This guest post is by
Yanning Chen, PhD candidate at Johns Hopkins SAIS. This article first appeared on Agenda for
International Development (www.a-id.org) on October 12, 2017.
Sub-Saharan Africa is undoubtedly the most important
frontier for climate change mitigation and adaptation. More than 620 million
people, two-thirds of the population, lack access to electricity. Electrifying
sub-Saharan Africa using existing energy mix jeopardizes the goal of limiting
warming below two degrees Celsius above pre-industrial levels reiterated in the
Paris Agreement. Finding a low carbon path for sub-Saharan Africa requires
significant investment and cooperation in renewable energy, including wind,
solar, hydro, geothermal, nuclear, and biofuels.
Wind power stands out among renewable energy options in the
region for three reasons. First, sub-Saharan Africa has abundant wind
potential, especially in highlands of Chad and Ethiopia and coastal regions.
McKinsey estimate puts onshore wind capacity at 109 GW. Secondly, wind farms
are less controversial and more quickly to build. Hydropower dams are costly
and pose irreparable dangers to the local geography and communities. Solar
farms take up large parcels of land and require regular cleansing. Once wind
farms are operational, they do not disturb nearby farming and grazing activities.
Thirdly, price of wind technology has declined drastically in the past decade. Comparison of levelized cost of electricity (LCOE) by
Lazard, an international financial advisory and asset management
firm, shows wind is one of the cheapest renewables and comparable to coal.
However, it is worth noting that LCOE does not account for technology transfer
costs, adapting the grid, regional variations, cost of capital, and other risks
associated with launching new technologies in sub-Saharan Africa.
Currently, sub-Saharan Africa accounts for less than 1% of global installed
wind power capacity. Despite its small presence, wind development in the region
expanded exponentially in the past decade, with introduction of new actors,
financing mechanisms and institutional arrangements. Case studies of wind farm
development in Ethiopia, Kenya and South Africa seek to illustrate the robust
wind financing landscape in sub-Saharan Africa.
Ethiopia currently has two wind farms in operation—Ashegoda
Wind Farm and Adama Wind Farm. Both wind projects were supported through its
Growth and Transformation Plan (GTP), a five-year plan setting targets for the
entire economy. In 2008, Ethiopian Electric Power Corp. (EEPCo), the then
national utility company, signed an ECP (Engineering, Procurement and
Construction) contract with Vergnet of France to development a 120MW wind farm
at Ashegoda. French Development Bank (AFD) and BP Paribas financed 90% of the $289.7 million project through a mixture of
commercial and concessional loans, with the Ethiopian Government covering the
remainder. Ashegoda Wind Farm was inaugurated in 2013.
In 2009, HydroChina and CGC Overseas Construction Group
(CGCOC) signed an EPC contract with EEPCo to develop a 51 MW wind farm at
Adama. It was the first Chinese overseas EPC project in clean energy.
Export-Import Bank of China financed 85% of the $117 million project through
the preferential export buyer’s credit. Following completion of the first
phase, EEPCo added 153 MW to Adama Wind Farm under the same financing
framework. Adama Wind Farm II inaugurated in 2015. Both
Ashegoda and Adama Wind projects adopted concessional financing from single
donor to mitigate institutional uncertainty and promote domestic industry
overseas. In Ethiopia’s case, the government has no experience and no
regulatory support for wind farm development. Thus companies treading into
uncharted waters rely on national development agencies to safeguard through
extensive negotiation and challenges. Single donor concessional financing model
offer them maximum flexibility.
Kenya: Independent Power Producer (IPP) &
Multilateral and Private Financing
Kenya officially liberalized its electricity generation
sector through power sector reform in 1996, allowing IPPs to own and operate
energy projects along national generation company. Long tradition of IPPs has
enabled creative financing packages to support wind energy. In addition to
IPPs, Kenya supports wind energy through feed-in tariffs. Kipeto Wind Farm is a
$323 million project to add 100 MW wind capacity in Kenya. Owned by a joint
venture between African Infrastructure Investment Fund, International Financial
Corporation (IFC) and Craftskills Wind Energy International, the project is
part of U.S. Power Africa Initiative, which seeks to double access to
electricity in sub-Saharan Africa. Under the Initiative, Overseas Private
Investment Corporation (OPIC), the U.S. government’s development
finance institution, has committed a $232 million loan. China Machinery
Engineering Co is the EPC contractor with turbines as well as operation and
maintenance (O&M) provided by General Electric.
Valued at over $800 million, Lake Turkana Wind Farm project
is the largest private investment in Kenyan history, as well as the largest
wind farm in Africa at 310MW capacity. Developers for Lake Turkana Wind Farm
are KP&P Africa B.V and Aldwych International. Other equity partners
involve three Nordic investment funds –Finnfund, Nofund and the Danish
Investment Fund for Developing Countries (IFU). African Development Bank (AfDB),
with the Standard Bank of South Africa and Nedbank as co-arrangers, arranged
debt financing. Most notably, $128 million of the loan came from AfDB’s own
Green Bond program, which finances a portfolio of eligible Greenfield renewable
energy projects. Fourteen financial institutions, including European Investment
Bank, Netherlands Development Finance Company, PTA Bank, Danish export credit
agency (EKF) and others, collectively provided over $600 million in loans to
the project. In addition to private investors, public institutions, such as
Government of the Netherlands and EU Africa Infrastructure Trust fund, were
also crucial in providing grants and loan guarantees. The wind farm came online
in July 2017. Due to its innovative public-private partnership financing
structure, the Lake Turkana Wind Farm project was nominated as the “African Renewable Deal of the Year”.
South Africa: IPP & the Renewable Energy
Independent Power Producer Procurement Programme (REIPPP)
Despite South Africa’s vast wind potential along its coastal
regions, abundant coal resources in the country had slowed development of wind
power. South African government introduced renewable energy feed-in-tariffs
(REFIT) in 2009. However, the government replaced REFIT with the Renewable
Energy Independent Power Producer Procurement Program (REIPPP) in 2011, a
competitive tender process for renewable energy projects. REIPPP has been
lauded for its transparency and effectiveness. Between 2011 and 2015, there
have been five rounds of bidding with a total of 92 IPPs awarded, accounting
for 6327MW of renewable capacity. Of which, thirty-seven are wind farm projects,
accounting for 2660MW of wind capacity.
Financing for wind projects in South Africa come from a
variety of sources. To highlight a few, Sere 100MW wind farm received a $365
million loan from AfDB and the Clean Technology Fund, a climate investment fund
to facilitate technology transfer; Enel Green Power, developer for 111MW Gibson Bay Wind Farm, obtained a $170million
loan from German Development Bank (KfW); a joint venture between South African
developer Exxaro Resources and Tata Enterprise, financed the Amakhala Emoyeni
Wind Farm through a debt/equity ratio of 80/20, with $323.8 million loan from
IFC ($72million) and Standard Bank of South Africa ($256million). In fact, one report notes that Standard Bank of South
Africa has financed 40% of 1760MW renewable energy capacity operational in
South Africa in 2015. The growth of South Africa’s renewable energy program, as
well as local financing capability is truly awe-inspiring.
Trends & Challenges
Wind farm financing and development across Ethiopia, Kenya
and South Africa demonstrate large variance. However, several trends emerge.
Financing for wind power indicates a variety of options and
sources, ranging from traditional western/OECD donors to emerging markets;
multilateral development banks to local banks; Clean Development Mechanism to
Green Bond.
Adoption/availability of these various financing mechanisms
responds to local institutional and regulatory environment. In Ethiopia, lack of
regulatory and institutional support limit financing option to single donor,
whereas in Kenya, tradition of IPPs enable innovative financing structure;
however, lack of institutional support limits the number of wind project
opportunities. Finally, in South Africa, competitive, transparent and regular
IPP tendering process has allowed private investors to flourish.
Despite significant progress in wind energy development and
financing in sub-Saharan Africa, there is under-utilization of new climate
financing mechanisms, such as Clean Development Mechanism (CDM), Green Climate
Fund and the China South-South Climate Cooperation Fund. At the moment, some
sub-Saharan countries find CDM cost-ineffective to register. In addition, CDM
does not account for mitigation from emerging market investors. Sustainable
development mechanism, CDM’s post-2020 successor, should address these issues.
Development and financing for wind energy in Sub-Saharan
Africa has traditionally relied heavily on the public sector with greater
involvement from the private sector in recent years. Facing the double-threat
of climate change and energy poverty, public financing will be grossly
insufficient. Scaling up private sector wind energy finance is crucial in
limiting global warming to two degrees Celsius, as well as meeting Sustainable
Development Goal of ensuring universal access to affordable, reliable and
modern energy.
1 comment:
Nice
Post a Comment