Exclusive interview with Ana Hajduka, Founder and CEO, AfricaGreenCo. During African Utility Week, she will address the Africa Power & Investment Forum on “Regional power integration - funding power generation and large scale regional projects” and is a panellist at the forum discussing: “Finance for sustainable energy investments”.
Ana is also a moderator and speaker during the T&D conference track on: “Is regional power sector integration viable? Feasibility study from AfricaGreenCo”.
Please give us some background about Africa GreenCo and your goals?
Through my previous role as a Senior Legal Advisor on power projects in Sub-Saharan Africa it became clear to me that despite the many efforts of international development agencies, development finance institutions and multilateral development banks, the current initiatives are not stimulating sufficient private sector development of power generation projects to meet the growing needs of the continent. Most current initiatives are focused on plugging a funding gap and/or providing credit enhancement but do not address the underlying structural issues in the market. I therefore put my thinking cap on to come up with a creative solution to this challenging problem and the concept of Africa GreenCo was born.
The principle objective of Africa GreenCo (which stands for Africa Green Regional Energy: Efficient, New and Creditworthy Offtaker) is to establish a public-private partnership in the form of an independent, creditworthy, regional, renewable energy off-taker/trader and aggregator of power: streamlining development, mitigating off take and credit risk, and catalysing private sector finance for renewable energy development. Africa GreenCo would help establish a renewable energy power market and act as a credit mitigating intermediary for power projects. It will enter into long term power purchase agreements with generators and back-to-back power sale agreements with various off-takers, which in turn would encourage private sector investment and enable quick and much needed capacity additions.
From a financial stand-point, it will leverage its capital base to achieve adequate creditworthiness so as reduce the need for the private sector to obtain credit protection. Through its structuring, governance and supply arrangements, it will mitigate the risks of end-user off-taker default. From an operations stand-point, it will coordinate government decision making, facilitate interconnection and increase power trading.
What is the current status of Africa GreenCo initiative?
Africa GreenCo as a concept was endorsed and included in the recommendations section of the SE4All’s Finance Committee Report (prepared by the Bank of America, BNDES and the World Bank) which was presented to Africa’s Heads of State in Addis Ababa on the 13th of July 2015 at the Financing for Development Conference.
We have established a UK not-for-profit company to develop the concept to its pre-implementation stage. This UK entity is entirely separate to the proposed entity discussed elsewhere which will be structured in accordance with the conclusions reached during the feasibility study. The feasibility study (legal, regulatory, technical and financial), which is well underway, is being funded by The Rockefeller Foundation and is due to be completed by June 2016.
We are working with fantastic advisors from Lions Head Global Partners (financial), Shearman & Sterling (legal), Tim Nielander and Ben Kioko (regulatory & governance), and PPA Energy (Ricardo) (technical) and we are thankful to them and to our Advisory Committee Members (Tantra Thakur - former CEO of the Power Trade Corporation of India) and Phlippe Niyongabo (Former Head of Energy Division within the Department of Infrastructure and Energy, African Union Commission) for all their invaluable assistance to date.
How will Africa GreenCo operate?
Africa GreenCo will act as intermediary offtaker only and will not manage the actual transmission and distribution of energy. Furthermore, it will not own any of the grid infrastructure or seek to replace existing utilities or power pools, but instead will help develop the largely under-utilised power pools via power trade. Rather than replacing existing structures, it complements them, and can further act as a bridge to any future regional energy market liberalisation and energy trade integration.
Unlike many current development efforts, which focus on the financing component of both large-scale and off-grid generation, this mechanism addresses the core issue of creditworthiness of offtakers and the lack of a viable power market in which to sell electricity production.
Tell us more about how the ultimate Africa GreenCo entity will be structured?
Africa GreenCo would initially be set up as a public-private partnership between member states, national utilities, DFIs, donors, investors and MDBs. A phased and incremental strategy for the membership structure is being developed as part of the feasibility study starting with a particular country/countries. It is key to the success of the concept that it has the political buy in.
We are aware of the challenges involved in establishing new member states co-owned organisations, but have a solid team with a wealth of experience of achieving similar goals. The cooperation of numerous member states in the creation of African Risk Capacity, Africa 50 and the Africa Trade and Insurance Agency (amongst others), provide a good indication of increasing support for the development of regional mechanisms.
In order to attract different sources of capital, Africa GreenCo may adopt a tranched structure (first-loss, second-loss, etc.) with different sources (e.g. donors, DFIs and other investors) plus member states contributions through equity capital (potentially funded by pooling IDA contributions similar to the arrangement for ATI).
In the initial stages, it may only be possible to achieve the necessary credit quality through an AAA rated DFI or MDB guaranteeing Africa GreenCo's payment obligations. However, over time and as Africa GreenCo increases its portfolio and develops a strong track record, the intention would be to achieve the necessary creditworthiness by attracting capital from commercial investors.
Ultimate goal: Africa GreenCo is an investment grade counterparty.
What are the key benefits Africa GreenCo will deliver to the public and private sectors?
The key benefits for the private sector include:
• Improved liquidity and lower debt costs as a result of a creditworthy counterparty
• More efficient contracting process and structure due to single off-taker with standardized documentation and highly experienced management team
• Improved certainty of execution
• Reduced payment default or delay risk
• For projects which are located in one country but will rely on sales to multiple countries – reducing the reliance (practically and financially) on a single national offtaker to act as a conduit
Key benefits for the public sector include:
• Local ownership by structuring the vehicle as a public private partnership with African sovereigns and non-State actors as members (similar to African Risk Capacity, AFC, Africa 50 and African Trade and Insurance Agency)
• More efficient contracting process through single-point supply and standardized documentation
• Reduced power prices by minimizing risk premiums applied by investors and introducing more competition
• Facilitating utility improvements in the following ways:
- Reduce the utilities’ on balance sheet provisioning for contingent liabilities through risk transfer to AGC
- Creating fiscal space for structural changes
- Helps optimise existing generation resources and increases viability of proposed resources on a regional basis
- Increases investment and competition for PPAs and thereby creates scope for lower pricing
- Reduces transaction costs by creating a clear PPA negotiation and execution framework (And/or collaborating with parallel programs)
- Helps achieve scale - by aggregating and pooling projects, with attendant benefits of grid compatibility, negotiating power and security of offtake
Curent weak financial position of utilities and limited choice of an alternate buyer in case of utility default deters private capital. An intermediary between a buyer and sellers by bearing the credit risk:
- adds liquidity and efficiency through its role as an aggregator of PPAs
- attracts viable investments in the power sector on the strength of a multi-buyer model
- promotes exchange of power with neighbouring countries by managing and meeting seasonal/daily/demand supply variations
- acts as a platform for future market innovation in terms of local currency financing strategies/post construction refinancing of debt at IPP level, securitisation and other - as a creditworthy counterparty AGC can unlock and scale new financing strategies
Fundamentally, the flexibility of the AGC concept is that it is scalable and brings together states, DFIs, national utilities, IPPs and critically, investors, in a workable relationship via a principal intermediary entity in the market.
What is your vision for the energy sector in Africa?
For me the vision for the energy sector in Africa relies on three key messages: first, that regional integration is crucial; second that strengthening utilities is crucial, and third that we need to substantially scale up investment (from the private sector and expanded concessional, non-concessional development finance and emerging markets) in order to unlock Africa’s energy potential. In order to do this, new concepts and ideas need to be developed that enable a fundamental reduction of costs and help strengthen utility creditworthiness rather than just the provision of liquidity.
Indeed, a similar vision was outlined in AfDB’s New Deal on Energy for Africa, which calls for a structural shift toward an integrated renewable energy strategy and a programmatic approach to renewable energy development and planning (both for on-grid and off-grid) rather than the scattered project-by-project approach we have witnessed to date.
I believe that via Africa GreenCo we can achieve a structural shift towards an integrated renewable energy development. Africa GreenCo would be a single point PPA counterparty, eliminating the need for generators to negotiate multiple PPAs and associated support packages and as such is ideally placed to facilitate projects of a geographically and economically significant scale, particularly those that operate across borders.
Regional and interregional power sector integration is a prerequisite for larger and more cost-effective hydroelectric, geothermal, wind, solar and biomass projects, and will save billions of dollars in development, operation and maintenance costs, both for investors and governments.
What surprises you in your work?
I was surprised by the incredible support and kindness of many key stakeholders in the market who have taken time to provide comments and helped guide Africa GreenCo through it’s early teething stages. Their faith in the concept gave me the encouragement I needed to leave my previous role as a Senior Lawyer on African power sector projects in order to launch Africa GreenCo.
What will be your message at African Utility Week?
Without cooperation and integration, Africa will not be able to fully harness its natural resources and bring power to those who most need it. By joining forces and spreading risks, the volume of power generation will increase and the cost of power will decrease. Structural change can in itself mitigate risk and reduce cost by creating a diversified pool. By sharing risks, the capital required by each country to secure the power it needs will reduce. We need to work together to make this happen.
Anything you would like to add?
I would like to thank everyone who has helped me and Africa GreenCo along the way and would urge anyone who would like to provide suggestions or feedback to contact the Africa GreenCo team at firstname.lastname@example.org. We know it is an ambitious project but big problems require big solutions and we have to aim high. It is a learning journey and we are keen to draw on the experiences of others, whether positive or negative. Many hands make light work and through Africa GreenCo we are planning on powering a lot more lights!