INTRODUCTION

The Southern African Power Pool (SAPP) was created in 1995 through the Southern African Development Community (SADC) treaty to optimise the use of available energy resources amongst the countries in the region and support one another during emergencies. At the time of creation, the SADC governments agreed to allow their national power utilities to enter into the necessary agreements that regulate the establishment and operation of the SAPP. SAPP membership was therefore restricted to national power utilities of the SADC member states as indicated in the Inter-Governmental Memorandum of Understanding (IGMOU). In the revised IGMOU of February 2006 SAPP-membership was also made possible for other Electricity Supply Enterprises.

When the SAPP was created, the region had sufficient operating reserve of more than 20%. In the last twenty years, the operating reserve has been diminishing steadily as demand has outstripped supply and there has been very limited investments in both generation and transmission infrastructure. This has resulted in power cuts in most of the SAPP members. One of the concerns has been that the SADC region has seen limited investments in generation and transmission infrastructure in the last twenty years, despite the efforts by SAPP the Regional Electricity Regulators Association (RERA) to make the region conducive for investment. One wonders as to why the region has seen few investments.

The purpose of this paper is to highlight the challenges that the region has faced in attracting and financing new projects and also to look at new ways of attracting capital, especially private capital, into the SADC power sector.

PROJECT IMPLEMENTATION

SAPP Priority Projects
Over the past decade, SADC had held two conferences aimed at attracting investments in the power sector. The first conference was held in September of 2001 in Victoria Falls (Zimbabwe) and this was followed by a second conference, referred to as the Regional Electricity Investment Conference (REIC), held in Windhoek (Namibia) in September 2005.

On 21 November 2005 after the REIC, the Development Bank of Southern Africa (DBSA) hosted the first SAPP and RERA Investors Roundtable meeting in South Africa. This followed the request made by SADC for the DBSA to coordinate financiers and investors in response to the ‘Priority Power Projects’ for the SADC region. From 2005, the SAPP agreed to redefine projects so as to accelerate their implementation. The priority projects were redefined as follows:

  • Rehabilitation projects, de-mothballing and extension of existing plants,
  • Short-term generation projects with full feasibility studies; completed and approved environmental impact and social assessments (EISA); and the ability to be implemented before 2010,
  • Medium-term projects with full feasibility studies and completed EISA and having the ability to be implemented before 2020,
  • Long-term projects – most of these projects have no feasibility studies done and would require some work to move them to bankability stage before financial commitments could be secured. The projects would be implemented after 2025.

SAPP members have been working on rehabilitation and de-mothballing projects because these are existing infrastructure and only require new capital injection to deliver to their full rated capacities. As an example, the DRC has an installed capacity of 2,442MW but only about 1,200MW is available. The other capacity is not available either because the units are out of service or are lacking spare parts for maintenance to be completed and be brought back to service. Such projects are first priority for the SAPP because they can easily be implemented in the short-term.

On the supply side, the SAPP has agreed to:

  • Maximise the utilization of all the installed supply options by re-capitalising the power utilities. Most, if not all, of the utilities are government owned. This will require the governments to inject capital into the utilities and ensure their viability.
  • Creation of an enabling environment for renewable energy
  • Development of a structure for the implementation of a least cost SAPP generation facility.

The SAPP priority transmission projects are divided as follows:

  • Outstanding transmission interconnections whose aim is to interconnect the three non-operating members of the SAPP (Angola, Malawi and Tanzania) to the SAPP grid.  The specific projects to address the three are:
    • Mozambique-Malawi interconnector,
    • Zambia-Tanzania-Kenya Interconnector, and
    • Interconnection of Angola.
  • Transmission projects aimed at relieving congestion on the SAPP grid. The main projects include:
    • DRC-Zambia, and
    • Zimbabwe-Zambia-Botswana-Namibia
  • New transmission projects aimed to evacuate power from the generating stations to the load centres.

The region has now agreed to implement the priority projects in order to avoid black-outs now and in the future.

Investment Incentives

Investments into the SADC power sector have not been forthcoming in the last few years. The region has agreed that in order to attract investment into the power sector, there is need to provide investment incentives to all investors, both local and foreign. Alongside that, the region intends to address policy issues relating to legal and regulatory frameworks, and allow VAT and tax exemptions for import of power equipment and machinery into the region, for a defined period of time. Some countries have already implemented the initiative.

Creation of an enabling environment

The creation of an enabling environment for investors in the power sector is essential for the region. For this to be achieved, the region has agreed to address policy, legal and regulatory frameworks across the region. Countries have different legal frameworks and this would need to be addressed as well.

Implementation of cost reflective tariffs and time of use tariffs

Compared to other regions, southern Africa has some of the lowest cost of electricity in the world. The reason has been that for many years, the region had enjoyed excess supply capacity to the extent that some generating facilities in South Africa were decommissioned at some stage. The supply situation has reversed, but the current tariffs are not enough to attract investments into the power sector. The region has therefore agreed to implement cost reflective tariffs and at the same time adopt regulatory principles that would enhance those tariffs.

SAPP members have also agreed to implement time of use tariffs (TOU). It is hoped that the introduction of TOU tariffs will allow high energy intensive users to shift their loads to off-peak periods.

FUTURE FUNDING REQUIREMENTS

The SAPP, with assistance from the World Bank, initiated a Pool Plan study in September 2006. The Pool Plan Study Objectives were to: 

  • Develop an integrated generation and transmission expansion plan for the SAPP.
  • Determine the benefits that can be derived for the members from a coordination of their individual expansion plans.

Two cases for the studies were considered: 

  • A Base Case based on the existing generation and transmission plans for each of the 12 SAPP utilities, and
  • An Alternative Case that considers various scenarios for the optimization of generation and transmission capacity additions assuming free trade, no constraints (both internal and external). Three Alternative Cases were considered: 
    • Initial Alternative Case was based on the now revised demand forecast. Initially the load forecast was set at 2.4%. In the revised one, 4.3% is used.
    • Updated Alternative Case that treats nuclear units with operating dates 2017-2025 as committed.
    • Revised Alternative Case that treats nuclear units as not committed. 

The Revised Alternative Case was adopted for the SAPP Pool plan. The most important benefits of regional integration, coordination, and optimization are the cost savings, mostly reduction in capital costs.  A total cost of $48 billion is achieved for developing the alternative case rather than the base Case.  The reasons are that in the alternative case:

  • They replace more costly plants with less costly plants
  • They reduce excess capacity in the middle years and eliminate it by 2025
  • They reduce energy not served by adding plants in the early years and interconnecting ENE (Angola) with the other SAPP utilities.
  • They provide interconnections to support trade that benefits all parties.

The Alternative case shows that 56,687 MW of new additional power generation capacity would be required by 2025 as follows:

  • Rehabilitation projects, de-mothballing and extension of existing plants,
  • Short-term generation projects with full feasibility studies; completed and approved environmental impact and social assessments (EISA); and the ability to be implemented before 2010,
  • Medium-term projects with full feasibility studies and completed EISA and having the ability to be implemented before 2020,
  • Long-term projects – most of these projects have no feasibility studies done and would require some work to move them to bankability stage before financial commitments could be secured. The projects would be implemented after 2025.

SAPP members have been working on rehabilitation and de-mothballing projects because these are existing infrastructure and only require new capital injection to deliver to their full rated capacities. As an example, the DRC has an installed capacity of 2,442MW but only about 1,200MW is available. The other capacity is not available either because the units are out of service or are lacking spare parts for maintenance to be completed and be brought back to service. Such projects are first priority for the SAPP because they can easily be implemented in the short-term.

On the supply side, the SAPP has agreed to:

  • Maximise the utilization of all the installed supply options by re-capitalising the power utilities. Most, if not all, of the utilities are government owned. This will require the governments to inject capital into the utilities and ensure their viability.
  • Creation of an enabling environment for renewable energy
  • Development of a structure for the implementation of a least cost SAPP generation facility.

The SAPP priority transmission projects are divided as follows:

  • Outstanding transmission interconnections whose aim is to interconnect the three non-operating members of the SAPP (Angola, Malawi and Tanzania) to the SAPP grid.  The specific projects to address the three are:
    • Mozambique-Malawi interconnector,
    • Zambia-Tanzania-Kenya Interconnector, and
    • Interconnection of Angola.
  • Transmission projects aimed at relieving congestion on the SAPP grid. The main projects include:
    • DRC-Zambia, and
    • Zimbabwe-Zambia-Botswana-Namibia
  • New transmission projects aimed to evacuate power from the generating stations to the load centres.

The region has now agreed to implement the priority projects in order to avoid black-outs now and in the future.

Investment Incentives

Investments into the SADC power sector have not been forthcoming in the last few years. The region has agreed that in order to attract investment into the power sector, there is need to provide investment incentives to all investors, both local and foreign. Alongside that, the region intends to address policy issues relating to legal and regulatory frameworks, and allow VAT and tax exemptions for import of power equipment and machinery into the region, for a defined period of time. Some countries have already implemented the initiative.

Creation of an enabling environment

The creation of an enabling environment for investors in the power sector is essential for the region. For this to be achieved, the region has agreed to address policy, legal and regulatory frameworks across the region. Countries have different legal frameworks and this would need to be addressed as well.

Implementation of cost reflective tariffs and time of use tariffs

Compared to other regions, southern Africa has some of the lowest cost of electricity in the world. The reason has been that for many years, the region had enjoyed excess supply capacity to the extent that some generating facilities in South Africa were decommissioned at some stage. The supply situation has reversed, but the current tariffs are not enough to attract investments into the power sector. The region has therefore agreed to implement cost reflective tariffs and at the same time adopt regulatory principles that would enhance those tariffs.

SAPP members have also agreed to implement time of use tariffs (TOU). It is hoped that the introduction of TOU tariffs will allow high energy intensive users to shift their loads to off-peak periods.

FUTURE FUNDING REQUIREMENTS

The SAPP, with assistance from the World Bank, initiated a Pool Plan study in September 2006. The Pool Plan Study Objectives were to: 

  • Develop an integrated generation and transmission expansion plan for the SAPP.
  • Determine the benefits that can be derived for the members from a coordination of their individual expansion plans.

Two cases for the studies were considered: 

  • A Base Case based on the existing generation and transmission plans for each of the 12 SAPP utilities, and
  • An Alternative Case that considers various scenarios for the optimization of generation and transmission capacity additions assuming free trade, no constraints (both internal and external). Three Alternative Cases were considered: 
    • Initial Alternative Case was based on the now revised demand forecast. Initially the load forecast was set at 2.4%. In the revised one, 4.3% is used.
    • Updated Alternative Case that treats nuclear units with operating dates 2017-2025 as committed.
    • Revised Alternative Case that treats nuclear units as not committed. 

The Revised Alternative Case was adopted for the SAPP Pool plan. The most important benefits of regional integration, coordination, and optimization are the cost savings, mostly reduction in capital costs.  A total cost of $48 billion is achieved for developing the alternative case rather than the base Case.  The reasons are that in the alternative case:

  • They replace more costly plants with less costly plants
  • They reduce excess capacity in the middle years and eliminate it by 2025
  • They reduce energy not served by adding plants in the early years and interconnecting ENE (Angola) with the other SAPP utilities.
  • They provide interconnections to support trade that benefits all parties.

The Alternative case shows that 56,687 MW of new additional power generation capacity would be required by 2025 as follows:

Coal fuel plants provide most new capacity    23,883 MW
Hydro and pumped storage are next             18,045 MW
Diesel fuelled peaking units                          12,594 MW
Gas fuelled combined cycle plants                2,164 MW
 

The optimized plan includes no new nuclear. In 2025, a total of 102,871 MW would be required in the SAPP as follows:

Coal               57,415 MW
Hydro & PS   27,016 MW
Diesel            13,908 MW
Natural Gas    2,732 MW
Nuclear           1,800 MW
Financing Requirements

Figure-1: Financing Requirements [2006-2025]

The financing requirements from 2006 to 2025 are shown in Figure-1. The alternative case requires $16 billion less capital than Base case; the Updated Alternative case requires $26 billion less than Updated Base case and the Revised Alternative reduces financing requirements by $48 billion. The study concluded that the revised alternative Case should be used as the SAPP Pool Plan. In the Revised Alternative Case, the most pressing need is to eliminate forecast near-term shortages. Cost effective projects are: Rehabilitations, De-mothballing and Extensions of existing plants. The study also recommended the interconnection of ENE (Angola), ESCOM (Malawi) and TANESCO (Tanzania) in addressing forecast shortages as building new generation.

The question remains, how will the SAPP fund the identified projects and what new strategies need to be used to attract investments?

A lot of utilities in the region have very weak balance sheets; a number are technically insolvent and would not be deemed to be going concerns without continued government support, which makes it difficult for such utilities to attract finance to their projects.  This, combined with the comparatively small local demand in most SADC countries relative to the size of any new generation project of scale, results in the need to sell the majority of their power into South Africa.

PROJECT PREPARATION

Power projects have a long gestation period, from the planning stage to the commissioning stage, are very complex, from a policy and political perspective and take an inordinately long time to get to bankability and then to financial close; this is multiplied many times over for cross border projects.  One developer of an IPP has spent almost $90m as risk capital on an IPP in the SADC region to date in project preparation and the project is yet to get to financial close. Not many developers would have the capacity to do that. Accordingly, there is a strong requirement for risk capital to get projects to bankability. Whilst there is a multitude of sources of funding for project preparation, it is not easily accessible and the donors/ funders are reluctant to release such funding unless they can see a clear path to financial close. Numerous feasibility studies have previously been conducted for projects in the SAPP pool plan, but an appropriate instititutional framework to drive these projects and an enabling environment is required to give the providers of risk capital the confidence to make such facilities available going forward.

Capacity building, enhanced project preparation and initiatives for the expanded use of instruments would facilitate and assist the implementation of regional power projects in SADC on an expanded scale.  In the short term, due to the lack of a wide skills base in the region, it would make sense to provide a centralized facility where regional projects are prepared thoroughly and professionally.

FUNDING OPTIONS

Development Finance Institutions (DFIs) are sitting on large amounts of unused risk capital and have not been able to optimise its use for development finance, and its potential to catalyze commercial financing. In addition, DFI’s have a wide range of differing and sometimes contrasting requirements to access grants and concessionary funding, and this, combined with the wide variety of other sources of funding makes it a challenge for project funders to know where to begin.

DFIs need to take the lead in defining needs and priorities, designing strategies and action plans, bringing stakeholders together, and coordinating and managing implementation and should devote more resources to cross-border infrastructure, with positive incentives to integration, including concessionary finance for projects that create positive regional returns.

It’s also worth noting that a number of emerging economies have begun to play a growing role in the financing of infrastructure in Sub-Saharan Africa. Total resource flows from these emerging economies are now comparable in scale, if not bigger, to official development assistance (ODA) from OECD countries or capital from private investors, with China being the main source of these funds. The funds are channelled primarily through the China-Export-Import (Ex-Im) Bank and at least 35 countries in SSA have benefitted from Chinese finance or are actively discussing funding opportunities with the Chinese. Chinese EPC companies are playing a more proactive role in development of power in Africa and a number of projects are currently being implemented in SADC using this model.

In determining the bankability of a project and the potential to bring investors on board, it is vital to understand the basis and criteria that funding institutions and project developers use in evaluating the project. It is highly likely that funding of most power projects will generally be confined to limited recource (project and hybrid) funding using a special purpose vehicle for both generation and transmission projects.  

At a project level, the funding structure needs to maximise the use of ECA financing in the purchase of plant and equipment from countries like China and use partial risk or credit guarantee programs to credit enhance off-take risks and project insurance or guarantees to mitigate political risks. The ECA finance can be combined with local currency loans (using credit enhancement instruments of local currency debt issues) to pay for non-eligible contect or local costs by accessing government & other pension funds or local banks if local capital markets are not well developed. Projects also need to take advantage of grants and low-interest loans, particularly for cross-border transmission projects.

It will be essential to get the DFIs and other funders (including the Chinese funding agencies) to commit an agreed percentage of the total capital required for the SAPP cross border projects as part of donor/DFI commitments to multi year funding programmes, based on the above framework to assist with:

  • the implementation of projects involving the interconnection of the SAPP members i.e. the transmission grid and the relevant backbone lines in each country required to evacuate power from new power plants onto the grid, (projects to be structured as public public partnerships using concessionary funding & grant funding); and
  • The updating/ completion of feasibility studies to bankability of an identified basket of generation projects by mobilising the risk capital.

In our view this will provide an enabling environment to allow generation projects to be developed via IPPs.