The long process of reform is showing its first fruit as full construction begins on the 7.5MW Mubuga solar PV plant. Developers hope more IPPs will follow, writes Dan Marks
Full notice to proceed was given on 23 January to contractors at the Mubuga solar PV project in Gitega province. The plant is Burundi’s first IPP to reach this point and will play an important role in reducing reliance on thermal power and providing power during the dry season. Mubuga has been in development by Gigawatt Global Coöperatief for five years alongside a range of international financial institutions. Commercial operation is expected by year-end.
Mubuga is the first on-grid project to be funded by the UK government-funded Renewable Energy Power Platform (REPP), which is managed by Camco Clean Energy. It is also the first project to close with backing from the African Trade Insurance Agency (ATI) and German development bank KfW’s Regional Liquidity Support Facility (RLSF).
Gigawatt became involved with the project while developing a similar plant in Rwanda, the 8.5MW Agahozo-Shalom Youth Village solar plant, which began operating in September 2014. While Gigawatt was in Rwanda, the Burundian government was making progress with the World Bank Group (WBG)’s International Finance Corporation Advisory to put in place a framework and regulatory structure for IPPs.
After being approached by a local entrepreneur, Gigawatt signed a memorandum of understanding with Burundi’s Ministry of Energy and Mines in July 2014 to develop a solar project and received funding from the Energy and Environment Partnership in February 2015 for feasibility studies. REPP joined the project soon after, helping to fund development. The US’ Power Africa and BIO Invest also funded advisors and studies for the project.
“When we first started looking at the country we found that while it was very underdeveloped, like many other countries in the region, it had the right institutions and structures to allow IPPs and public-private partnerships, including a new electricity and water regulatory agency,” Gigawatt Global vice-president finance and Gigawatt Global Burundi SA managing director Michael Fichtenberg told African Energy.
The project faced delays following President Pierre Nkurunziza’s controversial decision to run for a third term in April 2015. While political continuity had benefits for the project, where high-level support was integral to overcoming the difficult process of launching the country’s first IPP, tensions could flare again when elections are held in May this year, though Nkurunziza has said he will step aside.
Construction is being funded by bridging loans from the REPP and South African asset manager Inspired Evolution’s ten-year closed-end Evolution II fund. REPP is also providing mezzanine debt, while Evolution II is an equity holder. Once the plant begins operating, the US’ International Development Finance Corporation (DFC, formerly the Overseas Private Investment Corporation) will refinance the loans to become the senior lender.
“DFC are coming in post-construction and their requirements and timeframes meant that it was going to be very difficult to reach full financial close while still making the timelines set out in the power purchase agreement,” Camco managing director Geoff Sinclair told African Energy.
Attracting private investment was an important goal for Mubuga’s stakeholders and the financing structure was designed to help facilitate investors such as Inspired Evolution. “One of the reasons REPP is leaving the mezzanine tranche in is to help boost equity returns,” Sinclair said. “Because we’ve got a developmental mandate we look closely at the equity returns to see whether they are sufficient and, if not, how we might remedy that using the full range of financing instruments.”
Burundi has the lowest electrification rate in the world at 9.3% in 2017, according to the World Bank Group, with 9.9m people lacking access to grid power. Political instability and a difficult operating environment have deterred international investment in the country. However, since 2010 the government has been pushing to attract investment into the sector with a series of reforms including a new regulator and tariff increases. At the same time, national utility Régie de Production et de Distribution d’Eau et d’Electricité (Regideso) has been working with the World Bank Group to improve performance.
“There are some advantages to investing in smaller frontier markets. There is less bureaucracy and less government agencies and competing interests than in much larger organisations, and a more limited number of people that you need to work and liaise with to advance project development,” Fichtenberg said.
The country has been heavily reliant on seasonal hydropower and expensive thermal generation, with around 30.5MW of domestic hydropower capacity, 16MW imported from the Ruzizi I and II hydropower plants, and 40.5MW of thermal capacity. Mubuga is intended to reduce the use of thermal power and help mitigate hydro’s seasonal variability. The project’s backers expect this dual role to reduce the risk of non-payment. It has also allowed them to make the case for high-priority access to foreign currency.
“The price for diesel is significantly higher than the tariff that we have, and with the reductions in the cost of solar power there is only a small difference in comparison to the cost of new hydro IPPs,” Fichtenberg said. “Our project was seen as a displacement for the current requirements for diesel, which has to be paid for in US dollars. The government of Burundi allows special priority for foreign currency for certain sectors, including pharmaceuticals, fertilisers and energy, so the government agreed that it was beneficial to them to make dollars available to our project because it offset and reduced their requirement for dollars otherwise needed for diesel-based electricity generation.”
The government has given significant backing to the Mubuga project by guaranteeing Regideso’s commercial obligations, providing comfort to investors and allowing the utility to build a track record of good credit for future IPP investments. Burundi was one of the first countries to sign documentation for the RLSF, a significant component of the project’s risk mitigation. The RLSF will provide a guarantee for a letter of credit to cover up to six months’ worth of payments from Regideso and can be drawn down multiple times in a given year. In the event of a drawdown, ATI will engage with the government to recover the funds, which will become available again should there be payment delays again in future.
“When you look at RLSF since it was launched, the Burundian government was one of the first governments to sign up and sign the memorandum of understanding which allows ATI to offer RLSF to eligible projects, so from our side that shows at the very least a high level of interest from the government in encouraging IPPs to invest,” ATI assistant underwriter Obbie Banda told African Energy. “During that process, we engaged with the government to make clear their obligations and the need for them to come quickly to the table if there are any payment delays. The encouraging engagement from that, in addition to legally binding agreements between the Burundian government and ATI, gave us some comfort in being able to engage and make timely recoveries should there be any drawdowns under the facility. As an institution, we also have a developmental mandate and the effect of this project in Burundi will be significant.”
RLSF is also supporting projects selected through KfW’s Global Energy Transfer Feed-in Tariff (Get FiT) programme in Zambia as well as solar projects being procured under the Millennium Challenge Corporation compact in Benin. It is also likely to provide cover to projects in Malawi and Uganda that have been approved by ATI but which have not yet reached financial close.
Mubuga’s sponsors hope that it will result in more projects being developed in Burundi to reduce the high cost of power. There are several hydroelectric projects in the pipeline. The state-owned 49MW Jiji-Mulembwé plants are expected online in 2022 and are backed by the WBG, European Investment Bank and African Development Bank (AfDB) (AE 381/11). Angelique International is already building the 20MW Kabu 16 hydropower plant for Regideso, which is expected online later this year (AE 395/11). Development has also progressed considerably at the 15MW Ruzibasi hydroelectric project.
Among the IPPs, Virunga Power is developing the 8MW Ruvyi102 and 8MW Mule037 hydroelectric projects with Songa Energy. A request for expressions of interest to carry out feasibility studies, including possible solar hybridisation, was issued for both plants in 2019 with funding from the AfDB’s Sustainable Energy Fund for Africa (AE 406/8).
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