Harnessing IPPs to increased West Africa’s electricity generation

A new World Bank report which draws from experiences in five African countries has stated that independent power projects (IPPs) are crucial to help deliver electricity to the 600 million people in Sub-Saharan Africa.

The report titled: “Independent Power Projects in Sub-Saharan Africa – Lessons from Five Key Countries” draws on case studies carried out in Kenya, Nigeria, South Africa, Tanzania and Uganda – countries that have the most experience with IPPs in the region to learn the factors that enabled their successes, challenges they had to overcome and record useful insights that will help in crafting better policies.

It finds that renewable energy IPPs are becoming more promising and can even become more viable if procured competitively.

“Independent power projects now constitute the primary vehicle for private investment in the African power sector,” said Makhtar Diop, World Bank’s Vice President for Africa. “The objective of this report is to identify key lessons that can help African countries attract more and better private investment.”

It was established that there are 126 IPPs in 18 Sub-Saharan countries, accounting for an installed capacity of 11 GW and $25.6 billion in investments. South Africa alone accounts for 67 IPPs, 4.3 GW of capacity and $14.4 billion of investments; the remaining projects are concentrated in a handful of countries. Between 1990 and 2014, IPPs have spread across Sub-Saharan Africa and are now present in 17 countries.

Governments were advised that rather than focus on large investments in improving failing power grids often supported by weak transmission lines and poor power distribution network, decentralising power generation to wherever it can be harnessed and in whatever form at a cost effective price is the way to go.

Factors enabling creation of IPPs

West Africa’s power sector needs are enormous and already stretched public finances make it hard for governments to attract greater levels of private investment to scale up generation capacity. To reach the scale required, the World Bank called on governments to provide a sound investment climate and enabling environment.

According to the Boston Consulting Group’s (BCG) Sustainable Economic Development Assessment (SEDA) Report on Nigeria titled “Unlocking Nigeria’s Potential: The Path to Well Being,” evaluating the relative well-being of countries around the world by measuring how effectively a nation converts wealth into well-being, along with ten socioeconomic dimensions including economic stability, employment, income equality, health, environment and infrastructure recommended a creative approach to creating enabling environment.

Wiebe Boer, one of the authors of the BCG report said that Nigeria should focus resources on key priorities; develop detailed action plans and monitor execution closely; create linkages between implementers and decision-makers; lead from the front; go for some early wins, but keep an eye on the long-term; communicate the message about reform to those inside and outside of government.

Analysts say these reforms will mean better laws that will enhance the ease of doing business, improving infrastructure, build strong institutions that will ensure that everyone plays by the same rules, and reduce corruption.

The world bank in the same vein stated in its report that sub-Saharan African countries advised more competitive procurement efforts from countries in Sub-Saharan Africa, which includes encouraging long-term contracts through a competitive bidding process that can help secure reduced prices and help avert other issues, such as the possibility of a problematic contract. If direct negotiations are conducted, they should be done transparently, it noted.

“This can only be achieved though with clear and conducive energy sector policies, structures and regulatory environment,” states the report. Power regulation in West Africa suffers from inadequate regulatory capacity, undue government influence, low confidence of stakeholders in regulators and consumers often do not believe their interests will be protected by regulatory authorities. Electricity tariff increases in Ghana and Nigeria sparked widespread protest in January and February respectively.

According to the report, systematic and dynamic power sector planning, including the ability to accurately project future electricity demand, determine best supply or demand management options and anticipate how long it will take to procure, finance, and build the required electricity generation capacity will provide needed relief.

Financial viability of the public utilities is vital, the report argues, as they remain the principal off-takers of power produced by IPPs. Given the high-risk environment of most countries in Sub-Saharan Africa, the continent’s authorities were urged to provide proper mitigation through financial guarantees and security measures to attract new investors.

Inadequate electricity services pose a major impediment to reducing extreme poverty and boosting shared prosperity in Sub-Saharan Africa. “Simply put, Africa does not have enough power,” the report says.

Despite the abundant low-carbon and low-cost energy resources available to Sub-Saharan Africa, the region’s entire installed electricity capacity, at a little over 80 GW, is equivalent to that of the Republic of Korea.

Recommendations

The World Bank report urges Sub-Saharan Africa to ramp-up its power generation capacity substantially. It notes that the investments needed to meet this goal largely exceeds African countries’ already stretched public finances hence increasing private investment is critical to help expand and improve electricity supply. The private investments, it said could be much greater and better concentrated on projects that will deliver the best value.

“Historically, most private sector finance has been channeled through privately financed independent power projects (IPP), supported by nonrecourse or limited recourse loans, with long-term power purchase agreements with the state utility or another off-taker,” the report said.

It concludes by stressing that all sources of investment need to be encouraged and for IPPs in West Africa to flourish, the countries needed dynamic, least-cost planning linked to the timely, competitive procurement of new power generation capacity.

This must be accompanied by effective regulations that encourage distribution utilities that purchase power to improve their performance and prospects for financial sustainability, thereby widening access to electricity, the World Bank report says.

ISAAC ANYAOGU