Issue #13 87853 A quarterly journal on public-private partnerships Power and mining: Digging deep to power up In this issue Market mover: Intraday electricity trading Timeline to transformation: Nigeria’s privatization Energy for development: MIT’s new research UN SE4ALL Special Representative interview: Kandeh Yumkella power ppps In partnership with Australia • Austria • Brazil • Canada • Catalonia (Spain) • Flanders (Belgium) • France • Ireland • Italy • Japan • Kuwait • Netherlands • Norway • Sweden • Switzerland • United Kingdom • United States • Public-Private Infrastructure Advisory Facility (PPIAF) • Global Partnership for Output-Based Aid (GPOBA) • Private Infrastructure Development Group (PIDG) • African Development Bank • Asian Development Bank • Brazilian Development Bank (BNDES) • Caribbean Development Bank • Central American Bank for Economic Integration • European Investment Bank • European Bank for Reconstruction and Development • Inter-American Development Bank • Infrastructure Consortium for Africa • Islamic Development Bank Issue #13 – April 2014 A quarterly journal on public-private partnerships IFC Advisory Services in Public-Private Partnerships 2121 Pennsylvania Avenue, NW • Washington, D.C. 20433, USA +1 (202) 458 5326/7 • ifc.org/ppp • handshake@ifc.org Editorial Tanya Scobie Oliveira • Alison Buckholtz Art & Design Victoria Adams-Kotsch Digital Strategy Jeanine Delay Disclaimer This journal was commissioned by IFC, a member of the World Bank Group, through its Advisory Services in Public-Private Partnerships department, which helps governments improve access to basic public services through public-private partnerships in infrastructure, health and education. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. Cover photo © Timmy O Toole, Nigeria In the 1924 The Atlantic article “Life as we know it,” Arthur D. In this issue Little, an engineer who founded the world’s first management consulting company, tried to predict the future. Amid all he got right—and wrong—two sentences still scream out for attention: “The rate of our economic progress is primarily a function of the abundance and cost of energy. The preparation and use of fuels and the generation and distribution of energy are basic industrial activities, which, in one way or another, vitally concern us all.” Almost an entire century later, energy continues to vitally concern us all—because progress will continue only if the energy that powers it keeps pace. By all accounts, it is not. The gap between what’s being produced and what’s needed continues to widen, and the effects of climate change threaten to deepen energy poverty in the regions that can tolerate it least. The Special Representative of the UN’s Secretary General for Sustain- able Energy for All, Kandeh Yumkella, understands energy poverty first-hand. He recalls for Handshake readers a recent visit to his native Sierra Leone for his university’s 50th anniversary celebration, at which power outages and other energy shortages marred the proceedings. His earliest demonstrations as a student at the uni- versity 30 years ago, he remembered, were in protest of these very same problems, which prevented students from studying at night and denied them clean water in the dormitories. Yumkella and the other experts, officials, and industry leaders in this issue believe that public-private partnerships can help bring much-needed access to energy to students like these, and to people in all corners of the globe. With the world’s energy future at stake, it’s time to listen to these voices. Together, they can give a new meaning to “life as we know it.” Laurence Carter, Director Tanya Scobie Oliveira, Editor IFC Advisory Services in Public-Private Partnerships Photo © Tau IFCZero |1 Features Spotlight Nigeria Ibrahim Babagana: Brown outs to bright lights | 18 Transaction timeline | 20 Hydropower Hydro in power-hungry Africa | 24 One size does not fit all | 28 Mining Mining for power | 30 Mohamed Ould Khouna: 52 Mauritania says “oui” to PPP | 35 Thirsty energy Thirsty energy | 38 Renewables Energy & climate change | 44 Supporting renewables | 48 Drilling down, heating up | 52 24 In this issue 2 | IFC.ORG/HANDSHAKE Columns Markets Integrating wind & solar | 56 COMPASS Surveying the PPP landscape Let’s talk transmission | 61 Power surge | 12 The ultimate power couple | 64 MONEY TALKS Going once, going twice... | 68 Financing & funding PPPs Trading tales | 16 INSIDE INFRASTRUCTURE Commentary on current events Bottling sunshine | 42 LEGALEASE Law & legislation, decoded Mexican Energy Reform | 58 72 Interviews Kandeh Yumkella: Humanizing energy | 06 Yael Borofsky & Sarah Dimson: Collaborating for change | 72 IFC | 3 Contributors 52 64 72 Pierre Audinet Sarah Dimson Aleksandar Katančević Ines Perez Arroyo Chris Head is a Consultant in the Africa Energy Group is an independent consultant specializing in the of the World Bank. contractual, commercial, and regulatory aspects of hydropower. Pierre Audinet leads the Clean Energy Program of the Energy Aleksandar Katančević Sector Management Assistance Program (ESMAP), is a Senior Energy Trader based in Geneva and a trust fund of the World Bank Group. advises Stratega East, a global consulting company. Sudeshna Ghosh Banerjee John Kjorstad is a Senior Economist in the Sustainable leads infrastructure research and business support Energy Department of the World Bank. for KPMG Global Services on behalf of partners and member firms around the world. Jeff Delmon is a Senior PPP Specialist in the Finance and Eduardo Márquez Private Sector Department of the Africa Region is a Foreign Associate in the International Practice for the World Bank, based in Tanzania. Group at Haynes and Boone, LLP in Dallas. Jamie Fergusson Gary McMahon is a Principal Investment Officer and the global is a Senior Mining Specialist in the Sustainable Renewable Energy sector lead at IFC. Energy Department of the World Bank. 4 | IFC.ORG/HANDSHAKE Marcelino Madrigal J. Charles Smith is a Senior Energy Specialist in the Energy is Executive Director of the Utility Variable- Anchor Unit of the World Bank. Generation Integration Group. Almudena Mateos Merino Perrine Toledano is an Energy Specialist of the Energy Sector is a Senior Economics Researcher at the Vale Management Assistance Program (ESMAP), Columbia Center on Sustainable International a trust fund of the World Bank Group. Investment, based in Jerusalem. Luiz Maurer Bastiaan Johan Verink is a Principal Industry Specialist in energy is a Financial Analyst with the Financial and resource efficiency at IFC. Solutions Unit of the World Bank. Arif Mohiuddin is a partner with CPCS and the Vice President INTERVIEWEES of West Africa. Ibrahim Babagana John Probyn is the Director of Power for Nigeria’s Bureau is an Analyst with the Public-Private of Public Enterprise. Infrastructure Advisory Facility. Yael Borofsky Ariel Ramos is a dual degree masters student in MIT’s is a partner in the Energy and Finance Practice Department of Urban Studies and Planning Group at Haynes and Boone, S.C. in Mexico City. and the Technology and Policy Program and Co-Founder of e4Dev. Peter Robinson is the Director of Africa Region for Economic Sarah Dimson Consulting Associates Ltd, based in London. is a masters student in MIT’s Department of Urban Studies and Planning with a specialization Diego J. Rodriguez in International Development and Co-Founder is a Senior Economist in the Department of of e4Dev. Water, Transport and Information Communication Technology of the World Bank, and head of the Mohamed Ould Khouna Thirsty Energy Initiative. is Mauritania’s Minister of Petroleum, Energy, and Mines. Zayra Romo is a Senior Energy Specialist in the Africa Energy Kandeh Yumkella Group of the World Bank. is the Special Representative of the UN Secretary General for Sustainable Energy for All. IFC | 5 humanizing UN’s Special Representative for Sustainable Energy for All focuses on the social dimension Photo © Micaela Ayala V/ Agencia Andes Interview by Alison Buckholtz 6 | IFC.ORG/HANDSHAKE Interview Kandeh Yumkella was appointed Special Representative of the UN Secretary General for Sustainable Energy for All (SE4ALL) in September 2012. In this role, he mobilizes commit- ments to positively transform the world’s energy systems toward a sustainable energy future. Here, he talks to Handshake about growing up energy-poor, the key role that public-private partnerships play in transforming the energy market, and the suite of policies that can jump-start the energy revolution. Your position is new at the UN. institutional framework for this is more challeng- ing than I thought. But it’s an exciting challenge. What does it feel like to be able to start something brand-new in the sustainable energy arena, and What has energy poverty meant energy poverty in general? to you in your own life, growing up in Sierra Leone and attending For me personally, it was a culmination of my efforts over a period of almost a decade, university there? trying to argue the case that I don’t see the poor Let me put it this way. I was in Sierra Leone developing countries, particularly those several weeks ago and I think of my trips there as in Africa, being able to achieve their goals going “back to the future.” During my visit, we without access to energy. There is a direct link celebrated the 50th anniversary of the university between income poverty and energy poverty. that I attended as an undergrad, over 30 years Getting this appointment was an exciting oppor- ago. The same problems still exist: lack of regular tunity because suddenly the UN believed we electricity supply, lack of clean water supply. I must institutionalize these issues in the context remembered that the second demonstration I co- of ongoing development discussions. Now, hav- led against the administration of that university, ing said that, I have to add that setting up a new at age 19, was about lack of energy—administra- IFC | 7 tors could not provide electricity and clean economic wealth, they are less resilient. Climate water to the dormitory. Thirty years later, here change is the biggest risk multiplier. I am still trying to deal with the same issues. What role do public-private How does climate change impact partnerships play in solving the the energy issue? problem of access to energy? Climate change makes it more urgent to take Public-private partnerships will be the key to action on global energy systems—otherwise, sustainable energy for all. That’s why our initia- we are all condemned to climate hell. Also, I tive, SE4ALL, is what we call a mega partnership see the inequity and unfairness of the global or a mega creative coalition. We have always economic system through the lens of climate included CEOs of private corporations, govern- change. Those who pollute the least will suf- ment leaders, and leaders of civil society. To fer the most from “business as usual.” Africa is achieve universal access to energy by 2030, we a good example. They account for less than 3 need about a $50 billion dollar investment per percent of greenhouse-gas emissions, but when year. The total official development assistance is you look at climate change scenarios, going into $9 billion. To reach $50 billion, you need private 2030 to 2050, the worst impact will be in Africa. money, not given as aid but as investments They lose 50 percent of their crop yield. For each blended with public finance. We want to create one degree rise in global temperature, in Central markets and incentives to deploy technology and Africa and parts of the Sahel, they experience get energy access for people. 1.5 degrees—for something they did not cause. There will be an increase in diseases with extreme The big question is how you create this and weather events, and because they don’t have the get the companies to be excited to make money and change the world. That’s our challenge. What do you say to persuade “ Climate change makes it more urgent that we need to do something on global energy government officials who need to be convinced to make access to energy a priority? systems. Otherwise, we are ” Even in the very poor countries, many govern- all condemned to climate hell. ment officials don’t see the link. They have been focusing, legitimately, on energy for economic 8 | IFC.ORG/HANDSHAKE growth. I give them another reason, sharing with their size, making their costs lower, and getting these leaders my views on the social dimensions women to install the equipment themselves, of energy and providing some new data—like leading to social inclusion. the fact that 4 million premature deaths each Morocco, which is at almost 90 percent electrifi- year are due to household air pollution. It’s worse cation, is another good example. They are doing than HIV and malaria combined. They say, “Oh everything with solar and wind. And Bhutan really?” Then I tell them, “Your women spend 20 might be one of those countries in the next hours a week collecting firewood and water. If five to 10 years that achieves all the targets for they had solar power to pump that, it would free renewable energy. On rapid electrification, South them up and the girls could go to school.” Now Africa is a big success. Same with Vietnam people begin to see the numbers and it begins and Cambodia. to resonate. This is why, at the beginning of the decade of Sustainable Energy for All, we are dedicating the first two years to energy, women, “ and children’s health. This is the way to human- ize the energy debate. At the beginning of the decade of Sustainable Energy Which countries are handling for All, we are dedicating access to energy the right way? the first two years to energy, women, and children’s health. Brazil, China, and India are all doing this very This is the way to humanize ” well. Brazil pushed electricity for all; now they are at about 90 percent electrification. The cur- the energy debate. rent president, when she was Minister of Energy, led the campaign for energy access tied to poverty reduction and social inclusion. That was their message. And they saw the impact immedi- You always make it a point to say ately. You bring energy to the rural community, and shops open up. You bring energy to the rural that sustainable energy for all is community, and they process more agricultural not just about poor countries. products. Incomes go up, and they buy more What do you mean? consumer goods. It is about you and me living in the first world, These countries, and many others, have domesti- doing our share. Germany is a great example. cated renewable energy technologies—reducing IFC | 9 Germans are doing distributive rooftop solar The same principle applies to energy efficiency. power to show that consumers of energy can The Danes have reduced their energy intensity become “prosumers”—they consume, and they more than any other nation. Their GDP grew produce. They have their solar power, they use as their energy consumption declined at the some of it, and they supply the rest of it to the same time. They have one of the best energy grid. This shows that if you go solar, you reduce intensity measurements, but now they are your emissions, but your lifestyle does not suffer. pushing an even greater ambition: to have more You pay a little more. But you and I can afford renewables in their energy mix and reduce their it, can’t we? footprint. The big question is how to convince the consumers to change their behavior, and incentivize this change. It sounds like you’re saying that SE4ALL the importance of incentives can’t In December 2012, the United Nations be overstated. General Assembly declared 2014 to 2024 Incentives are important and regulations also the Decade of Sustainable Energy for All, matter. If you don’t regulate, people will find underscoring the importance of energy for short cuts. If you’re going to create new markets, sustainable development and the post-2015 you have to incentivize research and develop- development agenda. The resolution by the ment and bring private investment in. You need General Assembly affirms support for the to incentivize corporations as well as individuals. initiative’s three goals of providing access Public policy is also important, generally, for to reliable and affordable modern energy creating that enabling environment that includes services; doubling the global rate of energy incentives, regulation, and also accountability efficiency, and doubling the share of renew- measures. This is the suite of policies that you able energy in the global energy mix. need if you want to see this energy revolution spread across the world. 10 | IFC.ORG/HANDSHAKE The World Bank Group and SE4ALL The World Bank Group’s President co-chairs the Sustainable Energy for All (SE4ALL) Initiative, which seeks to achieve three goals by 2030: universal access to electricity and clean cooking solutions; double the share of the world’s energy supplied by renewable sources from 18 percent to 36 percent; and double the rate of improvement in energy efficiency. The World Bank Group’s Energy Sector Directions Paper describes how it will help client countries secure the affordable, reliable, and sustainable energy supply needed to end extreme poverty and promote shared prosperity. The World Bank Group is advancing SE4ALL goals in many other ways as well— by supporting capacity building, technical assistance, and knowledge services to help countries expand access in a sustainable way. These initiatives include: The Energy Sector Management Assistance Program (ESMAP) ESMAP is supporting a technical assistance program to help countries achieve universal energy access by building portfolios of investment-ready projects for public and private financing. The $15 million program has begun in Senegal, Liberia, Guinea, Burundi, Mozambique, Nepal, and Myanmar, along with a program to promote improved cookstoves in Central America. ESMAP also manages a Global Geothermal Development Plan that seeks to mobilize $500 million to boost geothermal power in developing countries, as well as a Renewable Energy Mapping Program to identify renewable resource “hot spots.” The Global Gas Flaring Reduction Partnership (GGFR) GGFR, managed by the World Bank Group, has supported efforts to cut flaring of gas associated with oil production by 20 percent worldwide, from 172 billion cubic meters (bcm) in 2005 to 140 bcm in 2011. This has reduced CO2 Sustainable emissions by over 270 million tons, roughly the equivalent Energy For All of taking 52 million cars off the road. The World Bank Kenya­—a nation in Group and GGFR partners have agreed to step up flaring the midst of rapid reduction efforts during the next four years as part of the transformation. SE4ALL Initiative. IFC | 11 Power Surge By Bastiaan Johan Verink, World Bank & John Probyn, PPIAF Strong economic growth, population increases, sources—including liquid fuels—over the next and rising levels of access are driving electricity 20 years. demand to soaring new heights globally, and Globally, the annual investment required to especially in developing countries. The Inter- satisfy the demand growth is substantial: over national Energy Agency estimates that for the $740 billion per year, close to $430 billion of period through 2035, non-OECD countries that in greenfield project capacity. As electricity will account for most incremental electricity sectors in many countries deregulate and look demand, set to increase from 11,300 terawatt to private capital for investment requirements, hours (TWh) to just over 26,000 TWh—more independent power producers (IPPs) will play than the current generation capacity of the an increasing role in providing the necessary entire world. This makes electricity demand in generation capacity. Just how much private developing countries the single greatest source capital has been mobilized toward the power of increased final energy demand from all sector in recent years? Photo © Beni/flickr 12 | IFC.ORG/HANDSHAKE Compass Mapping it out contributed 140 GW of IPP capacity. However, 122 GW of this capacity consisted of hydro Between 2002 to 2012, a total of $350 projects larger than 50 megawatts (MW). billion was invested into greenfield IPP assets in developing countries. About 44 percent of Sub-Saharan Africa that investment was in renewable energy, which Non-renewable investment IPPs in Sub-Saharan for the purpose of this article also includes large Africa totaled $4.2 billion, bringing a mixture of hydropower plants. diesel-fired and natural gas generation. In natural Latin America gas, 19 plants over the last decade yielded $2.6 billion of investment for a total capacity of 3.2 In the period between 2002 to 2012, $21 billion GW. Nigeria led the way with 850 MW of new of investment has leveraged 31.5 gigawatts (GW) capacity. With $6.2 billion recorded, private of non-renewable IPPs. The majority of this finance of renewable facilities outstripped non- investment has been in natural gas-fired facilities. renewables. South Africa attracted two-thirds Renewable investments in the sector have Largest energy technologies used by region MENA ECA SA Natural Natural Gas: $7.5 billion Gas: $10.7 billion Coal: $100.6 billion LAC SSA EAP Natural Hydro: $127.7 billion Gas: $3.9 billion COAL: $24.6 billion EAP: East Asia & the Pacific; ECA: Europe & Central Asia; LAC: Latin America & the Caribbean; MENA: Middle East & North Africa; SA: South Asia; SSA: Sub-Saharan Africa. IFC | 13 of this investment through the Renewable followed by a steep drop in 2012 to $2 billion. Energy Independent Power Producer program. Coal was the technology most invested in, with $90 billion of investment leveraging 100 GW Europe and Central Asia of capacity growth. There was also significant The region of Europe and Central Asia has seen investment in renewables, with $17.7 billion $13.8 billion of investment in non-renewable bringing 12 GW of new capacity. India attracted IPP facilities over the last 10 years for a total the vast majority of this investment into its wind capacity of 14.5 GW. Among these were 3 GW and hydro sectors—$15 billion total investment. of coal-fired facilities and 10 GW of natural gas. In Pakistan, capacity shortage has recently led Turkey attracted the greatest share of invest- to a number of investments. Of these, nearly 80 ment, with 10.2 GW of capacity—all but one percent were supported by international finance 700 MW diesel facility financed since 2009. institutions. However, the region has also seen an explosion of renewable energy investment: $18 billion East Asia and the Pacific financing for 9 GW of power projects. Once Perhaps surprisingly, it was not East Asia and the again, Turkey was the recipient of the highest Pacific which saw the greatest investment in both level of investment, with $10 billion financing renewable and non-renewable IPP infrastructure. for 5.1 GW of capacity. This included 2.6 GW There was a total of $33.1 billion of investments of large hydro and also 1.8 GW of wind—the over the decade in non-renewables, far less than most significant generation technologies attract- registered in South Asia. Of this investment, $26 ing investment. billion was in coal. Natural gas-fired projects followed coal with over 16 GW of new projects in the period. Of these, close to 8 GW were in Thailand, including 3.8 GW of capacity financed Electricity demand in develop- since 2012. ing countries [will be] the single There was a similar level of investment in greatest source of increased final renewables—$22.5 billion—which includes energy demand from all sources large hydro and brought 18.7 GW of capacity. during the next 20 years. After large hydro (11.5 GW), there was 3.1 GW of wind financed and 720 MW of solar photovoltaic. South Asia Middle East and North Africa The region of South Asia saw $128 billion of Though limited in absolute numbers, the Middle investment in non-renewable facilities during East and North Africa region experienced strong the decade, with a spurt of $96 billion coming growth in privately financed greenfield capacity in the five years from 2007 to 2011. This was over the decade, from less than $1 billion in 14 | IFC.ORG/HANDSHAKE Investments in renewables, by region SSA TOTAL non-RENEWables EAP investment $194.8 billion TOTAL SA RENEWables ECA investment $152.8 billion Non-Renewables Renewables MENA LAC Values in 2012 US$. 2002 to over $4 billion in 2012. During that successful projects. For example, downstream the period, 7.7 GW of base load non-renewable WBG provides credit enhancement instruments capacity was financed, with 6.7 GW of that including IBRD/IDA Guarantees to mitigate in natural gas-fired plants. Renewable invest- critical project risks and thus overcome the reluc- ment was not high, but the 1.3 GW of capacity tance of private financiers to invest in key infra- included the Ouarzazate signature solar thermal structure projects. Upstream, the Public-Private plant in Morocco and the 300 MW Tarfaya Infrastructure Advisory Facility (PPIAF) assists wind farm. with the development of enabling environments The World Bank Group (WBG) is well placed that facilitate private investment in power sector to assist developing countries to meet the infrastructure. growing demand for private investment in the Investment data is based on the Private Participation in power sector. Assistance is available via a range Infrastructure Database. Updated annually, 2013 data is of programs, products, and initiatives across the available in July 2014. project cycle to ensure that clients can structure IFC | 15 trading Tales One night, not too long ago, I was sitting at a By Jeff Delmon, World Bank irony is that the parents often force the kid to bar with a friend of mine. He had just finished sell at a loss—so the neighbors get cheaper two weeks of painful negotiation of a power drugs and the parents are popular.” purchase agreement for a power public-private He explained further: “In some countries, the partnership (PPP): night and day, contentious government has a system in place to bail out the and slow progress. So, as a sensitive and car- offtaker in a transparent manner, by trying to ing friend, I said, “Quit your whining! Power get it to cut its own costs, only sell to customers generation PPPs must be the easiest PPP around. who pay, find other sources of revenues, what- You’ve got a tried and tested kit, clear demand, ever. This gives us a little more comfort that the a commercially and socially valued product, a offtaker will pay its bills, but not much.” sophisticated sector with strong sponsors and keen financiers, an accepted standard model for “Investors may also ask the government to allow PPPs, not too much land. As long as you can the offtaker to raise its tariffs. This sounds like a get fuel and connect to the grid, all is OK. In sensible business proposition, but it often isn’t. If fact, the offtaker often takes fuel and grid risk. the offtaker raises costs, it may find some of its Easy, right?” best customers (the ones who actually pay their bills) go to some other source of energy like their My friend was not amused. His response, while own generation, or a rival independent power a bit harsh, brought a lot of perspective: producer delivering directly. You see, the offtaker “The only hitch with your sunny view of power has borrowed from various lenders, often local generation PPPs is the offtaker. In some coun- and/or public banks, to keep electricity tariffs tries, selling power to the local utility is like low to please the government. The offtaker being a drug baron and selling drugs to a local is often more of a political than commercial dealer, and the dealer is broke, and the dealer animal, not incentivized to use isn’t very good at math so he sells to his custom- good commercial practice, but instead to satisfy ers at a loss. In other words, he is getting more political agendas. This results in inefficiencies, broke by the day. The only saving grace is that low collection rates, and high theft.” the dealer still lives with his parents, and they “And this means what?” I asked, putting my bail him out from time to time. Of course the drink down for emphasis. 16 | IFC.ORG/HANDSHAKE Money talks “This means its costs may be higher than some money the offtaker earns will actually make it to of the other potential suppliers of electricity,” he the account, since it is often obtained through answered. “It’s true even though they do not cash-based transactions, and cash has a tendency benefit from economies of scale, plus the quality to find its way to other uses. Plus, the offtaker is available from smaller scale solutions may pro- having a hard enough time making ends meet vide better quality services as compared to the without its cash flow being constrained. Even offtaker—I’m talking about problems like brown with a generous definition of ‘permitted costs,’ outs, blackouts, and surges.” Here he leaned an escrow arrangement may make the situation forward and pointed at me for emphasis. “Rais- worse.” ing prices, unless and until the offtaker improves Now he knew he had me; he was on a roll. He the quality or quantity of services it is providing, continued, “The offtaker has learned over many may result in the loss of its best customers.” years that the government is soft, it may threaten I nodded agreement, but noted the obvious: and complain, but it rarely follows through “OK, so how about a guarantee from his govern- on its threats to cut off subsidies. The country ment,” I said. “They are bailing the offtaker out still relies on the offtaker to supply most of its anyway, why not pay the investors and lenders electricity, so they are unlikely to do anything directly?” drastic. And, of course, the bad boy act works “This is the usual approach,” he responded with well with the government, so reform might a smile, “but not one the government will like. actually be against the offtaker’s self-interests Their utility is in trouble and needs to sort itself in the short to medium term.” out. If they provide a guarantee it just reinforces He was right, of course. The security structures bad behavior and may even incentivize non- we tend to place in an effort to protect lenders payment since the government will take care and encourage them to lend can actually under- of it. Plus, increasingly governments have to mine these same utilities. Unfortunately, disclose such guarantees, which may result in as investors we often ignore these issues and higher interest on the government’s other debt, instead focus on what it will take to close the or reduce the amount of debt to which it has deal. Would we be better off working closely access.” with the utilities to help them, which would “Fine,” I countered, “but how about an escrow of then enable those same utilities to be more revenues? The investors and lenders can grab the credit-worthy and do more PPPs? money the offtaker earns selling electricity across Looking beyond the project to the entire system its grid, and hold it to make sure they get paid when formulating a security package might be first.” I knew this was usual practice, having seen harder work, and more burdensome, but may this structure a number of times. be much more sustainable and better business. Taking the last swig of his drink, he replied, Clearly it is time for another drink. “Good idea. But of course we cannot be sure the IFC | 17 brown outs to Bright lights The privatization of Nigeria’s power sector Interview by Alison Buckholtz Photo © Peete Viisimaa/istock Ibrahim Babagana, the Director of Power for Nigeria’s Bureau of Public Enterprise, has had a front-row seat to the successful reform of the country’s power sector. As of today, five generation Privatization of Nigeria’s power sector companies and 10 distribution compa- took place in November 2013. What nies have been successfully privatized, for a total of $2.25 billion—the largest was the situation, pre-privatization, transaction of this kind successfully com- that made this transaction so pleted in Africa. Here, he gives Hand- shake readers a sense of life in Nigeria important to Nigerian citizens? before privatization, For a long time, the power sector here was run and how government managed poorly. In a country of 150 million Nigeri- and labor worked ans, the level of power was under 4,000 megawatts. together to agree on a way forward, and Although we live in a country with a lot of potential, how officials plan the power sector was not operating to optimal capac- to monitor the new ity. That’s why government decided there’s a need to transaction. privatize the sector. 18 | IFC.ORG/HANDSHAKE Interview vertically integrated utility companies have about How did lack of power manifest 47,000 workers in transmission, generation, and itself among different Nigerian distribution. So with labor, we went through a long process of negotiation, discussion, and communities? workshops—about 14 months—before we could The lack of power has impacted on the popu- arrive at an acceptable package to be paid out to lace in different forms. In industry, 90 percent the unions. of businesses had to sub-generate their power, which led to high cost of goods and services in the country. Because of the high level of brown Was that key to the transaction’s outs, even small and medium industries could success? not function very well, and that affects the income of the populace. That upfront agreement with the unions was one of the keys, and we were able to do that In the rural community, which is a major because we brought in external figures to assist segment of the country, lack of power has had in the negotiations. It’s also important that we a negative impact on things as varied and differ- conducted a transparent, open process and we ent as storage of vaccines and provision of light had the support of the President and the Vice to the schools. The impact was overwhelming in President. all aspects of the Nigerian economy. What are the plans for monitoring Was it difficult to convince stake- results, post-transaction? holders of the necessity of priva- tization? Did you have to engage We have entered into a performance contract with our new investors. In this performance audiences separately to demon- contract, we incorporate what they have indi- strate why this was necessary? cated they will do over a five-year period. We should be given access into the companies every You can categorize the stakeholders and the six months to look at their books. But since we outreach we conducted. Those who are in need are aware we don’t have the skills to monitor of power overwhelmingly support the reform these companies technically, we are trying to also agenda. Reaching this group was not a problem, engage a competent consultant that can help us nor was getting investors and bankers involved. with monitoring. Indeed, monitoring is crucial Even the general public of the country was to the success of the transaction. solidly behind the transaction. The key group of stakeholders we had to con- vince was labor. You have to understand that IFC | 19 transaction Timeline By Arif Mohiuddin, CPCS Transcom International Limited 20 | IFC.ORG/HANDSHAKE spotlight nigeria Privatization of the power sector will be different in every country, but the qualities of a successful privatization are shared among many nations. In Nigeria, the process began, as many do, in a time of great need, and launched due to political will. Here, one of the project’s transaction advisors presents the timeline and process of reform, highlighting the details of the privatization process that were critical to bringing Nigeria a brighter future. Photo © John Hogg/World Bank Historically, Nigeria has operated a state-owned exacerbated by aged and overloaded transmission vertically and horizontally integrated electricity and distribution networks and excessive over- monopoly. The National Electric Power Author- manning. These bitter experiences prompted ity (NEPA) was responsible for generation, the Federal Government of Nigeria (FGN) to transmission, distribution, and retail supply. In embark on a power sector reform program aimed 1999, the Nigerian Electricity Supply Industry at meeting the growing demand for stable and (NESI) reached its lowest point. Of the 79 reliable power. generating units in the country, only 19 were Once Nigeria’s power sector began moving operational—with average daily generation toward reform, the country’s National Electric capacity of 1,750 megawatts. Between 1989 and Power Policy (NEPP) was adopted in 2001. 1999, no new power generation capacity was To provide the appropriate legal framework added to the power infrastructure. Notably, an for the reforms envisaged by the Policy, the estimated 70 percent of the population had no FGN enacted the Electric Power Sector Reform access to electricity, per capita consumption was (EPSR) Act in 2005. The EPSR Act authorized 125 kilowatt hours, and industry system losses the unbundling of NEPA into distinct units. (technical, commercial, and non-payment) were The unbundled units, comprising separate estimated at 50 percent. generation, transmission, and distribution It’s no surprise that the system experienced companies, were held under the Power regular collapse, leading to a massive gap Holding Company of Nigeria (PHCN). between power demand and supply. This was IFC | 21 privatization roadmap Based on a strong showcase of the opportuni- ties through these roadshows, BPE received 341 In August 2010, Dr. Goodluck Jonathan, EOIs indicating solid interest in the Nigerian President of the Federal Republic of Nigeria, power sector from various international and local unveiled the Roadmap for Power Sector Reform investors. Following the submission of the EOIs, (now known as “the Roadmap”). The Roadmap 207 EOIs were shortlisted, and out of these, 163 sent a strong signal that power sector reform and bidding entities purchased the bid documents improvement of NESI remained a top prior- and obtained the eligibility to submit the bids. ity for the FGN. Consequently, it outlined the FGN’s plan for the acceleration of the pace of activity with respect to reforms mandated by Success, step by step the EPSR Act. In August 2011, as part of creating a conducive investment environment, FGN formally com- menced operations of Nigerian Bulk Electricity Trading Plc (NBET), with the primary objective The Roadmap sent a strong of bulk purchasing of power from the generation companies and reselling them to distribution signal that power sector companies. Additionally, from March 2011 to reform and improvement April 2012, BPE (with support from CPCS), remained a top priority for worked with the key stakeholders including the NCP, Federal Ministry of Power, Nigerian Elec- the Nigerian government. tricity Regulatory Commission, Gas Aggregation Company of Nigeria, Nigerian Gas Company, Transmission Company of Nigeria, Nigeria In December 2010, the Bureau of Public Enter- Electricity Liability Management Company, prises (BPE), under the direction of the National NBET, and potential bidders. Council on Privatisation (NCP), commenced This led to issuing the commercially attractive the privatization process with the engagement of tariff, developing the appropriate contractual CPCS Transcom International Limited (CPCS) structure with allocation of various risks in as transaction advisor. Immediately afterward, a the right places, and aligning the transaction call for Expressions of Interest (EOI) in investing structure with the objectives of FGN. All of the in six successor generation companies and 11 participants began to appreciate the existing successor distribution companies was published. situation of the power sector. Following that, a series of roadshows were In May 2012, BPE issued the Request for Pro- held in Lagos, Dubai, London, New York, posals along with the transaction and industry and Johannesburg. agreements containing the “entire deal structure” 22 | IFC.ORG/HANDSHAKE to the eligible bidders. On July 17, 2012, at companies moved ahead with the financial/ the close of the deadline for the submission of commercial bidding stage, the remaining two bids for the Successor Generation Companies, were re-tendered. (Following successful re-ten- 23 proposals were received for six generation dering process, the relevant agreements with the companies. Following evaluation of the bids, bidders were executed in December 2013.) all but one of the generation companies (Afam In February 2013, following successful negotia- Generation Company) failed to receive a techni- tions with the preferred bidders, transaction cally qualified bidder. Again, on July 31, 2012, agreements as well as the industry agreements at the close of the deadline for the submission of for all 15 companies were executed. All of these bids for the Successor Distribution Companies, entities successfully paid their acquisition price. 54 proposals were received for 11 distribution In November 2013, the Success Generation and companies. Distribution Companies were handed over to the Following evaluation of the bids, all but one of new owners, concluding the privatization process the distribution companies (Kaduna Distribu- and launching a promising new era for Nigeria’s tion Company) failed to receive a technically power sector. qualified bidder. Thus, while 15 of the 17 Gas supply risks in Nigeria The domestic demands on Nigeria’s gas from the private sector. To attract such an resources are huge, and it would be a mistake amount of capital to the gas sector, Nigeria to view the resource base as infinite. Nigeria’s will need to develop a bankable commercial Roadmap for Power Sector Reform sets a goal framework for gas that includes price reforms, of 20 GW of generation capacity by 2020 improvements in regulatory arrangements, a and most of this capacity will be gas-fired. redefinition of the role of public companies in Meeting this ambitious target will require the gas sector, and an alternative to the cur- more than doubling domestic gas supply rent financing model. Otherwise, gas supply from 1.5 billion cubic feet (BCF) per day to risks becoming the Achilles’ heel of power 3.4 BCF per day. Developing the roughly 30 sector reform. trillion cubic feet of reserves needed to sup- port such a production increase will require Excerpted from the forthcoming report “Harnessing African Gas for African Power,” from the World Bank’s Africa huge amounts of capital, perhaps $20 billion Energy Department and Sustainable Energy Department. or more, and most of this will need to come IFC | 23 Photo © Rich Beilfuss, Cahora Bassa 2 Hydro in Power- hungry Africa Private hydro is gathering momentum By Chris Head, Independent Consultant Africa is about to experience a wave of investment in its hydropower sector. But will it be able to avoid some of the problems that have bubbled up with other natural resource concessions? 24 | IFC.ORG/HANDSHAKE hydropower Private investment in African hydropower has follows similar experiences in Asia and South lagged behind the rest of the world, despite the America, where private hydro was initially slow continent having the largest untapped potential to take off. Once established, however, it rapidly combined with chronic power deficits. This gathered momentum. unsatisfactory situation is changing fast as governments struggle to meet rapidly growing demand from an increasingly prosperous middle Crafting the concession class and a burgeoning, power-hungry mining Another significant challenge is negotiating industry. concession agreements where there is little experience to draw upon. A recent review of 35 Sub-Saharan countries reveals that 14 are already Finding the finance engaging with private hydro developers, while 11 A major challenge has been the capital-intensive are moving in the same direction. This suggests nature of hydro projects. Faced with the need to that up to 25 African states may soon be negoti- invest in new capacity, most countries have only ating hydropower concessions, most for the a limited range of options. The very poorest may first time. still have access to concessionary financing, but These highly consequential contracts not only the majority have to rely on commercial financ- determine the nature of the project to be ing through private developers, or on sovereign developed, but also define what the host nation loans from emerging economies such a China, will receive for the use of its resources, and the through its EXIM bank. The latter are often impact on any existing or planned developments linked to a trade agreement and the money is in the river basin. They reach far into the future usually tied to Chinese construction companies. and involve many stakeholders. Governments To attract more varied sources of capital, many need help. African governments are liberalizing the power sector. This is a challenging process for a conti- nent that has traditionally been accustomed to Turning point a high degree of state ownership in all aspects of There are reasons for believing that African electricity supply. The process is more advanced hydro is now at a turning point. The recent com- in some countries than others, but the concept missioning of the 250 megawatt (MW) Bujugali of privately financed generating stations is now project on the River Nile in Uganda marks the well established. However, nearly all of these successful completion of the first sizeable hydro independent power producers (IPPs) have been IPP on the continent. There have been smaller thermal, wind, or geothermal projects; hydro has schemes, but Bujugali has demonstrated that proved to be a more difficult nut to crack. This with the right combination of private investment IFC | 25 and public support, much of the continent’s From generation to vast hydro potential could be developed by the private sector. It has boosted confidence among generation investors and developers alike, to the extent The new wave of private hydro in Africa offers that there are now a number of international great opportunities for nations to strengthen companies focusing exclusively on the African their power sectors and build their economies hydropower sector with a raft of projects under in the way that is happening elsewhere in the negotiation or development. world. First generation hydro concessions are relatively straightforward because they are structured Securing financing will be around the IPP acting as a captive supplier to the state-owned grid company; the host govern- the overriding challenge on ment is therefore focused on achieving least-cost a continent where credit power. However, in a few parts of the world, such arrangements are giving way to open mar- ratings are weak. ket concessions where the developer is free to sell power wherever he can find a buyer. Under these second generation arrangements, These include projects like Bumbuna (250 MW) the power produced moves from being a public in Sierra Leone and Ruzizi 3 (145 MW) in service to a tradable commodity, and the focus Burundi, both nearing construction, and several of the host government changes to maximizing large projects like Mphanda Nkuwa (1,500 its share of the economic rent from the site. This MW) and Cahora Bassa North (1,000 MW) in is more difficult to address—and will remain Mozambique, which are in the planning stage. In an obstacle—in a situation where concessions the Democratic Republic of Congo, which holds can stretch 30 years into the future, and energy 65 percent of Africa’s hydro resources, plans are prices continue to escalate at an unpredictable now in hand to develop the 4,800 MW Inga 3 rate. scheme as the first stage of Grand Inga, which will eventually have a capacity of 40 gigawatts. Hydropower development in Africa faces many For all of these, securing financing will be the challenges, but perhaps the greatest is to achieve overriding challenge on a continent where credit equitable and sustainable concession agreements ratings are weak. In most cases it will involve a that stand the test of time. complicated blend of private and public money and guarantees, as funding such projects is usu- ally beyond the reach of the private sector alone. 26 | IFC.ORG/HANDSHAKE Mining for lessons learned Under an open market model, hydropower is analogous to mining, as both are exploiting a natural resource to sell to third parties. In Africa, the mining sector embarked on privatization before hydro, with an influx of foreign investment that started about two decades earlier. This prompts the thought that there should be lessons to be learned from the mining sector, but anybody looking at the record of mining concessions in Africa will find a history of broken agreements; mining codes were constantly revised and often totally ignored. Many external observers are critical of what they regard as unequal contracts and one-sided promises, citing weak governance and a serious lack of local capacity to negotiate, monitor, and enforce such agreements. Photo © Roman Betik, Phalaborwa Mines, South Africa IFC | 27 One size Does not fit all Tailoring hydropower plants to community needs The technology for using falling water to create hydroelectricity has existed for more than a century. The evolution of the modern hydropower turbine began in the mid-1700s, when the French hydraulic and military engineer, Bernard Forest de Bélidor, wrote Architecture Hydraulique. In this four-volume work, he described using a vertical-axis versus a horizontal-axis machine. A century later, in 1882, when the electric generator was coupled to the turbine, the world’s first hydroelectric plant opened in the U.S. Today, hydropower plants combine cutting-edge technology with natural resources to serve the needs of many different communities. From small to extra-large, these facilities allow remote or inaccessible areas the power resources that have long eluded them, stalling progress and slowing development. The examples below illustrate how hydropower can be tailored to local needs with local resources. Bujagali (Uganda) Lake Mainit (The Philippines) The Bujagali hydropower plant is the first The $62.5 million, 25 MW Lake Mainit large-scale privately financed hydro in hydropower plant, which is scheduled for Africa. A 250 MW facility on the Victoria completion by 2015, will use Lake Mainit Nile River, it began operations in late as a natural reservoir to generate electricity. 2012, providing an alternative to more The project will reduce the magnitude and expensive thermal power sources. The facil- frequency of seasonal flooding during peri- ity uses the power of falling water from a ods of rainfall. Flooding in Lake Mainit, 30 meter high earth-filled dam to generate the fourth-largest lake in the country, electricity. affects over 60,000 hectares of commer- cial, industrial, and agricultural land. 28 | IFC.ORG/HANDSHAKE hydropower S, M, L, XL Ngayak III (Uganda) Facilities range in size from large power Nyagak III is a 4.4 MW mini hydro scheme plants that supply many consumers with in the West Nile Region of Uganda. The electricity to small and micro plants that Uganda Electricity Generation Company individuals operate for their own energy has hired IFC to serve as transaction advisor needs or to sell power to utilities. to assist in identifying a strategic partner to Large Hydropower: Although definitions develop the project. Six bidders have been vary, the U.S. Department of Energy (DOE) prequalified and the tender process defines large hydropower as facilities that is ongoing. have a capacity of more than 30 MW. Small Hydropower: DOE defines small hydropower as facilities that have a capacity of 100 KW to 30 MW. Nam Theun 2 (Lao PDR) Micro Hydropower: A micro hydropower plant has a capacity of up to 100 KW. A NT2, the largest and most complex hydro- small or micro-hydroelectric power system power project in Lao PDR, supplies 75 can produce enough electricity for a MW of electricity for domestic use and home, farm, ranch, or village. exports 1,000 MW of power to Thailand. Ashta (Albania) The Ashta hydropower plant, with an installed capacity close to 50 MW, is the first major hydropower plant built in Albania in 30 years. Its success is based on innovative StrafloMatrix™ technology—a new concept for developing hydropower at low-head sites where dams, weirs, or canals already exist. Projects that may not be financially viable, based on conventional turbines and generators, may now be developed using this method. This technology has many advantages over conventional plants, including low investment cost, easy and in- expensive maintenance, and shorter construction periods. Photo © Angelo Dell Atti, Ashta, Albania IFC | 29 power Mining for Sub-Saharan Africa’s suboptimal power situation exists amid vast energy resources. But African mines, with their substantial and growing need for power, could be the critical “anchor consumers”—high-volume customers that provide a captive source of demand and consistent revenues—that harness these energy resources. Photo © Ivars Linards Zolnerovics/Fotolia By Sudeshna Ghosh Banerjee, Zayra Romo, Gary McMahon, Perrine Toledano, Peter Robinson, & Ines Perez Arroyo Mines are greedy for power, and in Sub-Saharan power infrastructure—also known as “power- Africa’s (SSA) power sector, this may be the sort mining integration”—is an opportunity to of greed that is actually good. Because mining develop the power sector of Africa’s mineral- activities require large amounts of power to rich economies and expand electrification. run their systems—power is rarely less than 10 percent of the operating costs of mining and often rises above 25 percent—these mines pres- demand expected to triple ent themselves naturally as “anchor consumers” The future demand from mining for power that can stabilize the sector. Leveraging mining’s is substantial and could reach up to 23,443 power demand and its capital investments in megawatts (MW) in 2020. While South Africa 30 | IFC.ORG/HANDSHAKE Mining is projected to add sizable mining demand for demand will create even higher pressures to close power and grow at 3.5 percent annually, the the supply gap. Compared with grid-supply in growth in other SSA countries, projected to be 2012, mining demand in 2020 could be as much 9.2 percent, is more impressive. Demand will as 35 percent. come overwhelmingly from the Southern Africa region, dominated by South Africa. Even with- Intermediate options between out South Africa, Southern Africa will have the highest power demand from mining, largely due grid-supply and self-supply to the large requirements in Mozambique and Mines traditionally source power from the grid. Zambia, followed by Central Africa and Western However, in cases of high tariff, poor power Africa. Mining demand in Guinea, Liberia, and adequacy and reliability from the grid, or the Mozambique is expected to represent more than high cost of extending transmission and distribu- total non-mining demand by 2020. This growing tion networks to the mining site, some mines 30 25 US ¢/kilowatt hour 20 15 10 5 0 Guinea Mauritania Tanzania Self-supply Shared infrastructure among mines Shared infrastructure among mines & electrification of communities IFC | 31 Power-sourcing arrangements across Africa Intermediate options Mines Grid- Self-supply Mines sell Mines serve as Self-suppy supply & Self-supply & grid collectively invest in anchor Grid-supply & CSR* self-supply sales to grid grid demand backup for IPP Mine Mine Mine Mine is con- Coordinated Mine invests Mine buys Mine produces its provides produces its nected to investment with gov- power from doesn’t own power power to own power the grid and by a group ernment in an IPP and produce any for its own community and sells is moving of mines, new, or the serves as power, but needs through excess to into its own producers, upgrading an anchor buys 100% Description mini-grids the grid generation and users of, power customer from grid or off-grid in one large assets solutions power plant off-site; connected to the grid Main Diesel, HFO Diesel, HFO Coal, gas, Diesel, HFO Diesel, HFO, Hydro, gas Any Any generation hydro solar drivers Mali & Guinea, Cameroon, DRC, Ghana DRC, South Africa Mozam- Guinea Madagascar Mozam- Tanzania Niger bique, (hydro), bique, Zambia Presence Sierra Leone Zimbabwe & Liberia (oil) Energy demand 2,444 MW 5,730 MW 15,269 MW by 2020 CAGR**: 2000-2020 11.5% 5.77% 4.66% (projects) CAGR**: 2000-2020 (avg. -5.7% 0.29% annual energy 1.88% consumption) *CSR: Corporate Social Responsibility Source: Africa Power-Mining Database, 2013. **CAGR: Compound Annual Growth Rate 32 | IFC.ORG/HANDSHAKE generate their own power (self-supply). Still Growth Limitations more mines combine some form of both grid- supply and self-supply (intermediate options). There are physical and financial constraints to There are about six intermediate arrangements growth in the concept of power-mining integra- reported by the mines. tion. The most common physical barrier is the lack of a national transmission grid capable of Although it still remains a minority among catering to additional flows as the mining sector power-sourcing arrangements, projects reporting and the rest of the economy expands. The other self-supply rose the fastest at 11.5 percent. In dominant constraint is the weak financial situa- fact, the mines envisage spending between $1.1 tion of the utilities. to $1.3 billion between 2013 and 2020 in self- supply based arrangements. Intermediate options grew at 5.8 percent and grid-supply grew at 4.7 percent. However, annual average electricity Mines can be anchor consumers consumption rose only for intermediate arrange- for local electrification. ments, suggesting that self-supply is primarily chosen by relatively smaller projects. Several different kinds of risks can also help Power-Mining integration explain why the power-mining integration can be a win-win has been limited. These include: Harnessing economies of scale can produce cost • Planned investments in mining may not savings for both the mines and the population. materialize because of price swings, difficul- This is especially true in Guinea, Mauritania, ties in raising capital, overly optimistic geo- and Tanzania, where there is substantial potential logical assessments, and political instability. for mines to be used as anchor consumers for Prices in international commodity markets local electrification. In these cases, mines that fluctuate, sometimes wildly. The period since are contiguous to each other and are considering 2003 has seen the biggest sustained upswing self-supply could jointly form or else contract historically, though prices have moderated with an independent power producer (IPP) since 2012. and effectively form a mini-grid or sell excess • Mines and smelters may cut their output power to the grid. This could occur through when prices fall, and thus their power needs hydropower projects, as in Guinea; through fall as well. gas projects, as in Mauritania; or through coal, hydro, or gas projects, as in Tanzania. IFC | 33 • Mines have finite lives, usually shorter than those of large power facilities, so power investments will eventually need other customers who may not materialize. • Mining interests can be (or may become) a powerful lobby to extract subsidies or special privileges from the power sector, particularly if overall demand for electricity grows and the mining operations are no longer needed as anchor customers. If that happens, mining demand may crowd out medium-size firms and residential consumers, reducing the possibilities for extending access to electricity. Though many institutional roadblocks have threatened to derail the power- mining nexus, the integration of mining and power can be a win-win for Africa’s next generation. Its potential is as rich as the minerals nestled underneath our feet, and the promise is well within the reach of those committed to transform- ing the landscape. Forthcoming “Power of the Mine: A Trans- formative Opportunity for Sub-Saharan Africa” World Bank, 2014. 34 | IFC.ORG/HANDSHAKE Interview “ oui”to PPP Mauritania says Integrating power and mining Although mining has a long history in Mauritania, partnerships between the power and mining sectors are making possible new options for industries as well as local residents. In this interview, Mohamed Ould Khouna, Mauritania’s Minis- ter of Petroleum, Energy, and Mines, talks to Handshake about how the mining sector can play a stronger role in the development of new power generation options, and the advantages to governments that are open to this integration. Photo © Isuru Senevi, Mauritanian mines IFC | 35 How can the mining sector play a resources and help ensure the safety of the energy supply for mining operators. stronger role in the development of new power generation options in Mauritania? What are some of the advantages for governments that are open The mining sector is one of the key levers to growth. Its contribution to GDP is over 25 to the idea of the “power-mining percent, and it creates over 15,000 jobs directly integration”? or through subcontracting. However, it appears A strategic approach to energy-mining integra- that the availability of competitive energy is the tion presents benefits to all stakeholders. It essential element needed to boost the develop- allows for a national infrastructure that remains ment of the mining and industrial sectors with after the end of mining operations, it boosts high added value. investment in the sector through the involve- ment of creditworthy consumers, and everyone “ benefits from lower prices. But the success of this approach relies on professional, experienced Integrating power management. and mining can make a significant positive What sort of public-private part- impact on peoples’ nerships (PPPs) do you envision living conditions. ” With this in mind, authorities have organized the power project from gas (discovered offshore), with the greater acceptance of the power-mining integration? What would be the most realistic approach to partnerships in Sub-Saharan Africa (SSA)? in partnership with major mining operators active in the country. The idea was to pool There is no miracle formula, as each case is the electrical infrastructure and optimize its unique. To structure the proposed electric operation in order to ensure a cheaper electricity Mauritanian gas station, we opted for funding supply for all consumers. These sorts of partner- in the form of a PPP that could meet three main ships can also optimize the exploitation of gas conditions: ensure the bankability and viability 36 | IFC.ORG/HANDSHAKE of the project, ensure a competitive price, and and greater access to electricity, and they assume allow for quick finalization. these benefits will come quickly. Successful This approach led us to create a private company communication between the government and in mid-2012. This private company, MEPS, its citizens, as we have had here for nearly two is responsible for the development of the Aval years, can explain specific benefits, along with (power plant) component on behalf of its the timeline. This keeps everyone’s expectations shareholders. This includes the mining and realistic. public electricity operator (SOMELEC). So far, this strategy has satisfied our needs. Could you give an example of how country-specific needs for power-mining PPPs in SSA vary? Several variants have functioned well elsewhere, like the development of the project by a public facility, or the hiring of a private developer. Each approach has its advantages and disadvantages. What is your advice to govern- ments that want to conduct community outreach to help citizens understand how the power-mining integration might affect them? Integrating power and mining can make a significant positive impact on peoples’ living Photograph courtesy of IISD/Earth Negotiations Bulletin conditions. In general, people have high hopes (http://www.iisd.ca/irena/irenaa4/) for the development of extractive industries, because of how its potential success might Mohamed Ould Khouna improve their lives. Citizens expect lower prices IFC | 37 Thirsty Energy The World Bank’s new initiative, Thirsty Energy, quantifies tradeoffs and identifies synergies between water and energy resource management. It aims to help govern- ments prepare for an uncertain future by opening disciplinary silos that prevent cross- sectoral planning, and working with stakeholders to build country capacity that can plan energy and water resources. In this context, partnerships are important; the energy-water challenge is too large for any organization to tackle alone. The Thirsty Energy group works with an array of partners to design and implement activities and has also formed a Private Sector Reference Group to share experience, to provide technical and policy advice, and to scale up outreach efforts. By Diego J. Rodriguez, World Bank The interdependence of energy & water Water produces power; power produces water. wider recognition worldwide, water and energy Almost all energy generation processes require planning often remain distinct. The tradeoffs significant amounts of water, and the treatment involved in balancing one need against the and transport of water requires energy, mainly other are often not clearly identified or taken in the form of electricity. Even though the inter- into account, complicating possible solutions. dependency between water and energy is gaining 38 | IFC.ORG/HANDSHAKE thirsty energy energy needs water Energy production processes require water. hydropower thermoelectric cooling power plant operations fuel extraction and refining fuel production Water production, process- ing, distribution, and end- use require energy. extraction treatment transportation water needs energy IFC | 39 By 2035 energy consumption which will increase will increase by water consumption by 35% 85% 2010 2035 2010 2035 increasing pressure on finite water resources Developing countries are vulnerable Population and economic growth, urbanization, Recurring and prolonged droughts are threaten- and increasing demand for food and energy ing hydropower capacity in many countries, place competing pressures on water. Water con- such as Sri Lanka, China, and Brazil. These sumption for energy generation will increase by stresses mount as emerging economies, like 85 percent from 2010 to 2035, posing a serious China, will double their energy consumption challenge to many countries around the world. in the next 40 years. 40 | IFC.ORG/HANDSHAKE A Marriage of equals Although the relationship, complementarities, • Understand the water requirements of and synergies between water and energy are now electricity generation and fuel extraction evident, these two sectors have historically been technologies and their potential impact. regulated and managed separately. Energy and • Consider the complexities of the hydrological water planning must be integrated in order to cycle and other competing uses when assess- optimize investments and avoid inefficiencies. ing plans and investments; consider joint Cross-sectoral implications need to be further development and management of water understood. To achieve this, planners should: and energy infrastructure and technologies, • Consider water constraints in the energy maximizing co-benefits and minimizing sector when planning power expansion. negative tradeoffs. integrate energy- enhance reduce water water planning efficiency dependency explore the use conserve water use alternative cooling of multipurpose and energy systems in thermal hydropower dams power plants replace old, integrate energy- inefficient recycle and reuse water infrastructure power plants water from operations incorporate water increase the implement renewable constraints into economic value energy technologies energy planning of water strengthen joint explore brackish and improve power energy-water gover- saline water options plant efficiency nance and encourage political reform improve biofuels’ production efficiency IFC | 41 Bottling Photo © sunjaec/flickr sunshine By John Kjorstad, KPMG Global Services Energy experts like to arm themselves with fac- face when legitimately trying to employ new tual curiosities—little tidbits designed to make technologies or convert new sources of energy. the general population think more about energy production and their own consumption. Risky routes to change Recently, I read such a fact in a promotional Changing the way we generate and distribute document published by Vattenfall. According to energy is not easy. It requires long-term plan- the Swedish power company, “every day more ning, efficient financing, and careful manage- solar energy reaches the earth than 5.9 billion ment of existing assets—many of which still have people could consume in 27 years.” a lot of useful life left in them. Some countries, What an incredible assertion. Given that most like Spain and Germany, have taken bold steps of the world’s current production of energy relies to accelerate change, but the Spanish stumbled heavily on coal and other fossil fuels (the relics of when the financial burden of their actions put sunshine past), we are clearly not very efficient at too much pressure on the country’s balance converting the vast potential of what is presented sheet. As a result, private investors learned a to us each day at sunrise. harsh lesson on the realities of political risk. It’s not for a lack of good intentions. Vattenfall, Spain’s experience was unfortunate. While the for example, is wholly owned by the Swed- country’s leaders should be applauded for creat- ish government and arguably one of the most ing the ideal environment to accelerate private progressive and diverse utilities in the world. investment and promote the development of Although the company has invested in new tech- cleaner renewable sources of energy, they must nologies like offshore wind energy, more than also accept responsibility for letting the situation half of its generation mix still comes from fossil escalate beyond their control. Governments are fuels. As of 2010, its portfolio included coal (44 consistently walking a tightrope of affordability percent), nuclear (25 percent), hydro (21 per- while trying to incentivize meaningful change. If cent), natural gas (8 percent), wind (1 percent), they do not get the balance right, there is a very and biomass (1 percent). While the company real risk that the whole policy might collapse clearly embraces the future, its carbon footprint with painful consequences. reflects the real struggle global energy producers 42 | IFC.ORG/HANDSHAKE Inside infrastructure This is why, despite the nearly universal public incredible facts. They want to grab our attention. desire to generate and distribute cleaner, more Warm, fuzzy marketing may be a less effective efficient energy, it may seem at times like the approach than, say, a 7 percent rate hike, but world is standing still. Power stations operate for it does offer consumers a less jarring and more decades—a half-century, even—and the coal- fascinating window into a world they often take fired plants being built today will still be part of for granted. the energy mix in 2050 and possibly even 2075. Yet not everyone gets this essential level of service. For some, the annoyance of poor power A role for coal infrastructure struggling to cope with rapidly growing demand is an unfortunate fact of life. Coal is still a popular choice for new power The exhaust from millions of resulting backup capacity. The need is great, the resource is generators is far worse, in my opinion, than the plentiful, it’s cheap to operate, and it generates smoke billowing out of massive chimneys at a an awful lot of capacity in a relatively small coal-fired power station. I’m dumbfounded by space. Until we value air on par with land, the how much petrol is wasted, and carbon emit- carbon footprint of an energy project won’t ted as the result of poor power infrastructure. A matter as much as the physical one. recent blog written by Todd Moss at the Center That is not to say that the world of energy isn’t for Global Development states that while a coal changing, but exactly how much or how fast power plant might produce around 1,000 grams is open to debate. Generation and distribution of CO2/kilowatt hour, an individually-owned 5 are still largely the domain of big utilities like kilowatt diesel generator emits twice as much. Vattenfall. The business model remains fairly There has to be a better way to serve our energy straightforward: generate large lumps of electric- needs and tap the incredible abundance of what ity (slightly more than demanded) and distribute Vattenfall says we ignore every day. The global it to consumers at the lowest possible cost. While demand for power will never cease. In order renewable energy, smart grids, and efficiency to keep the lights on (and our digital devices technologies are clearly driven by climate change charged), governments and the private sector awareness, the reality is that people mostly want must work together to provide sensible economic reliability at a low cost. and environmentally-friendly solutions. We Our expectation—particularly in the developed have both already, but rarely in a single form. world—is that energy is automatic. Flip a switch This must be our ambition, and the path to and the lights come on. We typically give it succeed is as clear as the light of day. Of the about as much thought as we would the sun many diverse sources of energy already available, rising each morning. You would only notice if only nuclear, tidal, and geothermal do not origi- it wasn’t there (or if it failed to cut through the nate from our sun. We just need to get better at smog). This is why energy experts peddle their bottling sunshine. IFC | 43 energy climate change & powering the 2°C trajectory 44 | IFC.ORG/HANDSHAKE Renewables The world is not on track to meet the target agreed by governments to limit the long-term rise in the average global temperature to 2 The energy sector is not immune degrees Celsius (°C). Global greenhouse-gas from the physical impacts of emissions are increasing rapidly and, in May climate change and must adapt. 2013, carbon-dioxide (CO2) levels in the atmosphere exceeded 400 parts per million for the first time in several hundred millennia. The of greenhouse-gas emissions, as more than 80 weight of scientific analysis tells us that our percent of global energy consumption is based climate is already changing. We should expect on fossil fuels. The International Energy Agency extreme weather events (such as storms, floods, (IEA) has researched the role of energy and its and heat waves) to become more frequent and potential to limit climate change. Key findings intense, as well as expect an increase in global include: temperatures and rising sea levels. Policies that have been implemented, or are The energy sector is key to now being pursued, suggest that the long-term limiting climate change average temperature increase is more likely to Despite positive developments in some coun- be between 3.6 °C and 5.3 °C (compared with tries, global energy-related CO2 emissions pre-industrial levels), with most of the increase increased by 1.4 percent to reach 31.6 gigatonnes occurring this century. While global action is in 2012, a historic high. Non-OECD countries not yet sufficient to limit the global temperature now account for 60 percent of global emissions, rise to 2 °C, this target still remains technically up from 45 percent in 2000. In 2012, China feasible, though extremely challenging. To keep made the largest contribution to the increase in open a realistic chance of meeting the 2 °C global CO2 emissions, but its growth was one of target, intensive action is required before 2020, the lowest it has seen in a decade, driven largely the date by which a new international climate by the deployment of renewables and a signifi- agreement is due to come into force. cant improvement in the energy intensity of its Energy is at the heart of this challenge. The economy. In the United States, a switch from energy sector accounts for around two-thirds coal to gas in power generation helped reduce Photo © Martin Ramsner IFC | 45 emissions by 200 million tonnes, bringing them emissions by 2020 (as a bridge to further action); back to the level of the mid-1990s. they rely only on existing technologies; they However, the encouraging trends in China and have already been adopted and proven in several the United States could well both be reversed. countries; and, taken together, their widespread Even after allowing for policies now being adoption would not harm economic growth in pursued, global energy-related greenhouse-gas any country or region. emissions in 2020 are projected to be nearly The four policies are: 4 gigatonnes CO2-equivalent higher than a • Adopting specific energy efficiency measures level consistent with attaining the 2 °C target, (49 percent of the emissions savings). highlighting the scale of the challenge still to be tackled just in this decade. • Limiting the construction and use of the least-efficient coal-fired power plants (21 percent). • Minimizing methane emissions from upstream oil and gas production (18 percent). Governments need to design and implement frameworks that • Accelerating the (partial) phase-out of subsi- dies to fossil-fuel consumption (12 percent). encourage prudent adaptation, while the private sector should Adaptation to the effects of assess the risks and impacts as climate change is necessary part of its investment decisions. The energy sector is not immune from the physical impacts of climate change and must adapt. In mapping energy system vulnerabilities, we identify sudden and destructive impacts Four energy policies can keep the (caused by extreme weather events) that pose 2 °C target alive risks to power plants and grids, oil and gas installations, wind farms, and other infrastruc- The IEA’s 4-for-2 °C Scenario proposes the ture. Other impacts are more gradual, such as implementation of four policy measures that changes to heating and cooling demand, sea level can help keep the door open to the 2 °C target rise on coastal infrastructure, shifting weather through to 2020 at no net economic cost. The patterns on hydropower, and water scarcity on policies in the 4-for-2 °C Scenario have been power plants. selected because they meet key criteria: they can deliver significant reductions in energy-sector 46 | IFC.ORG/HANDSHAKE Disruptions to the energy system can also have significant knock-on effects on other critical services. To improve the climate resilience of the Delaying further action, even to energy system, governments need to design and the end of the current decade, implement frameworks that encourage prudent would result in substantial addi- adaptation, while the private sector should assess tional costs. the risks and impacts as part of its investment decisions. Anticipating climate policy The price of inaction can be a source of competitive Delaying stronger climate action to 2020 would advantage come at a cost: $1.5 trillion in low-carbon The financial implications of stronger climate investments are avoided before 2020, but $5 tril- policies are not uniform across the energy lion in additional investments would be required industry and corporate strategy will need to thereafter to get back on track. Delaying further adjust accordingly. Under a 2 °C trajectory, net action, even to the end of the current decade, revenues for existing nuclear and renewables- would therefore result in substantial additional based power plants would be boosted by $1.8 costs in the energy sector and increase the risk trillion (in year-2011 dollars) through to 2035, that the use of energy assets is halted before the while the revenues from existing coal-fired plants end of their economic life. would decline by a similar level. Of new fossil- The strong growth in energy demand expected fuelled plants, 8 percent are retired before their in developing countries means that they stand to investment is fully recovered. Almost 30 percent gain the most from investing early in low-carbon of new fossil-fuelled plants are fitted (or retro- and more efficient infrastructure, as it reduces fitted) with carbon capture and storage (CCS), the risk of premature retirements or retrofits of which acts as an asset protection strategy and carbon-intensive assets later on. enables more fossil fuel to be commercialized. A delay in CCS deployment would increase Excerpted from the forthcoming report “Redrawing the cost of power sector decarbonization by $1 the Energy-Climate Map” © OECD/IEA, 2013, trillion and result in lost revenues for fossil fuel pp. 9-12, modified by the authors. producers, particularly coal operators. Even under a 2 °C trajectory, no oil or gas field Read more in Redrawing the Energy-Climate Map. currently in production would need to shut down prematurely. IFC | 47 a how-to guide Photo © Tor Lindqvist/istock By Jamie Fergusson, IFC 48 | IFC.ORG/HANDSHAKE Renewables Renewable energy (RE) technologies such as elevated “feed-in” tariffs, auctions for specific hydro, wind, biomass, geothermal, and solar amounts of new renewable energy capacity, power offer the potential of increased energy and requirements for utilities to source specific security, limited local and global environmental percentages (or “portfolio standards”) from impact, and reduced exposure to fuel price renewable sources. volatility. Many of them are also experiencing Each approach has its supporters but none has rapid cost reductions as the technologies improve proven a panacea: all have their strengths and and the industries grow to scale. However, except weaknesses and often their success comes down in areas of particularly good natural resources, to the details of implementation. Feed-in tariffs or in countries that are otherwise dependent were once the darling of many as Europe’s on expensive imported diesel, renewable energy schemes encouraged rapid scaling of wind and is yet to be cost competitive with traditional solar power. But the shine has come off these sources of power such as coal and gas. Increas- solutions with painful retroactive reductions ing the contribution of renewable energy of tariffs in Bulgaria, Spain, and the Czech within a county’s energy mix often faces other Republic. Auctions have more recently been very challenge—such as perceived higher risk by effective in Brazil, South Africa, and elsewhere investors, unsuitable contractual or regulatory in creating competition and driving down tariffs, frameworks, and existing infrastructure and though such approaches might be less successful subsidies that weight decisions in favor of in periods of inflating prices and interest rates. traditional thermal power. As regulators and markets learn from past In response, many countries have and are imple- mistakes, many hybrid approaches are being menting specific regulatory support systems to designed that optimize the benefits of several encourage renewable energies. Multiple differ- different approaches. ent approaches exist, including fixed long-term IFC | 49 IFC has financed renewable energy projects under a variety of regulatory support systems. The table below provides a comparative analysis of the four broad categories of regulatory support based on IFC’s experience. PORTFOLIO STANDARDS A government-required percent of all power generated to be sourced from RE, often twinned TAX INCENTIVES with a credit or tradable certificate Accelerated tax depreciation, transfer- system by which suppliers demon- able tax credits (which can be used strate compliance. to raise capital), and other tax-based investment incentives. STRENGTH: Can drive competition among RE technologies, delivering STRENGTH: Can accelerate pay the government target at the lowest down of capital cost. | Can drive cost. | Can achieve an exact volume competition among RE technologies, target if measured against metered delivering similar incentives output. | Cost efficient (depends on to all. | Public “subsidy” is floor price of certificate). delivered upfront so regulatory reliance and public liability are WEAKNESS: Low TLC*. | Price not long-term. volatility. | Disadvantages some RE techs so likely to only support the WEAKNESS: Burden is single lowest cost technology for that directly on government finances with country. | Complexity. | Bureaucracy reduced tax income. | Can lead to in administering and managing the RE stop/start markets if support is only credit scheme. | Setting right percent approved on an annual basis (such as can be a challenge in understanding the in the U.S.) or with economic cycles cost implications on the sector (this can affecting the availability of profits to be mitigated by setting a suitable safety shelter from taxes. | Reduced operat- valve or penalty price above which the ing incentives can lead to less well-run credits cannot go). generation assets. | May disadvantage *TLC=Transparency, Longevity, Certainty some RE technologies. 50 | IFC.ORG/HANDSHAKE FEED-IN TARIFF (“FiT”) A FiT gives a guaranteed fixed price or premium per kilowatt hour (set by a AUCTIONS regulator) to the generator for all projects Government or utility- of a technology (renewable energy) type run competitive tendering for a fixed period of time. of fixed amounts of capacity for specified RE technologies. STRENGTH: TLC. | “Pull” incentive on the market. | Separate FiTs can STRENGTH: Combination of market allow multiple technologies to efficiency with the auction and the TLC be supported and deliver of a guaranteed price once set. | Greatest diversification. regulatory control on expansion of RE $ in the system. | Separate auctions can WEAKNESS: Getting the price allow multiple technologies to be right is hard, as equipment and supported and deliver diversification. financing prices are dynamic. A FiT that is too low will result in no investment WEAKNESS: High transaction costs and a FiT that is too high will give away and long lead times associated with excess returns and add to public costs. running the auctions. | Risk of non- | A FiT alone is not enough to spur the delivery if auction entry requirements market—also need access to grid, bank- and bid scrutiny are inadequate. | able PPAs, etc. | FiTs create long-term Setting suitable bid deposit/guarantees liability—suitable caps on the amounts is essential to successful outcomes. | of RE supported are needed, so sustain- Harder to achieve success in context ability depends on who is paying—are of volatility in capital costs and/or costs the tariffs passed through to consumers of capital, particularly related to cur- or subsidized by government funds—and rency markets (bids may become how much is supported? quickly unviable). Photo © Adrian IFC | 51 S. Jones Photo © Scott Ableman, Nesjavellir Geothermal, Iceland Drilling down, heating up PPPs fueling the future of geothermal power generation By Pierre Audinet & Almudena Mateos Merino, World Bank It’s hot at the center of the Earth—nearly 6,000 As of 2012, however, global installed capacity degrees Celsius—and the promise of public-pri- had only reached 11.4 gigawatts (GW), about vate partnerships (PPPs) for geothermal energy, 0.3 percent of the world’s total generation and power derived from the planet’s internal heat, only a fraction of its technical potential. What is heating up as well. Geothermal energy has risk factors are holding back the potential of wide appeal because it is a renewable resource geothermal energy, and how can tailored PPPs that produces sustainable base load power with help restore this promise? a fraction of the greenhouse emissions of fossil fuels. Around 40 countries worldwide, includ- ing several low and middle income countries, Risky business have the potential to meet a sizeable proportion Unlike other renewable energy technologies, of their electricity demand through geothermal such as wind, solar, and hydro, it is not pos- power, at a relatively low cost (around $.08 per sible to confirm the existence of the geothermal kilowatt hour [kWh]). resource with sufficient confidence for commer- 52 | IFC.ORG/HANDSHAKE Renewables cial development without performing at-depth extent and nature of public and private sec- drillings to assess specific geologic, chemical, tor participation across the phases of project and physical conditions in the field. Therefore, development. geothermal’s risk profile is substantially more significant than the other renewable options. Public Entity: Under this model, the entire project development cycle—including risks, While surface exploration is relatively cheap, costs, and benefits—is undertaken by public validation of geothermal resources through entities. This is true whether there is a fully exploration and confirmation drilling is expen- vertically integrated national entity (such as sive, often requiring $15 to $25 million per field. in Ethiopia and Kenya, KenGen at Olkaria), In other words, at least 10 percent of the capital a group of unbundled national entities operat- expenditure of a new geothermal plant needs to ing in the upstream phases and power sector be put at risk before it is clear whether a site has separately (as in Indonesia), or a combination the potential to recover the costs. Although the of national and municipal entities (as in Ice- rate of success for drillings increases with the land). Although the purely public model has the numbers of wells drilled, production drilling is advantage of directly benefitting the consumers not free of resource risk. This means that project through lower electricity tariffs (since no “pri- developers need to invest significant resources vate equity” return on investment is required), (up to 50 percent of the total project cost) before this approach has limitations. These include fully securing the geothermal fuel to meet a the insufficient level of government and other given power plant capacity. public resources that can be brought to bear on Geothermal projects also have relatively long the development and execution of a country’s lead times from the start of exploration to geothermal development. power plant commissioning and the first rev- enues. Together with the high upfront costs Private Developer: At the other end of the and resource risk, this contributes to the high spectrum is a vertically integrated, private devel- financing risk of these projects. Lack of com- oper model, which is typically undertaken only mercial debt for resource validation and most of by large multinational companies with strong the production drilling stage complicates matters balance sheets who are willing to take the entire further. project risk (Chevron in the Philippines). PPP: In most developing countries, the private Promising paths sector cannot put the required equity at risk for the riskier phases of project development, even Several models have the potential to mobilize with risk mitigation instruments in place, and capital and share the resource risk among the government has limited capacity to fully promoters of geothermal projects, restoring the assume the costs of developing its geothermal sector’s promise. These models can be broadly potential. In these cases, a PPP model helps grouped into three categories, based on the IFC | 53 mobilize private developer funds and reduces between the electricity generator and the power overall financial risk that would be taken by off-taker) will determine the specific distribution either the government or private developer when of risks. This model was used in the Leyte and operating alone. Different PPP variants can be Mindanao fields in the Philippines and in the used depending on the country risks and associ- Zunil I plant in Guatemala in the late 1990s, ated commercial, market, off-take, and other and is the model currently pursued in Kenya. risks. Most typically, the public sector will take on part of the risk of upstream resource explora- Joint venture: This entails a strategic partner- tion and development, with the private sector ship between a public entity and a competi- carrying out power generation activities. tively selected private investor. The geothermal developer is co-owned by the government and the private sector investor and all aspects of the projects are co-financed and developed (as with Geothermal’s risk profile is La-Geo, El Salvador). substantially more significant Other IPP variants: Here, government may than the other renewable fund the surface exploration, exploratory, and options. confirmation drillings, offering the successful field for development and power generation. Alternatively, government performs limited exploration, then shares the risk of further Drilling down to PPPs exploration and power generation. The latter A closer look at PPP arrangements reveals a option is feasible only if private investors can number of different approaches within the absorb the risk associated with confirmation partnership model, all of which have met with and production drilling. success around the world. In each case, the Regardless of the approach that’s used, interna- strategy was tailored to the specific needs of tional experience in geothermal energy shows the region and the parties involved. a clear need for public-private engagement in order to exploit even a fraction of the potential Tolling or energy conversion agreement: Under of geothermal power generation. If the risks are this approach, a geothermal steam field operator, in balance, promise can turn to potential—with generally a public entity, develops and operates power not far behind. the steam field. The steam is then converted to electricity in a power plant owned and operated This article is part of The Global Geothermal Development by a private developer, who may or may not Plan, an initiative by the World Bank Group’s Energy Sector attain ownership of the product. The type of Management Assistance Program (ESMAP) contractual relationship established between the and other multilateral and bilateral development partners. More information: www.esmap.org/node/3027 steam provider and the electricity generator (and 54 | IFC.ORG/HANDSHAKE Key Phases, Risks, and Cost Profile of Geothermal Development 100% “At Risk” Until Resource Located and Tested 100% Cumulative Cost Project Risk Traditional Point of Entry for Commercial Financing 50% 0% 1 2 3 4 5 6 8 7 9 Exploratory Phase: 6 Steam Gathering System Development 1 Preliminary Survey: includes data & Construction: detailed design, engineering, collection, inventory, selection of areas for procurement, and construction of the steam exploration, and pre-feasibility studies. gathering system and related equipment, which connects the geothermal reservoir to the power 2 Surface Exploration: identifies the plan. probable location and characteristics of 7 the geothermal reservoir and establishes Steam Gathering System Operation: exploratory drilling targets. all operating requirements of the geothermal steam field as part of the integral operation of 3 Exploratory Drilling: validates surface the power generation facility. exploration results, locates and tests the geo-thermal resource to support preparation Power Plant Development & of a feasibility study. Operations: 8 Power Plant Detailed Development & 4 Confirmation Drilling: confirms or Construction: detailed design, engineering, serves to modify the conceptual reservoir procurement, and construction of the power model, updates the volumetric assessment, plant and the electrical interconnect to the and establishes production drilling targets. transmission grid. Resource/Field Development: 9 Power Plant Operation: personnel training 5 Production/Capacity Drilling: increases and operational requirements as part of the inte- geothermal resource supply by drilling the gral operation of the power generation facility. geothermal reservoir in conformance with the model. IFC | 55 By J. Charles Smith, Utility Variable- Generation Integration Group (UVIG) integrating Wind Solar & Much has been learned over the past decade from experience and research in the integration of the variable generation (VG) of energy from wind and solar power plants into an electric grid. Understanding the lessons that have emerged for transmission and network planning, along with market design and operation, is critical to future efforts to integrate higher levels of VG at lower cost. Think of the transmission network as the glue Networks need to be large enough to cope with that holds energy systems together. It connects increasing generation supply. Expansion of the base load to generation, allows for large transmission networks is justified based on: blocks of energy to be moved from where they • economics (resulting in lower cost energy); are generated to where they need to be con- sumed, eliminates or reduces congestion, and • reliability (resulting in fewer hours of improves reliability. It supports the electricity outages); and markets by covering large geographical regions, • public policy goals (allowing for the allowing access to many generation units. This integration of VG from renewables). ensures a deep and liquid market, and better management of the aggregate variability in VG. Networks also must be well and appropriately managed. Evidence shows that national networks 56 | IFC.ORG/HANDSHAKE Markets must be managed at the central level to achieve integration, and increases the amount of VG that national objectives and fairly balance regional can be integrated cost-effectively. competing interests. A regulatory function at Reserve Requirements: A large balancing area the national level, such as the United States and associated aggregation benefits also reduce Federal Energy Regulatory Commission and reserve requirements because there is a reduced the Council of European Energy Regulators, variability over a larger geographic area, lead- can be important. ing to a smaller reserve capacity to manage the reduced variability. In addition, the contingency Market Design remains the same and can be covered with fewer total reserves in the footprint. National market design creates a level playing field for all participants (generators, transmission Unit Commitment and Economic Dispatch: companies, distribution companies) by provid- Scheduling and dispatching generation at the ing the same set of bidding policies, operating market level makes a larger pool of generation policies, and payment policies. As with transmis- available to balance the system load. This larger sion, a strong regulatory function should also be pool with a shorter dispatch interval provides developed in parallel to ensure fairness in market greater flexibility, leading to efficient and operation, discourage anticompetitive market economical system operation. behavior, and encourage new entrants. Experience pays off Market Operation A range of experience has now been developed Given the size and complexity of a well- with the establishment of competitive electricity functioning market, the complexity and expense markets around the world in countries as diverse of the software necessary to operate the market, as the U.S., Chile, Great Britain, Denmark, the operation of the existing infrastructure, and Germany, and Australia. The experience illus- the long-term goals for integrating a large share trates that well-designed markets can provide of VG, it is important to address the follow- an effective solution for the integration of large ing issues as part of a comprehensive market amounts of variable generation. But there is no operation. one-size-fits-all solution, and the most custom tailored solutions routinely take 10 to 20 years to Balancing Area: System balancing, done over develop and mature. While many are still a work large areas, is critical for reliable system opera- in progress, they provide an important guide for tion. In doing this, countries can aggregate VG those who would embark on the journey. across broad geographical regions. This reduces the variability of the output and the cost of IFC | 57 Mexican Energy Reform Releasing power & renewable energy By Eduardo Márquez & Ariel Ramos, Hans and Boone LLP Photo © Randy Montoya/Sandia Labs Mexico is among the world’s highest-potential (MW), this is still only a fraction of the potential producers of renewable energy. It has almost total capacity of over 40,000 MW. double the solar radiation and photovoltaic Mexico has one of the world’s most ambitious capacity of Germany, the country with the clean energy strategies that targets 35 percent highest installed solar capacity. The so-called of total power generation from renewables by “Ring of Fire” ranks Mexico fourth in the world 2024. As of 2012, the installed capacity for in the production of geothermal electricity, even power generation through renewable energy was though it currently taps only about 10 percent at 23 percent, which is still far from the targeted of its potential. As for wind energy, while the 35 percent. According to Mexico’s Ministry of installed capacity has grown over 600 percent in Energy, as of September 2013, the gross genera- the last five years to a current 1,200 megawatts 58 | IFC.ORG/HANDSHAKE Legalease tion of electricity in Mexico was 22,008 gigawatt for Sustainable Use of Energy a strategy to hours (GWh). promote the use of clean technology and fuels. Energy reform’s new rules Obligations and opportunities In December 2013, the Mexican Congress The underlying legislation will establish new approved a constitutional amendment (the obligations in clean energy and reduction of “Energy Reform”) to open to foreign investment pollutant emissions for players in this industry. and private participation the oil, gas, and power This will spur private parties to seek the support sectors. The Energy Reform will change the of international organizations and government rules of the game for the whole sector, including programs so they can access finance, social and renewable energy. It provides a formal opening environmental assistance, and other mechanisms for the private sector to participate in the genera- that will help them create bankable projects. tion of power in an open market. The underlying legislation for the Energy Reform is still on the Although new rules of the game have yet to be table, and the rules for such participation shall firmly established, PPPs will continue to play a be put in place in the upcoming years. strong role in the power sector. This is especially true for projects involving municipalities. These The Energy Reform establishes that the state municipalities could become the vehicle that will reserve the right to transmit and distribute powers Mexico’s transition to renewable energy. power. It provides for private participation through the finance, installation, maintenance, PPPs, POWER, AND RENEWABLES— management, and operation of infrastructure to carry out the transmission and distribution The Role of Municipalities of power. So far, public-private partnerships (PPPs) in Once the new law that regulates power is in power and renewables have been primarily place, the Executive Branch will have one year used between municipalities and private parties to create the National Center of Energy Con- for cogeneration and self-supply schemes, or trol. The agency will regulate Mexico’s electrical through long-term off-take contracts between system, operate the wholesale market of power, private parties and the Federal Electricity and give private parties access to the transmission Commission. and distribution grid. PPPs have been common at the municipal level As for renewable energy, the transitory articles because of the municipalities’ obligation to of the Energy Reform mandate the Mexican provide public services such as streetlighting. Congress to enact legislation within 120 days to They have provided an efficient and cost-effective regulate the survey, exploration, and exploitation mechanism to ensure high quality delivery of of geothermal resources. By 2015, the Ministry electricity. These PPPs will continue to light the of Energy shall include in the National Program way as Mexico’s Energy Reform takes hold. IFC | 59 Photo © Wendell/flickr What’s working In mexico: why and why not? Most of Mexico’s successful renewable energy generated by the plant. The current generation projects have been focused on wind, biogas, capacity is 30 MW. This private project received thermoelectric, and thermo-solar energy (includ- financing from IFC and the Mexican develop- ing photovoltaic modules). Bioenergía de Nuevo ment bank NAFINSA. León, the first biogas project in Latin America, is Due to the geographical conditions of states a good example. This project was a joint venture such as Chiapas, Oaxaca, Baja California, Nuevo between the private sector and the State Govern- León, and Tamaulipas, municipalities have been ment of Nuevo León through the State Ecologi- able to provide inexpensive renewable energy. cal and Waste Management Agency. Bioenergía However, other states have not seen the same de Nuevo León currently serves, and is partner- success. Political rifts, project risks, and the high ing with, seven municipalities. This project has cost of technology have all contributed to the been supported at different stages by the World problem. This highlights the most significant Bank, including an emission reduction purchase challenge in Mexico’s regulatory reform: to agreement to buy 1 million carbon credits. find an appropriate balance between the public Another example is Aura Solar. The solar power and private sector. When the private sector is plant located in Baja California was completed empowered to provide renewable energy at a in 2014 and it currently is the largest solar plant lower cost to municipalities, the potential of in Latin America and the first large scale solar Mexico’s vast resources and renewable energy plant in Mexico. The project has as its only capacity may finally reach its promise. offtaker CFE, which will buy all the solar power 60 | IFC.ORG/HANDSHAKE Markets let’s talk transmission Private investment for emerging markets Photo © Graham Crouch/World Bank By Marcelino Madrigal, World Bank Emerging markets need the security and reliability of well-planned power trans- mission networks. Private sector investment in the transmission network, already proven in developed countries, is becoming more common in emerging markets. The past is not prologue when it comes to mod- sector needed to remain public throughout the els for the transmission of power; fresh technolo- 1980s and 1990s, a model that could accom- gies and growing needs are driving a new way modate private investment started to take hold of doing business. Although many developing after 2000. Once investment needs were evalu- countries fervently believed that the transmission ated—and understood to be higher than the IFC | 61 government could handle on its own—officials assets and ensuring needed performance. This started thinking more about ways to include the assures that the transmission lines or substa- private sector. tions will always operate according to technical The transmission network has always been standards determined by system operations rules, seen as a natural monopoly, but it’s been mis- which continue to be managed centrally, in a interpreted as requiring monopoly ownership. monopolistic manner. Transmission networks need to be operated inde- More developing markets should consider this pendently to ensure non-discriminatory access, route. This is especially important as investment but investment needs can be achieved with the requirements in transmission grow alongside involvement of many actors, public and private. peoples’ demands and the need to integrate into The success of private investment in transmission grids more renewable sources of energy. in the U.S. led countries like Brazil—a shining example of tremendous investment need—to adapt this approach to its own requirements. In Transmission tips Brazil’s case, the country needed to expand and There are three elements critical to successful pri- reinforce its network to connect its system and vate investment in transmission. These include: facilitate the creation of new renewable energy A good planning process, coordinated by an sources. Officials there found that incorporating agency that is independent from all the other private investment in transmission was not only actors. Because the network is a monopoly, feasible, but beneficial to all parties. The opera- someone has to plan for it; this responsibility tion of the network remains a monopoly, and is typically falls to a government agency, a planning organized as one entity, but private investment agency, or a system operator. A comprehensive in transmission has been a success. plan will proactively identify transmission needs and requirements to meet demand in the most More than the sum of reliable, cost effective manner. The agency that creates and executes this plan must do so in an its parts integrated fashion by sensing the demands of This approach works because although there is all actors in the industry—including generators, just one network, it has many discrete compo- demand centers, and renewable energy plants. nents, and these components can be indepen- A mechanism to engage the private sector on dently developed by the private sector. The same supporting this investment. This could be a is true for other emerging markets. Once you public-private partnership (PPP), whereby, the identify those pieces of the network, you can private sector develops one of those investments engage the private sector to build them. Once a identified in the plan on a concession. These private sector entity does that, it has the right to arrangements mean that a private participant receive regulated revenue—but only in return for becomes a transmission-owning entity. They are satisfying its obligations for maintenance of the 62 | IFC.ORG/HANDSHAKE in charge of developing and maintaining the stable institutional and regulatory framework asset—and that in turn guarantees them rev- for the transmission sector is developed. India enue. That revenue gives them the opportunity is already considering mechanisms for private to recoup their investment and a fair return on participation in transmission; Mexico recently their investments. approved a very ambitious reform plan that This mechanism makes participation in the sec- opens the possibility of complementing public tor attractive because they are selling a transmis- resources with private participation. Brazil’s sion service that is regulated, with a regulated experience has resulted in a lower cost of capital rate of return. It’s important to note, however, in transmission. Those are the kind of model that transmission-owning entities do not decide results that other developing economies pay which energy flows through the network; that’s attention to, and more countries will move in decided by the system operator. This way, the this direction. key principles of the network are maintained— especially transparency and open access. A clear and stable regulatory framework that Brazil’s experience has resulted in defines how these investments are going to a lower cost of capital in transmis- receive revenue. This regulatory framework is, at its core, transmission pricing: very clear trans- sion. Those are the kind of model mission, cost recovery, and pricing rules. In this results that other developing context, cost recovery defines how an investor economies pay attention to. is going to earn revenue and how transmission pricing regulations will collect such revenue from all the users of the network. It’s especially critical for those developing mar- Awarding projects to investors follows competi- kets with high investment needs in transmission tive rules, which makes possible the awarding driven by renewable energy programs and the of the project to those who require the lowest need to improve the capacity and reliability of revenue to develop and maintain the projects. In the grids required by economic growth. Strong this way, regulators will feel more confident that planning abilities in the transmission sector; the costs passed to consumers are efficient and clear arrangements to engage the private sec- reasonable. tor through PPP models; and regulations that already take into account transmission and pric- A powerful draw ing will help pave the path to success. Private investment in transmission for develop- As populations grow, so will demand for energy. ing countries will become more attractive as The expanded requirements for transmission are demand for transmission grows and a clear and not far behind. Private investment, done right, can meet this need. IFC | 63 Markets The ultimate Power couple The energy model of the future couples renewables with free electricity markets Photo © Ananda Shila, Jharkhand State, India 64 | IFC.ORG/HANDSHAKE By Aleksandar Katančević, Stratega East The free electricity market is much younger than But it’s no secret that they are high polluting and any of the well-known fossil fuel markets; in fact, relatively expensive to transport. it is the baby of the energy commodity family. It was born in Latin America in the 1980s and it reached the U.K. in 1990 with the privatiza- Looking ahead tion of the U.K.’s power industry. But despite its Because of this, the energy model of the future relative youth, the free electricity market is more must combine free electricity markets with sophisticated than the fossil fuels market. This renewables. To compete with fossil fuels, these is thanks in part to the advanced technology of markets must be brought together to get the electric power systems used to generate electrical electrical energy produced from renewables to energy, but also due in part to difficulties with market—reliably—at a lower market price. storage. comparing forms of Renewable electrical energy is energy environmentally-friendly and The transportation time for electrical energy is non-polluting. almost equal to the speed of light, making this product unlike any other on Earth. It is also cheap to transport: long distance distribution costs close to nothing. Together, these factors Technological energy sources (batteries and solar make this product incredibly easy to move. panels) placed locally (distributed generation), And to top it off, renewable electrical energy is alongside additional information technology, can environmentally-friendly and non-polluting. answer the call, connecting production with the real-time electricity market (grid). But there is Fossil fuels, the world’s go-to solution, are also no commercial marketplace to sell energy that easy to store—they are like packets of ready the consumer generates and does not require; energy that need only be ignited when needed. IFC | 65 today’s electricity market environment is not ery, and be valid for at least one minute. Price yet sophisticated enough to support real-time information should be available electronically trading of energy produced or purchased by and fed directly into a device that controls the distributed generation and households. operational mode of the household. What’s the bottom line? Even if we had a In a successful scenario, the household would completely compatible energy source that could work in three modes: produce energy locally, the electricity market would have no trading mechanism for such a 1 Taking energy from the grid. source. 2 Feeding energy into the grid. 3 Neutral against the grid, but • feeding the energy into local batteries, or • taking the energy from batteries and the At the intraday electricity solar panel on the roof of the house (i.e., market, electrical energy being self-sustaining). is traded one hour ahead, working within the Are we there yet? electricity exchange. Several hurdles must be overcome before this model can operate. For example, the electric- ity market would need to develop to the point where it can generate real-time market pricing. Power systems stability would need to improve, Enter intraday trading and suitable energy management technology would need to be developed. The intraday electricity market, which grew from the need for real-time price information from Currently, spikes in demand are satisfied with the electricity market, is the closest relative to a fossil fuel energy. Thermal power plants are real-time market. In today’s intraday electricity stable, they respond quickly, and they are readily markets, electrical energy is traded one hour available. In a future where fossil fuels have been ahead, working within the electricity exchange. phased out, this will cease to be a back-up plan. For a new energy model to work, stakeholders In the future, the transmission system operator and consumers alike will need confidence in a or market operator responsible for the market real-time solution that will see us into the next area (either the country or a coordinated region) century. should ideally provide the price, which should be calculated about one minute ahead of deliv- 66 | IFC.ORG/HANDSHAKE Comparing sources of energy Fossil energy (oil, Renewable energy Electrical energy coal, natural gas) (hydro, solar, wind) No need, Transportation time Days to months 0.7 x speed of light available locally Transportation Medium to high Extremely low Zero costs Very limited to Stable in its natural Limited due to the the size of the form or easily stored Storage availability size and cost of reservoir, battery using industrial storage. or compressor and storage solutions. stored locally. Primary energy Derivative energy Primary energy Energy type source source source Commodity Energy transporta- Energy release Energy container application tion medium (infinite source) Environmental Pollution produced Extremely low Extremely low impact when burned Not really, always Absolutely Usage by the end comes with side (clean, no smell, Yes in some consumer in its effects (smell, no pollution, no applications original form pollution, CO2 hazardous gases) hazardous gases) IFC | 67 Going once, going twice... Electricity auctions deliver results Photo © Dana Smillie/World Bank By Luiz Maurer, IFC Auctions are an interesting and potentially effective form of procuring electricity. If successfully designed and implemented, they may lead to far superior results than other selection methods since they increase transparency and foster competitiveness. Bidders don’t raise their paddles in an electric- Broad benefits ity auction, and there’s no fast-talking man at a podium urging folks to act fast on a great deal. Auctions can be used in countries with a wide But the auction of electricity contracts is still range of sophistication in institutional and an exciting event for many countries, especially regulatory frameworks; in many cases, the for those just starting to introduce competition benefits have offset the overall implementation in the market. For governments that already costs. Auctions have also been used to procure use competitive procurement methods, these energy contracts across a wide range of technolo- auctions can further enhance competition and gies, such as wind, biomass, solar photovoltaic ultimately reduce energy costs to the end-user. or concentrated solar power, or even site-specific hydropower plants. 68 | IFC.ORG/HANDSHAKE Markets Although every case is different, successful that underbidding is widespread, and contract auctions have similar results. Typically, they failure rates remain high, leading to slower are able to: growth. This requires the establishment of strict • increase the transparency and competitive- criteria for participation and severe penalties ness of the procurement process, resulting for non-compliance. Large countries like Brazil in economically efficient outcomes that are and South Africa have the resources and skills to difficult to challenge; and design effective auction mechanisms, and smaller countries need support in designing equally • establish an objective, market-driven effective auctions. Benefits far outweigh the criterion for the thorny regulatory issue initial set-up costs. of pass-through of generation costs to a utility-franchised market. On a different level, auctions significantly increase the overall risk of renewable energy Latin America is leading the introduction of investments, as there is a relatively low likel- auctions to promote competition in energy ihood that any individual project will receive a procurement and contract new capacity. Overall, contract. Bidders must therefore put up signifi- about 30 energy auctions have been conducted cant sums in order to mount a bid at all, adding in Brazil, Chile, Colombia, Panama, and Peru. layers of transaction costs with little assurance Results have been satisfactory more often than that this risk will be rewarded with an actual not, in terms of attracting a large number of contract to build. private players and ensuring lower costs for consumers. Auctions for renewable power From theory to practice can work to expand the energy Moving from auction theory to real-life portfolio and push costs down. implementation is, however, not an easy task. Evidence from electricity auctions over the last few years makes it clear that to ensure success energy auctions must be built for purpose— This risk must then be reflected in the cost of taking into account the challenges and objectives capital, as both debt and equity providers will of the host country. When this is not the case, rightly identify increased contract and comple- there can be drawbacks. tion risks, and demand higher returns. These higher returns may well wipe out any gains Under an auction-based system, for example, derived from greater price efficiency. an incentive is created for bidders to bid as low as possible in order to increase their chances If there is confidence that auctions are there to of securing a contract. Recent experience from stay, as opposed to being a once-in-a-lifetime jurisdictions such as China and Brazil suggests event, manufacturers may invest with confi- IFC | 69 dence, even knowing that auctions may reduce Not bidding adieu margins for them. Manufacturers report that at least they know that there will be a sustainable Despite these challenges, there is a great deal market for them to sell their products. of potential for furthering the use of auctions in the power sector, even in small, unsophisticated Objective of procurement auctions High load growth Moderate to small load growth Brazil Mexico Chile Vietnam Attract new capacity Colombia Thailand Peru Philippines South Australia Pennsylvania, New Jersey, Maryland; U.S. Retain/replace capacity New England, U.S. Ontario Basic Generation Services Provider or last resort (New Jersey), U.S. (full retail is available) Illinois, U.S. Spain Alberta, Canada Spain Virtual Power Plants* France Netherlands Competitive markets Vertically integrated systems** *Cluster of distributed generation installations run by a central control entity. **When a company expands its business into areas that are at different points on the same production path. 70 | IFC.ORG/HANDSHAKE markets. For example, they can be used as a mechanism to grant the use of water rights, thereby enabling the develop- Auctions around the world ment of new hydropower sites. They can also be used to select preferred projects India—Between early 2010 and March 2012, or to allocate long-term energy contracts the price of solar energy in India dropped to competitively in multi-country power as little as INR 7.49 per kilowatt hour (kWh) pools. or $0.15 per kWh. Much of this price decrease is due to the National Solar Mission’s reverse Multi-product, discriminatory price auction bidding process, which awarded solar auctions are also potentially applicable projects to companies with the lowest asking to select small, modular units of emer- price. This price drop in Indian solar power gency power generation. Two-sided auc- means that solar could achieve price parity tions may entertain demand response, with coal or natural gas by 2016. increasing competitiveness, reducing market power, and paving the way for a Morocco—Ouarzazate concentrated solar more energy-efficient economy. power project achieved $190 per megawatt hour (MWh). The lowest feed-in tariff before As these examples show, auctions can this tender was $375 per MWh. be an efficient alternative to developing non-conventional sources of energy in Peru—Prices ranged from $69 per megawatt emerging markets, as a substitute for or hour for a wind farm to $119.90 for a photo- complement to the traditional feed-in voltaic solar park. That’s less than half the price tariff schemes. Despite the significant of power in some countries where the govern- initial costs to set up functioning auc- ment sets the rates, according to Bloomberg tions, auctions for renewable power can New Energy Finance. Wind farms get €77 per expand the energy portfolio and push megawatt hour in Spain and €82 in France, costs down. both through feed-in tariff programs. South Africa—In a 2013 bid, energy prices for This article was adapted from “Electricity Auctions: photovoltaic have reached a record low of $95 An Overview of Efficient Practices,” World Bank, per MWh. 2011. Updated examples of electricity auctions have been included. Turkey—Wind generator selling on the spot (“merchant”). Not an auction for a long-term contract, but price resulting from an auction takes place every 15 minutes in the power pool. IFC | 71 In 2013, with the support of the MIT Energy Initiative, MIT grad- uate students Yael Borofsky and Sarah Dimson launched Energy for Human Development (e4Dev), a platform for students, faculty, and practitioners from across a variety of disciplines to collaborate around energy and human devel- opment issues in developing coun- tries. Here, Borofsky and Dimson explain to Handshake readers how interdisciplinary collaboration Photo © Sandia Labs, Sandia z-machine better serves the study of energy for development, the real-world collaborating for implications of the research that change has already emerged from group efforts, and the ongoing impact of participation of institutions such as USAID and the World Bank. MIT’s interdisciplinary approach to researching energy for development health, water, and sanitation. Essentially, e4Dev e4Dev’s presentations demonstrate provides a unique opportunity for the spread of serious interest in a range of energy information and original ideas. issues in developing countries. Did this interest motivate the formation How is the research that e4Dev seeks of the group? to promote unique? Sarah Dimson: We created e4Dev for two Yael Borofsky: e4Dev is built around the notion primary reasons. First, to address an evident that energy is a cross-cutting issue in most devel- need for a space where those who are working oping world research and that it can be a useful at various intersections of energy and human way to bring researchers together that might not development could discuss and debate their otherwise find common ground or shared goals. work. Secondly, to bring greater attention to That seems obvious, particularly at a place like the critical role that energy plays across various MIT, which puts a premium on interdisciplin- economic and human development issues— ary research and happenstance connections. But education, electricity access, climate change, 72 | IFC.ORG/HANDSHAKE Interview through our own personal efforts to contribute of MIT’s brightest minds working on electricity to energy and development research projects, access, policy, and technology. we saw firsthand that despite good intentions, sometimes it is challenging for researchers to actively collaborate outside of their respective There is empirical evidence departments or labs. Through e4Dev, we’ve actually seen a diverse range of students, faculty, linking energy to economic and outside practitioners form new partnerships growth, and this awareness is or start new projects, which tells us the plan to help build these intellectual bridges is working. slowly starting to inspire more urgent—and hopefully more pragmatic—action in develop- e4Dev has hosted the World Bank and USAID. Do you see International ing countries. Financing Institutions (IFIs) and devel- opment agencies as part of a greater energy solution? There has been a tremendous focus SD: IFIs and development agencies play an on energy issues because of trends important and meaningful role in advancing eco- in urbanization, but many of e4Dev’s nomic and human development. So, as we cre- presentations are on rural communi- ated the framework for e4Dev over the summer ties. Why is this? of 2013, we were keen to find topics of interest for the MIT community, IFIs, and aid agencies. SD: Most developing country populations live in Fortunately, our strategic planning coincided rural areas and access to modern energy services with President Obama’s announcement about is extraordinarily low. For example, in Sub-Saha- Power Africa. As Yael and I discussed the Power ran Africa, access to electricity is approximately Africa initiative, we quickly realized that we had 32 percent and rural-dwelling residents consti- a ready starting point for a fall 2013 e4Dev event tute roughly 63 percent of the total population. that could highlight a range of energy issues in In regions of developing Asia, a large segment of Sub-Saharan Africa. Andrew Herscowitz, Coor- the population relies on traditional biomass for dinator for Power Africa, and Allen Eisendrath, cooking and the majority of people also live in USAID Energy Division Chief, accepted our rural areas. Further, in developing Latin America invitation to share more information about the and the Caribbean, access to improved water initiative and constructively engage with some sources in rural areas is not universal at about IFC | 73 80 percent. Therefore, it’s understandable that e4Dev’s energy poverty discussions, in particular, You’ve seen firsthand that interest in have concentrated on designing policies, systems, energy for development is growing. and business models to meet the needs of rural Why is this, and how will it change populations. Our unconventional dialogue about energy poverty in rural areas is likely to continue the way people talk about energy in even though contemporary conversations about the future? development and planning tend to lean towards YB: There is empirical evidence linking energy issues of urbanization. to economic growth, and this awareness is slowly starting to inspire more urgent—and hopefully What are some of the potential ways more pragmatic—action in developing countries. For example, the Millennium Development that public-private partnerships (PPPs) Goals do not explicitly include energy, but can contribute to energy-related the UN’s Sustainable Energy for All Initiative development issues? emphasizes the need to make energy issues a development priority. Building on this, Power YB: Improving energy systems in developing Africa and other influential new initiatives have countries requires more serious focus on plan- drawn more attention to the need for universal ning and regulation in order to create a stable energy access predicated on the development of environment where PPPs can succeed. Expand- reliable and affordable power. ing central grids and installing off-grid systems for millions are daunting tasks and incredibly risky endeavors. Long-term strategic planning and clear regulation are critical, especially in the context of creating successful PPPs on energy projects. SD: PPPs allow for tremendous opportunities to For more information or to participate in an e4Dev event at invest in education and training in developing MIT please contact: e4dev-request@mit.edu. countries. For example, with respect to regula- tors, PPPs can help facilitate regular training regimes for current and future regulators, for instance through the Florence School of Regula- tion. On a local level, PPP schemes can poten- tially help design and scale effective education and vocational training programs for youth and adults. Yael Borofsky Sarah Dimson 74 | IFC.ORG/HANDSHAKE 2013-2014 e4Dev Presentations • Energy for Human Development: Why Is Energy Critical for Human Development? A Multi-Disciplinary Discussion • Prospects for Grid-Connected Solar PV in Kenya • Solar Powered DC Microgrids in Rural India • Power Africa: Presented by USAID • Reliable Alternative Energy Options for Access: Lessons from China’s Countryside • Electrifying Rural India with Solar Microgrids: Adoption and Impact • How Can We Make Water Desalination Less Energy-Intensive? • Tackling Tanzania’s Drinking Water Crisis Through the Integra- tion of Water Filtration Technology and Information Communi- cation Technology • Architecting Large Desalination Projects for the Developing World • Sanitation in Urban Slums in Kenya, Presented by Sanergy • Solid Fuels from Biomass • Water in Ghana • Waste Gas-to-Liquid Domestic Fuels in India • Biogas in Nigeria, Presented by NovGen • Sustainable Charcoal Fuels in Uganda • Investigating Opportunities for Microgrids in India • Concentrating Solar Power in India • Mini-grids for Energy Access in India: Impressions and Reporting on Early Research • Developing an Innovation Ecosystem for Solar Energy in Chile • Solar-Based Energy Service Delivery: Africa’s Next Tech Revolution? Presented by the World Bank Africa Energy Group • Creating Waste Management Systems with the Informal Sector in Low-Income Countries Photo © U.S. Army Corps of Engineers IFC | 75 the global challenge of the 7 billion people on Earth today 1.2 billion people are without access to electricity worldwide. 2.8 billion 3.5 million rely on solid fuels for cooking, premature deaths in 2010 which resulted in due to indoor air pollution. Un-electrified populations across the world Figures in millions 2009 2030 21 5 809 698 561 34 589 13 Sources: Electricity Access Database (International Energy Agency); Dalberg analysis & the World Bank 76 | IFC.ORG/HANDSHAKE “ No electricity... that’s why we are always moving backwards. —A Ghanaian villager’s comments in “Life Without Lights,” a multimedia ” project about global energy poverty. Experience Life without lights For villagers in northern Ghana, living without electricity means living half their lives in the dark. Photo © Chad Skeers, Ghana Subscribe: ifc.org/handshake Connect with us: twitter.com/ifcppp scribd.com/ifcppp ifcppp.tumblr.com handshake@ifc.org April 2014