Malawi: Start-up of Salima solar plant marks first fruit of reforms

Issue 451 - 06 Dec 2021 | 6 minute read

The 75MWdc/60MWac Salima solar PV plant started commercial operations on 15 November, becoming the first solar independent power project in Malawi to connect to the grid and the first large international IPP developed under a new regulatory set-up.

Several more projects are set to follow, but Malawi is now  approaching solar saturation and ready to move on to larger hydropower plants like the 350MW Mpatamanga project on the Shire River.

Salima was funded by JCM Power alongside the Private Infrastructure Development Group’s InfraCo Africa and FMO. It was one of four projects awarded following a tender in 2017. Salima’s backers were also awarded the 28.5MWdc/20MWac Golomoti project, which is expected online in Q1 2022.

In addition, a 46MW plant in Nkhotakota was awarded to Phanes Group and Serengeti Energy (AE 448/27). The 26MW first phase is being built and is expected to begin operating shortly. Financing for a 20MW second phase has been lined up and battery storage is being considered. Voltalia was initially awarded a project in Kanengo but this was subsequently moved to Nkhotakota, which has led to the schedule being delayed.

Construction of the Salima and the Golomoti projects has been entirely equity funded, continuing a trend which has seen several IPPs on the continent seek alternative financing for construction and then refinancing after commercial operations begin. Financing from Salima’s original engineering, procurement and construction (EPC) contractor, China’s Sumec Clean Energy, was lost after the relationship broke down after the first Covid-19 lockdown (AE 438/12).

Strong risk mitigation has been put in place to support the scheme. Salima is the second project in Malawi (after Nkhotakota) to receive a revolving liquidity guarantee from the African Trade Insurance Agency’s regional liquidity support facility. Salima has transfer risk and breach of contract guarantees worth up to $58.58m from the World Bank Group’s Multilateral Investment Guarantee Agency (Miga), valid for up to 20 years.

Salima also has a sovereign guarantee and implementation agreement which covers issues such as currency risk. The power purchase agreement (PPA) is in dollars, but will be paid in local kwacha; the IPP is responsible for converting and transferring currency.

Malawi has an open auction system for currency which operates quite effectively, JCM Power chief executive Justin Woodward told African Energy. Salima’s backers do not expect access to foreign currency to be a significant challenge but they are able to request currency from Central Bank of Malawi in case of problems and ultimately have recourse to the Miga guarantee.

Evolving environment poses PPA questions

The power sector environment has altered significantly since the 2017 tender; national utility Electricity Supply Corporation of Malawi (Escom) has been split into three components: generation company Electricity Generation Company Malawi (Egenco), transmission and distribution company Escom and, most recently, a single buyer, Power Markets Ltd (PML).

The changes have led to discussions with IPPs on how to reassign existing PPAs with Escom over to PML. The new framework is still in its early stages; an application from PML for a single buyer licence was only submitted to the Malawi Energy Regulatory Authority in October 2020.

PML is intended to operate without the legacy debt of Escom, but remains heavily exposed to liquidity challenges because the utility is its only buyer. While tariffs have increased in recent years, any gains have been offset by higher generation costs, particularly at three thermal plants with combined capacity of 78MW supplied by Aggreko.

The government plans to use the new structure and to build on its recent experience with solar IPPs by developing more plants. Speaking at the Salima plant’s inauguration, President Lazarus McCarthy Chakwera said it was “a blueprint for future projects… One of these things it does is demonstrate that Malawi is an attractive destination for private sector investment in the energy sector.”

Chakwera presented a plan earlier this year to add 1GW to the grid over the next few years, including 15 projects already being developed, of which he said nine could begin operating in 2022.

Woodward believes Malawi is likely to stick with a formula that has proved successful so far. “I think it’s a good framework. A lot of countries think they are sitting on lots of developers and something too good, so they start to peel things back and destroy what they’ve done. I definitely don’t get that sense in Malawi. I think they’ve got something that works and they’ll probably stick to it. It’s just about getting competitively priced power from reliable parties.”

This view was backed up by comments from Chakwera reported in Blantyre daily Malawi24. “Malawians have no patience for pretenders,” he said. “We want serious people like JCM have shown themselves to be.” He added: “Malawi cannot afford to have governance systems that take eight years for projects like this to move from conception to completion.”

JCM Power is working on further projects. “The processes were quite long with Salima,” said Woodward. “It took us five years to develop, maybe even six. Golomoti took us two years. So that’s a good indication that after you have gone through the process once it gets much more efficient and much cheaper for us to develop the second one. So I think we can efficiently do it again, but it depends where they need power.”

Solar saturation raises the need for batteries

JCM is unlikely to develop another solar project without battery or other technologies, as the market is rapidly becoming saturated. According to African Energy Live Data, Malawi has installed capacity of 537MW now Salima has started up. After Nkhotakota phase I and Golomoti begin operating, this will increase to 583MW, with solar PV accounting for around 20% of total capacity. This is around the level that variable renewable energy is generally considered to be manageable.

However, with Nkhotakota phase II, a 20MW project being developed by Egenco at Nanjoka (AE 450/12), and Voltalia’s Nkhotakota project, a further 81MW of solar PV capacity is set to be added. Malawi has 336MW on-grid hydropower capacity, but it is run-of-river with little storage and highly seasonal, making it difficult to use to manage any drops in solar generation.

Escom is having to learn quickly how to manage solar power on the grid. “We’re still in testing mode, I would say, in terms of actually injecting power into Escom’s grid,” said Woodward. “Escom had been quite cautious in how much they would take our power, to make sure they wouldn’t have big outages should cloud cover cause output to drop. But it’s getting better.”

It is not clear how well further solar capacity additions can be managed. A battery system is being installed at Golomoti and Nkhotakota phase II is also considering battery storage. Woodward said the battery project was added to Golomoti without amending the PPA and made commercially viable by a grant from Innovate UK. It means Golomoti will be able to provide a smoother generation profile for Escom, making it more likely the plant will be able to be dispatched. “We won’t be compensated for the battery but we saw it as a ‘future mitigant’, making sure Escom could actually use the power we produce,” Woodward said.

In the longer term, large hydropower projects such as the 350MW Mpatamanga, which SN Power and Electricité de France are the front-runners to develop, will make solar power easier for Escom to manage (AE 410/9).

Battery storage and an interconnection with Mozambique and potentially Zambia will also increase Malawi’s ability to absorb variable renewable power onto the grid.

Grid capacity is another issue, with some areas becoming increasingly congested. Woodward thinks this might push the government towards tenders in the longer term rather than unsolicited projects, to better direct developers to parts of the grid where there is capacity for more generation.

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