In an exclusive interview with Deograsias Massawe, the Group Financial Manager, Rift Valley Energy Tanzania, he discusses the importance of promoting sustainable operating business practices in addition to how investors are managing their financial risks associated with infrastructure projects.
Your focus is on promoting sustainable operating business practices, please tell us more about this and why it’s important for sector growth and development in East Africa.
As a small private energy supplier, it is our aim to support the steadily growing Tanzanian electricity sector (and hence the local economy) with green power – which is only possible by applying an economically sustainable business model. Since 2012 (when our 4MW hydropower station was commissioned) we are generating approx. 20 GWhrs per annum for our three customer classes, which include our rural network (with more than 3,000 households), the tea industry in the area and the National grid, and we can see the increasing need for power specifically with our constantly expanding rural network – and this increasing demand is a real challenge for us.
For example: during the dry season, whilst our river levels are low, demand grows substantially for irrigation, and we are concerned, that there will be insufficient capacity to meet the needs, with the further expansion of our rural network.
We hence are currently developing a 2.5MW wind project, at the far end of our own distribution network, and – as the wind is blowing specifically in the dry season – expect that this additional wind capacity will eliminate our dry season capacity shortfall. Once commissioned in 2019, we will operate Tanzania’s first hybrid (hydro and wind capacity) mini-grid.
What are the renewable energy trends in Tanzania?
Apart for (large and small) hydropower, which still is the core of Tanzania’s renewable energy policy, a variety of off-grid solar projects have been established in the past, with strong support from both, international and national donor agencies.
What we recently have noticed is that large-scale (>50 MW) grid-connected solar and wind power is currently procured through public tenders, however, as the tariff expectation from the local government is low (around 4.5 US cent/kwh), we’ll need to see how this will be taken on by project developers.
Is there an increase in public-private cooperation to achieve planned infrastructure development?
Generally, the local regulatory environment supports private sector participation in the energy sector, for both electricity generation and distribution – so the local environment is favourable.
For bigger infrastructure projects PPPs are generally are foreseen, however, we haven’t seen a lot of traction here yet, as the PPP Act in its current form has been proven to be too complex for effective execution. Also, recent changes in the PPP Act, now allow the suspension of a public procurement process in certain cases, which does not necessarily stimulate competition.
However, as a developer of small hydro projects, we have seen great support from all the local authorities (EWURA, REA and the parent Ministry) who are helping to stimulate growth in this space.
How are investors managing their financial risks associated with infrastructure projects, such as delays and cost overruns?
Securing external financing is still a challenge in the sector, although there are still plenty of projects waiting to be developed and an increasing interest of a variety of financing institutions, to support renewable energy projects getting off the ground in East Africa.
In the past, we as RVE, have been successful in securing concessional financing for most of our projects, which have helped us to significantly bringing commercial banks to the table. specifically for the distribution side of our business that was of great help, as we are trying to keep specifically our rural distribution tariffs at an affordable level.
On the other side, what is probably most important for any renewable energy generation project to achieve bankability, is a favourable reliable and foreseeable power purchase agreement (e.g. with the national utility), which - for our current hydro projects - we are currently trying to settle.
Delays have been quite significant here, and it needs a lot of patience and trust of your investors to accept that. However, we still notice a strong will to support FDI in that sector - a positive sign, for example, was that the payments record for our current hydro PPA has improved significantly in the past, which helped us a lot to regain confidence in the sector.
It is, therefore, our strategy to diversify our customer groups, including commercial off-takers like the tea industry, and the rural community (which by the way uses modern, mobile phone based, pre-paid meter system to pay for its bills).
Licensing is also a challenge, in Tanzania, we need for example more than 35 different licenses to get a project off the ground.
What excites you about the energy sector in Tanzania?
We see the long-term prospects positive, with several big changes announced in the energy sector - one of them being the unbundling of Tanesco.
These privatisation efforts will assist to make the sector more competitive and open the space for new FDI. Read more: Tanzania shifts to natural gas-powered buses
We also see a new generation of SPPAs coming together now, which - once completed (we hope in Q3 2018) - will bring back stability and trust in the sector. All in all, the steady growth of population and economic development (we have an average of 7% GDP growth per annum) and a still very low connection rate of about 15% in the rural areas of Tanzania will provide private and public project developers with plenty of opportunity, and we are very excited to be in a good position to help this sector grow.