Hydropower Financing hydropower in Africa Africa has the potential to increase electricity access through a greater use of hydropower. Here, Ryan T Ketchum describes a hydro project planned for the Ruzizi River, and details how the project will work commercially.

n 21 December 2012, the General design report in May of 2011. In June of Assembly of the United Nations 2012, EGL launched a request for propos - Odeclared 2014–2024 the decade of als for the selection of a private investor sustainable energy for all. In passing the to develop Ruzizi III on a Build–Operate– resolution, the General Assembly noted Transfer basis. In September 2012, EGL that 1.3bn people live without access to declared the consortium of Sithe Global electricity and that 2.6bn people in devel - and Industrial Promotion Services (Kenya) oping countries rely on traditional as the preferred bidder for the project. biomass sources for cooking and heating This is the same consortium that devel - needs. Half a billion of those living with - oped the 250 MW US$900mn Bujagali out access to electricity live in Africa. Hydroelectric Dam on the River Nile in Hydropower is undoubtedly the most Uganda, which achieved commercial oper - common form of sustainable and renew - ations in July of 2012. able energy. In 2008, it accounted for The proposed technical solution for around 16% of global electricity produc - Ruzizi III envisions a run-of-river project tion. In Europe and North America, 25% comprising a diversion dam, a 7 km head - and 29% of potential hydropower proj - race tunnel, penstock and surge chamber, ects have been developed. In Africa, one surface powerhouse, three Francis-type The planned Ruzizi III site of the continents with the greatest need turbine generator units, a 220 kV switch - for additional generation capacity, only yard, and a 10 km transmission line to a ment. At the end of each month, the 5% of potential hydropower is in use substation which will be located at hourly availability payments will be today. Kamanyola in the DRC. The design also summed to determine the monthly avail - Hydropower has the potential to pro - includes a small generating unit at the ability payment. vide a significant percentage of the dam site to produce energy from the eco - This structure achieves two objectives – energy that is necessary to realise the logical flow that will be released to the it incentivises the project company to objectives of the General Assembly’s reso - bypassed reach of the river between the ensure that the plant is available; and it lution. The CEPGL Organisation for Energy dam and power station. The proposed allocates day-to-day hydrological risk to in the Great Lakes Region (Energies des technical solution would have a total the offtakers. The risk of a significant and Grands Lacs, or EGL), a forward-looking installed capacity of 147 MW, with each adverse shift in hydrology will, to some international organisation operating turbine designed for a maximum flow rate extent, be shared by the offtakers and the under the auspices of the Economic of 50m 3/s giving a total plant discharge of project company as the offtakers will have Community of the Great Lakes Countries, 150 m 3/s (not including the small unit at the right to terminate the CPPTA follow - has long been working to achieve these the dam site). ing a significant and long-term reduction objectives. It is now positioned to make Given the hydrology of the river, it is in water flows. the Ruzizi III hydroelectric dam – the third anticipated that the nominal mean annual Large and medium-scale hydroelectric in a series of four projects on the Ruzizi energy production will equal approxi - projects generally involve high upfront River – a reality. mately 710 GWh, which equates to a costs for feasibility studies, social and envi - capacity factor of approximately 56%. ronmental impact assessments, social and Ruzizi dams environmental impact mitigation plans, The Ruzizi River forms the border Finance and development detailed engineering and design, and, for between the Democratic Republic of The project’s capacity will be purchased by hydroelectric projects undertaken as inde - Congo (the DRC) and Rwanda. The south- Régie de Production et Distribution d’Eau pendent power projects, commercial and flowing river connects Lake Kivu with et d’Electricité, SNEL, and the Energy and legal structuring. In order to bring the Lake Tanganyika. Two projects located on Water Sanitation Authority – the paras - project to market more quickly, EGL the river are currently in operation. The 30 tatal utilities of Burundi, the DRC, and elected to conduct the tenders for the MW Ruzizi 1, which is owned and oper - Rwanda respectively. Each offtaker will project in two phases. ated by SNEL, the parastatal electricity purchase one third of the capacity of the During the first phase (which is now utility of the DRC, is located 3 km down - project under a common power purchase drawing to a conclusion) the stream of the outlet from Lake Kivu and terms agreement (CPPTA) and separate investors/developers (the sponsors) have was commissioned in 1959. The 44 MW power purchase agreements. been chosen. The terms of the tender for Ruzizi II is owned and operated by The tariff will be structured so that the the first phase did not require bidders to SINELAC, a multi-national organisation offtakers will pay for the capacity made bid a price for the capacity the project established by a treaty among Burundi, available by the project company, which is company will make available. This the DRC and Rwanda, and was commis - measured during each hour of each day. enabled the bidders to bid for the project sioned in 1989. The capacity the project company makes without having a firm engineering, pro - EGL has been steadily working to pro - available will be adjusted from actual curement and construction (EPC) solution mote the third project in the cascade – the hydraulic conditions (the actual net head and price in place and without knowing Ruzizi III Regional Hydroelectric Project – height) to nominal hydraulic conditions the financing costs the project company for some time. Engineering firm Fichtner (the net head height with the head pond will incur to pay interest on, or to repay, completed the feasibility study commis - at the full supply level) during each hour the project debt. Instead, bids were evalu - sioned by EGL in 2010, and a detailed to determine an hourly availability pay - ated on the basis of:

24 Energy World February 2013 • the return on equity the investors will development, including in most of Sub- expressed an interest in, or have already have an opportunity to earn; Saharan Africa. provided significant funding for the Ruzizi • a cap on the soft development costs In order to overcome this problem and III project. Lenders that have been actively the investors can seek to recover allow for a system of regulation that involved in Ruzizi III to date include the through the availability payments; entails many of the benefits of return-on- AfDB, KfW, DBSA, the European and rate base regulation, the regulation by Investment Bank, Agence Française de • a fixed monthly operations and main - contract method establishes the method - Développement, Proparco, and FMO tenance charge. ology that will be used to establish the among others. The World Bank’s During the second phase, which will be final tariff in an agreement that is subject International Development Association is undertaken after the CPPTA and power to international arbitration. This agree - in discussions with EGL with respect to a purchase agreements have been exe - ment is entered into before the partial risk guarantee which should enable cuted, the project company will conduct investment is made. private lenders to provide debt financing an international competitive tender to In this case, that agreement is the for the project. The sponsors are expected select the EPC contractor that will con - CPPTA. The tariff annex contained in the to request the issuance of political risk struct the project. The project company CPPTA does not, therefore, set out the insurance by the World Bank’s Multilateral will also arrange financing for the project price. Instead it contains the detailed Investment Guarantee Agency. during the second phase. series of formulas that will be applied to The successful development of Ruzizi III It will be possible to enter into the recognised project costs in order to calcu - would be a small step towards the realisa - CPPTA and power purchase agreement late a price per MW per hour of tion of the goals described in the before firm pricing is known because the availability that will apply during each resolution so recently passed by the tariff will be set using a so-called regula - year of the 25-year supply period under United Nations. It would also enable tion by contract method. This effectively the agreement. Burundi and Rwanda, both of which are enables the project to be constructed members of the East African Power Pool using a form of regulation that is similar Proven record (EAPP), to contribute the types of tradable in many respects to the return-on-rate This same structure was used on the resources that are necessary for the suc - base form of regulation that is widely Bujagali Hydroelectric Project. The cessful realisation of the EAPP’s goal of used in the US, Europe and other well- strength of this structure is evidenced by integrating the region’s disparate power developed markets. Such ex post the lenders that ultimately provided systems into a single interconnected sys - regulation is feasible in those markets financing for Bujagali, including: the tem with the scale and diversification given the long history regulators in those International Finance Corporation, the required to dramatically lower the cost of markets have of successfully balancing European Investment Bank, KfW, DEG, electricity in East Africa. G the interests of investors and ratepayers. AfDB, Agence Française de It is unlikely that a system of ex post reg - Développement, Proparco, FMO, Standard Ryan T Ketchum is Partner in the Energy ulatory review would be feasible in Chartered, and ABSA Capital. and Infrastructure Team at Hunton & countries that are in an earlier stage of Many of the same lenders have Williams, www.hunton.com Energy Institute Process safety survey (EIPSS)

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