PROJECTS & ENERGY: An Introduction to Africa-wide

New Rules for African IPPs 

In a number of jurisdictions in Africa there are growing challenges impacting the continued viability of operational independent power producer (IPPs), with some governments and offtakers now openly querying “take or pay” clauses in power purchase agreements. This is sometimes due to valid concerns relating to the viability of paying for available capacity without there being sufficient demand for electricity, but, at times, this is more of a mask for the consequence of a government contracting too many IPPs in a given country on a take or pay basis. Regardless of what has led to this situation, the consequence now in many countries is that the traditional IPP model with a state-owned offtaker and government support, is becoming something of an inflexible “dinosaur”, and alternative, more flexible, models which largely remove the public sector are becoming more relevant for consideration. What does this mean for host governments and offtakers – is this an opportunity or a threat?

Context   

For a traditional, large, grid-connected IPP to be viewed as “bankable” by project finance lenders, the requirement has been: (i) a power purchase agreement (PPA) with the state-owned offtaker; and (ii) an implementation agreement or concession agreement (IA) with the host government with both the PPA and IA (and other accompanying regulatory documents) all otherwise meeting the requirements of a “rule book” that has grown in length over many years. That practical experience and perception of risk has often resulted in other new “rules” in terms of required risk allocation, to ensure that “lessons are learnt” from past experience.

All of that process has led to large IPPs being cumbersome beasts to get to financial close. One of the typical requirements of the “rule book”, is that energy which is otherwise available from the power plant must be paid for by the offtaker, whether that energy is dispatched by the offtaker or not – ie, the “take or pay” requirement in a PPA. This is because lenders have not been prepared to assume the risk that the demand for the energy and all other requirements to meet existing demand, such as a functioning transmission system, will be there for the tenor of the assumed debt.

Such a “take or pay” requirement should not, in itself, be assumed to be wrong or unnecessary. It is probably sensible for a host government to be asked to take the risk as to the general growth of its economy and the planning for such growth, with electricity demand increasing accordingly. However, in a number of jurisdictions, a large number of take or pay PPAs have been signed with the private sector, often over a very short period, which has led to a cash crisis, with the relevant host government not having had the time or available capital to otherwise develop its grid system, connections to end-users and, even more importantly, collection mechanisms with those end-users, to ensure that cash is available in the sector to meet payments due to IPPs under existing PPAs.

Such a situation arose recently in Ghana with almost all of the grid-connected IPPs recently threatening a shut-down of their power plants due to the accumulation of significant PPA arrears. The situation has fortunately improved. Similarly in Kenya, there has been a taskforce established to review the nature of certain of the PPAs that have been signed by the state offtaker, KPLC, with “take or pay” PPAs being questioned. Similar queries have been raised regarding the concept of “deemed energy” in PPAs for renewable power projects in Uganda (with “deemed energy” in this context, being the energy that an offtaker is required to pay for but which has not been delivered to, or taken by, the offtaker). Of course, the current situation in South Africa’s energy sector has many more factors associated with it, but certainly the prevailing context now with the state offtaker, ESKOM, is that alternative models to the traditional large grid-connected IPP are much more relevant. There are challenges in other African jurisdictions as well in either getting grid-connected IPPs implemented or having them paid for on time by the host utility offtaker.

Alternative models and a new “rule book” 

Notwithstanding the challenges being faced in many economies in Africa due to the impact of COVID-19, and the ongoing fall-out arising from the Russian invasion of Ukraine, there does continue to be incremental new demand for reliable and preferably green electricity in many jurisdictions in Africa. Even ignoring the possible massive electricity requirements of green hydrogen initiatives now being discussed in many African markets, the more typical industrial consumers of electricity are themselves currently seeking alternative sources of energy for their operations. There has been massive growth in industrial rooftop solar developments in the region and alternative aggregated platform structures are also now being actively discussed, whereby multiple renewable energy generation sources are aggregated to supply energy to a group of dedicated industrial customers – all of this being undertaken without any obligations being assumed by the state offtaker or host government.

The traditional “rule book” of what is then required to allow for a successful project financing of a grid-connected IPP has had to undergo a substantial re-think by developers, lenders and now governments/offtakers. On the basis that the cash-flow(s) assumed to be present to back any financings are now derived from the private sector, the validity of any request for host governments to back such cash-flow(s) and provide other forms of contractual support for such initiatives can certainly be questioned. As an example, in the debt financing of GENSER in Ghana, which has a portfolio of PPAs with dedicated mining customers, there is no governmental support at all. Other renewable platform initiatives are also now in active development without necessitating any host government commitments.

The implementation of renewable power projects, in a manner which does not impose any liabilities on the public sector, should be viewed positively by host governments and utilities alike. Money is often scarce in the African energy sector, even more so in these times, so facilitating new renewable generation without the public purse being impacted is certainly a good thing. The new “rule book” continues to be written, but the end of that book could be a good news story for all.