During EAPIC in Nairobi in September, CEO of Africa GreenCo will address the long-running regional conference on: “Regional power integration – funding power generation and large scale regional projects”.
1. 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 focussed on plugging a funding gap and/or providing credit enhancement but do not address the underlying structural issues in the market. In particular, the current focus on deploying monies for individual projects whether by direct finance or by guarantees is not sufficient as such a way of funding and managing risks is project specific and in addition moves the obligations away from uncreditworthy entities (i.e. utilities) to already heavily indebted governments (by virtue of sovereign guarantees). This is an unsustainable model going forward as it transfers utility risk to governments without solving the underlying structural utility and market weaknesses. 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 is to establish a public-private partnership in the form of an independent, creditworthy, regional, renewable energy offtaker/trader and aggregator of power. Africa GreenCo aims to increase private sector investment in energy generation in sub-Saharan Africa by mitigating the credit risks associated with the current lack of creditworthy offtakers. Current weak financial position of utilities and limited choice of an alternate buyer in case of utility default deters private capital. An intermediary aggregator between buyers and sellers can help attract sustainable investments in the power sector on the strength of a multi-buyer model. Its role as a financially sustainable intermediary offtaker and power trading company can also stimulate regional electricity trading and facilitate more efficient use of available and new resources by optimising them on a regional basis.
Unlike current development efforts which mostly focus on project preparation, advocacy, capacity building or on the financing components for renewable energy generation, Africa GreenCo proposes an introduction of a principal in the market which addresses the core issue of creditworthiness of off-takers and the lack of a viable power market to sell electricity production. The envisioned entity is an ambitious attempt to help increase the liquidity and scale of regional power trade and develop the power pools in sub-Saharan Africa by providing them with the first ever government co-owned, independently managed and financially sustainable electricity service provider capable of developing a fair and standardised electricity market.
Africa GreenCo would act as intermediary offtaker only and would not manage the physical transmission and distribution of energy. It would not own any of the grid infrastructure or seek to replace existing utilities. Rather than replacing existing structures, it complements them, and can further act as a bridge to any future energy regional market liberalization and energy trade integration. Africa GreenCo would help liquify and expand energy power markets by acting as a credit risk-mitigating intermediary for privately financed power projects through long-term power purchase agreements (PPAs) and back-to-back power sale agreements (PSAs) to various offtakers including state utilities. Africa GreenCo will also assist in managing and matching growth in electricity supply and demand which is a significant challenge for utilities in SSA. New IPPs can take many, many years from conception to commercial operation, and when an IPP reaches its commercial operation date, supply increases in a single discrete leap equal to the power station’s capacity.
This is issue is exacerbated by the relatively small base from which some countries start. For example, in Uganda UETCL reports, “Uganda’s peak power system demand currently stands at 500 MW against an installed generation capacity of 851.53MW with a firm capacity of 496 MW that varies in accordance with the prevailing hydrological conditions.” And yet Uganda currently has two new large hydro projects under construction totaling 783MW (Karuma and Isimba), and in the region of a couple of hundred MW more across various project ranging from around 5MW to 83MW which are either currently in construction or advanced stages of development. I.e. Uganda currently has in construction or late stages of development new generation capacity equal to around 200% of existing peak demand (although much of that is intermittent, and so new firm capacity may be expected to be a significantly lower percentage).
Similar issues can be found in Rwanda and Kenya, in Kenya for example earlier this year it was reported that, “Peak demand for electricity [in Kenya] is currently at about 1,600mw, leaving the country with nearly 700mw of excess power.” At the same time, many countries are experiencing large supply shortages.
(i) it is reasonable to expect that countries in SSA will experience periods of under supply (or periods when supply is supplemented by expensive short term ‘emergency’ power) as well as periods of over-supply.
(ii) While Africa GreenCo cannot conjure up electricity demand which does not exist, in practice when African GreenCo has many electricity buyers across ideally several countries, including both utilities and large industrial customers, and is also established as a trader of electricity, it will be much better placed than a national utility offtaker to find spot and/or short term buyers for capacity which would otherwise be sitting idle under the bilateral IPP model; i.e., to match idle supply with excess demand. Africa GreenCo will actively seek to do that, and envisages taking only a small margin to recoup its own costs, before passing the revenue to generation company which would otherwise have received no revenue at all under a bilateral IPP model.
2. What is the current status of the Africa GreenCo proposal?
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 company limited by guarantee to develop the concept to its pre-implementation stage. This UK entity is entirely separate to the proposed entity discussed elsewhere which is anticipated to be an African based and led regional entity. We are currently funded by The Rockefeller Foundation and we are currently moving from Feasibility Study stage into Implementation Stage with a view to incorporate the entity in 2017.
3. How will Africa GreenCo operate?
The proposed strategy is to establish an independent organisation that will participate in the power markets as a principal, namely Africa GreenCo, the:
= New and
= Offtaker for Africa.
Africa GreenCo as a concept has been developed to fulfil the following key design principles:
= Financially sustainable
= Scaling operations over time
= Operating at a regional level
= Complementing and collaborating with existing initiatives
= Benefiting utilities and sovereigns
= Benefiting project developers and investors
= Incorporating blended capital from concessional and commercial sources
Africa GreenCo will play two synergistic roles in African power markets:
1. Intermediary offtaker and aggregator; and
2. Power trader.
Intermediary offtaker and aggregator
Africa GreenCo will act as an intermediary offtaker and aggregator for IPPs.
Taking a simple example of a single utility offtaker, as depicted above, Africa GreenCo will add value by:
i) Having the financial capacity to act as a creditworthy offtaker under the PPA, thereby reducing the perceived risk of the project for investors and improving the quantum and cost of capital available for renewable energy projects; and
ii) Having the technical and legal capacity and framework in place to execute transactions more efficiently, ensuring that IPP developers and investors can be confident of reduced time to completing the transaction.
Africa GreenCo will also play a role in supporting and promoting efforts for a regional standardization of transaction documentation, particularly in terms of robust PPAs and PSAs. AGC will work with offtakers to simultaneously build institutional capacity for IPP engagement and reduce the burden of multiple bilateral negotiations.
For more complex transactions, Africa GreenCo will also act as an aggregator and diversifier of risks. Particularly for large-scale projects and projects located in border regions for which there may be multiple offtakers, Africa GreenCo will act as a single contractual counterparty for the IPP and manage the complex risks arising under a multi-offtaker structure through standardized documentation.
4. Tell us more about how ultimately Africa GreenCo entity will be structured?
Africa GreenCo will implement this operating strategy within an entity that combines the following overarching characteristics:
1. Prioritises political and financial ownership by African governments – in line with recently established bodies such as ARC, Africa50, ATI and AFC;
2. Attracts investment from the development finance community and international and local commercial investors;
3. Balances its public-private ownership and partnership approach with a commercially managed, financially sustainable operating model; and
4. Is able to operate as a legally and financially creditworthy offtaker across African power markets.
5. What are the key benefits Africa GreenCo will deliver to the public and private sectors?
Africa GreenCo aims to improve the power market ecosystem at three levels:
1. individual projects;
2. offtakers and end users and;
3. regional power pools as a whole.
At the project level, Africa GreenCo aims to help more projects achieve bankability and therefore bring larger volumes and new sources of capital to African power markets and reduce Africa’s infrastructure funding gap. The main components of this objective are to:
1. Reduce the cost of capital from investors financing independent power projects by:
= Reducing the cost of getting projects to financial close;
= Reducing the credit risk of projects and in turn:
o reducing the return thresholds of equity investors;
o reducing the interest rates on project debt; and
o increasing the tenors of project debt.
2. Increase the types of investor participating in African IPPs whether through equity, debt or refinancing and therefore the quantum of capital flowing to the power sector.
3. Act as an entry point for more efficient credit enhancement of IPPs through building a portfolio of contract exposures that can engage with concessional and commercial insurance and guarantee instruments at scale.
At the offtaker level, Africa GreenCo aims to streamline African utilities’ engagement with IPPs, reduce the time and effort required to bring transactions to close, relieve the burden of providing sovereign guarantees and, in the process, help to create the space necessary for them to implement measures to achieve long term creditworthiness and improve domestic power markets. The main components of this objective are to:
= Improve the financial performance (and therefore creditworthiness) of offtakers by
o reducing the costs associated with negotiating and executing IPP transactions;
o creating the scope for reduced tariffs due to lower IPP cost of capital;
o helping maximize the income from existing power assets through cross border trading opportunities; and
o helping move away from fossil fuel by substituting short term emergency power with cross border traded power and helping catalyse investment in utility-scale renewable energy projects.
= Increase the installed capacity in the power system, facilitating more reliable power supply to end users;
= Create the fiscal space for investment in institutional capacity building as well as upgrading and expanding transmission infrastructure, by moving the focus of sovereign support away from power purchasing and towards long term planning and development.
At the regional level, Africa GreenCo aims to make cross-border power markets more dynamic and support efforts to integrate planning, power sector regulation and infrastructure investment across member states. Africa GreenCo will:
= Actively trade power in competitive markets, increasing liquidity and efficiency;
= Work with member states and utilities to match power supply surpluses and deficits and maximize the efficient use of natural resources on a regional basis;
= Support and enhance existing efforts to simplify the transaction process and regulatory environment for IPPs on a regional basis; and
= Help to build the financial and economic case for more investment in regional interconnection and grid management.
6. 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.
7. 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 its feasibility study stage into its current implementation stage.
8. What will be your message at EAPIC?
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.
9. Anything you would like to add?
I would like to thank everyone who has helped me and the Africa GreenCo Team along the way and would urge anyone who would like to provide suggestions or feedback to contact the Africa GreenCo Team at email@example.com. 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!