Accra, June 13, 2017//- More investment in Africa’s power transmission sector is urgent than before. Of 38 countries in Africa, nine have no transmission lines above 100 kilovolt (kV).
The combined length of transmission in 38 countries in Africa is 112,196 kilometers (km). The country of Brazil has a longer transmission network than Africa, at 125,640 km, and, at 257,000 km, the United States of America (United States) has more than twice the length of the African transmission network.
Despite its large land mass, Africa also has fewer kilometers of transmission lines per capita than other regions.
The length of transmission lines in Africa is 247 km per million people: excluding South Africa, this indicator drops to 229 km per million people.
In contrast, Colombia has 295km of transmission lines per million people, Peru has 339km, Brazil has 610km, Chile has 694km, and the United States has 807km.
Building more transmission lines and upgrading transmission capacity will be an essential part of the overall expansion of the electricity sector. As Africa needs transmission both within and between countries, investments are required at both the national and regional levels.
Africa needs to invest in long-distance lines, using both alternating current (AC) and direct current (DC) technologies, and to expand in-country transmission networks at a range of voltages. Africa has large low-cost hydrogeneration resources, but the realized potential is far below the load they could serve, according to the latest World Bank’s report dubbed ‘Linking up: Public-Private Partnerships in Power Transmission in Africa’.
Transmission investment, including investment in transmission between countries, is needed to connect these resources to consumers. In-country investments requirements are also large covering various project types.
In Kenya, the Kenya Electricity Transmission Company (Ketraco) expects to develop approximately 7,000 km of transmission lines by 2020— including 2,200 km of 132 kV lines; 2,400 km of 220 kV lines; 2,000 km of 400 kV lines; and 612 km of 500 kV High Voltage Direct Current (HVDC) lines.
The report observed: “Public finance is relatively scarce in fiscally constrained environments. The opportunity cost of overwhelming use of public capital in the power sector can be high, especially in countries facing demands to address other socioeconomic deficits”.
Project finance can allow state-owned utilities to raise additional capital that would otherwise be unavailable, by separating out a portion of cash flows related to particular investments.
Under a project finance structure, the government’s guarantee on payment does not make the fiscal position worse.
Rather, it ensures that a small increase in electricity tariffs intended to pay for a financially viable project will truly dedicated be to that, and will not be used for other debt services or expenditures. Private finance allows the state-owned utility, or the government, to pay competitive and cost-reflective transmission prices.
As the private sector invests in financially viable transmission projects, this can also have spillover effects. With higher transmission capacity, utilities can increase electricity sales and reduce generation costs. Finally, private involvement can bring managerial skills, technical knowhow, and performance incentives, and stronger accountability to the sub-sector.
Business models of private-public partnerships
Several different business models have been used to attract private investment in transmission. The four main models are privatizations, whole-of-grid concessions, independent power transmissions (IPTs), and merchant investments. Private finance has brought substantial investment in new transmission to the countries using these models.
With the restructuring and liberalization of power markets in Organisation for Economic Co-operation and Development (OECD) countries, the approach to financing transmission investment changed.
Private companies now finance a large share of transmission investment in many countries in North and South America, and in Europe. Privately financed transmission has also been introduced in some developing countries. India, for example, has attracted US$5.5 billion of private investment in transmission since 2002.
Four main business models have been used: Indefinite privatizations provide ownership of the transmission network to a private company, usually through a trade sale or public flotation of a government-owned transmission business. The private owner has the exclusive right (and obligation) to develop new transmission in its area of operation.
- Whole-of-grid concessions provide similar rights and responsibilities to privatizations,
but for a shorter period. In most cases, the government implements this business model
with a competitive tender of the concession, and enters a concession contract with the
winning bidder.
- Independent Power Transmissions (IPTs) provide the rights and obligations associated
with a single transmission line, or a package of a few lines. In most cases the government
implements this business model by tendering a long-term contract, with payment dependent on the availability of the line.
- Merchant investors build and operate a single transmission line (“merchant line”). In
many cases this is a High Voltage Direct Current (HVDC) line. The merchant investor benefits from moving power from low-price regions to high-price regions. In most cases, merchant lines are a private initiative, and are not initiated by the government.
In some countries more than one business model is used. For example, the United States and the United Kingdom have lifted the exclusivity of private transmission businesses for new transmission investment, allowing governments to also conduct IPT tenders. All of these models can work, but the conditions in which they work best are different.
Bolivia’s attempt at privatization, for example, did not last, and experiences with concessions in the African countries have failed to yield significant investment. However, where the conditions are right, private finance under these models has brought substantial investment of new electricity transmission to some countries.
For example, the three companies involved in privatization in the United Kingdom invested GBP 5.6 billion from 2013–16. And in Peru, IPTs raised US$1.8 billion in 18 tenders, and on average the winning bids yielded 36 percent lower annual costs than those estimated. In India, the share of private investment–including joint ventures with public transmission company—has been growing since the late 2000s.
The private sector has invested a total of US$5.5 billion, and there is US$5 billion worth of projects scheduled to follow.
Africa’s experience with private sector participation in the transmission sector has been negligible, primarily through whole-of-grid concessions. Though these have not achieved significant investment in transmission, they have brought some operational benefits.
Africa has no experience of privately- financed transmission lines through IPTs or merchant lines. Some preliminary steps have been made to prepare for IPT tenders in Nigeria, but no projects have been awarded.
IPTs could be the most promising business model to involve the private sector in Africa. They have performed well in other developing countries, including the case-study countries. The per capita income level of some of these countries at the inception of IPTs was similar to the per capita income levels of the African countries that are considering the introduction of IPTs today.
IPTs in both middle-income and low-income countries have led to substantial private investment in transmission, significant cost savings through tenders, and to contractual agreements that are thus far stable. Further, the risks that IPT investors carry are similar to those that IPP investors carry, and the IPP business model has worked well in Africa.
There are four main alternatives for structuring the IPT, broadly differentiated depending upon the source of capital expenditure (CAPEX) requirements, whether the private company will own the transmission assets, and whether these will be transferred at the end of the term .
The selected case-study countries did not have identical structures for their IPTs, but they were all successful in attracting private finance to invest in new transmission assets. There were two distinguishing characteristics. First, the stage at which the asset was transferred: in Brazil, Peru, and India the tenders are for Build, Own, Operate, Transfer (BOOT) Type 1 contracts.
This transfer condition requires measures such as valuation of the asset condition, or requirements for minimum maintenance spending toward the end of the contract term to ensure that the asset is transferred in good condition.
In Chile, IPT contracts are Build, Own, Operate (BOO) Type 2. This type of contract establishes revenue certainty for an initial period, and is followed by regulatory determinations later in the life of the asset. This was the only example in the case studies of indefinite private ownership of the transmission asset financed under an IPT tender.
An alternative is that the private company finances the asset; receives long-term payments based on operational performance; and transfers the asset ownership at a much earlier stage.
This is a Build, Transfer, Operate (BTO) contract, Type 3. For example, the asset could be transferred to the government-owned transmission company immediately after commissioning, while the capital costs would be recovered over a contract term of 30 years.
An early transfer of ownership is not a usual approach under project finance. It may in theory be able to provide similar incentives to traditional IPT contracts.
However, this would require that the transfer of ownership is purely on paper, and does not lead to any intervention by the new owner that would affect cost or performance.
It would also require that security is provided in some way other than the ultimate security that arises from ownership of the asset.
Risk allocation under these structures are all similar except for the EPC+Finance option (Type 4), in which the public sector bears operation risk.
Otherwise, all of the contract forms essentially transfer both construction and operation risk and CAPEX requirements away from the government. There are no efficiency gains from the EPC+Finance approach, as the developer does not bear whole-of-life performance risk.
Despite the success of IPTs in other countries, it should be recognized that the context for transmission investment in Africa differs from those in most countries with IPTs. These differences include the financial viability of the power sector, and the industry structure.
Most of the countries using IPTs have sufficient revenue from electricity consumers to ensure the profitability of generators, network businesses, and distribution businesses. This is not the case in most African countries.
However, India’s experience, where the challenge of low tariffs and high losses has been overcome, demonstrates that overall power-sector profitability is not a necessary precondition for IPTs to work well.
Another difference is that most countries using IPTs have already introduced vertical separation between generation, transmission, and distribution. Some African countries have introduced vertical separation, but most have not.
Finally, using IPT tenders presents disadvantages relative to other business models. Procuring transmission infrastructure through the IPT model requires running frequent tenders. This generates higher transaction costs than other business models.
This is especially true if compared to procuring transmission lines through a whole-of-grid concession.
Ultimately, global experience shows that the benefits of IPTs outweigh the costs of implementing them. However, successful experience with IPPs in the generation of electricity, with similar PPP structures, suggests that IPTs could be used to augment investments in transmission in Africa.
African Eye Report
