Africa’s Independent Power Transmission Potentials Untapped

powerIntroducing Independent Power Transmissions (IPTs) for electricity transmission in Africa could result in similar benefits to those achieved by IPTs in other countries, and by IPPs in Africa, according to the latest World Bank’s report dubbed ‘Linking up: Public-Private Partnerships in Power Transmission in Africa’.

To realize these benefits, African governments will have to take actions to produce a favorable enabling environment for IPTs. Their approach can draw on the lessons learned from introducing IPPs in Africa, and international experience in IPTs.

The ten steps required are to:

  • Develop policies that support IPTs. A clear policy direction on how to introduce IPTs, adequately consulted, will be important in order to drive investment. Policy development will need to consider the arguments both for and against testing the use of IPTs to meet government objectives, and reach a final decision.

Development Finance Institutions (DFIs) can also assist through dissemination of knowledge products and technical assistance, including peer-to-peer advice from other developing countries with IPT experience.

  • Develop the legal and regulatory frameworks to support IPTs. In most countries, introducing IPTs will require changes to legislation, regulation, and other documents such as grid codes. Governments should draw on the substantial body of international experience to identify lessons learned elsewhere. Primary legislation may be required, and the legislation may also need to evolve over time.
  • Conduct trials of IPTs. Moving to a new model that has worked well internationally but has not been tried domestically is a risk for African governments. They should start with trials of IPTs to better understand the implementation challenges, and revise regulations and policies as necessary to improve efficiency. International experience shows that IPT tenders can be run while existing frameworks for government-financed transmission are kept in place, and this has been the practice in most countries that have used this model.
  • Introduce new models for concessional lending. Transmission projects are capital- intensive. African governments need to engage with DFIs to ensure that concessional finance is not tied to delivery by government-owned companies, and to develop models for DFI support to transmission projects delivered by IPTs.

The low cost of concessional lending helps African governments meet their investment targets at a lower cost to consumers, and any shift to IPTs must safeguard these benefits. African governments can also work with DFIs to ensure that DFI lending policies are not biased toward government ownership of transmission, and do not impede the use of privately-financed transmission.

  • Decide the stage at which to tender transmission projects. There are two broad choices here. Early-stage tenders allow for more innovation by bidders. However, they also expose them to risk on issues such as approvals and permitting, and require a more complex evaluation.

Late-stage tenders are for projects that are already well developed, in which the evaluation can focus on cost. Late-stage tenders are likely to be the best approach for starting off trials of IPTs. They are simpler to evaluate, based on the price offered by different bidders to build and operate a line according to a single detailed design.

By contrast, early-stage tenders lead to offers with different designs and require more assessment of the viability of the proposed solutions.

  • Determine payments to IPTs based on availability. International experience shows that it is best to expose IPT bidders to risk on their performance in ensuring high levels of availability, but not to expose them to risk on the volume or value of flows along the line.

The availability targets are typically close to 98 percent and this, together with other requirements, needs to be set out in a Transmission Service Agreement (TSA) with the IPT. The TSA should include an obligation to commission the line in accordance with the technical specifications by a defined date (often referred to as the commercial operation date).

  • Ensure adequate revenue and credit enhancement where needed. IPTs will be implemented on a project finance basis. Financiers need confidence that the contractual payments will be received, for example, through the use of escrow accounts if the sector as a whole is not profitable.

Where escrow arrangements are not enough to make the project bankable, governments may also have to use a government guarantee to back payment obligations to IPTs. If the sovereign guarantees are insufficient, multilateral guarantees may be needed.

  • Tailor IPT projects to attract international investors. African governments that want to try IPTs should ensure that the tenders offered are of sufficient size; that they face no particular environmental or permitting challenges; and that there is a pipeline of future projects. The projects should be large enough to justify the transaction costs. In some cases, this may mean bundling several projects into a single tender. In Peru for example, capital costs ranged between US$52.2 million and US$291.0 million, from a sample of 14 transmission projects tendered between 1998 and 2013. On average, capital costs were US$116.2 million.
  • Prepare to implement IPT transactions. Governments will need to seek transaction advisers, prepare TSAs and bid documents, define eligible bidders, and conduct a market sounding. The TSA will include the contract term, payments, performance obligations and incentives, indexation, and force majeure among other things.
  • Run competitive tenders. The final step will be to run a tender, evaluate bids, and award an IPT contract.

There is potential to develop IPT programs in Africa that will be attractive to international bidders. To achieve this, governments should work with international investors and potential providers of loan finance to build detailed business models that will attract international interest, and can be replicated across the African continent.

The next key step is to move beyond merely considering how this business model applies within Africa, and piloting a few projects.

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