Power Sector Reform and Investment -...

www.gsb.uct.ac.za/mir

Prof Anton Eberhard Management Program in Infrastructure Reform and Regulation

University of Cape Town

Power Sector Reform and Investment Comparing Uganda with Kenya and Tanzania



Drivers for utility reform in developing countries

• Inefficiencies in investment and operations – soft budgets, poor governance, regulatory failure, no competition, few

incentives for cost reduction

– deterioration or collapse of services

• Financing for capacity expansion – public resources insufficient -> private

• Part of overall economic restructuring – macro-economic constraints or crises

– state re-defines relationship to SOE’s

• Technological innovation – Changing economies of scale and scope

– New possibilities for competition

• Sector reform as a fad? – international role models


Emergence of the “standard model” of reform

Vertically-integrated, publicly-owned monopoly

Commercialisation and corporatisation

Independent regulation

Unbundling to separate potentially competitive elements from non-competitive elements

Private sector participation

Introduction of competition IPPs for the market

or wholesale competition in the market

eventually customer choice and retail competition


MODEL 1:NATURAL MONOPOLY

MODEL 4:RETAIL COMPETITION

MODEL 3:WHOLESALE COMPETITION

MODEL 2:SINGLE BUYER

Utilities are vertically integrated

Generation, transmission and distribution are not subject to competition

No-one has choice of supplier

Single buyer chooses from various generators (IPPs)

Access to transmission xxx not permitted for sales to final customers

Single buyer has monopoly over transmission networks and over sales to final customer

Distribution companies buy direct from generator (IPPs)

Distribution companies have monopoly over final customers

Open access to transmission wires

Generators compete to supply power

Power pool established to

facilitate x

All customers have choice of supplier

Open access to T & D wires

Distribution is separate from retail activity

Retail industry is competitive

Generation (G)

Transmission (T)

Distribution (D)

Customer (C)

IPP IPP

Single buyer G & T

D D

C

G GG

TPower poolexchange

Franchisecustomers

(FC)

Largecustomers

(LC)

D

C

D

LC

D

C

G GG

TPower poolexchange


Progress in power reform in Africa

• About 30 African counties have established independent

electricity regulators

• Some countries have unbundled their state-owned utilities – e.g. Kenya (KenGEn & KPLC) e.g. Nigeria (Gencos, TCN, Discos)

– e.g. Ghana (VRA, GRIDco, ECG)

– e.g. Uganda (UEGCL, UETCL, UEDCL)

• Most countries have enacted laws permitting private sector

participation, but progress is mixed – Private concessions and management contracts

• e.g. Uganda, Cameroon, Cote d’Ivoire, Mali, Gabon concessions

• E.g. Namibia, Lesotho, Rwanda, Tanzania, Kenya, Nigeria management contracts

– Frameworks for small RE IPPs

• e.g. Tanzania, REFITs, etc

– About 50 IPPs across Africa

• e.g. Kenya (5 + 3 more), Uganda (first large IPP hydro + a number of smaller IPPs), Tanzania,

Ghana, Cote d’Ivoire, Senegal, Nigeria, Togo, South Africa (renewables), etc


Progress in Africa’s two largest economies

• South Africa

– After slow start, a successful renewable energy IPP programme

– Rounds 1 & 2 = 47 projects totaling 2450 MW

– Wind prices drop 20% and solar PV 40%

– Round 3 in progress plus more

– Procurement of gas, coal & hydro IPPs planned

• Nigeria

– Sale of 5 out of 6 Gencos; sale of NIPPs planned

– Concessioning of 10 out of 11 Discos

– 25 % payment made; 75% expected by September 2013

– TCN management contract

– Bulk trader

– Transitional electricity market being designed

•


Power market structures in E. Africa

D

T

G IPPs

Uganda

G G IPPs IPPs

T T

D D

Kenya Tanzania

Private State-owned

UEDCL

UETCL

UEGCL

KenGen

KPLC

Tanesco

Umeme

Eskom


IPP performance differs

• Kenya has best record in attracting IPPs

– Dynamic planning system

– Timely initiation of international competitive

tenders

– Capacity to effectively procure and contract built in

KPLC

• Tanzania has worst record

– Poor planning

– Unsolicited bids rater than ICBs

– Series of corruptions scandals in new power deals

–

Kenya’s IPPs much cheaper and reliable than Tanzania


Uganda IPPs MW

• Bujagali 250

• Jacobsen, Namanve 50

• Electro-Maxx, Tororo 20

• Mpanga Hydro 18

• TronderPower, Bugoye 13

• Kasese Cobalt, Mubuku III 9.5

• Kilembe Mines 5

• EcoPower, Ishasha 6.5

• Kakira Sugar 12

• Kinyara Sugar (captive) 5

• Kabalega 9


Uganda GETFit

• Aims to fast-track portfolio of <20MW grid connected renewable energy projects by offering a premium to feed-in tariff

Feed-in Tariff GETFiT Premium

Small hydro >10MW 7.9 1.4

Bagasse 8.1 1

• Payments front-loaded in 1st 5 years

• Standardised PPA and IAs

• Possible WB PRGs

• Facilitated Tx interconnection

• Number of RfP windows

• 8 projects approved to date totaling Euros 48m & 73MW


Improving generation expansion

planning, procurement & contracting

• Allocate responsibility and build capacity for generation

expansion planning

• Develop clear criteria for allocating new build opportunities between the incumbent SOE and IPPs?

• Allocate responsibility & initiate timely competitive bids for IPPs

• Develop procedures for evaluating unsolicited bids

• Develop capacity for contract negotiations with new IPPs

• Avoid potential conflicts of interest when SOEs are the Single-Buyer


Power

Off-taker

Power Purchase

Agreement

IPP Project

Company

Fuel suppliers

FSA

Lenders

O&M Contractor

O&M Contract

EPC Contractor Shareholders

EPC Contract Loan Agreement

Environmental

Authorities

Permit

Shareholders

agreement

Regulator

License Government Concession

Modified from Clive Ferreira, Fieldstone

Source: Clive Ferreira - Fieldstone

Government

Understand IPP risks


• Implementation Agreement (“IA”)

(Typically granting land or rights);

• Power purchase agreement (“PPA”);

• Fuel supply agreement (“FSA”);

• Operation and maintenance agreement (“O&M”);

• Engineering Procurement Contract (“EPC”);

• License;

• Permits;

• Financing agreements;

• Inter-creditor agreements; and

• Insurance agreements

• Guarantees?

Source: Clive Ferreira, Fieldstone

A lawyers dream:

a developers nightmare!

Source: Clive Ferreira - Fieldstone

Key IPP contracts


• Non-competitive, non-

transparent tender and

award process

• Corruption

Risk Mitigation

• Open bidding to foster competition

• Transparent notification of

procurement intention and tender

process, including timetable

• Comprehensive information and

documentation packages for bidding

and negotiation, pre-bid conferences

• Information on avoided costs

• Pre-qualification, bid-securities set at

appropriate level

• Objective evaluation criteria with

independent scrutiny

Tender and

bid process


Traditional risk management (1 of 5)


• Late completion

• Reduced output

• Inefficient (high heat rate)

• Environmental compliance

Risk Mitigation

• Turnkey, lump sum, date

certain contract

• Liquidated damages for

performance failure

Fuel Supply

Construction

Operational

• Low availability

• High operating cost

• Fixed fee contract with

performance bonuses

• Operational guidelines and

penalties/termination for

performance failure

• Reliable fuel supply to

specification

• Adequate resources for

life of project (PPA)

• Proven reserves

• Alternative supply obligation

• Liquidated damages for

delivery failure

• Cost pass through


Source: based on Clive Ferreira – Fieldstone.



• Creditworthiness of Power

Purchaser

• Poor billing and collection

• Demand for electricity

• Non-dispatch

• Currency convertibility and

transferability

• Devaluation of local

currency

• Inflation

• Change in fuel prices

• Accounting and financial

information available on power

purchaser

• Long term power purchase

agreements

• Sovereign guarantees

• Front-loading of tariffs

• Escrow accounts

• Dollar denominated contracts

• Indexation of key costs

• Local currency financing

(established financial markets)

Revenue


Source: based partly on Clive Ferreira – Fieldstone and Woodhouse, E 2005.


Mitigation Risk

“The odour of over-pricing can set back IPPs for years!”



Regulatory

• Arbitrary changes to rules,

and/or addition of new

rules

• Misapplication of rules

• Too much regulatory

discretion in price reviews

• Additional cost risks

(associated with

performance and

environmental standards,

accounting rules, taxation)

• Change of law exemption

• Clarity of regulatory

framework and approval

processes

• Regulatory discretion

limited

• Regulatory capacity built

• Political risk insurance

• Partial risk guarantee

• Appeal process and

dispute settlement facilities

Risk Mitigation

Political interference risk: government intervenes in regulatory process



Legal and

political

• Lack of clarity in investment,

taxation and contract law

• Lack of clarity in energy policy

and restructuring

• Movement to merchant market

• No recourse to courts

• Change of law

• Cancellation of contracts

• Enforceable legislative framework for

foreign investment / taxation / property

rights / contract law

• Published energy policy backed by

legislation and reform steps with clear

IPP framework and level-playing field

with incumbent

• Change of law exemption

• Multi-lateral partners / finance

• Equity turn-over / local partners

• Renegotiation or exit options, linked

across issues

• Political risk insurance

• Partial risk guarantee

• Off-shore arbitration

Risk Mitigation

• Force Majeure for unforeseen circumstances, usually insurable

• Strikes and labour disputes usually contentious issue

• Parties to receive payments from power purchaser under Force Majeure


Contributing elements to IPP success

• Favourable investment climate

• Clear policy and legal framework

• Coherent power sector planning

• Transparent and credible regulatory oversight

• Competitive bidding practices

Country level


Contributing elements to success

• Committed equity partners

• Favourable debt arrangements

• Secure and adequate revenue stream – Credit worthiness of off-taker

– PPA

– Appropriate security & credit enhancement measures

• Secure, competitive fuel contracts

• Positive technical performance

• Ongoing strategic and risk management

Project level


Non-OECD investments are unlocking projects

• Some Chinese examples

• Uganda: Karuma & Isimba Hydros

• Zambia: Kariba North Bank Hydro

• Zambia: Kafue Gorge Lower Hydro

• Ghana: Bui Hydro

• Ghana: Sun Asogli gas-fired power plant

• Ethiopia: Genale Dawa & other hydro

• etc

• Need for a better understanding of how these deals are

structured, risk assessed, procurement undertaken and

finance arranged – and how they might be replicated?


DfiD’s role in facilitating more investment in power

• Strengthen enabling environment for investment – Clear policy and legal framework

– Coherent power sector planning PPIAF

– Transparent and credible regulatory oversight TAF

– Competitive bidding practices

• Support to governments in structuring transactions (DevCo)

• Early stage project development (InfraCo Africa)

• Mobilisation of domestic capital markets (DevCo)

• Long-term debt & mezzanine finance (EAIF)

• Specific support for renewables (GETFiT, GAP)

• …………

• …………


Prof Anton Eberhard Research, training courses, consultancy

University of Cape Town

The Management Programme in Infrastructure

Reform & Regulation (MIR) is an emerging centre

of excellence and expertise in Africa. It is

committed to enhancing knowledge and capacity to

manage the reform and regulation of the electricity,

gas, telecommunications, water and transport

industries in support of sustainable development.


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