Tuesday, 28 July 2015

Power Purchase Agreement, PPA -For Africa's Energy Problem!


The Aluto Langano Geothermal IPP(first Ever) Project in Ethiopia

The global investment need for energy, infrastructure, mining, and real- estate related projects is estimated to reach $13 trillion in 2030 from $6 trillion in 2013, according to McKinseys research. Obviously, a significant portion of this investment need is in Africa. According to the Africa Infrastructure Country Diagnostic (AICD), the infrastructure need of Sub-Saharan Africa exceeds US $93 billion annually over the next 10 years. To date, less than half that amount is being provided thus leaving a financing gap of more than US $50 billion to fill.

Given this staggering situation in the continent, African governments are becoming under pressure to meet the ever rising demand for infrastructures. More than anything else, the energy infrastructure has been the most challenging, both in terms of cost and management, to develop. Most countries, for a long time, relied literally on public spending to narrow down the infrastructure gap and it does not seem they succeed when it comes to the case of energy even if they have achieved so much to date.


African governments are now recognizing that involving the private sector to invest in the energy sector, and consequently drive their economic developments is crucial, if not a must, and the private sector on its part is excited to take advantage of this rising momentum.

What has not still been dealt enough is how it is going to be possible for both to achieve their needs, better services with low cost for the public, and an equitable and guaranteed return from their investment to the private sectors?

Power purchase agreements, PPAs, after being a point of discussions quite for some time in the background, are now emerging as viable models to address the prevailing energy poverty thereby attracting private investment in to the continent. Power Africa initiative, for example, was primarily intended to incentivize American companies to do business in Africa with such arrangements although it has not still been materialized as anticipated.

Power purchase agreements are essentially public private partnerships uniquely designed to the energy industry for commercial supply and purchase of electricity between a private developer and an entity, usually a state utility in Africas case.

Given the involvement of too many parties, as off takers /buyers, project companies/ sellers, lenders and other stakeholders, and the lack of sufficient exposure by African counterparts to such to such causes before, however, it is frustrating to consider PPAs as immediate solutions for the continents energy shortfall. The complexity and risk associated with such model is paramount. The risk allocation and mitigation efforts are no doubt costlier and time taking and it is too optimistic to consider such initiatives to bear fruit in a short span of time, and if it does it is at the public's risk. 

Due diligence to the formulation of a comprehensive approach as wide as 15 to 20 years life span of specific project contracts is necessary. It too requires aligning project contracts not to compromise national interests and it will not be an easy task.

Building institutional capacity to supervise and enforce the contracts with a complete set of expertise is a must be done job prior irrespective of the cost if PPA Projects has to deliver the badly needed services on budget and when needed. Involving and retaining teams throughout the lifetime(from initiation to negotiation to execution to closing) of the project will at the end of the day pay off the public in both fronts- In the management of potential risks and the intended deliverables as they will constantly be informed.

Ethiopian government’s resistance to liberalize the market, and the following aggressive public sector led development strategy, for example, has finally paid off the country but incentivizing the private players to participate in the power and energy sector development efforts (where one of the biggest shortfalls is registered in GTP I) and maintaining the economic growth in the country should now be a priority before the damaging complacency is built up in the public space.

Adopting power purchase agreement, PPA, model is obviously a delicate balance ( between the risks and the benefits) to make but it should be tried, tested and applied as a complement and transition rather than putting aside the option and detaching oneself from the world of opportunities. Most often, saying is easier than doing but Africa doesn’t have too many options than doing if the energy picture has to be changed forever for the better and fuel the largely anticipated industrialization!

The other week, I was reading a hand book on power purchase agreements, PPAs, organized by department of commerce(US), and I found the book simple (the way it is presented), informative and timely for anyone interested in the energy market. Please go get and spend time on the book (Understanding Power Purchase Agreements) Or Click here  to find the hand book.