Friday, 22 February 2013

AfDB driving a low cost-energy model in Africa

A hydro dam under construction:
Expensive ventures

THE AFRICAN DEVELOPMENT BANK, AfDB, is driving a shift in infrastructure financing model in Africa. The change involves unbundling public  sector service provision into several functions inorder to enable  private-public sector partnerships. For instance, electricity generation can be unbundled into; power generation, distribution and transmission functions, each managed separately.

And as a result of unbundling of services, the private sector can now be contracted to provide certain public sector services. These contracts are determined according to the financial risk, urgency in service delivery, economic impact and revenue risk.

In Africa, demand for infrastructure is growing faster than the public sector's ability to deliver. The African Union, for instance estimates that a US$360 billion investment is needed to provide infrastructure up to 2040, that is a whooping US$13.3 billion a year. Of this energy will require an estimated US$45 billion. 

To generate this kind of capital, innovative financing models that involve private sector investment are necessary. The private sector is increasingly being invited to provide public services or goods for a fee. Generally the contracts for what is called Private-Public Partnership last 25-30 years. Here various models are in place depending on the commercial viability of the project in question.

For instance in electricity generation, mobilizing the initial capital to sink in the project have proven tricky. Investors do not have the stomach for sunk in capital as drilling a geothermal well for instance. Even in wind power generation mobilizing initial capital is slow and tedious. This is why the largest wind power farm in Africa, the Lake Turkana wind power project in Kenya (LWTP) is still trudging along with financiers asking for this or that guarantee. This project has been on the drawing board for close to ten years, and is making slow progress.

To fast-track the completion of the projects, a new business model was necessary. Hence the unbundling of state corporations in infrastructure sector. In the new model, government departments retain the policy function. A new Specials Purpose Vehicle, SPV, is created to undertake the implementation function while service delivery is leased to the private sector.

 The model was successfully tried in Kenya's geothermal power development. An SPV, Geothermal development Corporation was created to drill steam wells and cap them in Menengai geothermal project in Kenya's Rift valley. The government borrowed from development Finance Institutions, including, AfDB, to finance the drilling risk.
A geothermal Station: Clean, cheap energy
The corporation will then lease the capped wells to independent power Producers (IPPs) who shall build, operate and maintain their generating capacity which they sale to the power distributor. The funds generated from the sale of power will then be used to service the loans used to drill the wells. Using this model, GDC is now drilling steam wells to generate some 400 MW of geothermal power by 2016. The firm plans to have cumulatively drilled and build steam wells with capacity to produce 2000 MW by 2020, rising to 5500 MW by 2030.
As a result, AfDB, which partly financed the Menengai project, is seeking to introduce the same model in Djibouti, Ethiopia Tanzania and other countries with the eastern rift valley. In Djibouti, AfDB plans to develop a 50 MW power plant in the Lac Assal region. While in Ethiopia and Tanzania, the AfDB is leading in defining a geothermal development road map. In the Comoros, the AfDB has started the identification process for a 20 MW geothermal plant, matching the needs of the archipelago.

This model is gaining popularity among DFIs as it fact-tracks the increase in the stock of public goods and services, eliminate production and distribution bottlenecks in Africa, lower the price of public services. Geothermal power for instance will cost US$0.07 per kWh.

It also ensures that the public exchequer will not be stretched thin by debt servicing in the future. User-fees will be used to service the debts contracted to provide these goods.

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