Mr Meeteran noted that investors in Independent Power Plants (IPPs) need assurance of not just off-takers but payment guarantee by the government of countries.
The Sector Specialist, Energy Project Finance at the Dutch Development Bank FMO, Bernhard van Meeteran, said on Thursday that the inability of governments in West Africa to guarantee able buyers (or off-takers) of energy have made investments in the sector challenging in the region.
Speaking on Public-Private-Partnerships in the Energy Sector at the West Africa Energy Cooperation Summit (WAECS) in Lome, the capital of Togo, he said private companies always want a guarantee of existing buyers of the electricity to be generated before they can set up a plant, so as to mitigate the losses that come with not being able to sell produced energy.
Earlier, Abide Bataba-Agamah, a Legal Director at the Togolese Electricity Sector Regulatory Authority (ARSE), said Independent Power Plant (IPP) operators usually include a ‘take or pay’ clause in the contracts with the government during Public-Private-Partnerships (PPP). The ‘take or pay’ clause means that the off-takers will either ‘take’ power produced, ‘or pay’ for the power produced if it is not required, which usually occurs in situations where the electricity distribution companies fail to take all the energy produced.
This, Ms Bataba-Agamah noted, has for years had negative implications for both the government and consumers while the IPP operators wriggle out of the challenge.
“For a long time, we had projects where we found ourselves consuming only a quarter of what is produced, of the installed capacity, but we still had to pay for this energy. It is a shock for the end consumer as well,” she said.
Challenges
Mr Meeteran noted that investors in IPPs need assurance of not just off-takers but payment guarantee by the government of countries.
“If there’s nothing, you’re left alone with no off-taker, with no payment, … And that’s not something that the Development Finance Institutions (DFIs) are willing to finance at the moment. So, we’ve also seen countries who’ve said no to government guarantees,” he said.
He also noted another challenge specifically about the Francophone West African countries (CFA zone), where, he said, the central banks require IPPs in their construction period to convert all the disbursed funds by the DFIs to the local currency.
“This, apart from delays in time, also costs taxes and exchange rates costs. So it can add up to 3 to 5 per cent of project costs. For those that are currently under construction, this is an additional cost that is not foreseen,” he said.
“We have one IPP that started operating in the West African francophone zone that doesn’t get the euros from the central bank anymore, and therefore has to buy it in the market – 3 to 4 per cent of costs in addition, not foreseen. This is basically a change of law under the project documents; but we think it should be resolved, and I think it goes for more countries in the CFA zone.”
Recommendations
The Dutch Development Bank official, Mr Meeteran, therefore, suggested payment guarantees through the Regional Liquidity Support Facility (RLSF), so the IPP operators can get alternative cash flow when the off-taker fails to pay or on time. The RLSF is an insurance initiative that provides IPPs the liquidity they need in the event that their off-taker delays payment.
“We’ve seen the collection account being set up in Ghana and we’ve seen that there has never been enough money in it to pay all the IPPs. So, it is a good system. It can work, but there must be enough money in the circuit to make it work. Without it, it doesn’t help,” he said.
Speaking on the ‘take or pay’ concerns raised by Ms Bataba-Agamah, Mr Meeteran said the plants have running costs and someone has to pay for it.
“The lenders (who financed the project) want to be paid, the owner wants to have a certain return on his investments; if he can’t get it, they won’t finance it,” he said.
