African Power Market

Background:

a) Africa faces a huge electricity demand challenge. Existing infrastructure is insufficient to

meet current requirements.
b) Over 530 million people, primarily in rural communities, are expected to remain without
power. Only 39 per cent of the African population has access to electricity, compared to
70–90% in other parts of the developing world.
c) In North Africa access is very high (more than 95%) while in rural areas elsewhere it is
only 12.9 per cent. Across sub-Saharan Africa (SSA) only 31.8 per cent have electricity
access.
d) In many places, even where there is access, power cuts and the need for load shedding,
with its negative economic and social implications, continue to be a regular occurrence
e) Some of the key challenges being faced by the Power Industry in Africa are:
 Security of Power Supply
 The inability to recover the cost of new generation via current electricity tariffs
 Badly managed infrastructure
 Regulatory uncertainty and a lack of political commitment

Transmission and interconnection projects in sub-Saharan Africa (SSA) have historically been
procured directly by governments, through sovereign debt or concessional funding structures. 
With the demand for these projects increasing, and with the additional pressures on government
finances exacerbated by the COVID-19 pandemic, African governments are considering PPP
Model as one of the possible approaches to address the transmission infrastructure.

Question 1: The IPT model was successful in improving grid development in India but is not a
panacea. Can you tell us some of the falls and how they should be mitigated early in Africa?

 Response: Several different business models have been used to attract private investment in
transmission. The four main models are:

a) Privatizations: Ownership of the transmission network to a private company. The private

owner has the exclusive right (and obligation) to develop new transmission in its area of
operation.
b) Whole-of-grid concessions: provide similar rights and responsibilities to privatizations,
but for a shorter period
c) Independent power transmissions (IPTs): provide the rights and obligations associated
with a single transmission line, or a package of a few lines.
d) Merchant investments: build and operate a single transmission line

IPTs could be the most promising business model to involve the private sector in Africa. IPTs in
both middle-income and low-income countries have led to substantial private investment in
transmission, significant cost savings through tenders, and to contractual agreements that are
thus far stable. In India, the PPP structures have been primarily BOOT model. This transfer
condition requires measures such as valuation of the asset condition, or requirements for
minimum maintenance spending toward the end of the contract term to ensure that the asset is
transferred in good condition. Some of the key execution issues that may be addressed in PPP
Contracts are:

a) Land Issues: On a transmission PPP, there is no single site, and therefore typical project
risks such as land rights, environmental and social issues and ground risk are amplified.
Such activities may be mandated to state owned Transmission Service Provider (TSP)
for implementation like land acquisition or TSP to handle more cost effectively or
sensitively dealing with communities.
b) Conducive policies for development of IPTs: A clear policy direction on how to introduce
IPTs, adequately consulted with the stakeholders, will be important in order to drive
investment.
c) Decide the stage at which to tender transmission projects: There are two broad choices.
Early-stage tenders allow for more innovation by bidders. However, they expose them to
risk on issues such as approvals, execution risk and require a more complex evaluation.
Late-stage tenders are for projects that are already well developed, in which the
evaluation can focus on cost.
d) Ensure adequate revenue and credit enhancement where needed: IPTs will be
implemented on a project finance basis. Financiers need confidence that the contractual
payments will be received, for example, through the use of escrow accounts. Where
escrow arrangements are not enough to make the project bankable, governments may
also have to use a government guarantee to back payment obligations to IPTs

Question 2: Many RMC are interested in having private participation in energy projects and
want to develop sector-wide policies and reforms that would allow private participation on a
commercial basis; from your experiences, what is the best way to about this in Africa?

Response: Key policies and reforms to thrust private participation are as below:

a) Determine payments to IPTs based on availability: IPT bidders should be exposed to risk
on their performance in ensuring high levels of availability, but not to expose them to risk
on the volume or value of flows along the line. This leaves demand risk with the
procuring authority and ensures that the IPTs are paid for matters largely within their
control.
b) It will be necessary for transmission charges and their funding sources to be ring-fenced
and carefully regulated, enabling the IPTs to have a strong and predictable revenue
source.
c) Creditworthiness of the counterparty to be ensured through govt regulated bodies alike
PGCIL in India, to protect the IPTs from any payment defaults.

Question 3: Contract Design is the most important step to project success, can you tell us
some of the building blocks on your project’s success that should be emulated/replicated?
Question 4: How do you make sure that the transmission charges for remuneration of IPT
projects get paid by industry players knowing that Africa’s electricity tariff pricing sometimes
incorrectly assesses the demand, generation capacities and cost, network losses and other
network parameters to set a cost reflective tariff schedule?

Response:

a) Determine payments to IPTs based on availability: IPT bidders should be exposed to risk
on their performance in ensuring high levels of availability, but not to expose them to risk
on the volume or value of flows along the line. This leaves demand risk with the
procuring authority and ensures that the IPTs are paid for matters largely within their
control.
b) Land Issues: On a transmission PPP, there is no single site, and therefore typical project
risks such as land rights, environmental and social issues and ground risk are amplified.
Such activities may be mandated to state owned Transmission Service Provider (TSP)
for implementation like land acquisition or TSP to handle more cost effectively or
sensitively dealing with communities.
c) Post the tender process, the contract should be executed between IPT and state owned
TSP. State Owned TSP should collect the revenue from Consumers. Thus, the payment
risk should be borne by the State Owned TSP and ensure timely payments to IPT

Question 5: Given your experience, what would be your anticipation on the sticking issues/deal
breakers/ risk allocation for private sector in Africa:

Response:

a) Timely payment should be ensured. IPTs should be insulated from the payment risk from
the offtaker. A state owned agency should ensure that timely payments are secured for
the private player.
b) Dispute redressal mechanism should be in place and timely disposal of the disputes to
be ensured to avoid any undesirable delay in addressing the issues
c) Regulatory bodies should have a definitive turnaround time (TAT) to address the
regulatory approvals and clearances
d) The transmission payment should be linked to the availability of the transmission lines.
Payment to IPTs separated from the flow of power the transmission lines, which is
beyond IPT’s control.
e) Land issues should be addressed by the govt appointed agency. RoW policies should be
properly designed to ensure that any bottlenecks during operation phase are duly
addressed

Question 6: With the slow development of strong regulations and policies to guide IPTs, how
best can we deliver these projects with the private sector?

Question 7: What should be the top 3-4 fixes needed to jump start IPTs/PPPs and who is best
placed to lead that?
Response: Before a firm policy is framed for infusion of private investment in the space, it shall
be quite vital to infuse confidence among the private sector for investment in the space. While
policies may be firmed up in parallel, following may be considered to develop the confidence of
private investors in African power market:

a) Efficiency improvements of existing infrastructure assets shall be pivotal to instill faith of

private sector investors
b) The inability to recover the cost of new generation via current electricity tariffs is one of
the major barriers to invest in new large-scale generation and transmission projects
c) The PPAs should be risk balanced to attract new investments. The PPAs should be
bankable
d) Development of regional power market to trade power within the region and optimise the
utilisation of generation capacities
e) Availability of liquidity in local commercial banking industry shall be one of the critical
factors that private players would look for financing new projects in the power sector
f) Unbundling and liberalisation of the power market to attract private sector investment

Further continued derisking is essential if players such as commercial banks are to play a
greater role in projects. Issues such as off-taker creditworthiness, political risk and currency
risk shall be critical. Government creditworthiness and private sector off-taker involvement
remains vital to get projects off the ground