IPPs Can Work for Sub-Saharan Africa: World Bank

A World Bank report published June 22 explains why independent power projects (IPPs) are crucial in delivering electricity to the 600mn people in Sub-Saharan Africa currently without it.  

Africa’s power sector needs far exceed most countries’ already stretched public finances, making it crucial for governments to attract greater levels of private investment to scale up generation while offering a stable investment climate and enabling environment, the detailed report argues.

Independent Power Projects in Sub-Saharan Africa – Lessons from Five Key Countries, which is free to download, also draws on case studies from Kenya, Nigeria, South Africa, Tanzania and Uganda to argue its case on IPPs.

Breakdown of Sub-Saharan African IPPs by technology (Graphic credit: the World Bank's June 2016 IPPs report)

Currently 126 IPPs are present in 18 sub-Saharan countries, accounting for $25.6bn of investments and 11 GW of plants, so 13% of the region’s installed capacity – or 25% if South Africa is excluded.

In a preface to the report Makhtar Diop, the World Bank's vice president for Africa and a former Senegalese economy minister, argues that investments in IPPs should be “much larger and less concentrated.” South Africa alone accounts for 62% of the region’s IPP capacity, he notes: “The objective of this report is to…help African countries attract more and better private investment.”

The report – whose lead author was Anton Eberhard of the University of Cape Town who co-wrote ‘Harnessing African Natural Gas’ in 2014 for the World Bank – says that four factors can enable more and better IPPs: 1) encouraging long-term contracts through a competitive bidding process, which can help secure reduced prices; 2) clear and conducive energy sector regulation and structures;  3) planning and accurate future electricity demand forecasting; 4) financially viable public utilities that will pay the IPPs for their power. Renewable energy IPPs are becoming more promising and can be viable if procured competitively, the report also noted.

Prof. Anton Eberhard  (Photo credit: Graduate School of Business, University of Cape Town)

Nigeria has shown it is possible to attract gas-fired IPPs in a challenging investment climate which have worked better than state-run assets, the report argues, helped by more reliable gas supplies – certainly until militants’ attacks on gas infrastructure of the past four months.

The financial weakness of Nigeria’s distribution companies though remains a concern. Efforts to restructure existing state plants into 10 ‘national integrated power projects’ (or NIPPs), a key initiative of the three recent presidents, were “either complete or near completion as of late 2015” and, because of gas supply constraints, only some were operational. Privatisation of these 10 NIPPs, totalling 5,000 MW and all gas-fired, is incomplete, although preferred bidders have been selected.

Yet Nigeria has attracted the most investment in IPPs of any country in the region, except for South Africa, the report notes. It also argues that a complex risk mitigation package built into Nigeria’s $859mn, 450-MW Azura IPP venture – which reached financial close in 2014 – was worth the effort, because such mitigation makes IPPs far more bankable.

In Tanzania, the report cites the potential of new gas discoveries to transform the country’s power generation landscape, but says this potential has yet to be fulfilled. “When power is not planned, procured, and contracted transparently and consistently, the implications are potentially grave, far-reaching, and ongoing,” it notes. Yet it adds that Songas, a successful Tanzanian IPP that fired up in 2006 on Songo Songo gas, has not had the recognition it deserves – with the cheapest cost of generation at $0.05/kWh. The report suggests that Tanzania should primarily focus on realising a market for its onshore gas – because its large deposits of “offshore gas will not flow without an export market as it is too expensive”. Tanzania has 527 MW of gas-fired power plants (34% of the country’s total), most of which are IPPs, the report notes.

In South Africa, the government reversed its original policy of letting state giant Eskom procure IPPs “recognising an obvious conflict of interests” and has since drawn on international expertise, and has been successful in adding new renewables capacity. It procured 3.9 GW in private power during 2012-14, all of it renewable. The report was largely written prior to very recent developments regarding LNG- and IPP-tendering by Pretoria.

IPPs in Sub-Saharan Africa have only a 22-year history, the report notes, with investors making first inroads in Cote d’Ivoire in 1994 (Ciprel), followed by Kenya 1996, then Senegal, Tanzania, Ghana (1997-99) and the AES Power barge in Nigeria that reached financial close in 1999. Shell and Eni later built their own gas-fired IPPs in Nigeria.

Just over 60% of IPPs by technology-type are open- or combined-cycle gas turbines (OCGTs, CCGTs) – the latter normally exclusively gas-fired. “Competitively-bid OCGTs and CCGTs are consistently less costly than directly negotiated capacity using the same technologies,” the report asserts. The authors calculate that a competitively tendered CCGT can come in at $1,038/kWh, so about 10% less than the $1,145/kWh cost of a directly negotiated one.

Chinese-funded IPPs in the region that reached financial close in 2010-14 had an average size of 226 MW – in contrast to the 114 MW average across sub-Saharan Africa – and were in both resource-rich countries like Ghana and poorer ones like Mali; however two-thirds by capacity were hydro.

Mark Smedley | www.naturalgasafrica.com

'Independent Power Projects in Sub-Saharan Africa: Lessons from Five Key Countries'  by Anton Eberhard, Katharine Gratwick, Elvira Morella, and Pedro Antmann, pp324, published by the World Bank can be downloaded free using this weblink, or by using the one in the 3rd paragraph above.