The Paris Agreement: the future of renewables in East Africa?

Global Publication April, 2016

The pact announced at COP21 last December, known as the Paris Agreement, does not require countries to meet climate targets but it does oblige all nations to at least subject their climate plans to public scrutiny every five years in a far more transparent manner than most have ever done before. In return, developed countries are committed to providing more climate finance to developing nations and an adjoining 19-page decision of the Paris meeting states that developed countries should set a new goal of investing more than US$100 billion a year in low carbon technologies and infrastructure in developing countries by 2020.

This deal was viewed by many within the energy industry as less about discouraging fossil fuels and more about encouraging investors to support low-carbon technologies.

The global market for low-carbon goods and services is currently valued at around US$5 trillion a year and the Paris Agreement creates the political imperative on governments to accelerate low carbon policies.  As a result the amount of capital chasing new low-carbon investment opportunities is likely to increase considerably. In the words of Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change, a European network of institutional investors with €13 trillion in assets, the Paris Agreement “provides an unequivocal signal for investors to help escalate the development of low-carbon infrastructure. In tandem with the Paris Agreement, the Africa Renewable Energy Initiative (AREI) was announced. The AREI is the outcome of a concept which began at COP17 held in Durban in 2011, and is backed by the African Union Heads of State. AREI is led by, amongst others, the African Development Bank (AfDB), New Partnership for Africa’s Development (NEPAD) and the International Renewable Energy Agency (IRENA). AREI sets an initial target of US$ 20 billion invested in renewable energy projects in Africa within the next four years, with the eventual goal to develop at least 300 GW of new renewable generation capacity by 2030. To do this AREI seeks to galvanise financial resources from the private sector, development finance institutions and multilateral development banks, building on existing work and initiatives (including Power Africa, SE4ALL and the Africa Clean Energy Finance Initiative) to accelerate investment in renewable energy. The AfDB and other financial groups such as the World Bank have pledged an initial US$5 billion in public and highly concessional finance between 2016 and 2020, and Canada, France, Germany, the UK, Italy, Japan and the US have released US$10 billion to support Africa’s renewable energy development.

How well positioned are the legal and regulatory frameworks in Tanzania and neighbouring Kenya to take advantage of AREI?

At the COP21 meeting, Kenya’s Cabinet Secretary for environment and natural resources, Prof. Judi Wakhungu, stated that Kenya is ready to take part in massive solar and wind energy production.

With the financial close of the Lake Turkana project and its ambitious geothermal programme, Kenya is indeed leading the way on large scale renewable projects. We also anticipate the financial close of a solar photovoltaic project in Kenya before the end of this year. However, as the Kinangop project has highlighted, teething issues remain on Kenyan renewable projects. In particular, problems arise due to complex land and community issues, the extent of the application of public procurement rules to renewable projects, and the need to protect the creditworthiness of the offtaker, Kenya Power. Kenya has a renewables policy in place and a well-established electricity sector, but entry into the market is not as easy as many experienced developers would have expected. In the future, we anticipate that Kenya will move towards competitive bidding for renewables and it is currently undertaking studies in this regard.

In Tanzania the development of renewable energy projects has been hampered by many factors, not least of which are ongoing concerns surrounding the solvency of the offtaker, TANESCO, a lack of incentives to attract investment and a lack of a clear procurement process to facilitate and encourage investment. Furthermore, with the anticipated exploitation of its natural gas and coal resources, the Tanzanian public sector creates an impression that its future lies in fossil rules rather than renewables.

Tanzania has had a feed-in tariff scheme in place since 2008 for small power producers (100 kW to 10 MW) which has had some limited success in attracting investors, but there are no feed-in tariffs or other clear incentives for renewable energy projects larger than 10 MW. Instead it is open for developers of larger projects to approach the Government of Tanzania for bilateral negotiations outside the feed-in tariff scheme, and the process for these bilateral negotiations is regarded as cumbersome and complex.

However, a notable first step to address this situation was taken with the introduction in February 2016 of the Electricity (Competitive Power Procurement Framework) Regulations, 2015. The regulations pave the way for the introduction of two new sets of rules that will create a competitive bidding framework for small power projects (projects with a capacity of between 1MW and 10 MW) that utilise a renewable energy source, and for all large scale power projects (projects with an electricity generation capacity of above 10MW). The first of these sets of rules, for the development of small power projects, came into effect earlier this year.

The new rules set out a simplified, non-competitive process that applies to the development of all hydro and biomass small power projects, and wind and solar projects of less than 1MW in size.

Wind and solar projects of between 1MW and 10MW are subject to a competitive process that will be tendered in bid rounds of up to 100MW. The newly formed Electricity Infrastructure Procurement Committee will issue a request for qualification inviting interested parties to submit bids for qualification, which will be evaluated according to their technical capability, financial resources and demonstrable commitment to acquire land rights. Following selection of qualified bidders a request for proposal would be issued, which stays open for nine months for solar and 15 months for wind, inviting the submission of binding bids with a bid price per kWh in US dollars together with bid security of US$2 per kW of proposed project installed capacity. Preferred bidders arising out of the RFP stage are then invited to execute a 25 year standardised power purchase agreement after posting a second bid security of US$25 per kW.

It is not the first time that large scale investment has targeted the Africa renewables sector and developments are still slow moving, with many obstacles to overcome. However, the AREI is an Africa-led initiative and it has a fixed near-term goal of developing 10 GW of new renewable energy generation by 2020. This means that the continent has proactively set itself an achievable target that should help to galvanise the development of financial products to assist to de-risk offtaker creditworthiness issues, and spur national governments in their on-going regulatory reforms.

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