Innovative private micro-hydro power development in Rwanda
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Maurice Pigaht, Robert J. van der Plas
MARGE-Netherlands, Brem 68, 7577 EW Oldenzaal, the Netherlands
a r t i c l e
i n f o
Article history:
Received 12 March 2009 Accepted 8 June 2009 Available online 16 July 2009
Keywords:
Micro-hydro electricity Rural electrification Private sector participation
a b s t r a c t
Under the ‘‘Private Sector Participation in Micro-Hydro Development Project in Rwanda’’, four newly registered Rwandan companies are each constructing a micro-hydro electricity plant (100–500 kW) and building a low-voltage distribution grid. These companies financed their plants through their own equity and debt with support from the PSP Hydro project. This support comprised a subsidy of 30–50% of investment costs, technical and business development assistance, project monitoring and financial controlling. The experiences gained so far have important implications for similar future micro-hydro energy sector development projects and this paper puts forward three key messages: (i) institutional arrangements rather than technical quality determine the success of such projects; (ii) truly sustainable rural electrification through micro-hydro development demands a high level of local participation at all levels and throughout all project phases, not just after plant commissioning; and (iii) real impact and sustainability can be obtained through close collaboration of local private and financial sector firms requiring only limited external funds. In short, micro-hydro projects can and will be taken up by local investors as a business if the conditions are right. Applying these messages could result in an accelerated uptake of viable micro-hydro activities in Rwanda, and in the opinion of the authors elsewhere too.
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1. Introduction
This paper describes the early results of a project in Rwanda that has successfully mobilized local equity and debt capital for micro-hydro projects with local distribution grids. The develop-ment of micro-hydro projects as a source of on-grid and off-grid electricity in developing countries has been attempted through a wide range of approaches. It is the community-owned approach that still dominates development aid projects, with few notable exceptions.1Although there is not sufficient information to allow a comparison of different approaches,2 in the experience of the authors community-owned projects have generally disappointed in impact, self-replication potential and sustainability. The PSP Hydro project was conceived to pilot a new private-sector-oriented approach to micro-hydro power development, with a view to significantly increase local equity and debt, impact and sustainability.
The PSP Hydro project approach is based on common wisdom as presented by donor organisations3:
Independent grids may be superior to grid extension in trying to serve disperse demands at great distances. Criteria for site selection should avoid political interference. Pricing policies are key for project viability and a rational system of cost recovery is the most important factor determin-ing the long-term sustainability of RE programs, in particular attracting the initial capital and reducing risk perceptions. Subsidization of operating costs has widely proved to be counter-productive and to undermine the utilities’ financial position, their ability to extend service, and ultimately the RE programs themselves. The private sector can be attracted to participate in rural electrification schemes, even in a poor country, if an appropriate legal framework and risk management options are in place. RE programs can benefit greatly from the involvement of local communities—or suffer because of its absence.In practice however, micro-hydro plants are generally not developed by local private entrepreneurs but mainly through
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doi:10.1016/j.enpol.2009.06.039
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This paper reflects the personal opinions of the authors and does not in any way represent the views of GTZ or of other project partners.
Corresponding author. Tel.: +31 652 456 219; fax: +31842 217425.
E-mail addresses:[email protected] (M. Pigaht),[email protected] (R.J.
van der Plas).
1
China, Sri Lanka, Vietnam.
2
Google and Scopus searches mainly report on technical issues, not institutional or organizational ones.
3
World Bank: Africa Region Findings—Rural Electrification: Lessons Learnt, World Bank, 2001.
100% public-financed projects.4 In the absence of objective analyses of such projects, the experience above, and the personal experience of the authors elsewhere in Africa and Central Asia has shown that such approaches face significant inherent challenges such as:
High reliance on (foreign) consultants with minimal inputs from local experts and/or communities resulting in low transfer of competence and capacity building. After construction plants are transferred to the local commu-nity for all operational aspects, the sustained maintenance, repair and operational tasks normally appear beyond the capacity of the local community. Operation of such plants is then often by default taken over by the national electricity company.Examples of 100% privately financed micro-hydro plants exist throughout the World, including Rwanda. These plants are paid, installed, and operated mainly by tea or other commercial companies, religious institutions, etc., that want to meet their electricity needs by auto-generation. In general, for as long as these organizations remain in good financial health and can source technical capacity, the micro-hydro plants continue to be used.
The disparity between the performance of private and public plants is stark and yet, this may give rise to a different approach that has not been tried before—strange as it may appear.
2. The Rwanda PSP Hydro project
The aim of the PSP Hydro project is to increase rural electricity access by developing micro-hydro plants in the range of 100–500 kW jointly with the private sector. The PSP Hydro project is the first attempt in Rwanda to attract private commercial participation in the development of micro-hydro resources. The hypotheses used are: (i) given the appropriate support, Rwandan companies are capable of managing, constructing, co-financing and operating such plants and small electricity utilities; and (ii) by leveraging aid funds through a mix of subsidy, private equity and commercial loans, it is possible to improve the institutional set-up and local ownership.
The approach followed by the PSP Hydro project to accelerate rural electricity access was through creating public–private partnerships between Rwandan private companies and the government. Foreign donor subsidies were used to leverage risk money from private companies to develop commercial micro-hydro projects. Commitments shown by private companies were high—they understood the need for successfully operating the plants for some time in order to recover their investments. The PSP Hydro project is part of the Dutch–German Energy Partner-ship ‘‘Energising Development’’ that is implemented by GTZ and funded by the Netherlands Directorate General for International Cooperation (DGIS).
2.1. First call for proposals in 2005
Private expressions of interest were solicited through afirst call for proposalsby MININFRA5 and the PSP Hydro project in 2005; some 20+ project developers submitted their draft micro-hydro
investment plans (MHIP); unfortunately none was of sufficient quality to be considered seriously. In general they were looking for a risk-free opportunity to construct a micro-hydro plant and had submitted a rough project idea with a large budget.
After business plan training sessions by the PSP Hydro project focusing on economic project performance, project developers were requested to resubmit a revised and improved version of their MHIP. Out of the total of 15 resubmitted, 6 showed enough potential to be considered for PSP support and eventually 6 project developers entered into a preliminary subsidy agreement. This contract allowed financial support from the PSP Hydro project directly to the project developer, limited to a 50% maximum of co-funding for the total investments as originally presented in the MHIP. The agreement also included the provision of technical engineering and business development assistance to the project developers organized by the PSP Hydro project through local contractors. Selection criteria included reasonable proof of potential equity contribution, viable draft business plan, and good qualifications for key project developer staff.
2.2. The development of viable business plans
In 2006, two of the six proposals were withdrawn. The first of these had difficulties obtaining a bank loan after the foreign partner stopped its involvement when he learnt about Electro-gaz’s decision that the power purchase agreement (PPA) tariff would be only FRW 60/kWh (approximately US$0.11).
The second withdrawal came as a result of another kind of regulatory uncertainty—another institution had obtained the rights from MINIFRA to develop the same site as the project developer who had already studied this site. Because of the additional costs to be incurred by changing to a different location, the project developer decided to forego further involvement.
Aside from a viable business plan, project developers had to obtain all regulatory clearances, such as environmental clearance from REMA6(preparation of an environmental impact mitigation plan), licence to operate a micro-utility from RURA,7 approval from the District authorities to develop the site following general agreement with MININFRA, and a Power Purchase Agreement with Electrogaz for those plants that decided to interconnect. Although it was not originally foreseen except for 2 plants that they would interconnect with Electrogaz, most project developers opted to incur additional costs to improve their cash flow and enable the possibility to sell all generated electricity.
At the end of 2006 the first finalized grant contract was signed between GTZ and the project developer who had submitted a viable MHIP and fulfilled all contractual obligations with the exception of bank financing. Two more grant contracts were signed in 2007 as well as the first two commercial financing agreements between project developers and Rwandan banks. Project developers are fully responsible for the final plant design and for construction and procurement of the turbine, generator, and the distribution network. They received feedback and advice from Electrogaz for technical matters and from another local firm for business development matters. They were responsible for procurement of services and equipment using competitive procedures. The PSP Hydro project assisted them by providing limited technical assistance and by contracting independent studies and audits to verify the technical and financial perfor-mance.
A second call for proposalswas organized in 2007 to replace project developers that had disappeared and to bring the total 4In Rwanda an international organization recently completed pilot plants
through a learning by doing project in Nyamyotsi, Gatobwe, Mutobo and is building another one in Nyamyotsi; in other countries in the Region similar pilots are underway. It calls this South–South technology transfer a great success, ready for replication elsewhere in Africa. Plants are for 100% financed by the government and the organization, works and studies are done by Asian consultants.
5
Ministry for infrastructure, energy and telecommunications.
6
Rwanda environment management authority.
7
number of micro-hydro projects back to six. This second call for proposals resulted in 5 proposals of which 3 were evaluated positively by a commission of MININFRA, Electrogaz, and Rwanda Private Sector Federation staff plus PSP Hydro team staff. Only one of these three proposals reached the stage of grant signature, as the remaining 2 projects turned out not to be viable—one because of conflicts of water use, and the other due to a lack of capacity on the part of the promoter who was technically and financially qualified but failed to pursue his submitted proposal.
2.3. Situation today
Table 1below shows some details of the six projects. Out of a total of 8 MHIP that have been considered under the PSP Hydro project program (6 in the first tender and 2 in the second), 5 are under development (63%) while 3 dropped out (38%). Of the projects under development, 3 are about to become operational in the summer of 2009 (60%).
Of the projects that dropped out, one requested to be removed from the PSP Hydro project for cost reasons as well as a malfunctioning regulatory environment,8 one was removed because the provider was unable to even fulfil the basic requirements, and one had trouble with the banks due to past personal experiences and in addition problems with the PPA.9See
Table 2for more details about the number of projects submitted to PSP and under construction.
2.4. Sector-wide achievements
As an innovative pilot project, PSP Hydro project has faced – and overcome – a number of institutional and regulatory challenges since its start in 2005, notably:
Nationally standardized power purchase agreements and feed-in tariffs did not exist. The PSP Hydro project negotiated the concept with Electrogaz and MININFRA—the project devel-opers would need such PPAs to decrease their risks and convince banks to provide debt financing. Prices and contracts were decided between Electrogaz, MININFRA and RURA. As a result, today a standard PPA contract exists and the last of these agreements was concluded with less than 2 weeks negotiation time. The conditions are flexible and open for both parties. A standard FRW 60/kWh tariff is applied for a period of 9 years, reviewable annually. There are no penalties for not delivering a minimum quantity of electricity, and the buy-back from Electrogaz to the project developer has been included as well. This is possible because the total capacity of the sixprojects combined remains small compared to Electrogaz’ capacity. In addition, Electrogaz is eager to replace some of its expensive thermal generation capacity, rented as an interim solution during the country’s acute electricity shortages in 2005.
RURA operates in the absence of an energy law that would provide legal regulatory framework for the power sector. This framework is foreseen for the second half of 2009. Through the PSP Hydro project however, RURA established a regular dialogue with all private sector electricity projects and has a provisional independent power supplier approval process in place. Approval of electricity projects is currently granted in 2–8 weeks. Each of the developers has proposed and negotiated with future clients his own cost-reflective electri-city tariffs, which are all below what Electrogaz charges. Although RURA did not approve or disapprove the tariffs, it is watching developments carefully with a specific interest to protect poor rural clients. REMA had no clear procedures for evaluating the impact of micro-hydro projects. Since working together with PSP Hydro project, REMA approval for hydro projects is now obtainable in 4–12 weeks. Banks in Rwanda had little or no experience with energy projects. As a consequence, they lacked expertise and were overly concerned about the unknown risks of energy projects. Now, the Banque Rwandaise de De´veloppement, the Banque Commerciale du Rwanda and the Banque de Kigali have given commercial loans and/or turbine leases to micro-hydro project developers under the PSP Hydro project. The BRD and BK usedTable 1
Project details, first call for proposals.
District/river Equity contribution Loan Subsidy (%)
kW
Rutsiro/Rwishywa 25.4% (1 Rwandan company and 1 foreign individual) 24.8% from Rwandan development bank 49.8 105 Nyaruguru/Mazimeru 42.5% (1 Rwandan company and 1 foreign company) 29.3% from commercial bank (BK) 28.2 500 Gakenke/Gaseke 15% (1 hospital, 1 parish, 1 foreign investor, 5 Rwandan
investors)
36.7% leasing contract from commercial bank (BCR) and loan from other institution
48.3 438 Gicumbi/Kavumu
Mwange
15.2% (1 Rwandan company) 34.8 (not in place yet) 50 110 Musanze/Mpenge 26.3% (1 Rwandan company) 43.9 (not in place yet) 29.8 128
Table 2
Number of MHIP submitted, considered, and implemented.
Project proposals
Submitted Considered Under construction 1st CfP 15 6 4 2nd CfP 5 2 1 Total 20 8 5 Success rate % considered of those submitted Submitted (%) % under construction of those considered 1st CfP 40 27 67 2nd CfP 40 20 50 Total 40 25 63 8
In this context, rules how to award sites to project developers.
9
Rwandese consultants to help them with the evaluation of hydro projects.
The Ministry for Infrastructure and Energy has greatly improved its coordination of micro-hydro projects, as Belgian Technical Cooperation, GTZ, UNIDO and others have been promoting projects in isolation. Whilst in the initial stages, the PSP Hydro project faced site conflicts with other developers, now a national hydropower site database is used to coordinate all hydropower projects in the country. Project developers obtain pre-approval from MININFRA for the development of a particular micro-hydro site, after which approval is obtained from the District authorities. At the beginning of the PSP Hydro project there was no association or Chamber of Commerce for energy businesses in Rwanda. A Chamber of Commerce for energy businesses has now been created under the Rwanda Private Sector Federation. All PSP Hydro project businesses are members alongside dozens of established and new Rwandan energy business. In 2005 there was no known company in Rwanda with micro-hydro expertise except the national utility, Electrogaz. At present, there are 5 legally registered private firms with contacts to hydro engineers, hydro equipment suppliers and financing institutions—and a capacity to design and realize a micro-hydro project.In the PSP Hydro project a total of some 430 non-connected households, 30 institutions, and 36 small businesses have been identified as interested and willing to pay for the electricity at the proposed tariffs. In addition, electricity will be fed into the national grid, although the quantity is expected to decrease as the mini-grids develop and hook up more local and rural clients over time.
3. Micro-hydro and beyond—creating infrastructure, businesses, livelihoods and a modern economy
Despite the fact that in 2005 the country had no energy law, no bank-financed electricity generation projects, no regulatory framework for energy and no private sector electricity producers other than a companies law and a contract law, the PSP Hydro
project was able to induce the creation of the first independent power producers and retailers in the country.
Although the solutions under these conditions encouraged by the bottom-up approach of the PSP Hydro project were often ad-hoc and imperfect, in fact they did contribute to improving energy sector and financial sector business.
3.1. Technical capacity—‘‘creating’’ Rwandan micro-hydro experts
In 2005 the views on the technical capacity present in micro-hydro in Rwanda was clear—there are neither Rwandan compa-nies nor micro-hydro experts, therefore all expertise needs to be imported. The PSP Hydro project, somewhat contrary to this perceived wisdom, assisted motivated Rwandan companies with no specific micro-hydro experience to start the construction and operation of micro-hydro plants. It also sub-contracted the locally staffed national utility to provide technical expertise. Finally, it also contracted another local firm to provide assistance with business development activities—the development of a business plan, the development of an accounting system, administration and strategic planning. Simultaneously other donor projects continued to contract mainly foreign expertise to build technical capacity.
The contrast between the locally driven PSP Hydro approach and the ‘‘conventional’’ top-down donor/government driven project approaches allows for an interesting comparison. These differing approaches are usually complementary but occasionally also antagonistic. SeeTable 3below for more details observed in Rwanda.
Top-down donor and government initiatives can learn valuable lessons from the innovative low-cost solutions employed by the private sector to implement their activities. Businesses for example use highly developed networks and trainings focusing on specific imminent needs to overcome implementation barriers such as skills shortages.
3.2. Changing business in Rwanda
The Rwandan private sector, not much different from the rest of Africa, is dominated by high risk, fast return investments, such as construction and low-tech high-margin production activities. Businessmen expect to turn over projects in 6 months to a
Table 3
Micro-hydro barriers and solutions.
Barrier Donor/government solution Project-driven solution Low number of micro-hydro and energy
experts
Building capacity of technical schools (such as Kigali Institute of Science and Technology) and the establishment of new schools (e.g. vocational training in renewable energy at the TUMBA College of Science an Technology.
Building up an informal network of project developers and hydro experts (of which 3–5 exist locally). Additionally using experts from Uganda and Burundi on short-term basis. Hiring younger Rwandan engineers as long-term employees to build up their skills.
Extensively using foreign experts to cover imminent needs whilst long-term solutions take effect.
Experts have skills in other, only partly-related areas (e.g. specializations in water works without the energy component)
Training seminars and study visits, mainly in Europe and S.E. Asia.
Electrogaz: assemble a team of experts that cover the different areas, e.g. one civil engineer, one electrical engineer, one mechanical engineer, etc.
Private companies: contract locally work such as civil engineering for which expertise exists in Rwanda, and contract internationally work where expertise is lacking such as turbine-generator manufacture and commissioning. Highly variable quality of experts and
qualifications
Raising standards at Rwandan training institutions and improving certification.
Using informal energy sector networks to get recommended experts and companies. Using experience and
recommendations in place of qualifications. Using proven companies/experts to cross-check works (such as civil engineering drawings) of less-proven companies and experts.
maximum of 2 years. PSP Hydro project developers are also rooted in this environment, and can be classified into 3 categories:
Companies or individuals that want electricity for their own activities as soon as possible—a hospital director, an agro-processing cooperative and a rural development NGO. They are ready to go through the trouble of organizing the electricity supply themselves as they do not want to wait much longer for electricity to come to their area. Although they do not need project support for this per se, it is a different matter if they start supplying a whole neighbourhood. Entrepreneurs interested in new business opportunities in collaboration with a reputable business owner near the location of the site. Profit motives play only a peripheral role and profitability is usually poorly analyzed based mostly on instinct. Companies expecting immediate profits from the subsidized components of the project, to be achieved either through profit on in-house construction contracts or through inflation of project accounts.All applicants attended training on business plan development. This introduced a system of long-term planning to companies that were clearly unfamiliar with long-term financial projections. Negotiations with local banks, which also looked carefully at 5-year internal rates of return, further reinforced this new thinking. This process in turn caused motivations of the project developers to change over time as they realized the long-term nature of the investment and commitment. As a positive sign of this, 3 of the companies are currently developing longer term plans that involve building further new plants or expanding current plants over the next few years. For this build-up, the companies are planning to use running companies as bank collateral and reference projects. In the furthest advanced of these cases, one company already has a signed lease agreement to expand its 250 kW plant to 500 kW with a second leased turbine, as soon as the first turbine is operational.
These examples show how a combination of a more long-term business, favourable economic conditions and an ‘‘injection’’ of company collateral, can allow a chain-reaction in power-plant construction.
3.3. New business networks and new investment
All the named projects were initially proposed by Rwandan companies or organizations. As the business planning phase advanced and the need for equity financing and business alliances became clear, these companies started to ally with local and international investors. These new alliances lead to the broad-ening of business networks for financial as well as technical purposes.
Three examples of this process in the PSP Hydro project are shown inTable 4. Note that all three created a new limited liability company to manage their project and operate their plant.
3.4. Administration and accounting
Next to obtaining bank financing, which will be discussed below, the second largest implementation challenge was achiev-ing a sound financial and administrative management of the grant recipients. These aspects were tackled by the PSP Hydro project with the following measures:
Drafting of administrative and financial procedure manuals by a Rwandan business development firm. Regular audits of company accounts and procedures by a regional auditing company. Feedback to the companies and checks on the implementation of that feedback. Detailed checks of all subsidized expenditures using interna-tional accounting standards. Feedback to the companies and re-submission of receipts and documentation. Cross-check of financial data by expert valuations of realized works through technical and financial audits. Subsidy disbursal in 3-month increments based on the financial audit, technical audit, updated activity report and realistic expenditure projections until the end of the invest-ment period.Of the 3 areas of capacity building (technical, financial/ administrative, management/planning), it was the financial and administrative capacity program which turned out to be the most crucial. The financial and administrative capacity building activities in the project were increased beyond the initially planned interventions thought additional training seminars, sub-contracting auditing companies and in-house trainings with GTZ. As a result, the project developers improved their accounting and administration capability drastically—companies evolved from being poorly managed without checks and balances, to using accounting procedures that meet international standards.10Of the 5 signed grant contracts only one company proved to be completely unwilling to acquire the necessary procedures and standards and has, for this reason as well as some others, been stopped as a result.
3.5. Laws and regulation
The need for energy regulation is well understood, but the enormity of building up legislation, regulation and regulatory authorities is proving a slow process in Rwanda. Driven largely by an acute need to legalize and formalize large-scale private sector energy generation projects in Rwanda, there is now a draft energy law, numerous feed-in tariffs with the state utility and an energy utility regulator.
As a comprehensive and consistent strategy for the support of independent power producers is still lacking, the ad-hoc agree-ments set-up to allow operations of the PSP Hydro project
Table 4
Original and current project development organization.
Site Initial Rwandan company type
New consortium members (order of share number—highest first) Nyaruguru/Mazimeru Regional development
NGO
1 German-based venture equity investment company
Gakenke/Gaseke Agricultural cooperative 1 US-based individual investor, 1 Rwandan-based hospital manager, 7 Rwandan-based businesspeople, 1 parish owning a nearby hospital Rutsiro/Rwishywa Industrial equipment
importer
1 EU-based individual investor
10
Purchasing and accounting of GTZ funds must comply with GTZ’s general procedures and regulations. Audits were carried out using international standards.
developers and other planned IPPs have laid the ground rules for this.
3.6. Banks, loans and collateral—new problems and solutions
Participation of investors is essential for private sector development. The banking sector provides the required liquidity for projects of this volume (US$0.4–1.3 million) and bank loans add the required leverage to private equity investments and make financial returns attractive.
Obtaining cooperation of the banking sector was the single largest problem area in the PSP Hydro project. Private investors would not have been able to obtain commercial debt for developing micro-hydro projects on their own. Even with PSP Hydro project assistance, bank financing was delayed or refused for the following reasons:
Banks were averse to entering into a new sector with no track record of private investments. Banks lacked expertise for a sufficiently solid evaluation of the technical aspects of the MHIP. Applicants had insufficient collateral to cover the high guarantee requirements of banks (4100% of loan amounts). This was due to low valuations of existing assets (such as rural real estate). The investment required for the micro-hydro projects was also much larger than past project volumes of small and medium enterprises in Rwanda.Eventually, following continuous discussion and following up by the PSP Hydro project, banks and project developers came up with a number of solutions that allowed the use of commercial financing at competitive conditions (15–16%, 4–5 year repayment) as follows:
Leasing agreements using the turbine/generator as collateral. The direct purchase and ownership of the turbine by the bank, led the bank to take 75–100% of the turbine CIF price as its guarantee value. Using African partial guarantee facilities of multilateral devel-opment banks, implemented via the Central Bank. The two guarantee funds used were FAGACE (Fonds Africain de Guarantie et de Cooperation Economique) and FSA (Fond de Solidarite´ Africain). Unlimited personal liability for loan repayments. Typical loan structures are: 15% interest rate 4-year repayment period 30% minimum equity requirement IRR exceeding interest rate collateralisation of the loan using a lease agreement or guarantee fund inclusion of all company assets and private assets of the shareholders as loan guarantees.Unfortunately, the subsidy given by PSP Hydro and the high collateralization demanded by the banks both had undesired negative side-effects:
The PSP Hydro project subsidy distorted the relationship between internal rate of return (IRR), bankability and return on equity. IRR becomes a misleading indicator, as the bank-ability and return on equity are inflated, whilst the (usually low) IRR remains almost the same. High collateralization led to a careless evaluation of the business plan and overall project profitability by the banks through insufficiently rigorous analysis by the banks and too little external ‘‘policing’’ of the project during implementation. Hopefully as banks become more familiar with hydropower projects, collateralisation requirements will drop, and banks will be better able to assess the merits of the business plans themselves.Future projects must find more effective techniques to work with the financial sector. Such better techniques should channel donor funds through the financial sector with a minimum of distortions and perverse incentives. Since the proposed method certainly has not been adopted across the board, some continued limited donor funds will remain needed, if not just to kick start the whole process.
4. Project results
4.1. Beneficiaries
The Dutch–German Partnership, Energising Development, evaluates the success of the PSP Hydro project among others through the indicator ‘‘people newly supplied with modern and sustainable energy services’’—households, institutions and com-panies who receive their first ever electricity connection. The projected number of beneficiaries and the actual project results are monitored through an external research institute.11
In practice, this indicator is a complex mix of direct beneficiaries, such as households, institutions and firms, and indirect beneficiaries such as users of electrified social services. The expected beneficiaries for the three project developers that are to become operational are:
2400 direct beneficiaries in households or approx. 430 house-holds,12 30,200 direct and indirect beneficiaries through businesses or approx. 36 businesses,13 61,800 indirect beneficiaries of improved social services from approximately 30 institutions (hospitals, government offices, schools, churches).14In addition to these tangible beneficiaries, there are also benefits from the electricity fed into the grid. Only one of the five ongoing projects does not plan to have a grid interconnection. All other projects will sell as much surplus electricity into the main grid, and thus benefiting national electricity grid customers in an undersupplied grid. The interconnection gave great comfort to the banks, who appreciated a guaranteed sale of 100% of electricity produced.
This is an area of serious concern, as there are conflicting conditions—the EnDev program prefers to have isolated rural electrification in addition to separate grid extension activities, whereas private investors would be best served with both simultaneously.
11
RWI Essen: ‘‘PSP Hydro Baseline Study Report’’, G. Bensch, J. Peters, March 2008.
12Assuming 5.55 persons per household. 13
Beneficiaries are taken to be: (employees of electrified businesses)+(de-pendents of employees assuming a household size of 5.55).
14
Beneficiaries of electrifying hospitals, government offices, schools, health centres and churches, is taken to be: (population in served area)(0.25 correction factor).
4.2. Cost and performance data
Estimates of overall cost and actual subsidy levels as realized by PSP Hydro as of early 2009 are presented inTable 5.
An average cost of $3600 for a micro-hydro plant includes the low-voltage distribution network and an interconnection to the national network. This is slightly above international yardsticks of US$3100–3600/kW15 for similar installations, which is to be expected given Rwanda’s above average material and energy costs.
Project developers provided 15–30% equity and loan financing accounted for about 30–50%; and grant financing accounted for the remainder. The internal financial rate of return of the projects is about 12%, giving a payback time of about 7–8 years. By obtaining a loan and providing limited equity only, project developers obtain a return on equity of 25–75% and a payback time of less than 2–5 years. The retail price of electricity is about US$0.21/kWh, which is below the national utility’s household tariff of about US$0.24.16It is expected that the tariffs will drop once loans are repaid and more clients are connected.
5. Conclusions and reflections
5.1. Progress so far
Even though the PSP Hydro project is still a work in progress, the results of focusing on institutional arrangements have been highly significant—both project developers and the Rwandan government have found innovative, home-grown solutions to market barriers (seeTable 3). Technical quality of the installation is fairly simple to control with regular external checks by Rwandan companies and occasionally foreign consultants.
As suggested by the PSP Hydro project’s experience, the success of micro-hydro power projects in terms of sustainability is greatly enhanced by a high degree of local participation throughout project cycle. In addition, secured loan financing and guaranteed buyers of electricity are crucial too.
Possible delays caused by PSP Hydro transferring control to local companies and providing only occasional assistance were justified because true ownership resulted. In fact, the under-standing of project developers regarding micro-hydro business changed during the project period from ‘‘implementing a budget and simply constructing a plant’’ to ‘‘developing a viable business’’. Just a few problems that the project developers dealt with successfully during project construction include: theft, fraud, wrong design specifications, difficulty securing loan financing, lengthy turbine delivery schedules and rising raw material costs.
Although this was not always easy, the fact that three will soon become operational shows that real and practical solutions were found.
Sustainability was enhanced and stimulated through a close collaboration of the project developers and financial sector firms. Four out of the five project developers have established a new limited liability company to manage the construction and operation of the plant. One of these companies is now trans-formed into a corporation whereby all clients have been invited to participate. The companies have taken a loan or lease contract from a local bank, which insisted on a close review of the project financial situation. The subsidy that was provided to these companies was not fully counted as collateral and therefore high levels of personal securities had to be provided. Although sometimes difficult, it aided greatly in enhancing ownership feeling among the project developers.
5.2. Implications for energy sector development aid in general
The PSP Hydro project enabled a higher leverage of public funds. Although a maximum grant financing of 50% was available for project developers, they were able to only use 35% due to cost overruns, inflation, and changed project designs such as the interconnection to Electrogaz.17 However, they had no great additional difficulties in covering the additional costs and were able and willing to provide 65% of their own financing.
The PSP Hydro project was able to develop a capacity of 1240 kW with relatively limited public funds. Furthermore, the use of partial subsidies to local companies allows an approach that depends for 100% on local businesses and appropriate financial and regulatory structures. The resulting business environment including feed-in tariffs, financial sector cooperation and regulatory framework, paves the way for an independent and fast-growing energy sector. One of the strong achievements of the PSP Hydro project has been to demonstrate that the private sector itself, in collaboration with Government authorities is able to successfully push for the creation for the regulatory and legal framework that allows it to flourish.
5.3. Tentative concepts for the future
Three of the PSP Hydro project developers have already and independently prepared business plans and concept notes for further hydro projects, for which they are now seeking financing. This, as well as the Ministry of Infrastructure’s desire to significantly expand the micro-hydro sector, convinced the PSP Hydro team to identify possible ways to improve and expand the program.
Many questions must be answered before this can occur, in particular: what is the lower limit for subsidies so that project developers are still willing and able to go ahead with their projects? To what extent can ‘‘smarter’’ financing mechanisms such as guarantee funds, loan facilities and equity funds be used? There are quite a few alternatives that can be tried.
Under the PSP Hydro project a new call for expressions of interest has just been issued that uses the lessons learnt from the project to move to improved and even more innovative approaches. Start-up business financiers18 that are active in Rwanda offer technical assistance to the project developer together with mezzanine financing, or a mix of equity and debt. This mix of different financing forms depends on the needs and
Table 5
Estimated costs and subsidy levels. Project Capacity (kW) Investment
(’000 US$) Investment (US$/kW) Subsidy (‘000 US$) 1 105 400 3800 200 2 400 1320 3300 440 3 500 1840 3700 460 4 105 470 4500 235 5 128 370 2900 110 Total 1237 4400 3600 1450 15
Extrapolating from IEA World Energy Investment Outlook 2003 of US$1900–2600/kW: adjust for inflation, take top half of range for micro-hydro (more expensive), and add distribution grid at 20% of total investment.
16
The current tariff is cost-reflective; it is high because of the high level of diesel-generated electricity.
17
These were the responsibility of the project developer; the originally submitted and approved MHIP was the reference for the allocated subsidy.
18
financial characteristics of each project. PSP will offer a matching grant to their equity investment. In return, the start-up business financiers help arrange the project financing, and be actively involved in the financial and administrative implementation of the project. Under this arrangement, a typical project would see:
a minimum of 15% equity from the project developer (as before), 10–15% equity from the start-up business financier, a subsidy of 10–15% to match the venture equity to be managed as equity by the the start-up business financier (reduced from 35%), 50–65% of loan financing facilitated by the start-up business financier.The use of public funds would therefore be even more effective, as now close to 3 MW is expected to be developed with a $1.5 million subsidy. In addition, given the fact that the venture capital provider will take shares in the newly formed utility, correct administrative and business procedures will be even more strongly imposed. The recent call for expressions of interest resulted in a total of 10 new proposals that are being evaluated
now. This is a good sign, as it shows that the PSP Hydro approach that timidly and reluctantly started in 2005 has in fact been one that the private sector in Rwanda has embraced.
6. Conclusion
The experiences of the PSP Hydro project so far suggest that a more cost-effective and sustainable way to implement micro-hydro power projects exist compared to 100% publicly financed projects. The speed at which governments can improve electrifi-cation access could increase considerably since both financing and project management are out-sourced to parties with a vested interest in making it work. The long-term impact of PSP Hydro will need to be assessed during the years to come.
Hopefully such experiences will help trigger a re-thinking of traditional approaches to energy sector development. If we are to reach the billions of people without electricity, a fundamental and radical improvement in the effectiveness and impact of energy sector interventions is needed. PSP Hydro is just one of many small steps already being taking in this direction.
