Diagnostic of TA for the Negotiation of Power Purchase Agreements

1. Catalysing Africa's Infrastructure Development Diagnostic of TA for the Negotiation of Power Purchase Agreements Pilot Countries: Ghana, Senegal, Kenya, Tanzania, Mozambique Key findings

2. Why? Background • ICA has established a "platform” the Virtual Working Group “VWG” under the leadership of the US Treasury to promote discussions on investments in the power sector. The objective is to enforce the cooperation between private and public partners. The last two sessions were focused on risks allocation which lead to the undertaking of TA Diagnostic in power agreements. • VWG participants are from six African countries (Senegal, Ghana, Nigeria, Kenya, Tanzania, Mozambique), representing ministries, power utilities and regulators. Furthermore there are representatives from DFIs and private sector power developers. • Public sector participants mentioned the desire for strengthening their capacitiesto ensure that the government is not negotiating PPAs from a position of dependence solely on outside advice (consultancy). Virtual Working Group (VWG) Session

3. Why? Objectives • Assessment of needs in TA to help strengthening the public sector capacities to negotiate and manage PPA and implement IPPs processes in the Energy Sector. This would help to: • Diversify the power mix and eliminate shortfalls or crisis in supply • Increase installed power generation capacity • Increase private investments, through enhanced investment climate • Outcome of the first two VWG video sessions was to start a "stock-taking of TA" in the Energy Sector to analyse previous and ongoing TA and identify TA gaps, if any. • Wherever required the ICA will recommend to mobilise further TA that can build capacity and keep the public sector apprised of the latest developments in the area of PPPs. Virtual Working Group (VWG) Session

4. Analysis Operating and planned IPPs Four of the five pilot countries have negotiated PPAs leading to the total number of 13 OPERATING IPPs: Kenya (7), Tanzania(2), Ghana (2), Senegal (2) and Mozambique (0). Four of the five considered countries are negotiating PPAs leading to the total number of 21 PLANNED IPPs: Kenya (5), Tanzania(0), Ghana (9), Senegal (2) and Mozambique (2). Excepting Kenya, visited countries seem to favour large and centralised power projects. In spite of significant potential, we have observed that IPP developments have not considered small to medium scale local private investments through decentralised options. Virtual Working Group (VWG) Session

5. Analysis IPPs share of total capacity IPPs constitute an important form of private sector participation. With electricity demand outstripping supply in many African countries, IPPs became a major source of new power generation capacity, i.e. generate almost a third of total capacity in Kenya. Virtual Working Group (VWG) Session

6. AnalysisGaps/Bottlenecks in IPP implementation • Lack of adequate energy strategy and energy policy to attract private investment • High coordination efforts as numerous public sector institutions are involved, leading to heavy bureaucracy • Inadequate skilled manpower on the public side with limited skills in (i) financial modelling (ii) risk allocation and management (iii) project finance and (iv) tariff setting • Lack of information (e.g. causes difficulties to set indicative tariffs for PPA) • Lack of technical environment (i.e. existing grid capacities are mostly insufficient to transmit additional electricity) • No templates for bidding processes or standardized documents inaugurated • Governments guaranteeing the obligations of its parastatal utility in the first place • Creditworthiness of off-taker potential Virtual Working Group (VWG) Session

7. AnalysisNeeds • Support to elaborate and implement energy strategy and energy policy • Need for a centralized IPP coordinating unit • Capacity building in (i) financial modelling (ii) risk allocation and management (iii) project finance and (iv) tariff setting • Poor quality of information (e.g. causes difficulties to set indicative tariffs for PPA) • Extension and/or refurbishment of the existing infrastructure, especially TL • Need for streamlined processes, standardized agreements (e.g. PPA), references (e.g. IPPs guideline principles) and benchmark tariffs • Alternatives for governmental guarantees Virtual Working Group (VWG) Session

8. TA Stocktaking Kenya Virtual Working Group (VWG) Session

9. TA Stocktaking Tanzania Virtual Working Group (VWG) Session

10. TA Stocktaking Mozambique Virtual Working Group (VWG) Session

11. TA Stocktaking Ghana Virtual Working Group (VWG) Session

12. TA Stocktaking Senegal Virtual Working Group (VWG) Session

13. Recommendations • Support to elaborate and implement a energy strategy and energy policy with stronger focus on small to midsize local IPPs • Provide additional Capacity Building in • financial modelling • risk allocation and management • project finance and • tariff setting • Provide Assistance to streamlined processes and implement standardized agreements (e.g. PPA) and benchmark tariffs • Provide key guidelines in PPA negotiation and risk allocation • Search and identify alternatives for governmental guarantees Virtual Working Group (VWG) Session

14. Thank you ! ICA Secretariat c/o African Development Bank BP 323 – 1002 Tunis Belvedere Tunisia Emailicasecretariat@afdb.org Phone (+216) 71 10 2982 Virtual Working Group (VWG) Session