Unlocking African potential19 May 2021
As part of the recent Digital Energy Festival for Africa, discussion presented by the Africa Energy Forum focused on overcoming development and environmental challenges to unlock hydropower potential across the region. Suzanne Pritchard reports
“The African Development Bank (AfDB) is the continent’s bank,” says Batchi Baldeh, Director of Power Systems Development at AfDB. “We offer various financial instruments across the project cycle for both private and public sector operations.”
Speaking at the Digital Energy Festival for Africa which was held in October 2020, Baldeh explained that the bank’s strategic framework for power is based on five high priority areas that are intended to support the continent’s achievement of UN Sustainability Goals.
Baldeh listed these ‘High Fives’ as being:
- Light up Africa.
- Feed Africa.
- Industrialise Africa.
- Integrate Africa.
- Improve the living conditions of Africans.
“Hydropower plays a key role across all of the High Fives,” he stated.
Malik Faraoun, a director from power project developer Themis, was also taking part in the digital dialogue. He explained that his company is focused on developing hydropower projects in sub-Saharan Africa with a portfolio of 539MW of projects in Cote d’Ivoire, Togo, Madagascar and Cameroon. When speaking about the potential for hydropower in Africa, Faraoun said that “the numbers are just staggering”.
“On the one hand 90% of hydropower potential remains untapped in Africa and on the other hand there are six million people who do not have access to electricity in Africa. So how can we reconcile the two?” he asked. “There are certainly some barriers that are manmade, such as dealing with regulations, and others that are made by nature. Increasingly we are also seeing other types of barriers related to environmental and social issues that are posing challenges to hydropower.”
The hydropower potential across Africa is described as being ‘staggering’
Baldeh went on to discuss the bankability of hydropower projects. It obviously is paramount to have feasibility, environmental and social impact assessments carried out to the appropriate standards with quality information on hydrology and geology etc, but Baldeh also stressed the importance of having project sponsors who are “credible and capable and understand the prerequisites for hydropower development”. Indeed, in terms of environmental services, advisors and contractors, all of these must be able to perform to the required standards across the project cycle from preparation, during implementation and completion.
An important part of project preparation, apart from securing feasibility studies and project development finance, is the power purchase agreement (PPA). Baldeh said that PPA documents “are very important as you need credible off-takers who can pay the bills” plus “a financing structure to make sure that happens”.
“Risk allocation is critical,” Baldeh stated. “And I will say that the main risk for a hydropower project is the environmental footprint. A dam can be several kilometres long and store millions of cubic metres of water and so it could impact thousands of people across huge areas that must be compensated.”
Uniqueness of hydropower
When compared with other technologies, Faraoun spoke about the “uniqueness of hydropower”. No project is similar, and every project has its own merits.
“Typically, hydropower requires a longer lead time before construction as there are too many uncertainties related to hydrology, geology and environmental and social aspects,” he explained. “We need to have a lot of work done upstream in order to have a bankable project by decreasing some of the uncertainty. One of the differences between hydro and other technologies that we see as a project developer, is that given the lead time is quite long, we require a more predictable framework for implementing hydro projects. This means interaction with the host government needs to be positive and some of the uncertainty needs to be addressed upfront.”
Faraoun also discussed how the role of the project developer is evolving.
“As a developer what we have seen recently is that we are not only a technical implementer or a financial engineer, we are also becoming more of an environmental and social expert as these issues need to be at the fore of project design. So that is why,” he said, “that we try to tackle environmental and social issues from the very early stages of the project as much as we can to ensure they are featured into the design, location and civil engineering structures of the project. This is very crucial for us.”
Ensuring that the requirements of the development finance community are addressed is also important.
“You cannot afford to get to financial close and find that some pieces in the environmental and social impact study do not fit together, and require more time to address,” Faraoun said. “However,” he adds, “we do see that lenders’ policies are not always aligned and harmonised.”
He said that this situation “has been evolving quite a lot recently”. In 2009 some of the major development banks such as the IFC upgraded their performance standards, along with the introduction of the International Hydropower Association’s guidelines.
“It can be difficult now to integrate upfront with certainty what the requirements of the lender would be,” Faraoun commented, “but it is important.”
Baldeh added that it is also important to ensure that “you have enough buffer” to ensure you are ready well before the commercial start date of the hydropower plant. He emphasised how hydropower construction is considered a big risk.
“Even when you reach financial close and start construction AfDB has seen delays in many projects where liquidated damages are exhausted or transmission lines are not completed on time,” he said.
Akosombo Hydroelectric Power Station on the Volta River supplies power for Ghana and Togo in West Africa
Location, location, location
The choice of project site for hydropower development is important, Faraoun stressed. What differentiates hydro from another project is its site location which will impact project cost and energy generation.
For example, in west Africa the topography is flatter with a greater seasonality of hydrology and so it is more challenging to develop here as bigger reservoirs are required. In such cases Faraoun spoke about the importance of analysis and simulation to decrease environmental and social impacts while preserving the hydro generating capacity of the site; as well as the need to do thorough investigations upfront to adapt the plant design to the specific characteristics of the site.
“We’ve seen lots of different types of projects in Africa. Some are very competitive and offer a low base load price for hydropower, and some are more expensive and need some sort of finance to make them economically viable. Pushing up profitability is obviously crucial not only to make the project financially viable,” Faraoun explained, “but to make the project sustainable and affordable for the end consumer.
“Price is very important for the bankability of a project and we are finding more innovative finance to help alleviate the financial burden. However, this is not used to boost returns for investors,” Faraoun says, “but to channel cost reductions for consumers.”
“At the end of the day,” according to Baldeh, “whichever project you are doing – solar, hydro, whatever – you must have a clear economic value proposition for the utility and country and must be competitive in the generation mix. That is a given. It is incumbent on developers and development groups to make sure that whatever hydro project is being developed ends up with a competitive tariff over the life of the project but,” he added, “it is easier said than done.”
Discussions during the digital dialogue also focused on the impacts of climate change on hydropower development across Africa.
“Climate change is happening and coping with it is crucial,” Faraoun says, explaining that climate change risk should be included in all hydrological studies as it can impact the revenue stream of a project.
Talking about climate change in relation to drought and hydropower production, Baldeh warned that if obligations are too huge or risky then there will be problems.
“Power trade and interconnectivity across the region is extremely important,” he said. “What we are seeing is that many countries are trying to have their own energy security, resulting in overcapacity in some country clusters, and deficiency in others. It makes a lot of sense to look at this more closely where we can facilitate more mutually beneficial electricity trade as the region transitions more quickly to greener growth. This is being looked at by the bank and other development partners.
“No development partner or country can do it alone,” Baldeh says. “For us, the way to go is interconnectivity and power trading infrastructure with an exchange of ideas and conversation across the region.”
Both Baldeh and Faraoun spoke about the development of the Inga hydropower scheme in the Democratic Republic of Conga. This has 3GW of potential that has still not been tapped.
Faraoun said that he believes it calls for more collaboration as such large projects need a pool of investors or financiers to collaborate for the project to be successful.
“Larger projects such as Inga need out of the box thinking, patience and innovation to make sure it’s viable. It is a big challenge,” Baldeh admitted. “We are still working on it but hopefully we can crack the nut.”
Including climate change effects in hydropower modelling is extremely important
All participants in the digital dialogue about untapping African hydro potential agreed that the conversation needed to continue, with greater collaboration and alignment between all different players such as government, developers and financiers.
“Nobody can do it alone,” Faraoun said, echoing what Baldeh had admitted earlier. “If you want to help Africa, we’ve got to tap into this hydropower potential. We need to do it together and have conversations with different stakeholders to address the challenges ahead.”