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There is considerable investor interest in reforms being enacted across the energy industry in Angola, but more work is needed before serious projects emerge and there remains caution about the extent to which cronyism has been eliminated, writes Dan Marks

There has been material progress reforming Angola’s opaque and nepotistic energy sector over the past year. Considerable work has gone into crafting new power sector regulations, and there have been notable changes to upstream licensing and the role of state oil and gas giant Sonangol, as well as important reforms to the downstream hydrocarbons sector. Investors and analysts canvassed by African Energy were impressed by the extent of the changes, although plenty of problems remain to be resolved.

Since former president José Eduardo dos Santos left power in 2017, his successor João Lourenço has been pushing to make the country more business friendly. Lourenço has struggled to deal with the fallout of the 2014 oil price crash and its ramifications for the oil-dependent economy and particularly Sonangol, which has seen production decline and is unable to adequately invest in modernising its aging infrastructure. Lourenço has been aggressively targeting the policies required to secure funding from the International Monetary Fund (IMF) and World Bank Group (WBG) (AE 383/1).

The resulting reforms appear to be a serious attempt to deal with the many problems faced by the energy industry and are likely to make an impact. Concerns remain, however, that the reforms reflect economic necessity rather than genuine political transformation and that changes to the previous system could be resisted.

In the energy sector the early indications are good, with the government showing willingness to tackle areas with significant vested interest. African Energy understands that the power purchase agreement (PPA) for the 120MW Biocom ethanol plant was cancelled because of its high cost and allegations of corruption. The plant had been operating since 2014 and a further expansion to 235MW was planned. It had been developed by a public-private partnership between Brazil’s Odebrecht, Angola’s Cochan – originally owned by Damer Industries – and Sonangol.

Investors told African Energy that the attitude of prospective local partners seems to have changed. Companies are no longer trading on their high-level political connections, but instead pitching their knowledge and experience of the country.

Most prospective international investors are only dipping their toes in the water, scoping potential opportunities and gauging government appetite. Unsurprisingly, it is the oil majors with a history in the country that have been quickest off the mark to announce concrete investments. Power sector developers are talking with the government and prospective partners, with some projects being moved forward. Development money has been flowing but the taps are not yet fully open, with large-scale programmes still some way off. The WBG does not expect its $250m Electricity Sector Improvement Project to go to its board until November.

Power sector gaining momentum

Angola’s oil industry has been the focus of the most intensive reforms to date, but the electricity sector is gradually catching up. The regulator – Instituto Regulador dos Serviços de Electricidade e de Agua (IRSEA) – in particular has been working hard to put in place a regulatory structure capable of supporting the development of independent power producer (IPP) projects. The government has finally begun to implement some of the more difficult policies included in the 2015 General Electricity Law, most notably cost-reflective tariffs.

Ending subsidies for utilities and fuel is a requirement of unlocking further IMF funds and this has now been enacted for both electricity and water. Ending fuel subsidies, by far the most politically challenging, is scheduled for next year. New electricity tariffs came into force on 15 July. Rates for the smallest consumers were frozen at Kz2.46/kWh ($0.01) but all other categories saw price rises, including a rise from Kz6.53/kWh to 10.89/kWh for the majority of household customers and from Kz7.05/kWh to Kz12.83/kWh for industry.

The 2015 law theoretically opened up the entire supply chain to the private sector, including concessions for generation, transmission and distribution. Licences for distribution and commercialisation of isolated systems, including mini-grids, were also provided for. However, very few private projects have gone ahead and those that did have performed poorly.

Existing licensing regulations were put in place between 2001 and 2005 and another spurt of activity in 2010-11 covered dispatch, commercial relationships, tariffs, grid access and quality of service. The regulator is now trying to complete the jigsaw with three major initiatives.

The first initiative is to produce a standardised power purchase agreement (PPA) and, in June, a model PPA for renewable energy projects was released for public consultation. The document was put together with technical assistance funded by the European Union and received a relatively warm response. “The government is definitely moving things in the right direction,” Globeleq managing director for business development Fabio Borba told African Energy. “The PPA template is a good bankable PPA.”

Lusophone Renewable Energy Association executive director Isabel Cancela de Abreu told African Energy the 86-page document included most of the necessary provisions. “It’s a very good initiative from the regulator and it can really help to speed up projects and promote the market,” she said.

However, critical issues remain to be resolved. “Key provisions are still missing,” Abreu said. “The first one is that a state guarantee is mentioned but no details are provided about what it is. In reality, it will be necessary that the offtaker Rede Nacional de Transporte de Electricidade [the transmission utility and system operator] provides a payment guarantee, and this would usually be provided by the government.

“The other main issue is the tariff currency. The document says that there will be a tariff expressed in kwanza, which is a key issue. Promoters would ideally like this in dollars, and if this is not possible then you need to define a formula of indexation of this tariff to the dollar and to inflation. This is not included.” The government is aware of the currency issue in particular but no resolution has yet been found.

The second initiative from IRSEA is called Regulamento Unico (single regulation), which brings electricity production, transportation and distribution regulations together alongside licensing procedures for isolated systems and commercialisation and production and distribution concessions. Transmission concessions are unlikely for the time being. This has not yet been released and is being worked on alongside the third element, which is a model concession agreement. IRSEA has requested EU financing for technical assistance in drafting the agreement.

A procurement process has not yet been established, although African Energy understands that teams from the WBG’s Scaling Solar programme have visited the country and are interested. Most stakeholders expect the government to begin with unsolicited projects acting as trailblazers to iron out thorny issues with development such as sovereign guarantees and currency. However, before that is possible, more clarity will be needed on exactly what the government wants from the private sector and how it intends to move forward.

“You don’t need all the reforms to be 100% completed before you start structuring your investments, but you do need to have the right regulatory framework in place by the time you close the project. In the markets we look at, if you want to wait for everything to be working perfectly then you are not going to build anything,” Borba said.

“Enacting legislation is already starting to attract private sector investment activity in the country. The test will be how to move forward with specific opportunities and which projects are the first to go through this structuring exercise with the government. It is only a matter of time before the private sector invests but it will be a challenging process for the country, especially the first project.”

Flagship projects

Globeleq is keen to be involved in these first projects and has been assessing solar and wind opportunities, as well as the 720MW Soyo II gas project. Soyo II is seen as a natural flagship project with strong government backing, and a lot of the preparatory works were completed during the implementation of Soyo I. The transmission grid is a double-circuit 400kV line capable of evacuating 1,500MW and gas pipelines do not need expanding, although minor upgrades may be required. The site is already owned by the government.

The 720MW Soyo I combined-cycle gas power plant has been gradually commissioned over the past year and is owned by Empresa Pública de Produção de Electricidade (Prodel). The plant was built and is operated by Angolan company Aenergy, which is also a 19% shareholder in Power Distribution Services Ghana. Aenergy chief executive Ricardo Machado told African Energy at the Africa Energy Forum in June that it wants to be involved in Soyo II.

The company has been working hard to position itself as a local partner for foreign investors in the country and elsewhere on the continent. It has built more than 30 power plants in Angola, with the smallest only 1MW and Soyo the largest. Suggestions that Aenergy may have had political connections to the previous regime are being countered by obtaining ISO 37001 certification in anti-bribery management systems. The company is also in the process of being rated by Moody’s in preparation for the launch of green bonds through the African Export-Import Bank. The bonds will be listed in Luxembourg and Aenergy hope to raise $400m, most likely starting with a $200m tranche by the end of the year.

There are questions around the availability of gas. Soyo I is powered by domestic gas and is reported to already be struggling with gas supply – the Soyo LNG export terminal has also not been operating at full capacity because of a lack of gas. There have been legislative changes aiming to attract further investment to monetise the country’s considerable domestic gas reserves, but in the interim the government is exploring the possibility of importing LNG through the export terminal, with stakeholders making early assessments as to how costly this could be.

Previous plans expected that the plants would either be operated 50% of the time as peaking plants or at 50% capacity to help maintain the reserve margin, with the plants operating as dual-fuel in particularly dry years. 
Borba said Soyo II would benefit Angola by displacing imported diesel and creating a demand for gas. “The existing infrastructure from Soyo I also makes the project cheaper with a more attractive tariff as a result,” Borba said. “It would also help create a firm template for private sector investments in the power sector, especially in renewables.”

 

Angola will be one of the countries discussed at the sixth annual Africa Investment Exchange: Power & Renewables meeting, which is being held in London on 13-14 November.