Zambia power sector

The Global Energy Transfer Feed-in Tariff (Get FiT) Zambia secretariat has announced the award of six solar photovoltaic (PV) projects with combined capacity of 120MW. The Get FiT programme, which is backed by German development bank KfW, is an official procurement initiative of the Zambian government.

The first round of the solar procurement auction had been targeting 100MW of solar capacity from projects 20MW or smaller. This will be followed by 100MW of hydroelectric capacity later in the year. However, the low prices achieved through the tender – which ranged from $3.999c/kWh to 4.8c/kWh – led the Get Fit Zambia investment committee, in coordination with the Zambian government, to award a further 20MW. The projects are expected to generate around 360GWh/yr.

Three consortia were awarded two 20MW projects each. The lowest bid was from Italy’s Building Energy and South Africa’s Pele Energy Group, who bid 3.999c/kWh for the Bulemu East and West projects. United Kingdom-based Globeleq and South Africa’s Aurora Power Solutions bid 4.52c/kWh for two projects named Aurora Sola One and Two. Finally, France’s InnoVent and Zambia’s Copperbelt Energy Corporation bid 4.8c/kWh for the Garneton North and South projects.

Two consortia have also been selected as reserve bidders, both also with two 20MW projects.

Preferred bidders will sign a 25-year power purchase agreement with Zambian utility Zesco. The African Development Bank announced in March 2018 that a $50m loan and $2.5m grant from the Green Climate Funds had been approved to support projects procured through Get FiT in Zambia. The Netherlands’ FMO, Germany’s DEG, the United States' Overseas Private Investment Corporation, South African commercial banks Rand Merchant Bank and Standard Bank, and Afreximbank have all shown an interest in lending to Get FiT projects.

Get FiT Zambia tender agent team leader and head of renewable energy advisory at Multiconsult, which is managing the Get FiT Zambia secretariat, Ryan Anderson said that “it is important to recognise that these tariff results represent a truly competitive outcome. Not only were developers required to find and acquire their own suitable sites and pay for shallow grid connection, but Get FiT Zambia has offered no form of grant financing, nor has it arranged for concessional financing”.

The comments are likely a response to criticisms of the World Bank Group’s Scaling Solar programme, which launched in Zambia and selected preferred bidders in 2016. Question were asked about the programme when a bid of 6.015c/kWh was announced, with some arguing that the figure was not a true reflection of the cost of developing projects in Zambia and that it would lead to unrealistic expectations from other African governments.

KfW principal project manage Marco Freitag said that “what has made this such a competitive outcome is the bankable standardised transaction agreements, the effective tender implementation and the steadfast commitment of the Government of Zambia and Zesco”. Standardised legal documents were developed with advice from law firm Trinity International LLP.

Ten consortia were prequalified to submit bids in the auction, with 15 project submissions made. Of these eleven met the minimum technical criteria. In a press release, Get FiT Zambia said that “it is notable that the primary reason that consortiums did not meet minimum criteria was due to deficiencies in complying with or demonstrating sufficient commitment to International Finance Corporation environmental and social performance standards”. Get FiT said that all successful bidders have committed to local capacity building programmes.

Notable in the results was the presence of Pele Energy and Aurora Power Solutions, two South African companies whose growth has been significantly facilitated by local ownership rules in South Africa’s renewable energy independent power procurement programmes (REIPPP). Now competing successfully outside of South Africa without the aid of local content or black economic empowerment criteria, the companies’ success illustrates that such policies can be successful if carefully implemented, although they remain controversial.

The European Investment Bank has taken a hard line on local content, ceasing support for REIPPP rounds other than the first round because it views local content rules as contravening European Union rules. Other development finance institutions and international companies consider that local content rules can distort the market and result in a higher cost of power.

The low prices achieved in the tender are surprising given the macroeconomic environment in Zambia, with international concern over the government and Zesco’s level of indebtedness, as well as the government’s willingness to address the issue. There was speculation during 2018 that the Get FiT tender might not take place at all. However, a broadly positive economic growth environment and optimism about power sector fundamentals are underpinning investor confidence, in spite of reservations about the government.

Also important have been ongoing reform efforts aiming to resolve some of the structural issues the sector faces. Get FiT Zambia director Judy Raphael said that “now that the awards are in place and the projects will have to sign PPAs and achieve financial close, the importance of ensuring a financially viable sector becomes even more pressing. Get FiT Zambia looks forward to working with the Zambian government and Zesco to ensure timely implementation of these projects.”

An announcement on the prequalification of bidders in the Get FiT small hydropower tender is expected shortly, with a request for proposals expected to follow during 2019.

 

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