Making power projects successful in Africa
It is no secret that many African countries suffer from a lack of power generation to meet their current base demand, let alone their expected growth in demand. According to McKinsey’s “Power Africa” 2015 report, “Only seven countries - Cameroon, Côte d’Ivoire, Gabon, Ghana, Namibia, Senegal and South Africa - have electricity access rates exceeding 50 per cent.
Advertisement
The rest of the region has an average grid access rate of just 20 per cent. Moreover, even when there is access to electricity, there may not be enough to go around.”
Why projects take so long
One reason is due to changing political environments and volatile global macroeconomic conditions. For example, low commodity prices caused by economic slowdown in China and India have resulted in economic pressures in commodity-dependent countries such as Zambia. Zambia, which relies heavily on hydroelectric power generation, executed a government support agreement and power purchase agreements for a 300 megawatt (MW) coal fired power project in 2011. This project has still not reached financial close, in large part due to its reliance on debt financing from China.
Another example is Nigeria, where recent presidential elections inadvertently caused the delay of the 450MW Azura power project and other planned projects by independent power producers (IPPs). In this case, President Buhari’s administration quickly unlocked the issues that were blocking the financing of the project.
Keys to successful power development
As a financier and developer of four African power projects currently, Endeavour Energy is no stranger to the complexities and challenges that occur when developing a project in an electricity deprived region. Backed by global private equity firm Denham Capital, phase one of our current projects totals more than 1,200MW and more than US$2.7 billion of capital expenditure.
Experience has taught us there are three keys to develop successful, timely power projects in African countries.
First, it is imperative that the fundamentals of the power project make economic sense for the individual country. Of course, each project must meet investor and lender requirements, but, just as important, the project must be the best power solution for that country, taking into account factors such as size, speed, reliability, length of service and costs.
Second, the project must satisfy the geopolitical needs of the country. For example, in countries where reliable power generation is needed, power projects with less reliability (such as some renewable power projects when compared to thermal power projects) may fall within a country’s long-term energy plans behind higher priority projects.
If a project takes much longer than the political life cycle of the country leadership, the project may not find support. For instance, hydroelectric power projects require three to five years of lengthy environmental studies. Projects like these may not be given priority over a thermal power project requiring only a year or less of studies when elections are nearing.
Lastly, power projects in Africa are complex and multiple stakeholders must be satisfied for the project to be successful. Key stakeholders include host governments and their regulatory agencies, regional communities and chiefs, project sponsors and their investors and lenders, local business owners impacted by the project, fuel suppliers, international governments focused on the country’s success across a broad range of issues, non-governmental organisations (NGOs), multilateral and development funding institutions and others.
IPPs must be prepared to partner (formally or informally) these stakeholders to overcome important challenges such as currency risks and credit requirements as well as minimise project costs but provide attractive returns, and enable cost reflective and affordable power markets by minimising government subsidies.
The developer must do its part by designing projects that meet the country’s needs and provide low cost power. To achieve this, it is critical for the developer to be able to convince key stakeholders (including international construction companies and international fuel suppliers) to share the project and country risks and upside optionality. This will enable all parties, including local governments, to be comfortable with their commitments.
Clearly, each project will face its own unique issues and a short timeframe for project completion is never guaranteed. Indeed, there are factors outside the control of all parties. However, if the developer and the host country can partner to resolve the issues at hand, the probability the project will be completed successfully and meet the needs of all key stakeholders in the shortest amount of time is much higher.