. To find out the sources of financing for renewable energy in Uganda
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3. To investigate the challenges faced in financing of renewable energy in Uganda

CHAPTER TWO: REVIEW OF UGANDAS POWER SECTOR

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This chapter, will give a review of Ugandas power sector with emphasis on the potential and challenges facing the sector in light of RE and its counterpart, Rural Electrification, while emphasizing the abundance of renewable/green energy options as the naturally occurring alternative option due to an abundance in their natural occurrence country wide. Under the same chapter, the existing policies that bear on the development of RE and Rural Electrification will be considered. It will also highlight and analyze the renewable energy policys position on PFI and PPPs as financing tools for renewable energy development in Uganda. Still under this chapter, the hindrances the policy and the Ugandan situation in general pose, in relation to the use of PPPs and PF in the renewable energy sector development, will be highlighted. 2.1 Review of energy sector policies and laws Ugandas energy sector is a very important and vital component of the Uganda economy. It constitutes a major income earner for the government in the form of taxes, fees, levies and duties among others, while also taking a large part of government and public expenditure through budget and sector support. With liberalization of the energy sector, private participation in the sector has increased tremendously with a big majority of energy investments constituting private sector finance.33 Since its liberalisation in the late 1990s, the electricity network in Uganda has achieved great strides in terms of development, coverage and maintenance despite the power cuts the country has been facing for much of the last five years.34 The country currently still faces a huge electricity supply deficit with a very large part of the population still unconnected to the electricity grid implying that those who have access to modern power are connected to isolated grids and stand alone systems among others. Much of the new generation is attributed to independent power producers (IPPs) who have tremendously contributed towards electrification of the country. These IPPs have generally thrived globally as a result of the liberalisation and unbundling of the power sectors in various countries.

33 34

UIA, Investing in Ugandas Energy Sector at http://www.ugandainvest.com/energy.pdf p.2 These power cuts were attributed to the low levels of power production caused by low water levels due to the long drought that the country experienced. The cuts were curtailed by the introduction of expensive thermal fuel generators in various parts of the country and increased water levels.

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Ugandas electricity sector like several others was unbundled, during the power sector reforms of the 1990s, from the vertically integrated government utility, UEB, that handled the three roles of generation, transmission and distribution simultaneously.35 It was unbundled into three separate independent functions namely generation handled by UEGCL, transmission handled by UETCL and distribution handled by UEDCL. The generation and distribution functions were concessioned out to, ESKOM (U) Ltd36 and UMEME37, respectively. The independent power regulator, ERA oversees and regulates the countrys electricity sector.38 All these above mentioned functions have achieved great strides in terms of performance and greatly contribute to the positive development of the sector. In 2002, the government came out with an Energy Policy after several years of relying on Ministerial Policy Statements.39 The Energy Policy 2002 was a sign of the governments commitment towards development of the energy sector on a long term basis approach. This energy policy highlighted and brought about several changes in the approach the government was using to bring about development of the power sector. These changes are identified and discussed later in this paper, with particular emphasis on the roles of renewable energy and finance in the development of the sector. The policy goal of the 2002 Energy Policy is to meet the energy needs of Ugandas population for social and economic development in an environmentally sustainable manner.40 The policy takes into account the linkages between the energy sector, the international arena and the rest of the domestic and regional economy. It further recognises that the sector is constrained by inadequate financing and as such further recognises the role of globalisation in ensuring that the country is in compliance with several conditions in the development dynamics of this time and age, and in this regard, the need to set up a conducive environment that can attract private finance and encourage energy trade and other aspects of partnerships, is propounded. 41 However, the policy also recognises that there is a need to strengthen the institutional and legal framework
35 36

S.6, Cap. 145 Laws of Uganda (2000 Edition) It is a wholly owned subsidiary of ESKOM Group of South Africa a leading power service provider in Africa. 37 A consortium of Globleque and ESKOM 38 Established under s.4(1) cap 144, Laws of Uganda 39 MOEMD, The Energy Policy for Uganda, 2002 at http://www.energyandminerals.go.ug/pdf/EnergyPolicy.pdf p.4
40
41

Ibid p.1 Ibid p.5

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in which the sector operates especially for RE among others. The government has put in place diverse and varied measures in this regard with several projects being promoted to ensure the achievement and realisation of such a conducive investment and operating environment and appropriate legal and institutional framework. The policy further recognizes the countrys abundant natural resource base and hence the vast potential for renewable energy production from such biomass sources which biomass has always been the leading source of Ugandas energy needs.42 Solar, wind, geothermal and bio-fuels are also identified as the other renewable energy categories with good potential for development; however, hydrological resources are the most abundant and have attracted the most in terms of development and private sector interest.43 Ugandas main source of power is hydro with an installed capacity of 2.154 billion kilowatt hours as per 200844 of which a minimum of 70% is attributed to large hydro, and the rest to mini hydro. Mini hydro is predominant in rural areas mainly due to the rural location of the mini hydro sites. This makes it a very important aspect in the Rural Electrification Process. The other categories of RE are also predominant in rural areas, explaining why RE is a key element in Rural Electrification. RE and Rural Electrification are intertwined and cannot be separated. In Ugandas case, most of the countrys RE sources lie in the rural areas, which factor makes them a very vital component under the relevant respective policies. Uganda developed the Rural Electrification Strategy and Plan, which covers the period 2001 to 2010, as a special program for rural electrification as required by the Electricity Act of 199945. Under this plan, one of the most important strategies that have been successful in overcoming some of the barriers to rural electrification is the establishment of an appropriate institutional framework which framework comprises a number of institutions charged with the management of the rural electrification process. One of these bodies is the Rural Electrification Agency (REA) whose mandate is to ensure implementation of the Rural Electrification Strategy and Plan,
42

MOEMD, National Biomass Demand Strategy 2001-2010 at http://www.energyandminerals.go.ug/pdf/BEDS-Contents.pdf p.4. According to the BEDS, biomass accounts for 93% of the energy mix in Uganda. 43 Private sector participation has been key in bringing several power projects to fruition. In mini hydro, private sector involvement is the norm as government does not take part as an investor in the development of power projects of less than 20mw. 44 These figures are according to the EIA country statistics at http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm? tid=2&pid=33&aid=12&cid=&syid=2004&eyid=2008&unit=BKWH 45 S.63 of the Electricity Act, 1999, Cap. 145, Laws of Uganda.

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through Public Private Partnerships.46 The REA works as the secretariat of the Rural Electrification Board47 (REB) whose role is to oversee the implementation of the strategy and management of the Rural Electrification Fund (REF)48. The Rural Electrification Master Plan49 is another of the framework strategies designed to overcome the barriers to Rural Electrification among others. All these bodies and functions work together to ensure that power projects are developed in the rural areas. These projects are all regulated by the Energy Regulatory Authority (ERA) which also decentralizes its regulation role in certain appropriate circumstances as highlighted later in this paper. With a progressively demand driven approach to development, governments role is the preparation and determination of policy, while promoting investments, with set targets, and provision of guidance to investors. On the other hand however, all capable sponsors such as private companies, local authorities, NGOs and communities among others are all able to initiate electrification projects and where these are not desirable for private sector initiation, government gets involved by promoting PPPs so as to ensure electrification in these areas in realistic time.50 This shows that government does not only stop at enablement through policy but also goes ahead to take decisive effort to ensure that the electrification plan goes on as planned. This aspect raises an interesting solution to one of the challenges to financing renewable energy under rural electrification (also read imperfect markets). It is worth noting that government is the major player in ensuring the success of a rural electrification drive in any economy because of its central role as creator and promoter of policy and law and also as an active participant as subsidizer and guarantor for most if not all private sector led power development projects. The RE policy also further recognizes that Uganda currently suffers from energy poverty51 which in Uganda is characterized by low consumption levels of modern energy forms such as electricity
46 47

REA Overview, at http://www.rea.or.ug/?p=site&s=2&pg=2 The REB is part of the implementation framework 48 The REF is also part of the implementation framework and allows for the provision of grants and subsidies on investment costs for Rural Electrification Projects. These grants are provided especially to cover part of the cost of feasibility studies and transactional costs, and subsidies are provided to reduce the cost of power to the rural consumer. 49 Its role is to provide information on investment opportunities. 50 www.energyinstug.org/...com.../file,Others%7CRural+E+Plan.pdf/ pp 6-7
51

MOEMD, The Energy Policy for Uganda, 2002 at http://www.energyandminerals.go.ug/pdf/EnergyPolicy.pdf p.8. Energy Poverty is defined as the absence of sufficient choice in accessing affordable, reliable, quality, safe, and environmentally benign energy services to support economic and human development

19

and petroleum products, inadequacy and poor quality of electricity services in addition to the dominant reliance on wood fuel sources.52 This is the situation that the policy sets out to change for the better, so much so that the country will be characterised by high consumption levels of modern energy among others. 2.2 Different sources of renewable power and estimated Mega watts Uganda has considerable renewable energy sources for energy production and provision of energy services. These resources include hydro, mini-hydro, solar, biomass, geothermal, peat, and wind. However, with the exception of biomass whose contribution is very significant, the remaining renewable sources contribute about 5% of the countrys total energy consumption. This limits the scope and productivity of economic activity in different parts of the country, yet if these resources were to be fully tapped into, they would go a long way in making the different categories of RE a major source of Ugandas power. Currently, hydro is the main source of renewable power for Uganda with large hydro being the biggest source, followed by the mini hydro sites which also provide a considerable amount of power, though in comparison terms mini hydro provides about 10% of what large hydro provides. Thermal fuel generators provide a considerable amount of power which is slightly more than the amount of power provided by mini hydro in terms of megawatts. It is however not an RE type hence will not be discussed further in this paper. Solar PV accounts for the third largest source of power in Uganda in current production terms, which however is very low. The figures for the potential of Ugandas renewable energy are tabulated below and seem to be in consonance with the current production by source as mentioned.

Table 1: Sources of renewable power and estimated Mega Watts (MW) Energy source Hydro
52

Estimated mega watts 2000

20

ibid

Mini-hydro Solar Biomass Geothermal Peat Wind Total

200 200 1650 450 800 5300

Source: Alternative energy sources assessment report 2004, national biomass assessment study. Table 2: A Bar Graph showing Sources of Renewable Power and Estimated Megawatts

6000 5000 4000 Mega 3000 Watts 2000 1000 0 Hydro Mini -hydro Solar Biomass Geothermal Wind Peat

Sources

Source: Alternative energy sources assessment report 2004, national biomass assessment study.

2.3 RE POLICY POSITION ON PFIS AND PPPS The RE Policy recognizes the very important role PPPs have to play in promoting investment in the RE sector. The utilization of PPPs as a financing and development tool can be achieved
21

through the provision of a conducive policy, legal and regulatory framework environment which is expected to contain among other things tax rebates for investors in the sector, favorable forex exchange conversion terms, incentives such as guarantees or other risk hedging mechanisms and favorable power purchase pricing terms and subsidies among others.53 These are particularly intended to address the problem of high investment costs and risk in these investments, which factors have a very important bearing on financing for RE projects. The role of the government in proactively implementing desirable projects which would erstwhile be undesirable to the private sector is recognized under a recommended strategy aimed at encouraging the private sector to invest at a later project stage when the initial undesirable stages such as exploration for feasibility purposes, have been carried out by the government. The private sector involvement is through direct participation in management, operations and development of the project.54 The policy further provides for the establishment of an appropriate financing and fiscal policy with the ultimate objective of attracting investment into the subsector and enabling RETs to penetrate different markets.55 Under the aspect of establishment of an appropriate financing and fiscal policy, the RE policy recognizes that, PPPs and other innovative financing mechanisms such as targeted subsidies, can be used to stimulate market penetration by RETs.56 The encouragement of market penetration deals with some of the challenges facing development of the sector. The current financial and fiscal regime in Uganda does not support low interest rates and long term lending57 which can be attributed to a small and under developed financial sector characterized by low capitalized financial and capital markets.58 This subsequently leads to a situation where there are very limited options for finance and a high demand for the prevailing long term and high interest rate lending. Furthermore, the previous absence of a credit reference service meant that most of the borrowers were considered high risk which factor further compounds the problem of high interest rates and short lending terms.

53

MOEMD, The Renewable Energy Policy for Uganda, at http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY %20POLIC9-11-07.pdf p.55 54 ibid 55 Ibid p.58 56 ibid 57 ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.7 Ugandas lending rates are considered the highest in the world in real terms. 58 The lending capacity of local development financial institutions is limited by their limited net worth while commercial banks prefer short term lending because of the good returns at low risk that accrue from the same

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The introduction of specific tax regimes for RE, such as accelerated depreciation, tax exemptions, preferential tax treatment and the adaptation of tax on other energy generation categories, in such a way as to encourage renewables, is another of the strategies proposed in the RE policy.59 Much as this strategy is mainly to encourage RE penetration in the market, it also has an important role it plays in the financing of RE projects as it impacts on the amortization period as well as the types of investors who could actually invest in the RE projects as utilities and financial institutions among others, as is explained elsewhere in this paper. In Uganda, there is VAT exemption for power development projects; however, this has not been effective because of some issues that touch on the mechanism of recovery since the exempted developers are still charged VAT by their non exempted suppliers hence causing problems even in recovery of the same by the investors. This hurts the suppliers and developers alike, ultimately leading to a situation where local contractors are not actively involved in development of power projects since there is no mechanism for them to recover their VAT besides increasing prices which in turn ultimately leads to high costs for the developer thus negating the VAT exemption. 60 In addition to the VAT exemptions for project development, Uganda Revenue Authority (URA) also offers 5 year minimum tax holidays for projects and developers who are registered with Uganda Investment Authority (UIA) as investors. This 5 year tax holiday exempts the developer from tax liability for the entire first five years of operations. However, many of the small and mini power developers have not taken advantage of this tax holiday due to a lack of information in regard to the same. The policy further recognizes that risk is an important factor that influences investment in, and financing of RE projects, and thus goes on to suggest the implementation of innovative credit enhancement instruments and risk mitigation mechanisms to make investors more comfortable to invest their money in RE projects in the country. This strategy is mainly mooted for the rural development programs;61 however it also has a big bearing on the investment in projects generally. The common risks identified by power developers in Uganda are several and include
59

MOEMD, The Renewable Energy Policy for Uganda, at http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY %20POLIC9-11-07.pdf p.55 60 ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.27 The GOU Contracts make it obligatory for developers to use local contractors and local materials as much as possible. 61 MOEMD, The Renewable Energy Policy for Uganda, at http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY %20POLIC9-11-07.pdf p.55

23

legal risks which arise from a lack of or limited awareness by the developers of the legislation and regulations relating to the power sector as well as a lack of confidence in the court system by some investors.62 In addition, regulatory risk is another category of risk that investors in the sector raise as a matter of concern. The regulatory risk is considered high and of paramount concern to the project developers and financiers especially. For the case of Uganda, this risk is due to the perceived political and government interference particularly in the end-user tariff setting process, despite that however, ERA is generally considered to be independent.63 Political risk of investing in Uganda is considered to be moderate due to the political stability the country has had for over the last 20 years. However, the recent election violence in neighboring Kenya and few incidences of political violence in the countrys recent past makes the developers and financiers cognizant of the fact that drastic changes can occur very quickly. Another category of risk recognized by investors in the power sector is infrastructure risk which ranges from telecommunications, roads and transmission infrastructure which are considered to be slow, inefficient, unsecure, inaccessible or inadequate64 for the purposes for which they are meant. These risks are low profile among developers save for transmission infrastructure risks which directly bear on the project. The above mentioned are some of the risk investors in the power sector in Uganda are concerned about. The issue of risk is dealt with in detail later in the paper. Because of the unique challenges posed by different situations in different economies, financing mechanisms for RE may also vary and as such, the policy suggests the development of financing schemes that are adapted to the local needs and traditions65 of the various communities in which the projects are likely to take place. Some of the schemes cited include the use of revolving funds to enable market development for small, appropriate RETs for rural development as well as microfinance for certain small scale domestic and community projects. These revolving funds, because of their revolving nature, would work best for short term return projects, hence the need to complement them with other longer term financing tools. Much as microfinance is useful, it is
62

ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.19 The legal risk is quite low and does not pose much of a problem in project development decision making. 63 Ibid p.26- The lending for the projects is mainly premised on the PPA and license as the main collateral, so government interference in tariff setting exposes the lenders to significant risks 64 Ibid 65 MOEMD, The Renewable Energy Policy for Uganda, at http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY %20POLIC9-11-07.pdf p.55

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also limited in scope and cannot be used to sustain large projects, hence its utilization in the development of small projects especially those that involve provision of small turnkey RE systems such as solar PV for home use among others. Microfinance can be utilized effectively for larger projects than the traditional small projects, by ensuring that the microfinance funds are mixed with other bigger funds with longer amortization periods in the financing structure for projects and this would go a long way in ensuring the widespread development of RE in developing countries. With ever increasing global concern about green house gas emissions and the large carbon footprint created by the industrialized countries and also many of the non green fossil fuel based energy projects, some innovative tools and mechanisms were created to help reconcile the need to develop with the need to preserve the environment. The RE policy proposes the need to benefit from the different opportunities that are offered by the Kyoto Protocol, CDM, Emission Trading, Joint Implementation Programs and the Carbon Credits Scheme.66 All these mechanisms can be effectively utilized so as to greatly reduce the financing burden on the RE project investors, as some of these mechanisms can be employed to secure green financing incentives, provided an appropriate supporting legal and regulatory framework is in place. 2.4 Sources of finance for renewable energy in Uganda A number of players have been attracted into the RE power sector especially in generation with several of them acquiring concessions for existing and self developed generation plants at both large and mini levels. Since the local finance sector is weak overall and the banks and other financial intermediaries have no experience with project financing in electrification, not much has been achieved in terms of having RE projects come on board save for the large hydro and fuel thermal generation segments.67 The pay-back period on these investments dose not correspond to the short term loan maturity period offered by most local financial institutions. However, donor finance is in plenty though inadequate and more still, undesirable where it does not reflect the market dynamics of demand and supply.
66 67

ibid Both have been successful in receiving finance because of the governments heavy involvement in their development through the direct procurement of project feasibility studies and the provision of very favourable guarantees, tariff and investment terms so as to have these projects quickly developed. The developers for these projects are also highly capitalised with a good reputation and thus attract the requisite financing easier.

25

Below is a table showing the sources of finance for RETs in Uganda. Table 3: Sources of finance for renewable energy technologies in Uganda Financial source Government of Uganda Multilateral and bilateral organisation Private Equity Funds World Bank African Development Bank IMF Private partners Various Renewable energy projects Bujagali interconnection project Some renewable energy projects Renewable energy projects Projects Bujagali

Source: Energy for water health education, national consultation workshop, Uganda, 15th November 2005 This table shows that the large majority of the finance for RETs in Uganda mainly comes from the category of public sources in the form of government and development partner financing. These play a very big role in bridging the financing gap in developing countries where there are few alternative private finance sources. The development Banks operating in Uganda are only three namely AfDB, EADB and UDB of which AfDB is the most capitalised followed by EADB and finally UDB. AfDB has extended support to several power projects in the country especially through the EADB and direct government loans. The interest rate for AfDB is based on the 6 months LIBOR plus 2-4 percentage points with an appraisal fee of 0.5% of the amount requested, which should in any case not be less than US$ 40,000, and this appraisal period is for a period of between 6 to 9 months.68 The rates and appraisal periods are typical and have to be accounted for when structuring the financing deals.

68

ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p. 23

26

The average cost of borrowing from development banks is 7% for foreign currency loans, with an added margin of 1-3% depending on the perceived risk of the borrower, however, on the shilling loan; it is in the region of 17% plus a margin of 1-3% depending on the perceived risk as well.69 This implies that it is more expensive to borrow in local currency than it is to borrow in US. Dollars due to several reasons which include among others the currency risk associated with the Shilling as opposed to the dollar. This however has an effect on the projects that would ordinarily opt for the cheaper option of borrowing in dollars, in that they would have to hedge against currency and exchange rate risks since the projects would be earning in shillings and yet have to pay back the debt in dollars. EADB with a capitalisation of approximately $200 million, on the other hand is popular among mini hydro power developers in the country with most of the loans extended to them having a ten year maturity period70 which period is short for such projects because of their long term nature, hence the need to employ innovative financing mechanisms to ensure a long general amortisation period. EADB charges 1% of the amount as loan arrangement fees of which 75% will be refunded if the project appraisal is unsuccessful.71 The project developers also benefit from lines of credit from AfDB, EIB, ExIm Bank of India among others72 which all constitute main sources of funding. The UDB on the other hand has not been approached by any power developers because of its low capitalisation of $20 million73 which would hardly build any serious power plant. This is therefore not considered an available source of funding for power projects in the country. Commercial banks in the country also actively lend to energy projects, however, two factors determine how much a commercial bank can lend and these are, the exposure limit of the bank which should be anything no more than 25% of their paid up capital and made available to a single borrower, and secondly is, the nature of commercial bank liabilities which support short term lending with a 5 year maturity period being the preferred lending term for several of the

69 70

Ibid Ibid p.22 71 Ibid p.23 72 ibid 73 ibid

27

commercial banks.74 The commercial banks active in lending to power projects in Uganda are DFCU, Stanbic Bank and Standard Chartered Bank. Some of the banks have resorted to syndication as well as partnering with their mother banks to co-finance projects so as to manage their exposure limitations among other factors. Here below is a table showing some of the banks that lend to power projects in the country together with their interest rates and other charges. Table 4: Power Project Lending Banks Name of Lender Base lending rate on Forex AfDB, EADB 7% (base lending rate) + 1-3% Base lending rate on Other Charges Shillings 17% (base lending Lead arrangement fee, rate) + 1-3% appraisal fee (1% at EADB/ 0.5% at AfDB), etc. UDB 9% 17-19% Approval fess 2% of the loan. Stanbic 7.5% 16% Arrangement fee 12% DFCU Barclays Bank Standard Chartered 8% 8.5% 19% 16-19% 18.5% Arrangement fees 12% of the loan. Commitment fees on fees

50% of arrangement unutilised amount. Source: Constraints to Investment in Ugandas Electricity Generation Industry75
74 75

ibid ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p. 23

28

Other financiers of energy projects in Uganda include NORFUND, DED/KFW, PROPARCO, EAIF, IDA through ERT, UECC through local commercial banks and Uganda Carbon Bureau for carbon credits among others. 2.5 CHALLENGES FACED IN DEVELOPMENT OF RENEWABLE ENERGY IN UGANDA Despite Ugandas vast hydro power potential estimated at 3000MW, lest than 10% of this potential is exploited thus curtailing commercial and domestic energy supplies. What has always been projected in financial year plans cannot be met due to underdeveloped financial sector which makes it difficult to efficiently and appropriately finance projects and manage the various risks presented by RE. However, other RE sources are also still not fully tapped into due to certain constraints that are institutional, legal and policy oriented. The major constraints to development and financing of RE in Uganda are discussed below. 2.5.1 Limited technical and institutional capacity. In Uganda, like in any other developing country, there is limited technical and institutional capacity, which cuts across both private and public sector, to implement and manage renewable energy investments. In Uganda however, great strides have been taken to tackle this technical and institutional inefficiency and thus several institutions have been put in place to deal with the various aspects of RE. The recent rural electrification programs for instance demand that there should be enough public and private involvement in the energy business. However lack of adequate local skills to address the various roles, needs and decision making, has hindered renewable energy development in Uganda76. The country faces scarcity of experienced qualified personnel to effectively manage the RE development process. This lack of experienced personnel leads to the employment and contracting of foreign firms at expensive rate which many a local developer would shy away from. The use of local contractors also presents problems with the financing institutions since the local contractors are often times small and undercapitalised and hence cannot raise the relevant performance guarantees and also do not have the requisite experience to handle large magnitude projects, as required by some multilateral and bilateral financing institutions.
76

MOEMD, The Energy Policy for Uganda, 2002 at http://www.energyandminerals.go.ug/pdf/EnergyPolicy.pdf p.51

29

There has for a long time been a lack of a standard procedure and legal instruments for new renewable energy investments causing some bit of frustration among would be investors and financiers due to the uncertainty of the entire outcome of the negotiation and development process. However, this has changed due to the publication of a standard PPA and FITs which create an element of certainty which certainty is important in creating bankable projects. The ERA has streamlined procedures for power development and operation which is going a long way to promote development of the sector. 2.5.2 Weak and inadequate financial sector The financial sector has hindered development of RE in Uganda. The lack of appropriate financing mechanisms to facilitate the development and promotion of RETs has for a long time frustrated efforts to develop RE projects. Commercial banks currently are not providing long term lending required for RETs, the capital market is small and thrives on short term capital instrument listings due to the small size of the capital market sector. Renewable energy technologies are still characterized by high upfront costs, which local developers as well as others may find unaffordable. Mechanisms for consumer financing to address this problem are still inadequate. The lack of domestic finances for energy sector projects has led to undue reliance on external financing. There is need to further stress that new resources (capital, technology, human resources) from the domestic private sector, financial institutions are still lacking to implement and support the renewable energy sector in Uganda77. However, the proposed liberalisation of the Pension Fund sector and, the recently created East African Common Market are bound to increase the capitalisation for the local capital markets and will go a long way in increasing available finance for RE projects among others. The recent capitalisation of the UECCC Ltd will also greatly contribute to solving this financing challenge as UECCC Ltd is a local initiative by the Ministry of Energy and understands the local market problems the industry faces, and for this reason, would greatly work towards solving the financing issue. The inadequate and unpredictable nature of financing energy schemes in Africa cannot be underscored. The ADB estimates that financing of energy schemes in the entire continent for the next 12 years will require a minimum $3 billion per annum, which though a big figure in itself, is
77

Forum of Energy Ministers of Africa, Report on the FEMA Ministerial Meeting, Entebbe, Uganda, august, 3, 2005

30

small considering the entire continent needs to benefit.78 It is also noteworthy that funding in the energy sector is generally done on a case by case or project by project basis as opposed to using a general long term financing strategy within the national and regional programs.79 Long term solutions to energy poverty are simply unthinkable without adequate access to investment which access is created by a good investment environment, implying that the role of the state in encouraging investment is quite paramount. Experience shows that market incentives and business innovation can provide new pathways for energy poverty solutions. Therefore, the need to maximize entrepreneurship, transfer skills and capacities as well as encourage public-private partnerships is crucial.80 2.5.3 Limited stakeholder involvement There has been limited stakeholder participation in the planning and implementation of renewable energy projects in Uganda, leading to poor sustainability of investments. Furthermore, with the Power Sector Review (PSR), the need for holistic program development and management, involving the various bodies and stakeholders in the power sector is even more pressing. In the past, energy planning emphasized the addressing of supply side issues, especially for commercial sources of energy, and not the demand side issues. This approach tended to favour the urban population, which is the major user of commercial fuels, while marginalizing the energy needs of majority of the population, which live in rural areas and depend mainly on biomass. The rural areas also contain over 85% of the population with the largest majority of this proportion actually living below the poverty line.81 The new strategy of involving all stakeholders and having specialised programs for the different areas of the population will go a long way in ensuring electrification of the country as the issues for the different areas are understood and tackled specifically as opposed to generally as was the case in the past. The specialised programs take into account the different development and financing dynamics of power projects in the various areas, which is very important as developers and financiers take

78

Energy Poverty in Africa at ww.ofid.org/workshops/EnergyPoverty/EnergyPovertyinAfrica.doc

79

Ugandas approach has been yearly contributions to long term strategies in that the National Energy Fund receives budgetary contributions annually save for the 2010/2011 budget where the contributions were conspicuously absent.
80

ibid ENABLE, Energy Sector Policy Overview Paper at www.enable.nu/publication/Energy_Policy_Overview_Uganda.pdf

81

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into account the local market situation among others in making a financing decision. Power development projects in rural areas for example will require subsidisation because of a lack of a reliable market among other factors. The segregation of the markets is one way to identify and better deal with financing issues for power development among others. 2.5.4 Lack of standards and quality assurance There are lack of adequate standards and mechanisms to monitor and ensure quality of RETs. The different solar technologies on the market are not known to the general public their effectiveness is equally not standard. Similarly hydro, wind, modern biomass and biofuel opportunities and standards of investment and operations are not known to the general public. This is not only a Ugandan problem but a problem in most of the developing countries, and as such, approximately one third of the estimated 1.6 billion people living without access to electricity worldwide live in Africa.82 The Uganda National Bureau of Standards (UNBS) is increasing its coverage and mandate to the energy sector as well t help in the standardisation of some local industry operations and qualities. Standardisation of the process an investor has to go through in order to invest in a power plant among others has also been standardised except that there still exist some conflicts especially in regard to certain roles such as building the power evacuation system for on grid projects among others. Standardisation of the regulatory element is also considered important as for small systems with generation of less than 2MW or sales of less than 4 GWh; the Electricity Act contains provisions which allow ERA to delegate its regulatory powers to competent local authorities. This is in order to prevent conflicts of interests arising from any local authority entering into the role of project concern and also to prevent regulatory bottlenecks from discouraging investment in the sector as this delegated regulation is usually less stringent83. This standardisation of procedures as well as quality ensures a predictable operating regime which is what would make financiers of projects more comfortable.

82

Yinka Adeyemi About 650 million Africans may lack access to electricity by 2030, delegates told at CSD4 at www.uneca.org/eca_resources/news/102605sdd_dna.htm 83 citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.131.2796...

32

2.5.5 Lack of proper laws to integrate bio fuels in the economy The responsible and sustainable production of biofuels ensures that the environment is conserved in the promotion of RETs. As noted, traditional biomass constitutes the major source of energy for Uganda and it is the governments objective to ensure that its use is modernised. With modernisation definitely comes the enactment of appropriate policy and legislation to create a predictable environment. As noted earlier, Uganda is still in the process of coming out with a biofuel law which law would facilitate investment in the sector as it will lead to a predictable and stable investment and operation environment. 2.5.6 Lack of diverse risk mitigation and management tools The local risk mitigation and management market for power project related risks among others is still small and shallow. The insurance market which constitutes a major player in this market is no exception to this especially in the tools and risk management and mitigation packages they offer for energy sector related projects. Like most other developing countries, the appetite of investors and off shore capital markets is impacted by the countrys risk ranking. The countrys risk ranking is determined from several factors and political risk in all its forms is the commonest form of risk that is used as a benchmark to determine the countrys risk profile. The legal and regulatory regime including but not limited to negotiations for Power Purchase Agreements (PPAs) and guarantees through implementation agreements (IAs), all form a basis for investor influx into the energy sector84. The UECC which offers partial risk guarantees for small hydro projects of up to 1mw under the PSP Hydro initiative is a good step in the development of tailor made risk mitigation measures through PPPs. All in all, these challenges all present opportunities to make the sector better in terms of predictability and stability of the investment and operation environment so as to attract financiers who like predictability and stability in areas where they may wish to invest their money.

84

Godfrey R. Turyahikayo, Investment opportunities in the power sector in Uganda, Uganda Business investment Forum, Cedar Park, Hotel, Johannesburg, 2nd October 2008 at www.tpnetworks.co.za/.../Investment_Opportunities_in_UGANDA.pdf

33

CHAPTER THREE: RE ISSUES This chapter will offer an analysis of the nature of renewable energy highlighting how RE works, the common RE issues, how RE projects are ordinarily financed and the major RE risk issues involved in RE projects and how they are ordinarily dealt with, citing prominent examples of different renewable power projects where necessary. The objective of this chapter will be to identify opportunities and challenges in offering solutions to the existing bottlenecks in the Ugandan power sector, as will be tackled in the subsequent relevant chapter. 3.1 RE SPECIFIC ISUES RE projects are different from other projects in the energy sector, first because of the cost element. RE Projects are characterized by high upfront costs which cover the aspects of development and investment, while maintaining low running costs for the project after commissioning. It is this nature that makes RE unique especially in regard to the financing aspect since many sponsors would not have the initial moneys to fully invest in the projects hence
34

seeking debt. Another reason for the high costs is that most RETs are still in the cost reduction stage and therefore have not yet settled at low market prices; however, how soon this happens is dependent on how fast RE is embraced at a global scale. In Uganda, most if not all RE projects have relied on more debt than equity in their financing. The capital intensive nature of RE projects makes them very sensitive to the conditions of capital cost financing hence the need to carefully structure the projects to take care of any contingencies. RE being quite novel in most areas and not having reached its full development potential even in the developed world means there is insufficient data for prudent project analysis. This problem is accentuated by a lack of accurate data on the fuel supply side.85 Much of the fuel in RE comes from nature which fuels could be in the form of wind, sunshine or water among others. These sources all pose unreliability issues because of their nature aspect i.e. being uncontrollable by man. This makes RE unique in that the fuel element is unpredictable and the arising risk should be adequately dealt with and managed in the structuring of the project if the project is to be made bankable. The risk profile of RE is difficult with an elevated ratio of high risk factors or unclear risk.86 This is due to uncertainty in regard to certain factors such as fuel source and a lack of control of such essential factors as fuel which in turn lead to problems in determining projected output thus affecting cash flow projections yet many financiers would want to see a good projected cash flow before financing a project. This aspect makes structuring RE projects even more complex than other ordinary projects and also highlights the need for innovative financing. Uncertainty can be dealt with by the use of proper feasibility studies and employment of adequate risk mitigation tools. Geothermal in the African Rift Valley has benefitted from a $18 million PPP arrangement called African Rift Valley Geothermal Development Facility (ARGeo) where UNEP and WB through the GEF are financing the feasibility studies for geothermal power generation in the rift valley as well as recommending appropriate technology to ensure lower costs of production than would ordinarily be the case, with the ultimate objective of underwriting risks of drilling in the countries of the Great Rift Valley.
85

Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p 4 86 ibid

35

Most if not all RE projects have a life span spread over a long period of time and are therefore exposed to risk for too long. With this high risk exposure period, the risk management expenses increase thus increasing the cost of the project. This is one of the reasons RE projects are expensive and require a lot in terms of risk mitigation by the parties to the project. RE finance differs for the different types of RE technologies and is even more segmented by the type of the debtor and the size of the projects. Project finance is used for large RE projects, corporate finance for small on-grid RE projects, and consumer and microfinance for small offgrid RE projects.87 Below is a table showing the general investment cost and risk element for different sizes of different RE projects. Table 5: The general investment cost and risk element for the different sizes of RE projects

Source: "Financing Renewable Energy-Instruments, Strategies, Practice Approaches"88

87

Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.6 88 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38 (Kfw Bankengruppe, Group Communications,

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3.2 RISK IN RE In order to successfully develop RE projects, risk has to be adequately and properly managed so as to be able to have well structured bankable projects that are competitive on the market and appeal to prospective risk sensitive financiers so as to easily attract finance. However, RE projects are very risky because of the high technological and resource risk involved, not competitive per se because of the economics involved and entail a more complex financing and operational structure than ordinary projects. This is all based on the premises that each and every factor of a project has an element of uncertainty which poses a threat to the success of the project and the risks have to be undertaken by some party either willingly or unwillingly with or without a premium in return.89 RE projects present the following risks as common to the RE sector;
i) Fuel Supply Risk-This is the risk that the fuel (source of energy) which could be wind,

water, sunshine or feedstock for biofuels and co-generation among others, will be unreliable consequently leading to the projects inability to generate energy in a manner that is predictable and dependable leading to a distortion of the cash flow and subsequently the payback schedule. Many of these projects rely on the supply of nature for fuel without a chance of substitution when the fuel source fails, hence its importance in RE projects. With Ugandas case, hydro is the main source of power and faces large hydrological risks due to the effects of climate change. This hydrological risk is a large concern for financiers who prefer90 that the government undertakes such risk.
ii) Demand Risk- This is the risk that the energy produced by a project will not be needed

and as such will not be bought as anticipated or predicted by the projections. This risk is very high in rural settings and hence poses a very big challenge for financing RE in
Frankfurt am Main, December 2005) p.19 89 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.23 90 ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.29

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rural areas and developing economies. This risk is also known as market risk and is addressed as mentioned earlier in the paper by way of issuance of payment guarantees by the state and in the case of Uganda, interconnection of power grids in the entire country and East African market.
iii) There also exist macroeconomic risks which risks arise as a result of changes in the

wider national economic conditions and include issues such as inflation, currency devaluation and increased interest rates among others. In circumstances where the state is involved, this risk is borne by the state because of its ability and capacity to control such risks, which makes the state the best party to handle such risk.
iv) Regulatory Risk poses problems for many RE projects and attempts to highlight the

uncertainty that the sector faces. This is the risk that the government interferes in the regulatory process and future laws and regulations when reviewed or changed will alter the benefits or burdens to either party. This is usually managed by way of contract through a stabilisation clause and the risk is borne by the state, which has the means and capacity to control and manage such risk. Since RE is of utmost importance and high on the political agenda of all countries, it is prone to be affected by politics hence its high political and regulatory risk profile.
v) Performance Risk is the risk that the generating plant will not operate in accordance

with the prescribed requirements in terms of time and quantity. This risk is usually allocated to the equipment supplier who gives a performance guarantee.
vi) Political Risk is another of the more important risks faced by RE projects especially in

developing countries with weak democracies and a propensity, however low, to convertibility, expropriation and political violence among others. By its very nature, this risk is allocated to the government together with the project developer obtaining political risk guarantees.
vii) Force Majeure is the risk that unforeseeable circumstances out of the control of the

parties to the project will occur and either renders the project worthless or unable to perform to expectations. This risk is usually dealt with by way of force majeure clause and insurance. The insurer undertakes this risk, because of its very nature and
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in most circumstances, the insurer is in the best placed position to effectively manage and mitigate the force majeure risk.
viii)

Environmental Risk is the financial risk stemming from both existing environmental regulations and the uncertainty over possible future regulations. With the ever increasing global importance of environmental protection and preservation, economies are bound to regularly update their environmental laws, policies and regulations thus affecting the projects position. Stabilisation clauses do well in this regard and the state undertakes this risk in most cases, though usually because of the importance of environmental matters and the need for conformity, the terms under this are usually renegotiated to take into account any new changes.

3.2.1RISK MANAGMENT Risk management is a very important element in the deployment of RE as it influences the availability or non availability of commercial financing to the projects 91 by also determining the competitiveness and cost of RE. Risk management for RE projects and commercial investment projects may come in the form of either one or several of the following tools viz; contracts, insurance, credit enhancement instruments, alternative risk transfer instruments and reinsurance among others, which can be used to reduce the costs of the project by transferring some of the major and expensive risks away from the lenders and investors.92 Risk management is necessary to make the financial structure of any commercial project such as RE projects viable, otherwise they would require increased capital costs, more equity or the project would be unviable. RE risk management is largely reliant on nature and its random character93 thus posing special RE risks. Below is a table illustrating the typical risk allocation profile for RE Project Table 6: Specific RE Risks
91

Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.23 92 UNEP-SEFI Financial Risk Management for Renewable Energy Projects at http://www.unep.fr/energy/activities/sefi/pdf/RE_Risk_Manag.pdf p.3. These are mainly characteristic of developed and well established financial markets, hence may not all be available to be effectively employed in developing countries with shallow undeveloped markets. 93 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.25

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Renewable energy types Geothermal

Key challenges Drilling expenses an associated risks Exploration risks Critical component failures such as pumps breakdowns

Solar thermal Hydro power

Technological risks as project sizes increase Flooding Annual resource variability

Wind power

High upfront costs Critical component failures Wind resource variability Offshore cable laying

Biomass

Resource price variability Environmental liabilities associated with fuel handling and storage

Biogas

Resource risk

Source: UNEP Financial risk management instruments for renewable energy projects, Summary document 2004 Insurance is the typical risk management tool and requires a certain amount of accumulated experience while only becoming available when technology reaches a certain maturity. However, for the case of RE, other standard risks may not be covered by insurance, due to a lack of a general interest, in principle, to deal with RE under the concrete circumstances.94 It is noteworthy that insurance, though included under financial risk management tools, is actually a financial compensation and not a protection against the damage and loss that could occur against a project.95 There are various categories of insurance for different risk elements.
94 95

Ibid p.26 ibid p.28

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Credit risk insurance is utilised to protect manufacturers, merchants and other suppliers of goods and services from non payment by their customers and clients who have been supplied with credit facilities. It can also be used effectively, in RE, to allocate risks among various parties since it allows for the transfer of risks to a professional risk taker ultimately lowering the financial risk profile of the project.96 Under this, the risks that would benefit from the insurance are commercial which include bankruptcy, insolvency, breach of contract, refusal to pay among others and political which include expropriation, confiscation, nationalisation, exchange rate inconvertibility, currency transfers and export /import embargoes among others. This credit insurance can be offered by either private entities or public entities with private entities offering flexibility, high discretionary credit limits, economic as opposed to political motivation, non requirement of domestic content products and low buyer underwriting percentage.97 This private credit insurance is scarce generally but more readily available in developing countries.98 Another category is political risk insurance99 which is utilised to take care of political risk concerns. It comes in three classic types namely coverage offering protection against restrictions on the transfer and convertibility of currency, damage to project assets as a result of political violence, and expropriation of project assets. The other type offers coverage against certain changes in the legal and regulatory regime directly negatively affecting the project in issue through creeping expropriation or even breach of contract by a host state. This category of insurance is mainly offered by four groups of which three are considered major. They include MIGA, OPIC, export credit agencies and private insurers. Political risk insurance provision by the different highlighted players in the market is dependent on several factors such as the host country of the project, the projects ability to comply with certain environmental and social standards such as the equity principles among others. IN Africa ATI is also offering the same.

96 97

ibid. A lowered financial risk profile increases the projects chances of being financed. ibid p.29 98 ibid 99 This can be used to give the project an investment grade rating even in situations where the issuer countrys foreign currency rating is sub or marginal investment grade.

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The responsibility of the state in ensuring the achievement of a low political risk profile cannot be underscored.100 One of the ways is by ensuring that long term clear and precise policies and laws are put in place for the RE sector at large so as to create predictability and reliability. This would go a long way in curtailing the perceived and real political risk common to developing countries. Partial Risk Guarantees are designed to mitigate the risks of sovereign contractual obligations or long maturity loans that private lenders are not equipped to evaluate or will not bear in developing countries.101 They have been used with hydro projects, and much as they are an instrument used to mitigate project risks, they can also be used to enhance credit worthiness, provide additional leverage with government and encourage risk sharing. They are typically provided by multilateral agencies such as MIGA and as their name suggests, effectively cover only the parts of the financing which they are specifically designed to cover such as risks concerned with rule of law, licences, termination amounts, regulatory frameworks, and interference in arbitration process, expropriation and rights of way.102 Partial political risk guarantees are used to cover creditors for specified sovereign risks that may arise from a governments default on contractual obligations, or the occurrence of certain force majeure events of a political nature.103 This tool has been used in the Bujagali power project in Uganda. A partial credit risk guarantee on the other hand covers creditors in circumstances where there is default and it provides cover up to a certain capped amount such as 40 percent of the initial principal, irrespective of the cause of the default.104 These are increasingly being used to manage currency risk and raise finance through facilitating local currency financing. UECCC provides partial risk guarantees to small hydro projects of up to 1MW under the PSP Hydro joint initiative and are due to expand the facility to bigger projects as their capitalisation is increased.

100

ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.33 101 UNEP-SEFI Financial Risk Management for Renewable Energy Projects at http://www.unep.fr/energy/activities/sefi/pdf/RE_Risk_Manag.pdf p.37 102 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.30 103 UNEP-SEFI Financial Risk Management for Renewable Energy Projects at http://www.unep.fr/energy/activities/sefi/pdf/RE_Risk_Manag.pdf p.37 104 ibid p.37

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Another type of risk management tool is the weather insurance or weather derivatives105 which are used to hedge or protect against weather related damage in weather sensitive sectors such as RE and agriculture. This tool is increasingly being offered under a structured finance package or quanto hedges that may include currency and power derivatives.106 Much as this tool has experienced a lot of trade in temperature related derivatives, it is also very popular in wind projects because of the substantial record wind power has, thus making it possible to calculate risks. This tool can help manage volume risks that cannot be managed in any other way so as to realise projects with a raised return on equity, higher gearing and reduced cost of capital.107 These weather derivatives and weather insurance tools are scarce in developing countries, however the Global Weather Risk Facility (GWRF) is working towards making these tools available to developing countries as well. Since weather is a part of most RE projects, the cash flow streams of these projects are highly dependent on effective management of the weather risk which risk entails variability in wind, precipitation and temperature.108 This effective management in turn creates financial certainty which in turn makes the project more bankable. Besides insurance, the capital and financial markets also offer other financial risk management tools which are generally quite expensive, complex and complicated and are essentially used to manage structural challenges posed by different projects. Contingent Capital is used to ensure that funds committed to the risk seller are available on demand i.e. whenever a loss event occurs. It is an appropriate tool that promotion agencies could use to cover the risk that would otherwise have deterred a private investor from investing funds in the RE project. Pledge of shares for start-up capital is necessary to secure an underlying debt obligation, where a private company may require taking over the shares of another in the event of default in the companys obligations. It works best as a collateral instrument especially in instances where the
105

A general guide in regard to derivatives is that, the more transparent a product, the cheaper it will be to use. This is why it is important to reduce the information gap in the sector. Cheaper weather satellite systems are increasingly evolving in various parts of the world and would go a long way in creating more predictable weather profiles at a cheaper cost. 106 UNEP-SEFI Financial Risk Management for Renewable Energy Projects http://www.unep.fr/energy/activities/sefi/pdf/RE_Risk_Manag.pdf p.33 107 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.33 108 UNEP-SEFI Financial Risk Management for Renewable Energy Projects at http://www.unep.fr/energy/activities/sefi/pdf/RE_Risk_Manag.pdf p.31

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company structure and company laws are quite clear amidst unclear, risky and complex land, property rights and mortgage laws. Exchange risk instruments come mainly in the form of a SWAP, which is an agreement between two counterparties. The objective of the agreement is to exchange one thing with financial value for another thing with financial value as well. In instances of exchange risk, cross currency SWAPs allow for, the exchange of principal amounts of money in different currencies between two parties, typically the off taker and the project sponsor, the payment of interest based on the exchanged amounts over a certain determined time frame and the re-exchange of the principle amounts at maturity.109 This instrument is available for the more advanced financial markets and is therefore lacking in developing countries, however it is an effective and reasonably priced, exchange risk, management tool. The developing countries are thus left with fixed exchange rates, exchange rate guarantees, public sector lending in local currency, escrow accounts, liquidity facilities dedicated to risk mitigation such as standby credit facilities for devaluation, regulatory risk mitigation, inflation index and foreign exchange index among others.110 Securitization of credits is a financing technique that involves transferring the risk of loans to assets into marketed assets. It is a process that involves the originator pooling a number of roughly similar assets which are sold to an SPV which in turn issues securities which are sold in either public or private placements with the help of a banking consortium.111 Credit enhancement through the involvement of reputable official lenders and risk managers such as IFC, WB, MIGA and other bilateral insurers could greatly boost the credit ratings of a project by reducing the perceived credit and political risk a stigma a number of developing countries deal with regularly. This tool has proven quite successful in attracting a lot of FDI into developing countries.112

109

Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.35 110 Ibid p.37 111 Ibid. The SPV is a trust or a corporation with the sole function of holding these assets. 112 UNEP-SEFI, Financial Risk Management Instruments for Renewable Energy Projects at http://www.unep.fr/energy/activities/sefi/pdf/RE_Risk_Manag.pdf p.19

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All these risk management tools are put together in the PPA and IA as the foremost risk management tool which plays a very crucial role in making the project bankable as several financiers would want to see a long term PPA preferably with a take or pay clause before they can approve funding. The terms of the PPA would need a skill in drafting and structuring for the entire project, if the project were to become bankable. 3.3 RE IN RURAL ELECTRIFICTATION RE and Rural Electrification, as mentioned earlier, cannot be separated as RE is a subordinated part of the overall strategy for financing and organizing rural electrifications. 113 The rural areas in most if not all developing countries require a major boost in the form of special consideration or what most may be referred to as affirmative action to ensure that they get electrified within reasonable time. Ugandas Rural Electrification Strategy and Plan 2001-2010 is the program that seeks to achieve rural electrification in Uganda. This strategy recognizes the role played by energy in the socio-economic development of the country especially its role as an investment catalyst. It constitutes a framework for development of the electrification process. The framework parameters are; i) the broad national strategy for poverty eradication and development ii) the national energy policy and iii) The power strategic plan. This strategy has its main result objective being the attainment of a rural electrification rate of 10% by the year 2010, which if translated to numbers would imply having at least 400,000 new rural consumers being served114. A lot has been achieved in this light with the achievements realised through the use of various strategies put in place and having the objective of overcoming the major barriers to rural electrification.
113

Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDF Dokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38 (Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.7 114 REA Overview, at http://www.rea.or.ug/?p=site&s=2&pg=2 It also has a vision to have all areas in the country have access to electricity by the year 2035. It is estimated that, of this 10% increase in coverage, 15% of the serviced households increase will come from higher connections to the existing grids outside of the urban triangle, 25% from isolated grids, 20% from photovoltaic solar systems and 40% from extension of the interconnected grid.

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The major barriers to rural electrification generally are: i) The transmission grid is usually too far off from the rural areas. ii) Several developing economies lack proper and workable incentives to encourage private investment in rural electrification iii) The high cost of RE technologies is a major deterrent yet still iv) There also exists a dearth in financing for rural electrification because of its complex nature and v) Most of the rural areas would require decentralised energy systems in the form of isolated/independent grids which are too expensive to set up and maintain especially in light of
vi) The low ability of most rural economies to sustain a power system without any form of

subsidy.115 These are the major but do not represent an exhaustive list of challenges to RE development especially in rural settings. Rural settings present a myriad of challenges, and these include the low population density of low income earners which directly translates into low consumption levels, the difficult terrain in rural areas among others which all make it more costly and difficult to implement rural electrification schemes since long distances for connection and transmission lead to greater electricity losses, and more expensive equipment maintenance and customer support which factors all call for the requirement of subsidies in order to make them financially viable.116 This part of the discussion is more concerned with the financing aspect of RE in rural electrification and will thus concentrate on the same. It is notable that there exists a very big financing challenge for RE in rural electrification, yet the promotion of RE is a very important aspect of most if not all rural electrification strategies, more especially in Uganda where there exists an abundance of RE resources. RE in rural areas would
115 116

This is the major reason why private finance is almost impossible to obtain in circumstances where there are no subsidies Ray Tomkins, Extending Rural Electrification-A survey of innovative schemes at rru.worldbank.org/Documents/OBAbook/10ch5.pdf

p.2

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mainly fall under the off-grid category which also comprises stand alone generation which are in most cases isolated. This isolation coupled with the other challenges such as the lack of a viable sustainable market among others, makes rural electrification commercially unviable hence unattractive to the private sector. This situation leaves the government and donors with the task of ensuring the implementation of rural electrification programs, which creates different financing dynamics since public moneys are involved.117 Developing countries such as Uganda are still working hard to achieve rural electrification under their national electrification drives, while some other developed countries are comfortably electrified. RE development in rural areas poses a different set of challenges from RE development in urban areas and hence financing challenges are also different. The difference in dynamics is recognised by S.63 of The Electricity Act118, which spells out the governments rural electrification strategy, which in summary is aimed at the government supporting the provision of rural electrification programs which programs attract both public and private sector participation with the objective of achieving equitable regional electricity distribution and access, grid expansion and off-grid solutions promotion, stimulation of innovation within suppliers and the maximization of social, economic and environmental benefits of the rural electrification subsidies.119 In financing RE for main-grid and rural electrification applications, reducing and minimizing the upfront costs of project finance while still ensuring the financial sustainability of the RE generators during operation respectively, are the key financing challenges.120 Since the sizes of RE technologies in rural electrification are smaller than in ordinary bulk power markets, the unit cost per MW of power, in project development and implementation is higher in

117

Public moneys have a totally different financing dimension from private moneys because of the difference in the way public and private sector approach investment. Public moneys would usually want to satisfy socio-economic and political objectives whereas private moneys often times look for a good ROI 118 Electricity Act, 1999, Cap 145, Laws of Uganda 119 MOEMD, The government of Uganda, Rural electrification strategy and plan covering the period 2001 to 2010 at www.energyinstug.org/...com.../file,Others%7CRural+E+Plan.pdf/ p.10 120 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.20

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Rural Electrification settings.121 Rural electrification power markets are commercially unviable and often times non commercial, and for this reason, subsidies as a cost recovery system, play a big role in ensuring that social equity is promoted. However, in the bulk power sector, subsidies are unacceptable as they distort the markets with regulatory failure likely to arise in financially weak sectors. The role of subsidies in financing RE in rural electrification is considered in light of how much in electrification access can be created by the available subsidy amount, more than, whether the subsidy is effective.122 This is because of the need to create a sustainable financing model that will address the concerns of the financiers first and foremost while also addressing the needs of the project sponsors in the short and long run. However, on the side of the government and international development partners, there is a temptation to have the effectiveness of the subsidy as the first and foremost concern because of the social impact function and responsibility that they often champion. Subsidies for rural electrification in Uganda come from donor support and a portion of the bulk power transmission levy under UETCL. The West Nile Rural Electrification Company (WENRECO) power project123 received subsidies worth $8.2m which subsidies were provided under the Energy for Rural Electrification Project. However, these subsidies were made available only for the benefit of the HFO plant in the form of fuel. With three categories of projects under the rural electrification strategy i.e. grid extension, mini grids and PV, it is easy to see how RE fits into all these categories, however, in light of the set up of rural areas, there is no best solution, rather, each community or area will have a solution that works well for it with each project category presenting its own challenges and resulting solutions. Under grid extension projects, the transmission grid is extended to cover new rural areas that were erstwhile unconnected and presents the least cost solution, however only as far as the volume and value of demand would justify the cost of the new transmission lines. The economics and financials of most rural areas in Uganda do not justify extension of the transmission system to these areas, however the national social and economic cost that the country would have to bear as a result of the non electrification of some of these areas, is reason enough to justify the
121 122

ibid supra 123 The WENRECO off grid power project is complex as it involves the provision of HFO Power in the interim pending the completion of the hydro power plant.

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extension of transmission grid lines to these economically unviable rural areas. This is why the government would most times accept to bear the cost of transmission by creating policy which allows for cross subsidies on the transmission levy between the non-grid connected rural areas and the grid connected bulk transmission viable market areas such as the urban areas, among others. With these cross subsidies, and the connection to the national transmission grid, a new market is created which makes power projects including grid connected RE power projects in rural areas even more bankable. For areas where demand is very dismal and the distance (also read cost) to connect to the grid is very high, a mini-grid project offers a very good cost effective solution especially for relatively concentrated areas such as towns, industrial estates, large facilities, etc. Bank of Uganda, the Uganda Central Bank manages the Energy for Rural Transformation Refinance Fund (ERTRF), which forms the basis of the loan component for the Energy for Rural Transformation (ERT) program, through commercial banks. It has been working on developing a financial intermediation for long term loan facilities for rural electrification124 to attempt to solve the problem of lack of long term finance for the sector. This initiative has come in the form of the UECCC Ltd which is expected to solve this financing problem that has hindered RE development in the country for a very long time. 3.4 GENERAL FINANCING OPTIONS There exist several financing options for RE, with both the public sector and the commercial private sector also offering a wide variety of instruments for financing and risk coverage which could be used for RET finance.125 In financing RE projects, it is imperative that the parties to the project fully appreciate that the costs, of producing electric power, while utilizing RETs, are very sensitive to financing terms hence the need to structure the financing package adequately. 126 The RE sector especially in developing countries has project promoters and investors with limited experience and track records in development of RE projects,127yet again, despite the different sizes of investment, the costs are generally higher and are all characterized by high upfront costs,
124 125

MOEMD, ERT Fact sheet p.1 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p. 13 126 ibid 127 Limited track record due to a general lack of successful RE projects save for the hydro aspect in countries such as Uganda

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yet the project promoters have very limited capital funds, be it credit or equity, hence opting to access high amounts of external financing from advanced and developed financial markets at favourable interest and maturity rates with the project cash flows acting as collateral for the loan. This painted picture is characteristic of project finance which is the most popular financing model for power projects and RE is no exception.128 There are several financing routes for the developers consideration and majorly include; i. Use of personal financial reserves which could also include support from friends and business associates. For big projects, this route can only be used to meet the required minimum equity threshold for the financial structure of the project, however for small projects; this route can be used to finance the entire project. In Uganda, it is unlikely that this route can be effectively harnessed mainly because of the low levels of capitalisation amongst the population and the long term period of investment before they can start earning, amidst several different short term return investment opportunities.

ii.

The use of bank loans that are secured against the developers assets, which falls under the category of corporate finance. This option would thus require a developer with adequate collateral and good financial reputation with their bankers. It however increases exposure of the developers core business to the risks associated with and emanating from the project. In Uganda, this has been used for projects such as co-generation in Kakira and Kinyara sugar works mainly because the co-generation is an extension of the core business of sugar production, however, if its to start from scratch as an independent project, it becomes very expensive to rely on corporate finance to develop power plants.

iii.

Co-development of the project with joint venture partners who are financially strong and more readily able to raise finance is another option and popular especially in instances where the initial developer wants to build a good reputation profile for the project. These joint venture partners would often times be those who have experience in the project and have the ability to raise finance from several sources as and whenever required. These joint venture
128

It also sets a benchmark of checking how much the local financial system can accommodate financing of such projects with available funds and instruments. A lack of adequate financial instruments is the major undoing of the financial systems in most developing countries.

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relationships result into a joint venture which often times is a separate special purpose vehicle. This has been used in the recent development of the 250mw Bujagali Dam by Bujagali Energy Limited which is a joint venture between IPS129 and Sithe Global Power LLC.130 This consortium of developers together with the Government of Uganda has provided equity to the tune of US $ 180M which is just a fraction of the entire project cost.
iv.

Use of bank loans secured against the project assets and future cash flows also known as limited recourse project financing which is the most popular route for power projects is another option. Under this, some guarantees may be necessary especially from the state among others. This has been used in majority of power development projects in Uganda because of its appropriateness to power project development.

v.

Leasing is also a very good option that would work well for RE however it is not common in developing countries for lack of long term lease facilities. Under it, the lessee uses assets financed and owned by the lessor for a consideration in the form of regular payments to the lessor. This has not been used much in power project development because of the lack of a mature leasing market in the country. However, Development Finance Company of Uganda (DFCU) and the Shell Foundation have capitalised the Uganda Energy Fund for this purpose. The above together with some major finance categories (sources of project capital) which present a major component of the financing structure are discussed in detail below. 3.4.1 Debt Debt financing usually takes the biggest part of the financing profile for project financing of power projects, with no exception to RE projects. Debt is generally lower risk than equity and the most highly structured component of the financing. They are generally structured such that the lender will get first priority on the returns of the investment or even at disposition, leaving the equity investors to be taken care of after. The challenge in power, leave alone RE, is packaging the debt in such a way that provides adequate assurance that the loan will be paid back in a timely manner which is the lenders risk management assurance hence ensuring that the risk
129 130

IPS is the Infrastructure division of the Aga Khan Fund for Economic Development This is an affiliate of the Blackstone Group which is a private equity firm with the ability to easily raise large finance on request.

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is brought within levels acceptable to the lender.131 Debt financing is characterized by fixed interest rates and strict repayment schedules which two issues are presented in various ways dependant on the source of finance.132 Project debt is usually supplied by institutional investors who are usually, either one bank, or a syndicate of banks. Just like is typical of PF, they lend against the cash flow of the project.133 Instead of relying on only bank loans, the project could also raise some debt financing from the issue of bonds on the bond market. Usually it is institutional investors who would take up most if not all of the bond on sale. These definitely require mature financial markets, which factor poses a great hindrance to many of the capital and finance markets of developing countries. These developing countries have capital and financial markets that are not liquid enough hence they cannot be fully relied on as a reliable source of project debt. In Uganda, the bond markets are short term in nature and usually do not exceed five years, which period is way too short for power projects. In any case, most of the players on the bond market are institutional investors who are conservative and traditional in their approach towards investment in projects with only very reputable and proven institutions bond requests being oversubscribed. With the liberalisation of the pension fund sector in Uganda and establishment of the East African Common Market, the capital and bond markets are expected to receive extra capitalisation which will greatly contribute to solving the problem of lack of capitalised and developed financial and capital markets. The term of the loans are dependent on government guarantees, certainty of project cash flows and the rate at which the banks borrow money.134 Project debt falls under the following categories; Project level debt which is also known as senior secured debt is debt that is secured by a lien on the project. The project forms the collateral and is the most senior element in the capital structure.135 This category of debt has been used in the structuring of several projects in Uganda
131

Edward. D. Einowski et al, Chapter Five, The Law of Lava, Penciling out: Project Finance for Geothermal Power Projects, (Stoel Rives LLP, 2009) P.1 132 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.16 133 US PREF, Renewable Energy Finance Fundamentals at www.uspref.org/.../USPREF_Renewable%20Energy%20Finance %20Fundamentals%20v2.1.pdf p3 134 ibid 135 DTI, DTI New & Renewable Energy Program, Financing Renewable Energy projects: A guide for developers at www.berr.gov.uk/files/file15118.pdf p.5 Such debt can also be secured by way of levered lease

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with the biggest being the Bujagali Power Project with project level debt worth $136m by IFC, EIB, AfDB, German DEG/KFW and the Netherlands Development Finance Company among others. In several other power plants, multilateral development institutions provide this project level debt such as was the case with Buseruka Power plant in Western Uganda promoted by Hydromax which received $6m as project level debt from the Preferential Trade Area (PTA) Bank, $9m from AfDB. In another project, Bugoye power project, the Emerging Africa Infrastructure Fund Ltd (EAIF) provided purely loan financing of senior debt worth $14m for the 13mw $35m project in Kasese, Western Uganda that was commissioned in 2009. 136 The EAIF also provided senior debt of $14m to the 18mw Mpanga power project being developed by the US based renewable firm Asia Energy Management Systems (SAEMS), while in the 6.5mw Ishasha power plant, the IFC provided $4m of project level debt. Another category is Holding company debt, which is incurred by the borrowing project sponsors, however, the cash they expect to get from the projects they own, is what is used as collateral for the borrowing. Such debt is attractive especially to large sponsors and utilities who can borrow at the corporate level at low interest rates, a factor which also favours such institutional investors even in Uganda where they can benefit from low interest rates when they borrow at the corporate level. Hydromax in the Buseruka power project obtained some form of holding company debt to contribute to the $8m equity contribution to the project. Construction debt is another category which is arranged by sponsors through a bank loan to fund the construction of the project since construction risk is unpopular among investors such as term lenders and project equity investors who would usually be more willing to spend once the project is up and generating income. Investors under this arrangement are also prone to mezzanine financing after the construction phase has been dealt with. Loan guarantees are also an important category of debt that is not so common especially in RE projects. These can either be used for project level and holding company level debt categories. Under this, the responsible government department guarantees a loan up to a certain high percentage which percentage is usually more than 50% of the project cost. 137 Under this category,
136 137

http://allafrica.com/stories/200811102627.html In the US, the Department of Energy is the guarantor and offers loan guarantees of up to 80% of the project debt in circumstances where the banks are willing to lend to the project with its risk profile. Here the lender bears the 20% unguaranteed risk. However where the risk profile is unattractive especially due to technological risk issues, the government will not guarantee but actually issue loans to the prospective investors.

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for unattractive project profiles such as those of new unproven technology, government may provide the loan directly however, for those with profiles that do not have a problem with private financiers; the government offers the said guarantee. Such a system could work as well in developing countries, since the concept involves government substituting the creditworthiness of the sponsor for its own creditworthiness. It could work well with governments that are creditworthy. Uganda has an energy fund whose funds are to be used to support investment in the energy sector. The fund is currently undercapitalised and hence cannot fully support investment in the sector. Further capitalization of the fund would serve various categories such as RE, conventional fossil fuel, etc for purposes of direct investment, offering guarantees and loans in the respective categories among others and will also serve in ensuring promotion of energy projects. The fund will be used to meet start up costs and to expedite implementation of energy projects138 especially the stages that may not readily attract investment capital. This capitalization of the Energy Fund could also come from donor support, internal collections, tariff subsidies, as well as annual budgetary contributions as has been the case save for in the 2010/2011 national budget where the Energy Fund contributions were conspicuously absent. Mezzanine Finance is a mixed debt category, with capital attributes, that falls in the subordinated level i.e. below the main debt in terms of priority of payment or in liquidation with its principle and interest paid only after sorting out the interest and principle of the senior debt. It is a higher risk loan as compared to other ordinary loans hence the returns are expected to be high, a factor which explains the compensation these loans receive through participation in the project profit and loss sharing. This high risk element presents problems in areas where the risk profile139 is very high such as in developing countries and rural areas in particular hence deterring such potential private investors who are usually on the lookout for high risk in favourably less risk profile areas, and as if to add salt to injury, RETs are not on their own favourable attractors of credit because of their novelty and unproven record in technology, which factors raise pertinent issues in regard to high technological risks. Mezzanine debt has been noted to be employed in circumstances where the prospective financier does not want to bear the initial project risks such as construction and development risk and would thus come in after the development or construction phase has been successfully implemented. This arrangement has
138 139

Uganda National Development Plan 2010/11-2014/15 p.55 Especially credit risk

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been noted in the Bugoye power project where one prospective financier agreed to put in mezzanine finance only after the construction phase has been successful.140 3.4.2 Equity Available equity for RE projects from the project promoters is usually minimal and comes in the form of direct investment of either personal finance resources, or as third party capital inputs by venture capitalists or other interested investors and this is mainly due to the requirement by prospective debt financiers to have a certain minimum amount of equity already availed to projects they have to lend to.141 This is a form of risk management, which also demonstrates a commitment by the project promoter to the project. With a minimum equity ratio of 20%142, the project developers have a big challenge in raising the said equity amounts to contribute to the whole financing package on their own, hence the need to attract additional equity investors who will share in the benefits that accrue characteristic to equity investors. 143 In Uganda, generally equity ranges from 20%-30% as can be observed in the various power projects such as WENRECO where equity was $3m, Bugoye $8m and in Bujagali $180m. In the RE sector and particularly in developing countries, the ROI for RE projects is lower than the 50%-60% target threshold usually preferred by venture capitalists which factor explains a lack of enthusiasm by private venture capital to invest in RE projects. This low ROI is also complemented by long payback periods with limited public exit routes, posing a real deterrent to private capital investment in equity for RE projects.144 In areas where the growth of the sector is promising and steady, alternative fund managers usually offer a lifeline in the form of finance to projects which meet a minimum 20% IRR, with a minimum investment of 5-10 million pounds and ability to fully recover input and profits within a maximum 10-15 year period. 145
140 141

This was for purposes of avoiding to deal with the construction risk. Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) pg 14 142 This is the usual industry standard, however each project presents its own financing challenges hence the ratio can change form project to project 143 Such benefits include the potential for high unbounded returns from the project which is on the other hand accompanied by high risk. This explains why venture capital firm involvement may always require a high equity stake so as to maintain a high degree of control over their investments. It is however considered very expensive because it dilutes the equity for the project promoters. 144 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p. 15 145 ibid

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Characteristically this paints a typical RE project return profile that would attract a seasoned alternative equity investor. Therefore, if the developing countries such as Uganda are to attract the required private investment into projects, such a profile has to be achieved as a minimum. The advantage is that bilateral and multilateral financing institutions can still afford to lend amidst such a profile, thus explaining the large number of bilateral and multilateral financing institutions in power project financing in Uganda. Such institutions include NORFUND, WB, IFC, AfDB and PTA Bank among others. There also exist structured equity investors, who are usually institutional investors who want to efficiently use the tax benefits from their investments.146 Such investors usually have a high appetite for project risk, a levered balance sheet so that they can always offer competitive pricing for the product and most of all, a predictable tax liability.147 These benefits may be in the form of tax credits and accelerated depreciation among others, which the project developers may not utilize in the short run before the project starts making profits, and yet deferring these benefits to a future date may prove unworthy for the project developers, and for this reason such tax equity investors come in handy. These tax equity investors could be utilities or other taxpaying entities such as financial institutions, banks and insurance companies who are usually passive in the investment, and are more interested in a return and the tax benefits they can obtain from their capital investment in the project. Their levered balance sheets which put them in a better position to offer competitive pricing can also encourage low cost power from such projects, which makes them an invaluable player in the industry that should be encouraged by the government incentives through law and policy. In Uganda, this type of investors have not been seen in the financing of power projects mainly due to a lack of the type of tax incentives that would promote such structured investment. Project equity investments are highly customized and are best made through structures such as partnerships and leases which provide a mechanism to efficiently transfer tax benefits to the equity investor especially where the tax laws of a state provide for the same. Such benefits include accelerated depreciation and tax credits which could be utilized at any time depending on the tax regulations of the economy and the structure of the investment vehicle. Under
146

DTI, DTI New & Renewable Energy Program, Financing Renewable Energy projects: A guide for developers at www.berr.gov.uk/files/file15118.pdf p.3 147 Ibid. The levered balance sheet arises from the investor having different sources of business income from various projects they might posses and as such can move money freely through the company operations.

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partnerships, the sponsor and equity investor form a partnership as the investment vehicle with each partner contributing a portion of the project capital expecting to benefit and be liable in the same proportions. The other project structure that is used is the lease which is an instrument through which sponsors can sell the project to a financial institution and lease the same back so as to transfer their tax benefits148 to the leasing financial institution. In order to encourage such investors to invest in equity for projects such as RE ones, it is important that the government tax law or sector specific law, specifically provides for the tax incentives to be obtained from such investments as opposed to the current general incentives as provided for in the Income Tax Act149 and The Investment Code Act150 among others which apply to all projects generally. This ambiguous generalization of tax credits and benefits does not serve to promote investment interest in the sector as it does not provide any specific incentives for those interested in such investment. However, special provisions were given for specific power project categories151 by URA, which is a good step in the right direction and once fully publicized and extended to other power categories, will lead to an increase in investment in the sector or better still an appreciation of the incentives. 3.4.3 SALES AND LEASE BACK Project financing has developed very interesting and innovative instruments to assist in the financing and development of projects while managing risk. In developing countries, this financing option could work well as the financing institution will maintain ownership of the financed asset which potentially eliminates the need for other collateral, subsequently solving the problem of credit risk to the extent that ownership of the financed asset remains in the financier. Another reason is that, in developing countries which have financial systems that do not allow for provision of long term loan facilities by local commercial banks152, leasing presents an opportunity for these financial institutions to get into financing RE projects from the initial
148 149

The Tax benefits include tax credits and depreciation benefits Cap 340, Laws of Uganda 150 Cap 92, Laws of Uganda 151 Under the URA Domestic Taxes Practice Notes issued on 05/02/2010, supplies in the form of goods and services, to hydro power projects among others, are exempt from VAT 152 This implies that with their short term financing, these commercial banks cannot get into financing of RE projects and other long term projects at the initial project development phase.

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project development phase.153 The Uganda Energy Fund entered in to an arrangement with DFCU to offer lease facilities for energy related projects. This is at least a step towards promotion of leasing as a tool to finance expensive RETs. The power sector in Uganda is yet to realise a lease developed project under this arrangement.

CHAPTER 4: PFIS AND PPPS IN RE This chapter will introduce the concepts of Private Finance Initiatives and PPPs while highlighting their roles in power sector development. Here, the nature of the two tools
153

154

will be

Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.17 154 They will be looked at together with he risk element

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analyzed with emphasis on their possible role in encouraging general power sector development and the role the government can play in ensuring that the same tools are effectively used to encourage sector development while emphasizing the role in RE. Each of the categories will be briefly looked at highlighting the major issues associated with them with an elaborate discussion on biofuels because of their increasing influence. 4.1 FINANCING STRUCTURES There exist two different structures for financing RE projects namely Corporate Finance and Project finance with the former constituting financing of a project and the latter constituting financing for a project respectively.155 There are several factors which affect the financing decision, first from the point of whether outside financing should be sought and if so, what form or mode of financing it should be, most of all on whether limited recourse financing should be used or not. The following questions should be addressed in order to eventually determine whether to opt for limited recourse financing or on balance sheet financing which option would have subsequent ramifications on how the entire project will be developed; i) Whether the project sponsors have all the necessary financing for the project from their own resources and if so, whether they are ready to employ the same in financing the entire project ii) Whether the magnitude or size of the project is right for purposes of attracting PF lenders. This is important because there are several lenders who may not be ready and willing to finance a project where the debt component is less than a certain minimum threshold, save for special circumstances. iii) Whether the project has several developers with different financing capabilities and objectives, involved in the project iv) Whether the size of the potential financial obligation would substantially damage the financial health of the borrower, should the project go bust or fail
155

Ibid p.18

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v) Whether the project is in a non-core business segment for the developer and offering

limited exposure to the company for the benefit of financial markets and shareholders.
vi) Whether there exist any specific project risks that the developer is not comfortable with

and would want to see them off loaded onto other third parties in a structured manner.156 4.1.1 ON BALANCE SHEET FINANCING

This involves the provision of funds to an economic subject based on the balance sheet and financial performance of the borrower and is more likely to be used by sponsors who are financially strong. This is often referred to as recourse lending. This form of financing presents the debtor as liable to the lender in their personal capacities as borrowers. Such financing falls under the category of corporate finance, and is, cheap as far as the arrangement costs, legal and annual fees are concerned, easy and quick to arrange and also presents a flexible financing structure with a less tight network of contracts for risk transfer and management which also leaves the sponsors in a position where they generally accept majority of the project risk.157 The moneys involved under this category of financing are usually small, hence attempts to use it with large projects that require large sums of money renders it unviable since most of the players in the financing of large projects including RE ones, would rather work with a more tailored financing structure.158 This kind is more suited for financing small RE projects such as small scale PV, stand-alone systems and also projects for first time developers among others. Small projects would usually only attract on balance sheet financing and where there is no balance sheet to rely on, equity capital from the sponsors and other sources such as family, friends, business associates, etc will be sought. However, it is worth noting that the cost of capital for private equity is expensive and not tax efficient.159 Another way for small projects that would not attract on balance sheet financing
156

DTI, DTI New & Renewable Energy Program, Financing Renewable Energy projects: A guide for developers at www.berr.gov.uk/files/file15118.pdf p.3 157 Ibid p.6 158 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p. 18 159 DTI, DTI New & Renewable Energy Program, Financing Renewable Energy projects: A guide for developers at www.berr.gov.uk/files/file15118.pdf p.6

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due to a lack of balance sheet to rely on would be to enter into a co-development arrangement with a financially strong partner.160 In Uganda, Kinyara and Kakira Sugar have used substantial on balance sheet financing for co-generation development. Most commercial banks in the country have the skill and expertise to deal with this form of financing as it is the commonest. 4.1.2 OFF BALANCE SHEET FINANCING

On the other hand, off balance sheet or limited/non-recourse financing presents a more desirable financing option for large projects. This form of financing allows for participation by many participants and financing entities giving funds to a project and mainly relying on the project cash flows to pay back the loan, and not the creditworthiness of the borrower as is the case with corporate finance. It entails the lender being able to control the project cash and even under certain adverse situations, such as when the project is either in default or not paying according to schedule, step in and operate the project. This is the lenders collateral and is known as taking security over the projects assets and contracts.161 This financing structure allows for creation of new entities usually referred to as SPVs which imply that the new created entity is separate from its founders who have either no or limited recourse liability in regard to the SPV as far as the lender is concerned. It comes with many advantages for developing countries especially as it allows for structuring of the entire entity to provide room for creating an adequate management structure, non standardized lending conditions that are tailored to a specific project. 162 This is used for several large scale projects and in RE, resource risk issues are raised and are addressed by incorporating additional mechanisms such as contingent repayment schemes and or reserve accounts.163 For the equity investor, project financing presents an opportunity to maximize equity returns, monetization of tax financing opportunities, and movement of significant liabilities off balance sheet and protection of key assets.164

160 161

Ibid DTI, DTI New & Renewable Energy Program, Financing Renewable Energy projects: A guide for developers at www.berr.gov.uk/files/file15118.pdf p.8 Taking security or collateral can involve assignment of priority rights to the project cash flow, bonding, contractual undertakings, insurance, mortgage or fixed and floating charges over the physical assets for the project which assets are not considered the major source of security but the project cash flow and last but not least, assignment of the project contracts. 162 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) pg 18 163 ibid pg 19

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The parties usually involved in limited/non-recourse financed RET projects are several and are linked together by a network of tight contracts. The principle parties are the shareholders and lenders on one side and then the contracting parties namely fuel suppliers where necessary, equipment suppliers, construction contractors and subcontractors, power purchasers, project operators and network operators on the other side. Here below is a table showing a typical project finance structure with the network of contracts between the parties. Table 7: Typical project finance structure for RE project

PROJECT COMPANY AKA THE BORROWER

Source: US PREF, Renewable Energy Finance Fundamentals165 For RE projects, the principle skill in structuring successful limited recourse project financing is in transferring or allocating specific risk to external parties who are best able to mitigate, absorb

164

Chris Groobey et al, Project Finance Primer for Renewable Energy www.bakermckenzie.com/.../na_projectfinanceprimer_article_jun08.pdf p. 1 This is why it is called structured finance
165

Projects

at

www.uspref.org/.../USPREF_Renewable%20Energy%20Finance%20Fundamentals%20v2.1.pdf

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or manage the said risk in the most efficient manner. This is done while leaving the residual risk which is usually modest, with the developer of the project.166 Risk in the circumstances is categorized into pre and post completion risk, which are dealt with differently. These different risk categories are briefly explained below. One of the pre-completion risks involved for RE projects is the Technology risk which is the risk that the technology used will not perform to expectations. This risk in RET projects is usually transferred to the contractor or equipment supplier who is considered to be in the best position to efficiently manage the risk. This risk transfer is usually done contractually by having the contractor or equipment supplier undertake liability to pay monetary damages in the event that there is a technology performance shortfall. New technology is usually considered very high risk for the reason that it hasnt been consistently tested and for this reason, it is not popular with lenders. This technology risk is managed by way of obtaining technology performance guarantees from the technology and equipment supplier. This risk is not specific to developing countries and is considered a general risk. There is also the risk that there will be a delay in completion of the project and this is termed as completion risk. This risk is usually allocated to two parties namely the contractor and the insurer. The contractor by way of contract undertakes to be liable to pay monetary damages for delay in completion of the project. This is coupled with insurance coverage where the insurer, for an insurance policy or premium paid, undertakes to cover certain delay risks such as those due to force majeure among others. This completion risk is considered high in Uganda due to a lack of skilled contractors to develop power plants167 hence the use of foreign contractors who are more familiar with the process of power plant development. Lenders in addition to use of qualified contractors would require forms of completion guarantees to mitigate this risk.168 The other common pre-completion risk for RE projects is the capital cost overrun risk which is the risk that the estimated budgeted costs will be insufficient to complete the project and would thus require extra capital to enable the project reach completion and operation stage. This is
166

DTI, DTI New & Renewable Energy Program, Financing Renewable Energy projects: A guide for developers at www.berr.gov.uk/files/file15118.pdf p.11 167 ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.29 168 ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.7

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important since the security for the lenders is the project cash flow thus they would not let the project die before it pays off the debt. The lenders place significant reliance on the contract to ensure the project is finished on time and when finished will perform to expectations.169 The fixed price turnkey contract is the risk allocation mechanism used to manage this risk. The contractor who should be creditworthy, enters into a fixed price turnkey contract with the developer, and undertakes to accept much of the capital cost overrun risk while also providing completion cost guarantees in relation to either new technologies (equipment suppliers) or contractors who are small or less known.170 The main contractor singly guarantees the performance of other contractors and equipment suppliers so as to reduce the complexity of having to specifically delineate the performance of each of the other parties yet that could be done by the main contractor in the subcontracts. The Bujagali power project and the WENRECO power project have faced capital cost overruns in their development with the cost of Bujagali increasing from the expected $550m at the beginning of the project to over $700m.171 After completion of the project, there also exist what are termed post completion risks, the commonest in RE projects are explained below. Operating risk is the risk that the operator will not be able to efficiently operate the plant to the required expectations so the employment of an experienced O&M operator is often required by the lenders in addition to operation guarantees from the O&M operator.172 The political risk is also common and fits into the category of pre and post completion. This is mainly in relation to the investment atmosphere and the non expropriation of project assets including the project cash flow. This is usually mitigated by obtaining political risk guarantees such as MIGA from WB and Africa Trade Insurance Agency173 among others. This political risk deals with regulatory risk issues particularly political tariff setting which is perceived as high in Uganda174, among others.
169

DTI, DTI New & Renewable Energy Program, Financing Renewable Energy projects: A guide for developers at www.berr.gov.uk/files/file15118.pdf p.9 170 Ibid p.11 This contract contains completion tests and liquidated damages payable in the event that the tests are not met as scheduled. 171 The cost for Bujagali keeps on increasing and it is feared it will hit the $1bn mark, making it the most expensive hydro power project in the world. 172 ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.7 173 Ibid p.49 174 ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.28

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There is default risk by the off taker UECTCL, which is considered a bit high in Uganda and this risk should be managed by the government providing a back to back payment guarantee for payments175 due from the single off taker, UETCL. The market risk is also high; as the available market is perceived not to be able to effectively take the produced power either due to incapacity in terms of ability to pay or in terms of a lack of a general market. This issue is expected to be mitigated by the interconnection to the general East African market. 4.2 PPPs PPPs are a long term performance based approach used to procure public infrastructure and involve a lot of private sector financing and risk sharing.176 The concept of PPPs is based on joint initiatives developed, executed and managed by a public sector agency and a private sector entity, both players having common goals and individual objectives.177 The public and private sectors join forces to design, finance, build, manage and maintain infrastructure projects. PPPs are characterized by shared goals, shared or complementary resources such as financial capital, human resource, political influence, time, knowledge and expertise, and finally shared risks and benefits.178 Every project might have a different PPP approach to it with the transactional relationship and risk allocation being different for each. Since the integrated private player assumes the financial and commercial risks under a long term contract thus also mitigating public risk, these PPPs are best suited for large complex projects with managed maintenance and construction schedules. The key benefit of these partnerships is shared economies of scale for both parties, and for the partnership scheme to be successful, three important basic elements have to be fulfilled; i) The governments benefit of fulfilling a development imperative, political goal or even social need should be considered seriously. ii) The private sector benefit of generating a profitable revenue stream and or expanding market access should be taken into account.
175

ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-InvestmentsConstraints_final_23-10-2008.pdf p.33 176 PPP Canada, 2008-2009 Annual Report, at http://www.p3canada.ca/_files/file/PPP-Annual-Report_EN.pdf p.6
177

Md. Monwar Hasan Khan, The role of public private partnership in renewable energy sector at flensburg.de/sesam/upload/Asiana_Alumni/Manohar_PPP.pdf p.12 178 Ibid p.13

http://www.iim.uni-

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iii) Lastly, the consumer benefit which comes in the form of quality service delivery at

affordable less than unsubsidized market price in a normal business set up179 should also be considered. They come in several forms, the commonest of which include service contracts, delegated management contracts and construction support among others.180 Service contracts are used where the public sector wants to maintain the overall operational responsibility for a project and thus gives the private player a contract to provide a bundle of specific services which services include human and technical resources for all operational and financial aspects of project management, and maintenance of the project facilities through an O&M contract which could allow the private player to take over and operate the facilities. 181 In Ugandas power sector, these service contracts have been used in majority of the power projects with ESKOM and UMEME concessions being typical of the same. The delegated management contract is used where the public sector wishes to maintain the overall ownership of the assets but does not want to get involved in the management of the same. The public authority thus delegates the management function to a private player for a definite long term period while maintaining an oversight supervisory role. This can be done either, through an affermage of lease agreement, which gives the private player who is referred to as the operator, the responsibility to maintain and renew the existing facilities in line with the contractual terms, or though a concession. ESKOM management concession in Jinja at the UEDCL power plants of Kiira and Nalubale is a typical example of a management contract in Uganda. It is also important to note that this management contract has so far been successful. Under the concession model, the public authority will maintain strict control over the service terms while also maintaining the power to make all key decisions in regard to the applicable rates and targets for the project, with the private player being given a long term right and responsibility to manage the project and make all necessary investments.182 The concession model is quite popular in the energy industry because of the long term given to the private
179 180

Ibid p.14 Stephen Thomsen, Encouraging Public-Private Partnerships in the Utilities Sector: The Role for Development Assistance, NEPAD/OECD Investment Initiative, Imperial Resort Beach Hotel, Kama Hal, Entebbe, Uganda, 25-27 May 2005 at www.oecd.org/dataoecd/29/45/34843203.pdf p.4 181 ibid 182 Ibid p.5

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players to enable them get returns on their investment before handover of the project facilities. This model can be made to work in certain RE categories. The concessions awarded to ESKOM by UEGCL and UMEME by UEDCL are typical concession model arrangements which concessions have management and service contracts included in the whole arrangement. The most popular form is the construction support which gives the private player a chance to get involved in the design and construction phases of the infrastructure project while also sharing in some of the risks involved. It has the Build Develop Operate (BDO), Build Operate Transfer (BOT) and Build Own Operate (BOO) categories under it. Under BDO, the public authority gives the private player a fixed term within which to design, construct and operate new infrastructure. The private player does not own the infrastructure whose ownership remains in the hands of the public authority. The private player assumes all risk related to the aspects undertaken by it while also committing to an overall cost for the infrastructure development and management, and is paid a fee by the public authority in return. The other category is the BOT which has been used for several hydro power plants world over, Uganda inclusive. It involves the private player undertaking the design, financing, building and operation functions of the project. This is quite robust and is a very popular PF model, with several interlinked contracts between various players; its use in PPPs should not be underscored either. Its popularity stems from the long term periods given to allow the private player service any debts incurred for the project development and to earn a suitable return on investment. Just like in the previous category, formal ownership of the assets remains in the public authority or the government. The third category is the BOO which, as its name suggests, has the private player own the infrastructure facility while maintaining control of the project as well. This arrangement has been used for virtually all power projects in Uganda since the liberalisation in the 1990s and most of the big power plants are on BOT arrangement with the smaller ones on BOOT arrangement and all for a period of not less than 15 years which period is considered adequate for the project to have paid its debt and received a reasonable profit. In Uganda, government is involved as an investor in power projects of above 40 MW and has undertaken PPP arrangement schemes in all that fit into this category. PPPs, especially in developing countries provide a vehicle for FDI into public utilities and come in various forms ranging from physical infrastructure development, provision of social and
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health services as well as public administration.183 Because of the inadequacy of public funds to invest in physical infrastructure, developing countries such as Uganda, need to invite and facilitate greater private participation in infrastructure project development. Traditionally, financing ordinarily comes from donor assistance and domestic public finances. The challenge for the private investment in infrastructure development is that it is not financially viable from a private sector perspective especially in regard to returns on investment as well as the time frame for the returns. Generally, PPPs can be expanded with special reliance on donor aid to enhance the quality of the projects, raise profitability and reduce risks.184 PPPs therefore have an important role to play in improving on the risk profile of a project especially where a reliable donor is involved. In addition, with donors such as the world bank that do not really look at profitability but offering social-economic benefits to the recipient states, the private investor is left to enjoy much of the profit which makes erstwhile less profitable projects more profitable. The involvement of the WB in the different power projects in Uganda has boosted the projects profile and attracted the requisite financing from other financiers accordingly. PPPs therefore present a form of subsidy for private investors and this subsidy is based on several factors but mostly on the presumption that the markets are not perfect. PPPs in developing countries face several challenges, important of which include the lack of proper and developed legal and regulatory framework and capacity, political and other non-commercial risks and a lack of private rate of return for several projects with a high social rate of return. It is quite important that the reason for PPPs is known before embarking on any PPP financing arrangements.185 In Uganda, PPPs have been used for virtually all power development projects directly for those above 40 MW and indirectly through various project support mechanisms for those below 40 MW, because of the governments involvement at various levels. The reason is essentially to subsidise the private investors where necessary and to also attract private financing into the project where government does not have adequate finance for the same.

183

Stephen Thomsen, Encouraging Public-Private Partnerships in the Utilities Sector: The Role for Development Assistance, NEPAD/OECD Investment Initiative, Imperial Resort Beach Hotel, Kama Hal, Entebbe, Uganda, 25-27 May 2005 at www.oecd.org/dataoecd/29/45/34843203.pdf p.3 184 ibid 185 It could be for efficiency purpose or funding purposes depending on the circumstances of each case.

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The PPP arrangements discussed earlier emphasize the public ownership and control of the project assets. However, for commercial ventures such as RE, a lot of private control and ownership is required if private finance is to be attracted. This can be through arrangements that involve joint-ventures, Greenfield projects and divestiture and asset sale.186 Joint ventures would have both the public authority and private player jointly finance, own and operate an infrastructure project. It is done on a strictly commercial basis which makes it even more attractive to the private players who may have profit as their number one objective. Still under the joint venture, the risks and responsibilities are shared in line with the equity stake in the project and any contractual arrangements to that effect, entered into by the parties. The Bujagali power project and WENRECO have benefitted from such an arrangement with the government playing an active role as shareholder and equity contributor. Greenfield projects are new projects that are usually built and operated by a private player who undertakes to bear the commercial risks associated with the project, while other risks are either undertaken by, or shared with, the public sector. The construction categories mentioned earlier can be used under this arrangement. Most if not all power projects developed in the recent past or undergoing development have been undertaken by the private sector majorly. Governments involvement has been in undertaking certain risks such as payment default risk by the off taker through payment guarantees among others. Divestiture and asset sale is another arrangement that can attract greater private sector participation in infrastructure projects. Under this, state assets are sold to the private sector either through the direct sale of the assets themselves or through initial public offerings. The state often times remains the regulator and subsidizer of projects that the private sector deems unviable to finance. These categories could include provision of power to poor rural communities among others. It is a PPP because the state continues playing a role in the sector while the private player also plays its part as described earlier. In Uganda, the government used this category during the liberalisation period and divested and sold some of the assets of UEB to UMEME among others, so as to streamline the industry. Currently, the government of Uganda does not have much to sale as far as RE is concerned rather its involvement is more in development of new projects.
186

Stephen Thomsen, Encouraging Public-Private Partnerships in the Utilities Sector: The Role for Development Assistance, NEPAD/OECD Investment Initiative, Imperial Resort Beach Hotel, Kama Hal, Entebbe, Uganda, 25-27 May 2005 at www.oecd.org/dataoecd/29/45/34843203.pdf p.6

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All these three arrangements can be used by IPPs, however the commonest are in relation to Greenfield projects and most if not all developing countries are actually focusing on private power through IPPs as the solution to the electrification problem faced by several developing countries187 and Uganda is no exception. By government offering incentives to encourage investment in the renewable energy sector, the government is already playing a role under PPPs. These incentives could be tax free imports, subsidies, etc and serve to ensure that the service is made affordable to the consumer by removing the projects commercial cost burden from the consumer who will in turn receive an efficient and yet affordable service, and also helps the private player recover investment costs in a shorter period than would have been, had the incentives not been given 188. These PPPs can be used to bring RE to populations that hitherto did not have any power, in a shorter time due to the short time that private players require for projects to start generating income when investing their money. This in turn shifts the investment burden from the government to the private player. PPPs would work best in areas where the private sector might not ordinarily desire to invest due to the poor economics and financials that these areas such as rural areas present. The commercial risks which involve forces of demand and supply are ordinarily borne by the private player while the other risks such as legal, regulatory and political are borne by the government which is in a better position to individually handle the respective risks. However, for these PPPs to work, government has to take serious initiatives at policy level to address some issues such as establishment of a proper legal and regulatory framework and environment for PPPs to operate in, establishment of long term finance schemes for such projects, increase awareness and promote the use of PPPs by all stakeholders and encouragement of decentralized power schemes for isolated off-grid areas that are not economical to connect to the national grid, among others. Another aspect of RE financing where PPPs would work is in the development of risk mitigation tools for the sector. Since risk management is a part of the financing package, it is important that innovative risk management tools are created. However, with insurance, which is the commonest and most readily available of the risk management tools, there exists a problem of institutional inertia, which simply means that, the sector does not invest in development of new insurance
187

Much of Private Participation in power goes into generation with the transmission function being retained by the government and the distribution function being given to one private player through concessions where there are small markets. 188 On the basis of a fixed pricing structure

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tools rather in adapting the existing ones to different situations,189 partly due to a lack of big budgets for R&D, a gap the public sector could always fill. 190 This role of PPPs is seen in the ARGeo project mentioned earlier in this paper. This project is a PPP initiative which underwrites risks of drilling in the countries of Djibouti, Uganda, Kenya and Tanzania among other Great Rift Valley countries. This initiative is receiving support from the governments of Iceland and Germany among others. The UECCC is another PPP initiative where the government and multilateral development agencies work together with the private commercial banks to avail medium term financing as well as risk guarantee instruments to private sector developers in energy projects. 4.3 PARTICULAR CATEGORIES OF RE Mini hydro is in abundance in Uganda, with a potential capacity of 210mw191 which would supply the national grid and also operate as isolated grids. Mini hydro has various liability covers for it because of the general understanding of the technology involved as a result of the wide scale use of large hydro. Mini hydro is thus easier to develop in Uganda than the other categorise hence is abundance. Geothermal is a reliable RE source that produces sustainable base load power with minimal environmental impact192 and is multidisciplinary in use. Ugandas renewable energy policy also recognizes the importance of this category of RE, which has a generation potential of 450mw.193 Geothermal projects however face high upfront costs for exploration, well drilling and plant and equipment installation. The issue with management of these risks is that the underwriters and insurers always try to use the petroleum environment model that they are familiar with, yet the two activities operate in different environments. This leads to a mismatch that does not really serve the purpose of effectively managing risk. More still, geothermal projects have a long
189

UNEP-SEFI, Financial Risk Management Instruments for Renewable Energy Projects, (Words and Publications, Oxford, UK, 2004) at www.unep.fr/energy/activities/frm/pdf/statusnotemarch08.pdf p.12. insuranceforRenewables.com is an example of a PPP initiative to provide project risk insurance for developing countries especially. 190 Centre for Research in Energy Efficiency and Conservation (CREEC) is a public private partnership initiative at the Makerere Universitys Science and Technology Faculty and is involved in research and development of Energy Efficiency and Conservation 191 MOEMD, The Renewable Energy Policy for Uganda, http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY%20POLIC911-07.pdf p.42 192 Jerry R. Fisch, The Law of Lava, Just Starting Out: Leasing, Siting, and Permitting Geothermal Projects: Chapter One, Lava Law: Legal Issues in Geothermal Energy Development, Stoel Rives LLP, 2009, P.1 193 MOEMD, The Renewable Energy Policy for Uganda, http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY%20POLIC911-07.pdf p.45

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waiting period from start till the project starts generating revenues and thus a high likelihood of the project not being able to meet its debt obligations since things could terribly go wrong during the waiting period. This is the concern of most if not all financiers for geothermal projects. Drilling is a very important and vital aspect of geothermal and a lot depends on its success. Unsuccessful drilling means the project will not generate power and thus there will be no revenue made. The risk of increased costs arising from blow outs and controlling a well, restoring and or redrilling a well, and the costs of remedial measures associated with seepage and pollution are all high under operation risk and have to be managed well in order to make the financiers of the project comfortable. The exploration risk of not being able to achieve minimum economically acceptable thermal water flow rates has been covered by the public sector but it is increasingly being shared through public-private initiatives which provide insurance cover against the risk of not achieving economically acceptable flow rates. This issue is being handled through a PPP initiative ARGeo which has obtained financing to the tune of $18m for the GEF to underwrite drilling risk in the Great Rift Valley countries including Uganda. It has financed certain techniques in Kenya such as micro seismic and magneto telluric surveys which processes can achieve savings of up to $75m on a 70mw installation. In Uganda, total geothermal power potential is 450mw with the most promising geothermal sites at Katwe in Queen Elizabeth National Park, Burnaga in Semliki National Park and Kibiro all in Western Uganda. Wind is also another of the widely applied RE categories that has not attracted much interest from investors quite contrary to the situation in Kenya. In Uganda, the wind speeds of 2 to 4 m/sec are only sufficient for small scale wind power generation and specialised applications such as wind water pumps194 and irrigation systems among others. It can also be used for small industries and rural areas as the capacity is in the region between 2.5kv to 10 kV.195 The capital costs per MWh for wind produced power are relatively high for the simple reason that wind plants only produce power when the wind is blowing.196

194 195

Ibid p.49 Supra it has been used for small scale pump projects in Karamoja in the North East of the country 196 John M. Eriksson et al, The Law of Wind- Power Purchase Agreements and Environmental Attributes (Stoel Rives LLP, 2009) Ch.6, p.1

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Risk management is achieved through sharing risk with the project sponsor seeking to shift the technology risk to the turbine manufacturer and the construction contractor, the lender typically takes paramount positions in the project revenues and assets and in the process shifts the risks to the project sponsor and third parties such as the construction contractor and turbine manufacturer by getting the benefits of contractual obligations and warranties. All this is done through the use of various legal undertakings by the parties involved. These undertakings include warranties and contractual requirements for the work carried out in making the project operational and equipment, mortgages and security interests granted in the project revenues, assets and key project agreements, the work performed, guarantees for each partys obligation from creditworthy entities and the requirements for insurance cover for certain adverse risks.197 There is also the risk of delay or non completion of the project, and this is the main concern for the investors in the initial stage and they are covered by insurance policies that are comprehensive in nature covering all aspects of risk in the construction stage. After the construction stage, the operational stage is reached and it also presents its own operation risks such as turbine failure to perform completely or to perform to expectations among others. This is covered by all operational risk insurance cover. These are accompanied by warranties and guarantees from the turbine manufacturers who should be creditworthy if the warranties are to be taken seriously let alone be considered. Contractual Service Agreements are used in some parts of the developed world and involve the turbine manufacturer undertaking to repair any defects or replace any defective turbines for in exchange for earnings on every MWh of power produced. 198 Wind power has been developed on commercial scale in neighbouring Kenya due to the high wind speeds and favourable wind FITs which support commercial wind power production. Bio fuels are being promoted in Uganda mainly to feed the transport industry through provision of bio fuels to blend in diesel and gasoline, with the benefits of the same being pitted as the motivation for their promotion. Such benefits include reduction in C02 and toxic air emissions,199 greenhouse gas build up and dependence on imported fuel200
197 198

ibid

UNEP-SEFI Financial Risk Management for Renewable Energy Projects http://www.unep.fr/energy/activities/sefi/pdf/RE_Risk_Manag.pdf p.27 199 With 312 million litres of petroleum being replaced with Methyl Alcohol, a reduction of nearly one million tons of Co2 emissions will result this is based on a 25% and 60% compulsory blend with 385 million litres of gasoline and 360 million litres of diesel respectively, according to the 2010 estimates. 200 MOEMD, The Renewable Energy Policy for Uganda, http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY %20POLIC9-11-07.pdf p.38

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Like other renewable energy options, bio fuels, which usually come as either biodiesel or ethanol, also require high initial capital injection, which capital generally comes in the form of either equity or debt. Each of the categories has its own advantages and disadvantages and it is quite important that the perfect mix of funds (categories of capital) is achieved, which mix is unique for each project due to the unique nature of circumstances surrounding different projects. It is noteworthy that, equity financing can come directly from the project sponsors or investors or alternatively from other financiers as mezzanine debt among others. Debt financing on the other hand could also come from project sponsors and other financiers as well. Equity financing, obtained from investors, is generally considered to be more expensive for the project developers than the traditional debt financing obtained from lenders.201 This is due to several reasons, important of which is the resulting equity dilution that would occur, hence the need for project developers to obtain equity financing to bring their projects to fruition.202 In order for the government or the energy policy to promote renewable energy development, it is quite important to understand what the financiers of the project want. This is a vital step towards achieving bankability of a project. Providers of equity finance for a biodiesel project just like other PF projects would usually want stable and definite future earnings from the project hence the common concern with the quality of applicable intake and off-take agreements.203 This papers main focus is on financing renewable energy hence will concentrate on the legal and regulatory as well as fiscal regime elements of the biodiesel industry looking at them from the aspect of how they will affect financing of RE projects. The issue of market risk should be addressed. This market risk is the risk that the Biofuels produced will not find buyers on the market. Since Biofuels are not necessarily popular among fossil fuel traders, it is necessary that the government, by law and regulation, set a certain minimum standard for Biofuels. This standard is two way;

201 202

Edward D. Einowski et al, The Law of Biofuels-Financing your Biofuels Project, (STOEL RIVES LLP, 2008) Ch.1- pg. 1 Ibid-Equity financing for biodiesel projects is becoming less available to project developers due to two major factors, namely the food versus fuel morality debate and the lag of second generation conversion technologies, yet equity investment into upstream and plant o8ptimization developments is on the increase. 203 ibid

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i)

That a certain minimum percentage of Biofuels should be blended in all gasoline and

diesel that is imported refined and also sold at pumps and fuel depots. In Ugandas case, the percentage has been put at 20%204 and this should apply to all gasoline and diesel importers and refiners to ensure that all the gasoline and diesel traded in the country is blended with a respective bio fuel.
ii)

The second way is to have obligated parties purchase a certain minimum obligated

amount of Biofuels, which purchases and use will in turn result into RECs for these parties. RECs could work if there is a law, regulation or policy which provides for the benefits of accumulating renewable energy credits and also penalises those that do not meet a certain REC amount. These RECs should only be attributed to purchases of Biofuels and not also, those bought out rightly from other parties as is the case in USA, mainly because Uganda is still a developing country205 and if it has to benefit from biodiesel development and utilisation, such standards should be put in place at least for the start as they would provide for a boost effect towards the development of Biofuels. With these obligations, the market for Biofuels is made more or less definite hence mitigating the market risk to that extent. However, on the other side of market risk is that the producers of Biofuels may not be able to meet the market demand for Biofuels. This could to some extent go hand in hand with volume risk, since volume risk, just like market risk is two way. However, it specifically deals with risk that the producers of Biofuels will either meet the market volume demands or not. With compulsory blending of a minimum of 20% Biofuels in all fuel imported or refined in the country, an almost definite market is created which means that the amounts of bio fuels required by the market are easily predictable. Biofuels are extracted from plants whose successful growth is highly dependent on the weather or climate, of the farming area, among others. This is what we may refer to as climate/weather risk which is ordinarily borne by the producer who may obtain insurance against the changes in weather.
204 205

supra A developing country that need a boost towards the development and promotion of Biofuels, and this compulsory one sided REC source requirement could as well serve that purpose.

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However, in putting together a financing package for a Biofuels project, other risks are considered quite paramount and these are technology risk, operating risk, debt burden and accounting liabilities.206 Because of the importance of these risks in a Biofuels project, each participant fights hard to shift these risks away from themselves, which leads to the difficulty, as mentioned above, in putting together a financing package.207 Through performance warranties, the developers and investors shift the technological risk to the builder while the lender always seeks to shift these risks to the project owners by taking senior positions in the project revenues and assets, while also shifting the same risks to third parties by getting the warranties and contractual obligations of these third party participants. The ultimate purpose of all this is to enhance the prospects of the loan being repaid on schedule208, since on-schedule repayments are very important in satisfying the financing package requirements. The role of the legal adviser in this whole financing package structuring is to ensure that the desires of the parties in risk sharing among others are identified by way of negotiation and put together by way of documentation in the form of legal instruments that bind the parties. Typical in such financings are several interconnected contracts which are put together to form a contractual matrix for the whole project. Legal instruments involved have instruments such as mortgages and security interests granted in the project assets, equipment and performance warranties as well as contractual obligations for equipment and work carried out in bringing the project to the operation stage, revenue and key project agreements among others.

206 207

Edward D. Einowski et al, The Law of Biofuels-Financing your Biofuels Project, (STOEL RIVES LLP, 2008) Ch.1- pg.1 ibid 208 ibid

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CHAPTER

FIVE:

GENERAL

OBSERVATIONS,

RECOMENDATIONS

AND

CONCLUSION Chapter five will highlight general observations of the financing aspect of the and attempt to offer solutions to the problems highlighted in the previous chapters while also suggesting alternative financing mechanisms for renewable power projects in light of the hindrances identified earlier in the paper. Under the same chapter, the role of legislation and regulation in encouraging the use of PPPs, PF and other financing tools to encourage development in the sector will be considered. Framework conditions present the major hindrance towards the financing of renewable energy projects in developing countries and generally. These are determined by policy and law thats in place. The framework conditions are affected by policy and legal framework, energy sector competition & bias and financing.
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Policy and legal framework can be used as a tool to encourage RE investment and development by creating instruments that allow IPPs including those of RE to easily connect, but most especially, to sell to the common power grids irrespective of their sizes. The inability to connect to the power grids is one factor that discourages private investment in the RE sector, because without that ability, the market is diminished. This is coupled with a lack of transmission access which could either be brought about by exorbitant transmission tariffs or by a lack of enabling law that allows for transmission and third party access for generators however small, in liberalised sectors where the transmission role has been privatized and is owned by a private player who may be vertically integrated. Even in government owned transmission regimes, there may be limitations on the minimum amount of generated power to supply through the transmission system, and this poses a threat to small power project development, yet some RE systems can only generate so little. All RE projects require siting and permitting approvals, and in many cases, these approvals may have stringent qualifications attached to them, most of which stem from environmental concerns especially where environment is categorized into the broad areas of physical, social and economic. Much as the government owes a responsibility to protect its people, the role of regulation should not be to stifle business development but to encourage responsible development of the sector. Therefore win-win solutions should be developed so that even small RE producers can be allowed to develop their sites in a responsible manner. This also puts a responsibility on the developer to match up to the required standards or they have no business in the sector, which standards should not be unduly constraining implying a workable and manageable minimum threshold. Policy and law can therefore be used to make the permitting and siting process less constraining than it is in many countries and this should be taken into account when enacting the relevant laws and policies as discussed earlier in the paper. The nature of the energy sector also presents its own specific issues in regard to how framework conditions affect the development of the RE sector. Firstly, the sector benefits from a lot of low cost energy from conventional sources yet RE is generally more expensive in certain instances, this thus creates competition issues, in that RE will not be able to favourably compete on the market. Thats why subsidies and special tax regimes directed towards RE are employed in many of the power markets, however they have the negative effect of causing distortions in price
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between RE and other power sources. These disparities could subsequently lead to a failure by the market to value the public benefits of renewables or worse still lead to market failure. The price disparities could also be somewhat regularized if the environmental cost of fossil fuels was also put into account when pricing conventional energy sources that rely on fossil fuels as raw materials. This will especially be important when the country starts using gas powered plants and HFO plants with production of HF and gas from the countrys oil and gas fields, hence it should be taken into account. The core issue that affects the development of RE, after the legal and regulatory framework conditions, is the financing aspect which also in itself is taken into account when determining law and policy for sector development. A lack of adequate information on the RE sector denies market access to would be development stakeholders while keeping financiers in ignorance of what the sector provides in the form of financing opportunities, and would thus be considered unattractive. One of the issues that make RE unattractive to developers are the high risk profile it possesses, and worse still there are not many established risk management tools to cater for such risk which risk is also not necessarily commensurate to the returns on investment. The typical demand profile for RE financing is based on the fact that funds are required in order to have the project materialize and also to ensure that, with an adequate and proper financing structure, the advantages of competitiveness of RETs would increase since the cost of RE electric power are also highly sensitive to the financing terms.209 Since RE, in comparison to conventional energy, has widened the financial tasks to be solved, the financial needs of RE exist at three levels i.e. household and community group levels which need micro-credit, entrepreneurs who need long term patient capital which allows them time to develop products and services based on RE and finally investors who require reduced or shared credit risks up to a point where several track records of success and confidence in RE have been achieved210 at a wider scale.

209

Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005)p.13 210 Ibid p.7

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Some other sources of financing for small projects that could be tapped into could include utility companies interested in diversifying their portfolios into generation projects. This is common especially when the legal and regulatory framework provides for easy access to the transmission grid for all sizes of projects with favourable tariffs. However, where there are constraints to connection to the transmission grids with no favourable FITS in place, it presents problems which make it unattractive for even utilities to invest in small generation projects. In the US, utilities and other taxpaying entities are encouraged to invest in RE Generation projects by the tax incentives in place. These tax incentives include production tax credits, investment tax credits and accelerated depreciation. PTCs can encourage investment in long-life, high quality and reliable equipment and machinery since the investor in the project would benefit from Tax Credits on the production of the project for a certain long term duration fixed by the tax regulations. In the US, it is 10 years of production from the commissioning date, however it can vary from country to country but it would be important to strike a balance, by ensuring that it is not too short a period so as not to attract the requisite interest, or too long a period for government to lose out on much needed tax money. In Uganda, as mentioned, 5 year tax holidays and VAT exemptions on the project as well as import duty waivers, serve in this regard as far as tax incentives are concerned. The introduction and utilisation of Investment and Production Tax Credits would go a long way in filling the financing gap for RE in developing countries. Where ITCs are utilised, the ROI of the project, once it comes on board, is boosted by the same percentage the project receives in ITCs which makes investment in RE projects under such a tax regime even more attractive to the private sector, seeing that an ROI of say 35% can be made in the first year of operation despite the project not making profits. Such an incentive would attract private finance from investors who would otherwise have been deterred by the long lead times of such projects. Equipment suppliers and contractors may also be interested in investing in small generation projects in return for a contract to either supply equipment, or to construct among others. This is common in the developed countries and is purely a business decision. It can also be employed in developing countries such as Uganda, however the technical skills and capacities of the local contractors who are more familiar and comfortable with the local market conditions as compared

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to their international counterparts who even require expensive state guarantees, should be tapped into and developed. This is where the training aspect in the development of RETs is utilised. Local entrepreneurs and businessmen can also invest as co-development partners in such projects. However in several economies especially the developing ones such as Ugandas, it is important that awareness of the sector is increased among the populace so as to make the available prospective RE project investors aware of what is on the market and better still understand investment in the RE sector. Much of the capital from business men and private investors in our local economy can present a cheap and fast source of financing for several of these RE projects which would offer a lifelong income and profits since the investors would own the projects and would have their money work for them. However, due to a varied array of opportunities to invest their money in and have quicker returns than in power where they would have to wait for a minimum of 10 years before they start earning, it is unlikely that private individual finance will play a big role in financing Ugandan power in the near future. Another source that should not be under looked are the community finance initiatives which involve the communities pooling money together so as to finance the RE projects for their benefit and use. Through such schemes where all the power is to be used by the community, offgrid projects present a better option that may prove cheaper than grid connected systems, however, where excess power is envisaged, connection to the transmission grid is paramount as it subsequently presents a source of income for the community who will benefit from selling excess power to the national grid. These community finance schemes come in various forms such as power cooperatives among others.211 Ugandas communities have vast capital resources that can be pooled together through co-operative investment societies which are being promoted by the government as SACCOs. These societies present a magic bullet for community financing of RE in rural electrification and should thus be promoted if gains in RET development in developing countries are to be realised. Carbon financing is also available for projects in the form of renewable energy, green or ethical investment funds which may be tapped into for purposes of developing RE projects. These funds are readily available for most RE projects as long as the project meets a certain prescribed criteria so as to benefit from the funds. The Rural Electrification strategic plan recognizes the
211

These were used in the USA to boost their rural electrification program.

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need to tap into this source of finance for RE projects. This source presents various mechanisms such as the CDM, JI and IETs among others. In Uganda, most projects are either too small to attract green financing or do not have the skill to apply for the same. This is the reason for the inception of Uganda Carbon Bureau which is supposed to be an umbrella for green projects of various sizes and help them get financing for carbon credits generated. They also take care of the entire process of application which makes it less cumbersome for developers. The CDM is a mechanism which creates a market for CO2. It works in such a way that, a party, usually an industrialized country under the UNFCCC and the Kyoto Protocol, buys emission reduction credits arising from projects developed in developing countries which are also referred to as Non-Annex One Countries. This market for CO2 involves the purchase of carbon credits which are termed CER and are expressed in tones of CO2 equivalent.212 The Kyoto Protocol has certain flexible mechanisms that can be used to leverage these benefits especially for Annex One Countries to reap the benefits of emissions trading in a cost effective manner while ensuring sustainable development for the developing countries. These three flexible mechanisms are the Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emissions Trading (IET) with JI and CDM being project based. These two project based mechanisms involve the development and implementation of projects that reduce GHG emissions so as to generate carbon credits as a result. The resultant generated carbon credits can then be sold on the carbon market as CERs. All RE projects are generally considered green as they play a role in reduction of GHG emissions through the provision of alternative non-fossil fuel based energy such as hydro, geothermal, wind, solar, biomass and also bio-fuel projects among others. Whereas JI is more concerned with development of projects in developed Annex One Countries through the generation of credits referred to as Emission Reduction Units (ERU), the CDM is concerned with generating CERs from projects in developing countries. Projects that may want to benefit from the CDM must, as a prerequisite, undergo a very rigorous documentation and approval process by a variety of local and international stakeholders. This process is based on the specified CDM modalities and procedures. The process involves the initial feasibility assessment and the development of a Project Design Documentation (PDD), host country approval from a host country that has ratified the Kyoto Protocol through their
212

Allafrica.com, Ghana: Carbon Finance And the Clean Development Mechanism (CDM) at http://www.carbonoffsetsdaily.com/news-

channels/global/ghana-carbon-finance-and-the-clean-development-mechanism-cdm-17164.htm

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Designated National Authority (DNA), project validation and verification by the Designated Operational Entity (DOE), registration, emission reduction verification and credit issuance by the EB.213 Once the project passes the tests set for it, it becomes eligible to benefit from the CDM which goes a long way in reducing on the project costs through provision of finance, efficient technology and sustainable development. The problem is that there is no developed carbon market in the developing countries of Africa especially since most of the carbon financing is concentrated in Asia and the Americas.214 Establishment of proper legal and regulatory environment Encouragement of the trading of CER is the way to go, in order to reap from the benefits of CDM for RE projects215 particularly in developing countries that have a very low carbon footprint. In addition to the above discussed mechanism is the Global Energy Facility (GEF), which is an intergovernmental fund with its main objective being environmental protection. It is comprised of the WB, UNDP and UNEP. In its mandate to protect the environment, the fund offers non reimbursable financing for the incremental costs in green projects which include RE projects. The incremental cost principle essentially provides for the compensation of marginally economically viable RE projects for the extra cost incurred over and above the would be cost of a similar non green project, so as to have the RE project reach early completion and entry onto the market.216 This arrangement has been used to fund feasibility studies in the Rift Valley for geothermal power production purposes under PPP arrangement. The promotion of the Uganda Carbon Bureau as well as promotion of other similar outfits while strengthening their mandate in putting together green projects and making their accessibility to green financing and carbon credit accumulation easier, would go a long way in making green financing available. This should be done as a joint effort involving all stakeholders. The creation of institutions based on PPP arrangements such as the Uganda Energy Credit Capitalisation Company and further capitalisation of the same to offer a wide variety of financing tools for a wider scope of power development in developing countries would go a long
213 214

ibid ibid 215 This is through the attraction of FDI 216 Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) p.69

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way in solving the financing challenge faced by developers of power energy projects including RETs in developing countries such as Uganda. The role of such an institution would be to bring together all sources of finance and risk management instruments under one roof and make them available to prospective developers either directly or through other financial institutions as is the proposed model of disbursement by the UECCC Ltd.

CHAPTER SIX: CONCLUSION From the foregoing discussion, it is noteworthy that developing countries have special financing considerations because of their economic set up thus making dynamics of financing RE projects in developing countries quite different from the traditional . With the developing countries having underdeveloped and undercapitalised financial systems, very big limitations as far as obtaining a full range of financing and risk management options from within and abroad do exist. The government or the public sector as it were, has the paramount responsibility to ensure the development of the sector and creation of an environment that will attract the full range of options to wit; ensuring the prevalence of a favourable risk profile and enablement of movement and availability of necessary finance and risk management tools for such projects. The private sector on the other hand has a duty to ensure that the created environment is utilised fully and in partnership with the public sector, to create lasting solutions that work. With each sector217 working on its own, it is almost impossible to create the environment that would enable the
217

Public or private sector

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improvement in the availability of financing and risk management tools for RE projects among others. All that has to be created is an enabling environment that would be nurtured by public and private sector participation through innovation to ensure workable financing solutions for the diverse situations and scenarios taking into account the existing handicaps. Important among the influencing conditions include the credit and risk profile rating of the country, which have a very big bearing on whether finance will be availed to a project or not. The role of the Public and Private sectors in solving the financing challenges highlighted is thus paramount. The government, donors and private sector should work in consonance to ensure favourable financing and risk management frameworks and incentives in the country. This explains why PPPs are actually being championed as the vehicle through which infrastructure projects should be developed. PPPs are not a silver bullet though and thus the role of PFIs such as Project and structured Finance, and other innovative financing tools, in the development of RE in these developing countries should not be underscored.

BIBLIOGRAPHY PRIMARY SOURCES LAWS 1995 Constitution of the Republic of Uganda The Electricity Act (1964 Revision) Cap 144 Laws of Uganda The Electricity Act, Cap. 145 Laws of Uganda (2000 Edition) The Income Tax Act, Cap 340 Laws of Uganda The Investment Code Act, Cap 92, Laws of Uganda

POLICIES MOEMD, The Energy Policy for Uganda, 2002 at

http://www.energyandminerals.go.ug/pdf/EnergyPolicy.pdf MOEMD, The government of Uganda, Rural electrification strategy and plan covering the period 2001 to 2010 at www.energyinstug.org/...com.../file,Others%7CRural+E+Plan.pdf/
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MOEMD,

The

Renewable

Energy

Policy

for

Uganda

at

http://www.energyandminerals.go.ug/pdf/RENEWABLE%20ENERGY%20POLIC9-11-07.pdf MOEMD, National Biomass Demand Strategy 2001-2010 at

http://www.energyandminerals.go.ug/pdf/BEDS-Contents.pdf Uganda National Development Plan 2010/11-2014/15

REPORTS ERA, Co-generation/Biomass/Waste Projects http://www.era.or.ug/Co_Generation.Php ERA, Constraints to Investment in Ugandas Electricity Generation Industry http://www.era.or.ug/Pdf/Report-Investments-Constraints_final_23-10-2008.pdf ERA, Small Hydro Power Projects http://www.era.or.ug/Pdf/Status%20of%20Electricity %20Projects%20under%20Development.pdf ERA, Solar Licensed Projects http://www.era.or.ug/SolarLicencedProjects.php ERA, Status of Electricity Projects under Development http://www.era.or.ug/Pdf/Status%20of %20Electricity%20Projects%20under%20Development.pdf Forum of Energy Ministers of Africa, Report on the FEMA Ministerial Meeting, Entebbe, Uganda, august, 3, 2005 PPP Canada, 2008-2009 Annual Report, at http://www.p3canada.ca/_files/file/PPP-AnnualReport_EN.pdf UIA, Investing in Ugandas Energy Sector at http://www.ugandainvest.com/energy.pdf Youba Sokona, ENERGY IN SUB-SAHARAN AFRICA at www.helio-

international.org/Helio/anglais/reports/africa.html BOOKS & BOOK EXCERPTS Edward D. Einowski et al, The Law of Biofuels-Financing your Biofuels Project, (STOEL RIVES LLP, 2008) Edward. D. Einowski et al, Chapter Five, The Law of Lava, Penciling out: Project Finance for Geothermal Power Projects, (Stoel Rives LLP, 2009)

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Jerry R. Fisch, The Law of Lava, Just Starting Out: Leasing, Siting, and Permitting Geothermal Projects: Chapter One, Lava Law: Legal Issues in Geothermal Energy Development, Stoel Rives LLP, 2009 John M. Eriksson et al, The Law of Wind- Power Purchase Agreements and Environmental Attributes (Stoel Rives LLP, 2009)

SECONDARY SOURCES PAPERS Chris Groobey et al, Project Finance Primer for Renewable Energy Projects at www.bakermckenzie.com/.../na_projectfinanceprimer_article_jun08.pdf DTI, DTI New & Renewable Energy Program, Financing Renewable Energy projects: A guide for developers at www.berr.gov.uk/files/file15118.pdf ENABLE, ENERGY SECTOR POLICY OVERVIEW PAPER at

www.enable.nu/publication/Energy_Policy_Overview_Uganda.pdf Md. Monwar Hasan Khan, The role of public private partnership in renewable energy sector at http://www.iim.uni-flensburg.de/sesam/upload/Asiana_Alumni/Manohar_PPP.pdf Peter Lindlein et al, "Financing Renewable Energy-Instruments, Strategies, Practice Approaches" at http://www.kfwentwicklungsbank.de/DE_Home/Service_und_Dokumentation/Online_Bibliothek/PDFDokumente_Diskussionsbeitraege/38_AMD_Renewable_Energy.pdf Discussion Paper 38(Kfw Bankengruppe, Group Communications, Frankfurt am Main, December 2005) Ray Tomkins, Extending Rural Electrification-A survey of innovative schemes at rru.worldbank.org/Documents/OBAbook/10ch5.pdf UIA, Investing in Ugandas Energy Sector at http://www.ugandainvest.com/energy.pdf UNEP-SEFI Financial Risk Management for Renewable Energy Projects

http://www.unep.fr/energy/activities/sefi/pdf/RE_Risk_Manag.pdf
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US

PREF,

Renewable

Energy

Finance

Fundamentals

at

www.uspref.org/.../USPREF_Renewable%20Energy%20Finance%20Fundamentals%20v2.1.pdf

CONFERENCE PAPERS Forum of Energy Ministers of Africa, Report on the FEMA Ministerial Meeting, Entebbe, Uganda, august, 3, 2005 Godfrey R. Turyahikayo, Investment opportunities in the power sector in Uganda, Uganda Business investment Forum, Cedar Park, Hotel, Johannesburg, 2nd October 2008 at www.tpnetworks.co.za/.../Investment_Opportunities_in_UGANDA.pdf Stephen Thomsen, Encouraging Public-Private Partnerships in the Utilities Sector: The Role for Development Assistance, NEPAD/OECD Investment Initiative, Imperial Resort Beach Hotel, Kama Hal, Entebbe, Uganda, 25-27 May 2005 at www.oecd.org/dataoecd/29/45/34843203.pdf INTERNET SITES citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.131.2796... Allafrica.com, Ghana: Carbon Finance and the Clean Development Mechanism (CDM) at http://www.carbonoffsetsdaily.com/news-channels/global/ghana-carbon-finance-and-the-cleandevelopment-mechanism-cdm-17164.htm EIA country statistics at http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm? tid=2&pid=33&aid=12&cid=&syid=2004&eyid=2008&unit=BKWH MOEMD, ERT Fact sheet REA Overview, at http://www.rea.or.ug/?p=site&s=2&pg=2 Yinka Adeyemi About 650 million Africans may lack access to electricity by 2030, delegates told at CSD4 at www.uneca.org/eca_resources/news/102605sdd_dna.htm
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