In Africa, many independent energy supply projects have grown up alongside state-controlled programmes. Sector-based reforms designed to boost production of renewable energies have been a boon for such projects which are aimed primarily at meeting the energy requirements of private customers. By being able to raise finance in situations where public companies struggle to do so, private sector operations are able to get around certain commonly-experienced difficulties on the African Continent. Nevertheless, Governments have a duty to both adopt and comply with best international practices.

Many African countries are struggling badly to finance their energy requirements. For example, virtually no African electricity utilities have an “investment-grade” rating which prevents them from raising debt at reasonable rates in order to finance their energy projects.

Projects backed by publicly-owned energy providers also encounter certain limits. Long development lead times together with uncertainty over government commitments to purchase volumes produced – key to any financing project – have led some African countries to entrust energy production to the private sector.

Developing IPPs in Africa

In a bid to leverage the Continent’s vast solar capacities, wind and water resources, many corporations are turning to IPP-type private projects (“Independent power projects”, in industry jargon), primarily to meet their own needs, before transferring any energy left over to the grid. As the authorised production threshold has been raised, the number of such independent projects to produce energy for own-use has grown.

Although the situation varies by country, Africa has enacted a series of sector-based legislation over the past few years, such as Law 13-09 in Morocco 1. This allows programmes to produce energy with an installed capacity of up to 50MW to apply for authorisation from the Moroccan Energy Ministry. Any surplus must be sold exclusively to ONEE (the national electricity and water agency), with whom the independent producer must negotiate a transport agreement and a connection agreement (for the transfer of any surplus energy produced).

Other factors have also contributed to the success of IPPs in Africa: deregulation (albeit partial) of the energy sector, increasing demand for energy and the availability of special purpose financing, all supported by government guarantees to purchase power produced.

Development finance institutions (DFIs) have also played a key role alongside financing from foreign backers, especially Chinese concessional lenders and private investors. It is estimated that energy projects attracted USD 14 billion worth of financing in 2014, the bulk of which came from concessional loans put up by China Exim Bank.

Very welcome structural reforms

Participation in private sector financing is therefore an opportunity not to be missed. However, most African governments continue to regulate their national energy sectors via a single publicly-owned utility. This is still the case in Benin, Burkina Faso, Congo, Gabon, Equatorial Guinea, Mali and Niger, to mention but the countries belonging to the CFA franc zone. Nevertheless, beginning in the 1990s, a number of countries began to introduce structural reforms designed to partially deregulate their vertically-integrated monopolistic utilities. South Africa was the first to do so, followed by Ghana, Nigeria, Uganda and then Kenya. A third category of countries – comprising Angola, Cameroon, Côte d’Ivoire, Madagascar, Morocco, Mauritius, Senegal and Togo – have continued with their monopolies but adopted legislation conducive to IPP-type structures. Indeed, within this category of countries, publicly-owned agencies frequently acquire stakes in dedicated IPP project companies, generating a hybrid market with all sorts of complex governance-related issues. While the existence of an independent regulator may be seen as a safeguard for reassuring investors it does not appear to be an absolute imperative.

Although structural reform has undoubtedly resulted in better governance in the energy sector and an environment that is more conducive to IPPs, widespread financial mismanagement of publicly-owned bodies means that private electricity buyers are becoming more and more common in the industry. Nevertheless, there has to be sufficient industrial demand. Madagascar is a case in point. A number of hydroelectricity projects have been launched by JIRAMA, the public water and electricity utility, however, firm credible commitments to purchase power could not currently be secured for the total cumulative installed capacity of the projects due to the serious financial difficulties of the public energy body. Even by trying to sell to the private sector, there is no guarantee that the shortfall in demand could be made up. Thence the African paradox: a lack of creditworthy customers alongside massive energy requirements!

Adopting and complying with best practices

Nevertheless, the success of IPPs is down to a number of best practices that include more effective coordination between the assessment of requirements and power purchase agreements (or PPAs), setting up a clear, predictable and transparent framework for transferring procurement documentation – even for private initiatives, and coherent decisions regarding project structure and power purchase tariffs.

As regards the first point, too many African countries still suffer from inadequate public policy planning tools in spite of loud media declarations concerning plans or strategies that are supposed to last for a generation. Apart from South Africa, very few governments have actually linked their energy planning requirements to energy procurement strictu sensu. Fragmented structures frequently hamper a coherent public policy capable of ensuring diversity in the energy mix, a network capable of absorbing new projects and consistent arrangements for organising and awarding tenders and concessions.

Procedures for awarding IPPs, even within a private framework, must be clear, comply with  principles of equal treatment of candidates and remain constant over time. This does not mean that they have to be rigid! In a rapidly changing market where technical advances and competitive pressures are tending to push down the cost of equipment and material, investors should be able to enjoy contractual stability and the gains generated from lower market prices should also be split among the different parties. This will ultimately result in lower prices for end consumers, particularly in projects where surplus power is purchased by the national utility.

Lastly, “feed-in tariff ” arrangements (FiT) do not have to be a dogma. While FiTs are attractive because they reassure investors and because they have been successfully used in countries like Kenya, Ghana and Senegal, they curb competition significantly.

The financial strength of “off-takers” (i.e., power buyers), the scalability of their industrial plan and the reliability of their power purchase commitments will all be key to the success of an IPP venture in Africa, especially where the public utility is insufficiently creditworthy to be able to purchase the energy produced over the long term.

Footnote:

1 Law 13-09 relating to renewable energies, amended by the Dahir.n°1 – 16-3 of the 1st Rabii II 1437 (12 January 2016) implementing Law No. 58-15, modifying and supplementing Law No. 13.09 relating to renewable energies.