The World Bank Group’s Scaling Solar programme delivered more headline-grabbing tariffs with its second tender, this time in Senegal. Attracting a strong set of bidders, the projects will supply power at the lowest cost in the country, but some in the industry remain uneasy about the programme and the prices, writes Dan Marks
Senegal’s Commission de Régulation du Secteur de l’Electricité on 5 April announced the results of a tender to build two 60MW solar photovoltaic (PV) plants at Kahone and Touba. The tender was launched under the mandate of the World Bank Group (WBG)-backed Scaling Solar initiative.
Both projects were awarded to French utility Engie and asset manager Meridiam, who bid €0.038016 ($0.0468)/kWh for the plant in Kahone and €0.039831/kWh for Touba. The tariffs will increase by 1.2%/yr. The tender documents anticipate contract signing in early May and financial close in mid-September.
“After the record-low results of Scaling Solar’s first mandate in Zambia, this is another major breakthrough for the programme as these prices are approximately 60% lower than the solar contracts previously agreed in Senegal,” an International Finance Corporation (IFC) statement said. “This demonstrates that Scaling Solar’s innovative approach to bring investors and governments together in a transparent, streamlined and competitive process leads to successful deals that will provide clean, affordable energy for Africa.”
Fourteen bids in total were received for the two project, of which 12 were publicly announced. For Kahone, the other bidders were Nareva Holding and Masdar (€0.038899/kWh); Access Infra Africa and Total Eren SA (€0.0439/kWh); Actis Energy 4 and Mulilo Group Holdings Ltd (€0.045036/kWh); Scatec Solar (€0.045999/kWh); and Acciona Energia SA (€0.05793/kWh). For Touba, the other bidders were Nareva and Masdar (€0.039899/kWh); Access Infra Africa and Total Eren SA (€0.0439/kWh); Scatec Solar (€0.046299/kWh); Actis Energy 4 and Mulilo (€0.048888/kWh); and Al Nowais Investments LLC, Aldwych Power Holdings Ltd, and Alten 2010 Energías Renovables SA (€0.05164).
Some stakeholders have questioned the sustainability of the winning price. An experienced executive at one unsuccessful bidder questioned whether country risk was being adequately factored into the tariff. Although Senelec’s finances are now more robust – a recent CFA30bn ($54m) bond was oversubscribed – it has an unenviable financial history. The bidder was also sceptical about the value that could be delivered to shareholders at such low tariffs. But with few investment opportunities available on the continent, competition for large solar projects is likely to continue driving prices down.
Achieving low prices in solar
The bids beat by some margin previous lows achieved by Scaling Solar in Zambia, which caused a stir in 2016 when prices of $0.06015/kWh and $0.0784/kWh were announced for two projects of around 50MW (AE 361/11). The result caused a re-evaluation of solar procurement policy and tariffs by several governments in Africa, notably Nigeria (AE 345/9).
It remains to be seen whether the latest announcement will have a similar impact. But the contrast with feed-in tariffs and tariffs negotiated bilaterally emphasises the importance of how power is procured in determining the tariff.
“The result in Senegal should be seen as a very good price and evidence that things can be done differently,” IFC senior investment officer Stefan Rajaonarivo told African Energy. “But it’s not a benchmark. It’s evidence that the energy price can be lowered significantly when the right elements are taken into account.”
Low prices were achieved through a combination of factors: a tender run by a reputable institution with various risk mitigation products available backed by guarantees from the government and World Bank Group, development risk removed by the tender process, a lack of suitable projects in Africa driving up competition from experienced institutions desperate to place resources, good irradiation, a track record with solar independent power producers (IPPs) in Senegal and of paying on time, and a reasonable macroeconomic environment.
Dealing with development
Scaling Solar is a WBG programme bringing together the World Bank, IFC Advisory, IFC Investment and the Multilateral Investment Guarantee Agency. IFC Advisory was the transaction adviser for the tenders, working with domestic institutions to select and prepare the project sites. The cost of preparing the tender is shared between the government implementing agencies, donors and winning bidders (via a success fee).
This removes most of the development risk for the project. “What strikes me in some of the countries in central and western Africa that I cover for Engie, is that there is always very good masterplanning, a good view of what the supply should be, but when you go from that to assigning power generation needs to projects it is often very unclear how they are connected and whether your project is in the masterplan or not,” Engie chief executive for Western and Central Africa Philippe Miquel told African Energy.
“Often you find yourself working on a project not knowing if the power purchase agreement (PPA) will be signed, whether it is one of the priority projects, and in a sense having IFC working with either the local utility or the local government brings the coherence to the masterplan, translating the masterplan into projects,” Miquel said.
By carrying out much of the development upfront, Scaling Solar helps to deal with this risk. In Zambia, Scaling Solar and the KfW-sponsored Global Energy Transfer Feed-in Tariff (Get FiT) programme have become the official government processes for matching generation needs with projects.
However, the structure of the tender has sometimes been an issue for developers with projects outside of Scaling Solar, who have asked for more transparency around these early costs as they are not visible in the final tariff.
There is little doubt that the way low prices are achieved in Scaling Solar – with early development and policy uncertainty removed through the tender process and a range of risk mitigation instruments backed by sovereign guarantees and the WBG – has sometimes been misunderstood by other African governments.
Following the first Scaling Solar in Zambia, several countries – notably Nigeria, where tariffs were reduced from $0.155/kWh to $0.115/kWh in 2016 and the projects have yet to close – attempted to reduce or review tariffs without altering terms or support for solar projects.
In Kenya, a messy transition to an auction model of solar procurement has been marred by governance concerns and a drive to push prices down to $0.08/kWh despite signing power purchase agreements for four 40MW solar PV projects in July 2017 at $0.12/kWh, and subsequent changes in terms which have pushed costs up, rather than down.
Early complaints about being crowded out by Scaling Solar do not seem to be borne out by the experience in Senegal, where Scaling Solar coexists with a number of solar IPPs developed on an unsolicited basis.
“You may go through unsolicited bids at times and you may go through tenders at other times, that’s really for countries to decide. I think, as was the case in Senegal, probably the first projects need to be on an unsolicited basis to get momentum going and once there is some expertise and experience with tenders, then that becomes a good solution. In the end, once the ball is rolling there is room for everyone,” Miquel said.
Lowering prices by increasing competition has always been at the heart of the Scaling Solar programme. By running a tender which has dealt with a number of bottlenecks up front and is backed by the government and the WBG, Scaling Solar was able to attract a number of institutional investors. “The idea behind the tender is to try to maximise competition to benefit the client, with a view to getting the best possible price,” Rajaonarivo said.
“For me Scaling Solar has one main ambition, which is to set a framework which is replicable in terms of the process – a call for tender with a structured process associated with it – and a set of legal documents, such as PPAs and financial contracts,” Miquel said, adding that IFC was also helping the country become accustomed to tender processes and project documentation.
According to Miquel, perceptions of country risk are important in creating competition. “You can see that the bids are quite close and competition was quite intense. To me that’s the result of the successful closing of a number of solar PV projects in Senegal over the past two years, of which two have been built by Engie:Ten Mérina and Santhiou Mékhé, which are both 30MW,” he said (AE 362/8). “The fact that there have been projects built in Senegal on time, on budget, and that those projects are delivering power and that power is paid for means we are moving away from what I call ‘first of a kind’ syndrome in the country.”
He said reforms at Senelec under director-general Makhtar Cissé had improved confidence in the financial robustness of the offtaker. “An investor that is not convinced that it will be paid for its investment will price the risks in the project cost, which you will find in the tariff in the end,” he added.
Unsuccessful bidders in the tender told African Energy that another factor driving competition was the lack of good power projects in Africa. Project development across the continent remains arduous and early progress has stalled in many of the major sub-Saharan markets. Projects that have gone ahead have often been too small to interest institutional investors. By offering the opportunity to invest in projects at a larger scale and with political backing, Scaling Solar has been able to stimulate substantial price competition. “I think another element in lowering the price is related to the type of bidder that the client has been able to attract,” Rajaonarivo said. “These bidders are established players in the PV industry and they have a good relationship with their vendors, which allows them to obtain more interesting prices than other developers.”
Another factor bringing down prices is the availability of risk mitigation products. “The objective is to mitigate as much as possible the perceived risks, be they at a project level or at a country level, and that allows the bidders and lenders to feel sufficiently comfortable to bring the costs and prices as low as possible,” Rajaonarivo said.
As well as guarantee and insurance products from the WBG, the projects in Senegal will receive government guarantees that are increasingly not available elsewhere.
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