Power in East Africa: Continuing Progress

Power in East Africa: Continuing Progress

September 10, 2015

By Rahwa Gebretnsaie

The alignment of commercial interests between the United States and East African countries has produced a number of bankable projects in the region, but certain challenges will need to be overcome in order for the Power Africa initiative the US government has undertaken to increase electricity output in Africa to achieve its full potential.

Power Africa Update

Power Africa is a $7 billion commitment by the US government to the region, but approximately $5 billion was earmarked to come from the US Export-Import Bank, which has now had to stop making any new funding commitments after a deadline passed for Congress to renew its funding authority. While Senate and House leaders have been trying to find a way to renew the bank’s funding, strong opposition from key Republicans who control both houses of Congress have left the bank in limbo.

The good news for the Power Africa Initiative is that Ex-Im Bank credit requirements had largely sidelined it from participation in the financing of sub-Saharan power projects.

Of the other 11 federal agencies participating in the Power Africa initiative, the Overseas Private Investment Corporation will play an instrumental role in financing renewable energy projects in Africa. During President Obama’s visit in July to Kenya, OPIC announced a new $1 billion commitment in finance and insurance products and is reportedly on track to meet that commitment by the end of 2015.

OPIC and the US Trade and Development Agency are tasked with carrying out the US-Africa Clean Energy Finance (ACEF) program, an integral part of the Power Africa initiative. ACEF provides early-stage funding to help attract private sector follow-on investment in renewable energy projects in sub-Saharan Africa.

The East African region is becoming an increasingly attractive investment climate with its abundance of solar, geothermal and wind resources and the political will of East African governments to develop renewable energy sources.

A number of recent notable Power Africa transactions are progressing in East Africa.

OPIC approved an investment guarantee of up to $250 million to support construction of the Lake Turkana wind power project approximately five miles east of Lake Turkana in northern Kenya. The 310-megawatt, grid-connected wind farm will involve the installation of 365 wind turbines.

OPIC committed $233 million in debt to support construction and operation of the Kipeto wind power project in Kajiado, Kenya, south of Nairobi. When complete, the 100-megawatt, grid-connected wind farm will be one of the first utility-scale wind projects to come on line in Kenya.

The Africa Finance Corporation, a multilateral lending agency with substantial private-sector participation, based in Lagos, provided a $25 million loan as part of a $150 million senior unsecured syndicated loan facility to the Kenya Power and Lighting Company. The facility will support the rehabilitation and expansion of the power transmission and distribution network in Kenya to increase the capacity from the current 2,000 megawatt to 5,000 megawatt by 2020.

ACEF is providing funding to support an 8.5-megawatt solar power project in Kigali. The project will be East Africa’s first grid-connected, utility-scale solar energy facility.

Various Power Africa participants, including the US Department of Commerce and the African Development Bank (AfDB), are also providing legal and technical assistance to African governments to improve the conditions for private investment. The US Department of Commerce commercial law development program and the AfDB published an Understanding Power Purchase Agreements handbook that the two agencies hope will lead to greater standardization of PPAs and reduce negotiation times.

AfDB Update

The AfDB funded the cost of legal counsel to the Ethiopian government to assist with negotiation of a power purchase agreement for the 500-megawatt Corbetti geothermal project. The Ethiopian Electric Power and the Corbetti Geothermal Company signed a power purchase agreement in July 2015 for the first 500 megawatts of a potential 1,000-megawatt geothermal power plant.

The AfDB also serves as an implementing agency of the Climate Investment Fund, an $8 billion fund aimed at attracting private investment in renewable energy and climate resilience projects. The fund provides developing countries with concessionary loans, equity financing and risk mitigation instruments.

A number of notable AfDB and fund-financed projects are currently in the pipeline in East Africa. Six such projects are the 75-megawatt Aluto Langano geothermal in Ethiopia, the two Assela wind farms with a combined capacity of 171 megawatts in Ethiopia, the 150-megawatt Menengai geothermal project in Kenya, and the 15-megawatt Kopere solar PV project and the 140-megawatt Olkaria IV geothermal project, both in Kenya.

Regional Power Markets

Regional economic integration in East Africa has the potential to expand national power markets and create more opportunities for bankable projects.

The East Africa Power Pool – called EAPP – is a regional intergovernmental organization comprised of Burundi, Democratic Republic of Congo, Egypt, Ethiopia, Kenya, Rwanda and Sudan. The EAPP should eventually introduce regional power interconnection and allow power exchanges among utilities in the EAPP countries.

Actual levels of trade in energy among EAPP member countries are low due to a deficit in intra-regional transmission infrastructure. This infrastructure deficit is being addressed through financing and technical assistance programs launched by the AfDB and the International Renewable Energy Agency. If successful, regional power pools such as the EAPP should make utility-scale power projects more attractive in the region because of the potential increase in demand that could be served by a project after the initial power contract ends.

Three of Africa’s largest regional economic communities, the Common Market for Eastern and Southern Africa, the East African Community and the Southern Africa Development Community, recently came together to form the Tripartite Free Trade Area. This trade area will cover 26 countries stretching north to south from Egypt to South Africa and represents a significant step towards achieving regional economic integration. The aim of the trade area is to promote intraregional trade, market integration and infrastructure development. It could facilitate the development of regional power pools. The success of these efforts is largely dependent upon the political will and alignment of incentives among member countries.

by Rahwa Gebretnsaie, in New York