Linking Up: Public-Private Partnerships in Power Transmission in Africa Linking Up: Public-Private Partnerships in Power Transmission in Africa © 2017 International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000—Website: www.worldbank.org The findings, interpretations, and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the Public-Private Infrastructure Advisory Facility (PPIAF) or to The World Bank Group, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent.   Neither PPIAF nor The World Bank Group guarantees the accuracy of the data included in this publication or accepts responsibility for any consequence of their use. 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Contents vii Acronyms and Abbreviations xi Acknowledgments xiii Foreword xv Executive Summary 1 Section 1: Introduction 5  inancing Power Transmission: Challenges Part A: F and Opportunities 6 Section 2: A  frica Needs Transmission Investment and New Approaches to Financing and Delivering It 6 2.1  Access to Electricity Is Low in Africa 7 2.2  Increasing Access and Consumption Will Require a Major Expansion of Supply 8 2.3  Transmission Is Needed to Tie the Electricity System Together 12 2.4  New Approaches to Finance and Delivery of Transmission Are Needed 15 Section 3: P  rivate Finance of Transmission Has Worked Well Internationally 16 3.1  Model 1: Privatizations 18 3.2  Model 2: Whole-of-Grid Concessions 18 3.3  Model 3: Independent Power Transmission 19 3.4  Model 4: Merchant Investments 20 3.5  Interconnection Projects Can Also Use Some of These Models 25 Section 4: A  frica Has Little Privately Financed Transmission, but Substantial Private Investment in Generation 25 4.1  There Has Been Little Private Investment in Transmission 30 4.2 This Contrasts with Africa’s Success in Attracting Private Investment in Generation 33 Section 5: I  ndependent Power Transmissions Are the Most Broadly Applicable Business Model for Increasing Privately Financed Transmission in Africa 33 5.1  Applicability of the Model to All Types of Transmission Investment in Africa 35 5.2  Ability of the Model to Achieve Economies of Scale in African Transmission iii iv Contents 35 5.3 Competitive Pressure on Private Providers of Transmission in Africa under the Model 36 5.4  Requirements for Investor Confidence in Network Regulation in Africa 37 5.5  Consistency of the Model with Directions in Power Sector Reform 37 5.6 Extent to Which the Model Can Be Tested While African Governments Maintain Existing Models 38 5.7  Evidence That the Model Has Worked Well in Other Low-income Countries How to Scale-up Private Investment 41 Part B:  in Transmission in Africa 42 Section 6: Steps to Realize the Potential of IPTs for Africa 42 6.1 Develop Policies That Support IPTs 44 6.2 Develop the Legal and Regulatory Frameworks to Support IPTs 44 6.3 Conduct Trials of IPTs Alongside Existing Business Models for Transmission 45 6.4 Introduce New Models for Concessional Lending 47 6.5 Decide the Stage at Which to Tender Transmission Projects 48 6.6 Determine Payments to IPTs Based on Transmission Availability 49 6.7 Ensure Adequate Revenue Flow and Credit Enhancement for Projects 53 6.8 Tailor IPT Projects to Attract International Investors 53 6.9 Prepare to Implement IPT Transactions 55 6.10 Run Competitive Tenders for IPTs 57 6.11 Next Steps 57 Section 7:  Toolkit to Introduce Independent Power Transmission Tenders 59 7.1  Validate the Project 60 7.2  Evaluate the Suitability for Private Finance 61 7.3  Select the Team and Tender Type 63 7.4  Prepare the Preliminary Works 64 7.5  Design the Transaction 71 7.6  Run the Tender 75 Appendix A. Case Studies 93  ipeline of IPT Projects in Kenya and the Southern Appendix B. P African Power Pool 101 List of References Contents v Tables 2.1 11 Sample of Ketraco’s planned 6.4 50 Comparison of electric supply costs with transmission lines cash collected in 2014 (US$/kWh billed) 3.1 16 Business models for private investment 6.5 52 Financing structure of Azura IPP in transmission (Nigeria) 4.1 26 Examples of concessions and 7.1 58 Summary of the process affermages in Africa 7.2 62 Responsibilities under early-stage 5.1 34 Performance of the business models tenders and late-stage tenders against assessment criteria A.1 76 Brazil’s power sector main institutions 5.2 39 Information of winning bids for A.2 78 Successful and unsuccessful tenders transmission lines in Peru (1998–2013) (2005–2015) 7.1 65 Risk matrix B.1 95 Evolution of transmission lines, by 7.2 66 Main risks of an IPT project voltage (2009–2015) 7.3 67 Summary of key provisions to include B.2 97 The SAPP Grid in the TSA and associated agreements 7.4 69 PPP structures for IPT contracts Boxes A.1 89 Transmission lines by region, 2011–2015 (ct km) 2.1 13 Funding gap in transmission sector in Kenya B .1 96 Members of SAPP 3.1 19 Summary of outcomes of IPTs B.2 99 Pipeline of potential IPT projects internationally in Kenya 4.1 28 The only attempt in Africa to tender B.3 99 Pipeline of potential IPT projects for IPTs in SAPP 5.1 36 IPTs can reduce whole-of-life costs 5.2 37 Merchant transmission faces risks from Figures open access, regulated networks 2.1 7 Access to electricity and electricity 5.3 38 IPTs can bring in new sources of finance consumption (percentage of population; 6.1 43 Introducing onshore transmission kWh per person per year) tenders in the United Kingdom 2.2 8 Installed capacity (MW per million 6.2 45 Peru passed new legislation to maintain people) investor interest in transmission 2.3 9 Transmission lines per capita (km 6.3 46 Developing regulations suitable for IPTs transmission lines per million people) 6.4 46 Privately financed transmission in 2.4 10 Major potential generation and India has been growing transmission projects in Africa 6.5 47 Example of concessional lending to IPP 2.5 11 Map of Nigeria’s transmission system, showing transmission lines being 6.6 50 Most African utilities do not collect developed and proposed enough cash to cover costs 3.1 21 Basslink transmission line route 6.7 51 The use of escrow accounts to attract IPP investments 3.2 22 The SIEPAC interconnection 6.8 51 The role of guarantees in ensuring the 4.1 27 Length of transmission and distribution Azura IPP (Nigeria) was bankable lines in Cameroon (km), 2001–2010 6.9 54 Tariff for IPT contracts in Peru 4.2 29 Route of the Cahora Bassa interconnection line 6.10 55 The role of government-owned bidders 4.3 31 IPPs by year of financial close: Africa 7.1 61 Definition of different committees (excluding South Africa), 1994–2014 7.2 62 Early-stage tenders and late-stage tenders 6.1 45 Investments in transmission 7.3 70 One-stage and two-stage tender process in Peru (1991–2000) 7.4 73 Contract management 6.2 46 Evolution of new transmission lines in India, 1985–2017 (ct km of new B.1 94 Main companies in Kenya’s power sector transmission lines) B.2 98 SAPP’s experience shows how regional 6.3 48 Responsibilities under late-stage power pools can assist transmission tenders and early-stage tenders planning Acronyms and Abbreviations ANEEL Agência Nacional de Energia Elétrica AR Annual Revenue AVI Anualidad del Valor de la Inversión BIA Bureau of Indian Affairs BNDES Banco Nacional de Desenvolvimento Econômico e Social BOO Build, Own, and Operate BOOT Build, Own, Operate, and Transfer BPC Bidding Process Coordinator CCEE Cámara de Comercialização de Energia Elétrica CDEC Centro de Despacho Económico de Carga CEA Central Electricity Authority CEC Copperbelt Energy Corporation CERC Central Electricity Regulatory Commission CIE Compagnie Ivoirienne d’Électricité CISEN Coordinador Independiente del Sistema Eléctrico Nacional CNE Comisión Nacional de Energía CNPE Conselho Nacional de Política Energética COD Commercial Operation Date COMA Costos de Operación, Mantenimiento y Administración Ct km Circuit Kilometer CTEEP Companhia de Transmissâo de Energia Elétrica Paulista CTM Consorcio Transmantario CTU Central Transmission Utility DAM Day Ahead Market DFI Development Finance Institution DIC Designated Inter-State Customer DoE Department of Energy DRC Democratic Republic of the Congo EAE Strategic Environmental Evaluation EC Empowered Committee EDF Électricité de France EDM Electricidade de Moçambique; Électricité du Mali EIS Environmental Impact Statement EPC Engineering, Procurement, and Construction EPE Empresa de Pesquisa Energética EPIRA Electric Power Industry Reform Act ERC Energy Regulatory Commission vii viii Acronyms and Abbreviations ESIA Environmental and Social Impact Assessment ESKOM South African electricity supply company FERC Federal Energy Regulatory Commission GDC Geothermal Development Company GDP Gross Domestic Product GW Gigawatt HCB Hidroéletrica de Cahora Bassa HV High Voltage HVAC High Voltage Alternating Current HVDC High Voltage Direct Current IFC International Finance Corporation IPP Independent Power Producer IPS Industrial Promotion Services IPT Independent Power Transmission JV Joint Venture Ketraco Kenya Electricity Transmission Company km kilometer(s) KPI Key Performance Indicator KPLC Kenya Power and Lighting Company kV Kilovolt kWh Kilowatt-hour LCE Ley de Concessiones Eléctricas LCPDP Least Cost Power Development Plan LGE Ley para Asegurar el Desarrollo Eficiente de la Generación Eléctrica LGSE Ley General de Servicios Eléctricos LTI Law of Transmission and Interconnection LTTC Long Term Transmission Customer LV Low Voltage MAR Maximum Annual Revenue MEM Ministry of Energy and Mining MHI Manitoba Hydro International MIGA Multilateral Investment Guarantee Agency MME Ministry of Mines and Energy MoP Ministry of Power MV Medium Voltage MVA Mega-volt Ampere MW Megawatt MWh Megawatt-hour NBET Nigerian Bulk Electricity Trader NEM National Electricity Market NEP National Electricity Plan NGCP National Grid Corporation of the Philippines NPC National Power Corporation NTP National Tariff Policy ODA Official Development Assistance OECD Organisation for Economic Co-operation and Development Ofgem Office of Gas and Electricity Markets O&M Operations and Maintenance ONS Operator of the National Electricity System  Acronyms and Abbreviations ix PCOA Put-Call Option Agreement PEMC Philippines Electricity Market Corporation PGCIL Power Grid Corporation of India Ltd PhP Philippine Peso PIDA Programme for Infrastructure Development in Africa PIS Performance Incentive Scheme PPA Power Purchase Agreement PPP Public Private Partnership PRG Partial Risk Guarantee PRI Political Risk Insurance PSA Power Supply Agreement PSALM Power Sector Assets and Liabilities Management Corporation PSP Private Sector Participation RAPP Rajasthan Atomic Power Project REP Red de Energía del Peru RFP Request for Proposal RFQ Request for Qualification ROW Right of Way RTE Réseau de Transport d’Electricité RTO Regional Transmission Organization RTWR Rules for Setting Transmission Wheeling Rates SAPP Southern Africa Power Pool SEB State Electricity Board SEEG Société d’Énergie et d’Eau du Gabon SEIN Sistema Eléctrico Interconectado Nacional SENELEC Société National d’Éléctricité du Sénégal SERC State Electricity Regulatory Commissions SGT Sistema Garantizado de Transmision SIC Sistema Interconectado Central SING Sistema Interconectado del Norte Grande SONEL Société Nacionale d’Électricité SPV Special Purpose Vehicle SSE Scottish and Southern Electricity STE Sociedade Nacional de Transporte de Energia STU State Transmission Utility TBCB Tariff-based Competitive Bidding TCN Transmission Company of Nigeria TDP Transmission Development Plan TSA Transmission Service Agreement TSO Transmission System Operator TSP Transmission Service Provider VATT Valor Anual de Transmisión por Tramo VfM Value for Money VGF Viability Gap Funding WACC Weighted Average Cost of Capital WESM Wholesale Electricity Spot Market ZESCO Zambia Electricity Utility  Acknowledgments This study was authored by a team comprising Rahul Kitchlu (Senior Energy Specialist), Samuel Oguah (Energy Specialist), Emma Grubbstrom (consultant) and John Rennie (con- sultant) at the World Bank; Jamie Carstairs, Lucila Arboleya, and David Ehrhardt at Castalia Ltd.; and Ramón Nadira from Lummus Consultants International. The work was carried out under the guidance of Lucio Monari, Sudeshna Banerjee, Charles Cormier, and Wendy Hughes. Substantive inputs were provided by the speakers at workshops hosted in September 2016 in Nairobi and Abuja, including Pedro Antmann, Pedro Sanchez, Burra Vamsi Rama Mohan (Deputy General Manager, Power Grid Corp of India), Rafael Ferreira (PSR), and Ajay Bhardwaj (Sterlite Power). The team also engaged with many individuals who have enriched the content and rigor of this report. We are grateful to the numerous public stakeholders and private investors, including public utilities, regulators, and transmission companies, who provided invaluable insights. The team is grateful to colleagues in the Global Energy and Extractives Practice, who contributed insights and recommendations concerning their countries and areas of exper- tise including the Communications team comprised of Susan Pleming, Anita Rozowska and Aarthi Sivaraman. The team benefited from discussions with Sudeshna Banerjee, Manuel Sanchez, Mariano Salto, Kyran O’Sullivan and Muhammad Wakil. The team also benefited greatly from colleagues across the Bank Group including Robert Schlotterer and Arnaud Braud in the Financial Solutions group, Anabelle Libeau in MIGA, Xavier Muron and Celine Payet in PPIAF. The team wishes to thank peer reviewers Victor Loksha, Efstratos Tavoulareas, and Pedro Sanchez who provided valuable comments and constructive insights at various stages of this work, including all the participants in the Decision Meeting, chaired by Thomas O’Brien. Highly valued comments have also been provided by Kwawu Mensan Gaba, Teuta Kacaniku and the country management units (CMUs) for the finalizing of this report. Funding for this publication was provided by PPIAF. PPIAF, a multi-donor trust fund housed in the World Bank Group, provides technical assistance to governments in develop- ing countries. PPIAF’s main goal is to create enabling environments through high-impact partnerships that facilitate private investment in infrastructure. For more information, visit www.ppiaf.org xi  Foreword Africa lags other regions in access to electricity: two in three Africans, or about 600 million people, do not have access to electricity. This is a major drag on growth. Without electricity, health clinics struggle to provide basic services, children are unable to get a proper edu- cation, and businesses cannot grow and thrive in today’s global economy. When there is electricity, the quality of supply is often poor. A majority of countries in the subcontinent are still experiencing power shortages. If we do not address the underlying reasons preventing Africans from achieving wider access to reliable and affordable electricity, economic growth on the continent will remain slow, keeping millions trapped in poverty. A primary cause of the poor quality of supply and low electrification rates lies with weak power networks. Addressing these challenges will require new approaches to development financing; there is a disproportionately large funding gap affecting Sub-Saharan Africa’s power sectors which cannot be met by the limited public finances of client countries alone. Scaling up private participation along the energy value chain is necessary. To move the nee- dle significantly in the energy sector, we need to help countries attract sufficient levels of investment. Although African governments strive to foster private sector participation, this will not materialize without deliberate action. Governments demand investments that serve the public interest and support poverty reduction and growth targets but private capital will flow where rewards demonstrably outweigh risks. Africa is blessed with huge untapped potential for renewable energy, including hydro, solar, and geothermal but to connect these resources to consumers, Africa will need to invest in transmission lines. Much of the focus in scaling up investments in the power sector has been on the upstream generation capacity expansion and corresponding levels of investments are also required for Sub-Saharan Africa’s transmission segment. Without these transmission investments, there is a high risk of creating system bottlenecks leaving generation assets stranded. The report ‘Linking up: Public-Private Partnerships in Power Transmission in Africa’ examines the global experience in private sector led investments (e.g. public-private part- nerships, PPPs) in transmission and their applicability within the Sub-Saharan African context. Many countries in Latin America and Asia have successfully introduced private sector participation in their transmission networks and have seen reduced project costs and expanded coverage. In Africa, the concept of independent power producers has also yielded good results. The analysis presented draws lessons from these experiences that might be xiii xiv LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA applicable to the African context, highlights the required regulations and recommends options for attracting private sector participation in the power transmission segment. Ultimately, the report aims to help African countries achieve scaled-up and sustainable power sector investment for the benefit of their people and their economies as a whole. Makhtar Diop Vice President, Africa Region  Executive Summary The power sector’s record of delivering services in Sub-Saharan Africa (Africa) has been suboptimal. Generation capacity remains at 100 gigawatts (GW)—one-third of India’s, with a similar population—and an average annual per capita consumption of about 500 kilowatt-hours (kWh), one-fifth of the global average. Electricity is consumed almost exclu- sively by the affluent. Close to two-thirds of Africa’s population–largely rural and poor—are left out of the service delivery paradigm, with adverse consequences on socioeconomic welfare and economic productivity. This reality is at odds with the rising aspirations of the international community and national governments to reach every consumer with reliable, affordable, and sustainable energy solutions by 2030. Bridging the gap between where Africa is and where Africa aspires to be will require a confluence of new business models, new financiers, and new stakeholders in order to increase its capacity to generate electricity, and to build distribution networks capable of delivering it to consumers, as well as transmission lines to link the two ends of the power supply chain. Generation and distribution, the two ends of the sector value chain, have received more attention from policy makers and financiers as they experiment with new ways of procuring generation capacity, as well as more efficient ways of delivering service to consumers. Independent Power Producers (IPPs) have made investments in generation of US$25.6 billion, with an installed capacity of 11 GW.1 In distribution, new models of harness- ing private sector efficiencies have emerged in various forms of private-public partnerships (PPPs), as well as in concessions, management contracts, operations and maintenance con- tracts, and so on. Transmission, which has traditionally been considered a natural monopoly, and which contributes a relatively small part of the overall cost of the sector value chain, needs to move in tandem with additions to generation capacity in order to achieve timely transmission and final delivery to consumers. Transmission lines reduce overall costs by ensuring economies of scale in generation; creating access to cost-efficient sources of generation; reducing the reserves needed to ensure security of supply; and supporting the integration of renewables into the energy system. Even so, transmission remains a neglected part of the sector value chain. The average annual investment requirement for the transmission sector over the period from 2015 to 2040 ranges between US$3.2-4.3 billion. Almost all transmission investment in Africa is financed by state-owned enterprises (SOEs). This was also true for the rest of the world until the 1990s. However, since then a wave of restructuring across Latin Amer- ican countries, and many of the member countries of the Organization for Economic Co- operation and Development (OECD), has led to new business models for financing the transmission of electricity, with a lower role for public investment and a greater role for private finance. Global experience in this regard is therefore fairly recent. Starting in the developed and Latin American countries, it has rapidly spread to Asia. Today, Africa’s gross xv xvi LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA domestic product (GDP) is about where these countries were when they opened the sector to private investors. For example, Peru’s GDP per capita in 1998 was US$3,266, and India’s in 2006 was US$1,056. In comparison, Kenya’s current GDP per capita is US$1,113 and Nigeria’s is US$2,535. This report, in response to specific client needs, asks if the private sector can play a com- plementary role in scaling up the transmission of electricity in Africa, addressing both its potential advantages and disadvantages. Kenya and Nigeria are actively considering intro- ducing new sources of financing to meet burgeoning investment needs. This report draws from growing global experience in PPP case studies in Brazil, Chile, India, Peru, and the Phil- ippines, and provides a customized account of its applicability to Africa. The preparation of this report benefitted from close collaboration with public and private entities in Africa. At workshops in Nairobi and Abuja, international experts shared their country experiences in attracting private investment with local stakeholders. A third workshop was held in Arusha at the East Africa Power Pool’s (EAPP) Ministerial Conference, where preliminary findings were presented to seven ministers of energy from EAPP countries. Introducing the private sector to electricity transmission is an idea whose time has come in Africa. However, it has to be pursued cautiously and only in selected countries, where conditions are right. This report delves into the implications of such PPP models on the cost of service delivery and efficiency of service provision, and sets forth a toolkit that countries can adapt to their specific local conditions. Why Is the Scaling Up of Private Investment in Transmission Necessary in Africa? More investment in the transmission sector is urgent. Of 38 countries, 9 have no transmis- sion lines above 100 kilovolt (kV). The combined length of transmission in 38 countries in Africa is 112,196 kilometers (km). The country of Brazil has a longer transmission network than Africa, at 125,640 km, and, at 257,000 km, the United States of America (United States) has more than twice the length of the African transmission network. Despite its large land mass, Africa also has fewer kilometers of transmission lines per capita than other regions. The length of transmission lines in Africa is 247 km per million people: excluding South Africa, this indicator drops to 229 km per million people. In contrast, Colombia has 295km of transmission lines per million people, Peru has 339km, Brazil has 610km, Chile has 694km, and the United States has 807km. Building more transmission lines and upgrading transmission capacity will be an essen- tial part of the overall expansion of the electricity sector. As Africa needs transmission both within and between countries, investments are required at both the national and regional levels. Africa needs to invest in long-distance lines, using both alternating current (AC) and direct current (DC) technologies, and to expand in-country transmission networks at a range of voltages. Africa has large low-cost hydrogeneration resources, but the realized potential is far below the load they could serve. Transmission investment, including investment in transmission between countries, is needed to connect these resources to consumers. In-country investments requirements are also large covering various project types. In Kenya, the Kenya Electricity Transmission Com- pany (Ketraco) expects to develop approximately 7,000 km of transmission lines by 2020— including 2,200 km of 132 kV lines; 2,400 km of 220 kV lines; 2,000 km of 400 kV lines; and 612 km of 500 kV High Voltage Direct Current (HVDC) lines. Public finance is relatively scarce in fiscally constrained environments. The opportunity cost of overwhelming use of public capital in the power sector can be high, especially in countries facing demands to address other socioeconomic deficits. Project finance can allow state-owned utilities to raise additional capital that would otherwise be unavailable, by separating out a portion of cash flows related to particular Executive summary xvii Figure E.1 Transmission lines per capita (kilometers of transmission lines per million people) 900 800 700 600 500 400 300 200 100 0 a ia a e a e ca ca il ile ce es ru az ny bw bi bi qu er Pe at Ch an ri ri m m Br Ke Af Af ig bi St ba Fr lo Za N m h m Co d a ut ite Zi oz So Un M Source: Castalia. Data sourced from Trimble, C. et al., “T&D Data—State-owned national grid T&D data,” 2016, http://data.worldbank.org/data-catalog/affordable-viable-power-for- africa (accessed October 30, 2016); Rafael Ferreira, “Private Participation in Transmission Expansion: the Brazilian Model”, Presentation from consultation workshop, Nairobi, Kenya, September 26, 2016. investments. Under a project finance structure, the government’s guarantee on payment does not make the fiscal position worse. Rather, it ensures that a small increase in electricity tariffs intended to pay for a financially viable project will truly dedicated be to that, and will not be used for other debt services or expenditures. Private finance allows the state-owned utility, or the government, to pay competitive and cost-reflective transmission prices. As the private sector invests in financially viable transmission projects, this can also have spillover effects. With higher transmission capacity, utilities can increase electricity sales and reduce generation costs. Finally, private involvement can bring managerial skills, technical know- how, and performance incentives, and stronger accountability to the sub-sector. What are the business models of private-public partnerships in the transmission of electricity? Several different business models have been used to attract private investment in trans- mission. The four main models are privatizations, whole-of-grid concessions, independent power transmissions (IPTs), and merchant investments. Private finance has brought sub- stantial investment in new transmission to the countries using these models. With the restructuring and liberalization of power markets in OECD countries, the approach to financing transmission investment changed. Private companies now finance a large share of transmission investment in many countries in North and South America, and in Europe. Privately financed transmission has also been introduced in some developing countries. India, for example, has attracted US$5.5 billion of private investment in transmis- sion since 2002. Four main business models have been used: • Indefinite privatizations provide ownership of the transmission network to a pri- vate company, usually through a trade sale or public flotation of a government-owned xviii LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA transmission business. The private owner has the exclusive right (and obligation) to develop new transmission in its area of operation. • Whole-of-grid concessions provide similar rights and responsibilities to privatizations, but for a shorter period. In most cases, the government implements this business model with a competitive tender of the concession, and enters a concession contract with the winning bidder. • Independent Power Transmissions (IPTs) provide the rights and obligations associ- ated with a single transmission line, or a package of a few lines. In most cases the govern- ment implements this business model by tendering a long-term contract, with payment dependent on the availability of the line. • Merchant investors build and operate a single transmission line (“merchant line”). In many cases this is a High Voltage Direct Current (HVDC) line. The merchant investor benefits from moving power from low-price regions to high-price regions. In most cases, merchant lines are a private initiative, and are not initiated by the government. In some countries more than one business model is used. For example, the United States and the United Kingdom have lifted the exclusivity of private transmission businesses for new transmission investment, allowing governments to also conduct IPT tenders. All of these models can work, but the conditions in which they work best are different. Bolivia’s attempt at privatization, for example, did not last, and experiences with concessions in the African countries have failed to yield significant investment. However, where the con- ditions are right, private finance under these models has brought substantial investment of new electricity transmission to some countries. For example, the three companies involved in privatization in the United Kingdom invested GBP 5.6 billion from 2013–16. And in Peru, IPTs raised US$1.8 billion in 18 tenders, and on average the winning bids yielded 36 percent lower annual costs than those estimated. In India, the share of private investment–including joint ventures with public transmission company—has been growing since the late 2000s. The private sector has invested a total of US$5.5 billion, and there is US$5 billion worth of projects scheduled to follow. Africa’s experience with private sector participation in the transmission sector has been negligible, primarily through whole-of-grid concessions. Though these have not achieved significant investment in transmission, they have brought some operational benefits. Africa has no experience of privately- financed transmission lines through IPTs or merchant lines. Some preliminary steps have been made to prepare for IPT tenders in Nigeria, but no proj- ects have been awarded. IPTs could be the most promising business model to involve the private sector in Africa. They have performed well in other developing countries, including the case-study countries. The per capita income level of some of these countries at the inception of IPTs was similar to the per capita income levels of the African countries that are considering the introduction of IPTs today. IPTs in both middle-income and low-income countries have led to substantial pri- vate investment in transmission, significant cost savings through tenders, and to contractual agreements that are thus far stable. Further, the risks that IPT investors carry are similar to those that IPP investors carry, and the IPP business model has worked well in Africa. There are four main alternatives for structuring the IPT, broadly differentiated depending upon the source of capital expenditure (CAPEX) requirements, whether the private company will own the transmission assets, and whether these will be transferred at the end of the term (Table E2). The selected case-study countries did not have identical structures for their IPTs, but they were all successful in attracting private finance to invest in new transmission assets. There were two distinguishing characteristics. First, the stage at which the asset was transferred: in Brazil, Peru, and India the tenders are for Build, Own, Operate, Trans- fer (BOOT) contracts (Type 1 in Table E2). This transfer condition requires measures such Executive summary   xix Table E1 Business models for private investment in transmission Indefinite Whole-of-grid Independent Power Merchant privatization concession Transmission (IPT) investment Term Indefinite Long term: often Long term: often Indefinite 25 years or more 25 years or more Coverage All existing and new All existing and new Individual line or Single major new lines within a country lines within a country package of lines. line, often HVDC or region or region New lines only Revenues Annual revenues set Annual revenues set Annual revenues Revenues dependent by the regulator to by the regulator to largely or entirely set on energy (MWh) of ensure a reasonable ensure a reasonable by the winning bid flow along the line return on investment return on investment and price differentials and of capital, and and of capital, and between the two ends subject to periodic subject to periodic of the line regulatory review regulatory review or to arbitration clauses under concession law Incentives Related to whole-of- Related to whole-of- Availability for the Ability to move power grid performance grid performance line (typically 98%) from lower-price areas to higher-price areas Access Open access to all Open access to all Open access to all Proprietary access. transmission users on transmission users on transmission users on Access rights used by an equal basis an equal basis an equal basis owner or sold Examples— United Kingdom, Philippines Mexico, South Australia, United Global Germany, parts of America (including States France, parts of Brazil, Chile, Australia, some South Colombia, Peru), American countries India, United (including Argentina, Kingdom, Canada, Chile) Australia, United States Examples— None Cameroon, Mali, None None Africa Senegal, Cote d’Ivoire as valuation of the asset condition, or requirements for minimum maintenance spending toward the end of the contract term to ensure that the asset is transferred in good condition. In Chile, IPT contracts are Build, Own, Operate (BOO) (Type 2 in Table E2). This type of contract establishes revenue certainty for an initial period, and is followed by regulatory determinations later in the life of the asset. This was the only example in the case studies of indefinite private ownership of the transmission asset financed under an IPT tender. An alternative is that the private company finances the asset; receives long-term payments based on operational performance; and transfers the asset ownership at a much earlier stage. This is a Build, Transfer, Operate (BTO) contract, Type 3 in Table E2). For example, the asset could be transferred to the government-owned transmission company immediately after commissioning, while the capital costs would be recovered over a contract term of 30 years. An early transfer of ownership is not a usual approach under project finance. It may in theory be able to provide similar incentives to traditional IPT contracts. However, this would require that the transfer of ownership is purely on paper, and does not lead to any intervention by the new owner that would affect cost or performance. It would also xx LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Table E2 PPP structures for IPT contracts Who funds the capital Who bears Who bears Who owns # PPP structure investment? construction risk? operation risk? the assets? Examples 1 Build, Own, Private company Private company Private company Private company Brazil, Peru, India Operate, Transfer (BOOT) 2 Build, Own, Private company Private company Private company Private company Chile Operate (BOO) 3 Build, Transfer, Private company Private company Private company Government/SOE None identified for Operate (BTO) transmission lines 4 EPC+Finance Private company Private company Government/SOE Government/SOE None identified for transmission lines require that security is provided in some way other than the ultimate security that arises from ownership of the asset. Risk allocation under these structures are all similar except for the EPC+Finance option (Type 4 in Table E2), in which the public sector bears operation risk. Otherwise, all of the contract forms essentially transfer both construction and operation risk and CAPEX require- ments away from the government. There are no efficiency gains from the EPC+Finance approach, as the developer does not bear whole-of-life performance risk. Despite the success of IPTs in other countries, it should be recognized that the context for transmission investment in Africa differs from those in most countries with IPTs. These differences include the financial viability of the power sector, and the industry structure. Most of the countries using IPTs have sufficient revenue from electricity consumers to ensure the profitability of generators, network businesses, and distribution businesses. This is not the case in most African countries. However, India’s experience, where the challenge of low tariffs and high losses has been overcome, demonstrates that overall power-sector profitability is not a necessary precondition for IPTs to work well. Another difference is that most countries using IPTs have already introduced vertical separation between generation, transmission, and distribution. Some African countries have introduced vertical separation, but most have not. Finally, using IPT tenders presents disadvantages relative to other busi- ness models. Procuring transmission infrastructure through the IPT model requires run- ning frequent tenders. This generates higher transaction costs than other business models. This is especially true if compared to procuring transmission lines through a whole-of-grid concession. Ultimately, global experience shows that the benefits of IPTs outweigh the costs of implementing them. However, successful experience with IPPs in the generation of electric- ity, with similar PPP structures, suggests that IPTs could be used to augment investments in transmission in Africa. What are the steps to realizing the potential of IPTs for Africa? Introducing IPTs for electricity transmission in Africa could result in similar benefits to those achieved by IPTs in other countries, and by IPPs in Africa. To realize these benefits, African governments will have to take actions to produce a favorable enabling environment for IPTs. Their approach can draw on the lessons learned from introducing IPPs in Africa, and international experience in IPTs. The ten steps required are to: • Develop policies that support IPTs. A clear policy direction on how to introduce IPTs, adequately consulted, will be important in order to drive investment. Policy development Executive summary   xxi will need to consider the arguments both for and against testing the use of IPTs to meet government objectives, and reach a final decision. Development Finance Institutions (DFIs) can also assist through dissemination of knowledge products and technical assis- tance, including peer-to-peer advice from other developing countries with IPT experience. • Develop the legal and regulatory frameworks to support IPTs. In most countries, introducing IPTs will require changes to legislation, regulation, and other documents such as grid codes. Governments should draw on the substantial body of international experience to identify lessons learned elsewhere. Primary legislation may be required, and the legislation may also need to evolve over time. • Conduct trials of IPTs. Moving to a new model that has worked well internationally but has not been tried domestically is a risk for African governments. They should start with trials of IPTs to better understand the implementation challenges, and revise regulations and policies as necessary to improve efficiency. International experience shows that IPT tenders can be run while existing frameworks for government-financed transmission are kept in place, and this has been the practice in most countries that have used this model. • Introduce new models for concessional lending. Transmission projects are capi- tal-intensive. African governments need to engage with DFIs to ensure that concessional finance is not tied to delivery by government-owned companies, and to develop models for DFI support to transmission projects delivered by IPTs. The low cost of concessional lending helps African governments meet their investment targets at a lower cost to con- sumers, and any shift to IPTs must safeguard these benefits. African governments can also work with DFIs to ensure that DFI lending policies are not biased toward government ownership of transmission, and do not impede the use of privately-financed transmission. • Decide the stage at which to tender transmission projects. There are two broad choices here. Early-stage tenders allow for more innovation by bidders. However, they also expose them to risk on issues such as approvals and permitting, and require a more complex evaluation. Late-stage tenders are for projects that are already well developed, in which the evaluation can focus on cost. Late-stage tenders are likely to be the best approach for starting off trials of IPTs. They are simpler to evaluate, based on the price offered by different bidders to build and operate a line according to a single detailed design. By contrast, early-stage tenders lead to offers with different designs and require more assessment of the viability of the proposed solutions. • Determine payments to IPTs based on availability. International experience shows that it is bestto expose IPT bidders to risk on their performance in ensuring high levels of availability, but not to expose them to risk on the volume or value of flows along the line. The availability targets are typically close to 98 percent and this, together with other requirements, needs to be set out in a Transmission Service Agreement (TSA) with the IPT. The TSA should include an obligation to commission the line in accordance with the technical specifications by a defined date (often referred to as the commercial operation date). • Ensure adequate revenue and credit enhancement where needed. IPTs will be imple- mented on a project finance basis. Financiers need confidence that the contractual pay- ments will be received, for example, through the use of escrow accounts if the sector as a whole is not profitable. Where escrow arrangements are not enough to make the project bankable, governments may also have to use a government guarantee to back payment obligations to IPTs. If the sovereign guarantees are insufficient, multilateral guarantees may be needed. • Tailor IPT projects to attract international investors. African governments that want to try IPTs should ensure that the tenders offered are of sufficient size; that they face no particular environmental or permitting challenges; and that there is a pipeline of future projects. The projects should be large enough to justify the transaction costs. In some cases, this may mean bundling several projects into a single tender. In Peru for example, capital costs ranged between US$52.2 million and US$291.0 million, from a sample of xxii LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA 14 transmission projects tendered between 1998 and 2013. On average, capital costs were US$116.2 million. • Prepare to implement IPT transactions. Governments will need to seek transaction advisers, prepare TSAs and bid documents, define eligible bidders, and conduct a market sounding. The TSA will include the contract term, payments, performance obligations and incentives, indexation, and force majeure among other things. • Run competitive tenders. The final step will be to run a tender, evaluate bids, and award an IPT contract. There is potential to develop IPT programs in Africa that will be attractive to interna- tional bidders. To achieve this, governments should work with international investors and potential providers of loan finance to build detailed business models that will attract international interest, and can be replicated across the African continent. The next key step is to move beyond merely considering how this business model applies within Africa, and piloting a few projects. Note 1. A. Eberhard et al., “Independent Power Projects in Sub-Saharan Africa: Lessons from Five Key Countries,” World Bank Publications (2016). Section 1 Introduction Africans lack access to electricity.1 Only 35 percent Government-owned companies almost always have access, and those who do consume relatively finance new investment relying on finance from the little, face frequent outages, and pay high prices. national governments, Development Finance Insti- Reaching Africa’s access and consumption tar- tutions (DFIs), and other financiers such as China. gets will require additional investments in gener- Under these financing models, government-owned ation. Electricity generation capacity in the region utilities generally undertake the preparatory work; is just 98  megawatts (MW) per million people, well manage the construction using a range of contractors below the 203 MW per million people in South Asia, for particular tasks; and operate and maintain the 604  MW in Latin America and the Caribbean, and transmission line after it is commissioned. 803 MW in Middle East and North Africa.2 Building more transmission infrastructure will New approaches to financing transmission also be key to closing the generation and distribution are needed gaps. Africa needs generation capacity to create elec- Historic investment in the power sector in Africa is tricity, distribution networks to deliver it to consum- below the forecast investment needs. The average ers, and transmission lines to link the two ends of the annual spending in the past decade in the African power supply chain. Investments in transmission will power sector has been about US$12 billion, or 2 also allow access to low-cost generation capacity and percent of the Gross Domestic Product (GDP). This increase security of supply. accounts for 19 percent to 36 percent of the estimated Government-owned companies finance most investments needs. transmission investment in Africa Given this trend, Africa’s traditional approach to Government-ownership was the dominant model financing transmission needs to be supplemented. In around the world until the 1990s. However, many most countries in Africa the utilities are not profitable countries have replaced, or complemented, the and their borrowing requires government support. government-owned model with privately financed This financing model is hitting constraints on the transmission. total level of government borrowing. In most countries in Africa, government-owned A major role for government finance is likely to companies still finance most or all transmission continue. However, public funding will not be enough investment. In most cases these companies also have to meet the investment needs in the transmission exclusivity over the transmission grid and finance all sector. Introducing some degree of private finance transmission investments. would help to meet the access targets. In some countries legislation establishes an exclu- New sources of private finance for expanding sive franchise for transmission, effectively prohib- the transmission network can be raised provided the iting privately financed transmission models. One business model is right. In the generation sector in such country is Senegal. A few countries have two Africa, investors in IPPs carry the risk for the cost, transmission networks. Examples include Mozam- timely completion, and performance of their plant. bique, where the vertically integrated utility, Electri- IPPs have made investments of US$25.6 billion, with cidade de Moçambique (EDM), and the Mozambique an installed capacity of 11 gigawatts (GW).3 Transmission Company (MOTRACO) both own and Internationally a similar business model for inde- operate transmission lines. pendent power transmission (IPTs) has raised large 2 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA amounts of capital for transmission investments.4 presented to seven Ministers of Energy from EAPP Under this business model individual lines are put countries. Private developers and transmission com- out to tender. The winning bidder carries the risk panies also provided inputs on the topic. on timely commissioning, and capital and operating costs, and performance. Revenues are largely set by Objective and structure of the report the bid and the main performance indicator is the The objective of the study is to support the mobiliza- availability of the transmission line. Repayment is tion of private capital for greenfield IPTs in Africa. To over a contract term varying from 20 years to 45 years. do this, the report analyzes different business models, The use of IPTs in Brazil, Peru, Chile, and India col- frameworks, and underlying ecosystems for scaling lectively raised over US$24.5 billion of private invest- up IPTs in Africa, and provides recommendations on ment between 1998 and 2015. It also enabled close to specific pipeline transactions. 100,000 km of new transmission lines.5 This report is divided into two parts. Part A is Just as private finance has expanded transmission structured as follows: infrastructure in other countries, and generation in Africa, it can also expand transmission in Africa. • Section 2 sets out the main facts and data about the Implementing IPTs in Africa, or other models to power sector in Africa, describes the investments attract private investment, presents serious chal- needs, the benefits from increasing transmission lenges. Privately financed transmission in Africa will infrastructure in Africa, and the rationale for only happen if governments adopt policies supportive using new approaches to financing and delivering of this, and establish the right business, regulatory, transmission and legal environment to attract investors. Develop- • Section 3 defines the four main business mod- ing such policies and the enabling environment will els used for financing transmission investment require building consensus among various entities globally including Ministries, regulators, and utilities. Some • Section 4 looks at experience to date in attracting stakeholders may resist private ownership of trans- private investment in generation and transmission mission, particularly given the role of transmission in in Africa tying the power system together, and the traditional • Section 5 explains why the IPT business model is link with other central functions such as system plan- the most broadly applicable, and most promising, ning and operations. model to increase privately financed transmission However, this report describes why IPTs are investment in Africa the most appropriate business model for privately financed transmission in Africa and sets out practical Part B looks at how to scale-up private participa- steps to introduce IPTs in Africa to scale up transmis- tion in transmission in Africa: sion investments. • Section 6 looks at the steps needed to implement The report was developed in response to IPTs in Africa, and potentially realize benefits simi- requests from interested African countries, lar to those achieved by IPTs in other countries, and and through consultation with various by IPPs in Africa stakeholders • Section 7 includes a Toolkit for government offi- Some African countries—mainly Nigeria and Kenya— cials and policymakers in Africa to implement an have started to develop policy frameworks for private IPT transaction sector participation in transmission. During this process, they have been evaluating the right business, Appendix A provides case studies of private invest- regulatory, and legal environment to attract investors. ment in transmission in Brazil, Chile, India, Peru, and The report benefitted from close collaboration the Philippines. with public entities in Africa. Preparing the report Appendix B provides a pipeline of transmission involved three workshops and several consultations. projects in Kenya and the South African Power Pool The first two were hosted in Nairobi and Abuja, where that could be privately financed through the IPT busi- international experts shared their experiences in ness model. attracting private investment in transmission with local stakeholders. A third workshop was held in Methodology Arusha at the East Africa Power Pool’s (EAPP) Minis- A significant amount of data on transmission proj- terial Conference, where preliminary findings were ects and power sector figures has been collected and INTRODUCTION 3 analyzed for this report. Sources include a series of by legislation; unbundled transmission; and started World Bank databases, including the Private Par- by attracting private investment into generation ticipation in Infrastructure database, data collected before transmission—often IPPs selling to incumbent through the study “Making power affordable in Africa power utilities under long term PPAs. In the five case and viable for its utilities,” data from the International studies in this report, private sector participation in Energy Statistics, and others. The authors also con- transmission came after the development of private ducted interviews with different stakeholders and finance in generation through IPPs. primary and secondary research on new privately financed transmission projects. The report includes five case studies, of Brazil, Notes Chile, India, Peru, and the Philippines. Four of the case 1. Africa in this report refers to Sub-Saharan Africa studies look at experiences with IPTs, and the case and excludes North Africa and Djibouti. study of the Philippines looks at the performance of 2. Castalia. Electricity capacity (million kW a year). long-term concessions for the whole of the grid rather Data sourced from International Energy Statistics, “Total Electricity Installed Capacity 2014,” IEA, 2014, than individual lines. https://tinyurl.com/hqe2nys (accessed December 2, The five case study countries were selected 2016); data sourced from Trimble, C. et al., “Total because they present successful examples of private installed capacity—calculated excluding regional sector participation in transmission. Three coun- projects,” 2016, http://data.worldbank.org/data- tries are from South America as the region accounts catalog/affordable-viable-power-for-africa (accessed for “more than one-third of the global power sector October 30, 2016). project investment with private sector participation 3. A. Eberhard et al., “Independent Power Projects in in developing countries.”6 Brazil, Chile, and Peru also Sub-Saharan Africa: Lessons from Five Key Coun- stand out in attracting privately financed transmis- tries,” World Bank Publications (2016). sion through IPTs. 4. This report uses the term IPT for a privately The per capita income levels of some of the selected financed transmission line (independent power transmission project) to compare with generation countries when they introduced IPTs was similar to privately financed by IPPs (independent power the per capita income levels of the African countries projects). considering the introduction of IPTs today. For exam- 5. PPI Project Database, World Bank and PPIAF, ple, Peru’s GDP per capita in 1998 was US$3,266 and ppi.worldbank.org (accessed September 9, 2016). India’s GDP per capita in 2006 was US$1,056. In com- Total investment is defined as the sum of invest- parison, Kenya’s current GDP per capita is US$1,113 ment in physical assets and payments to the and Nigeria’s is US$2,535.7 government. Investments are recorded in millions The selected countries also had vertically inte- of US$. From this investment, 87 percent was done grated and majorly state-owned power sectors until after 2006. Data includes only greenfield projects. three or four decades ago, similar to most African 6. ESMAP, “Private Sector Participation in Electricity countries today. Electricity utilities were mainly Transmission and Distribution: Experiences from Brazil, Peru, the Philippines, and Turkey,” Knowl- vertically integrated and there was little role for com- edge series,no. 023/15, 2015. petition. Investments were mainly decided through 7. World Development Indicators, GDP per capita central planning, and financed by government-owned (constant 2010 US$), World Bank national accounts businesses. data, and OECD National Accounts data files, http:// However, all the selected countries undertook data.worldbank.org/indicator/NY.GDP.PCAP.KD, major power sector reforms. These were underpinned (accessed May 10, 2017). part A Financing power Transmission: Challenges and Opportunities Section 2 Africa needs transmission investment and new approaches to financing and delivering it Across Africa, access to electricity is low. Those with in all other regions of the world is above 96 percent. electricity use relatively little and face an unreliable The left side of Figure 2.1 shows the level of access to supply. Low electricity access also hinders economic electricity by world region. Africa is at the top, and the growth. Productivity is lower, fewer jobs are created, chart includes the world percentage for comparison. the provision of education and health suffers, and Those with access to electricity use relatively lit- fewer people have access to communication. tle. Per capita consumption of electricity in Africa is Increasing access to, and use of, electricity will estimated at 488 kilowatt hours (kWh) per year—the require substantial investment throughout the power lowest in the world, as shown in the right side of Fig- sector. Building more transmission infrastructure ure 2.1. It compares to 673  kWh per capita in South will be essential to expanding the power sector. Asia, the region with the second lowest level of access Investment in transmission will be necessary to link to electricity. As Figure 2.1 shows, more industrialized generation and distribution infrastructure, to allow regions like North America consume 10 times the access to low-cost generation capacity, benefit from level of electricity consumed by Africa. economies of scale, and increase security of supply. Consumers in a number of countries in Africa who In most African countries, government-owned access the grid also pay high prices and face frequent utilities finance all transmission investments. Given power shortages. Planned blackouts and unexpected the scale of investment required, private finance can power interruptions result in economic losses esti- play a role in meeting the energy requirements in mated at between 1 percent and 5 percent of the GDP Africa. of the countries they live in.1 This section sets out the facts and data about elec- Low access to electricity and unreliable supply tricity access, consumption, generation, distribution, of power hinders the region’s development. The low and transmission adequacy in Africa, and reports on access “result[s] in a loss of significant benefits—such the amount of investment needed across the power as productivity gains in business, the creation of new supply chain. This section also describes why trans- jobs, opportunities to study at home, improvements mission is an essential part of that overall expansion, in health, and better communication via television and explains the rationale to pursue private finance. and radio.”2 Providing more access to electricity is key to reversing this situation. International organizations and governments Access to electricity 2.1  in Africa are aiming for people in Africa to have sig- is low in Africa nificantly greater access to electricity by 2030. Yet, Access to electricity in Africa is low. Only 35 percent of reaching these people will be a challenge and require people in Africa have access to electricity. This is well significant investment. The ‘Sustainable Energy below the 78  percent in South Asia, the region with for All’ program—a United Nations and World Bank the second-lowest level of access to electricity. Access initiative—targets universal access to modern energy AFRICA NEEDS TRANSMISSION INVESTMENT AND NEW APPROACHES TO FINANCING AND DELIVERING IT 7 Figure 2.1 Access to electricity and electricity consumption (percentage of population; kWh per person per year) Access Consumption per capita Africa 35 488 South Asia 78 673 World 85 2,118 East Asia & Pacific 96 2,880 Middle East and North Africa 96 3,104 Latin America & Caribbean 96 3,568 North America 100 5,429 Europe & Central Asia 100 13,241 Source: Castalia. Access to electricity and electricity consumption (Percentage of population; kWh per person per year). Data sourced from World Bank, “Access to electricity (% of population),” SE4ALL, 2012, http://data.worldbank.org/indicator/EG.ELC.ACCS.ZS (accessed November 17, 2016); data from World Bank, “Electric power consumption (kWh per capita),” OEDC/IEA, 2013, http://data.worldbank.org/indicator/EG.USE.ELEC.KH.PC (accessed January 10, 2017). by 2030. Under this program, Nigeria targets 75 per- generation capacity is 98  megawatts (MW) per cent access by 2020 and 90 percent by 2030. To meet million people, well below the 203  MW per million this target, the Government of Nigeria needs to people in South Asia, 604 MW in Latin America and almost triple the country’s on-grid supply by 2030.3 the Caribbean, and 803 MW in Middle East and North Africa. More industrialized regions like Europe and Central Asia and North America have much higher 2.2 Increasing access levels of installed generation capacity per capita. and consumption To reach consumption targets, Africa needs to will require a major install 292 gigawatts (GW) of new additional generat- ing capacity by 2040, at an estimated cost of US$19.6 expansion of supply billion a year between 2015 and 2040.5 Where generation is scarce, people cannot use much electricity. So Africa needs generation capacity to Invest in, and expand, the distribution create electricity, distribution networks to deliver network it to consumers, and transmission lines to link the Building new generation capacity will not be enough; two ends of the power supply chain. Estimates of the Africa also needs to expand its distribution network annual investments required for generation, distribu- to connect people to electricity. Achieving this will tion, and transmission from 2015 to 2040 range from require major investment. US$33.4 billion to US$63.0 billion.4 In Africa, access to electricity averages 35 percent, and two of three households are not connected. Increase generation to achieve access This means that more than 600 million people have and consumption targets no access to electricity. For countries such as South Africa has much lower installed generation capacity Sudan, Chad, and Burundi, access to electricity aver- than other regions. Africa will need to substantially ages only 10 percent. Estimates of the annual invest- increase that capacity to achieve its access and con- ments for distribution from 2015 to 2040 range from sumption targets. Figure 2.2 shows the installed US$10.6 billion to US$14.2 billion a year.6 generation capacity per person. In Africa, installed 8 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Figure 2.2 Installed capacity (MW per million people) 3,418 1,654 937 803 604 203 98 Sub-Saharan South Latin America & Middle East Asia & Europe & North Africa Asia Caribbean East & Pacific Central Asia America North Africa Source: Castalia. Electricity capacity (million kW per year). Data sourced from International Energy Statistics, “Total Electricity Installed Capacity 2014,” IEA, 2014, https://tinyurl.com/hqe2nys (accessed December 2, 2016); data sourced from Trimble, C. et al., “Total installed capacity - calculated excluding regional projects,” 2016, http://data.worldbank.org/data-catalog/affordable-viable-power-for-africa (accessed October 30, 2016). Transmission is needed 2.3  generation capacity, benefiting from economies of scale, and increasing security of supply. to tie the electricity Economies of scale on the supply side mean that system together generation costs decrease the larger the scale of the power plant. Transmission enables this large-scale Africa also lacks transmission capacity. Of 38  coun- generation to connect to load. This is particularly tries, 9 have no transmission lines above 100 kV lines. important in Africa, as the region has major hydro- The combined length of transmission in 38  coun- power resources. Economies of scale in transmis- tries in Africa is 112,196  km.7 By comparison, Brazil sion also reduce overall costs; as transmission costs has a longer transmission network than Africa at decrease, the larger the scale and the higher the 125,640  km. And, at 257,000  km, the United States voltage. Higher voltages also generate lower trans- of America (United States) has more than twice the mission losses. In addition, by connecting multiple length of the African transmission network.8 generators, transmission lines also provide resilience Africa has fewer kilometers of transmission lines and backup to any generation at the distribution or per capita than other regions, as Figure 2.3 shows.9 household level. The length of transmission lines in Africa is 247 km Building more transmission lines and upgrading per million people. Excluding South Africa,10 this indi- the transmission capacity will be an essential part cator drops to 229 km per million people. In contrast, of the overall expansion of the electricity sector. Colombia has 295 km of transmission lines per mil- As Africa needs transmission within and between lion people, Peru has 339 km, Brazil has 610 km, Chile countries, investments are required at a national and has 694 km, and the United States has 807 km. regional level. Estimates of annual investments required for transmission in Africa, between 2015 and 2040, range Africa needs to invest in very diverse from US$3.2 billion to US$4.3 billion.11 types of transmission lines Investment in the transmission sector is needed to Africa needs to invest in long distance lines, using connect the generation capacity and distribution net- both alternating current (AC) and direct current (DC) work. This connection will allow access to low-cost AFRICA NEEDS TRANSMISSION INVESTMENT AND NEW APPROACHES TO FINANCING AND DELIVERING IT 9 Figure 2.3 Transmission lines per capita (km transmission lines per million people) 900 800 700 600 500 400 300 200 100 0 a ia a e a e ca ca il ile ce es ru az ny bw bi bi qu er Pe at Ch an ri ri m m Br Ke Af Af ig bi St ba Fr lo Za N m h m Co d a ut ite Zi oz So Un M Source: Castalia. Data sourced from Trimble, C. et al., “T&D Data – State owned national grid T&D data,” 2016, http://data.worldbank.org/data-catalog/affordable-viable-power-for- africa (accessed October 30, 2016); Rafael Ferreira, “Private Participation in Transmission Expansion: the Brazilian Model”, Presentation from consultation workshop, Nairobi, Kenya, September 26, 2016. technologies, and to expand in-country transmission 2,000  km. Reaching from Nigeria to Guinea, the networks at a range of voltages. Africa has large, project is expected to have a transfer capacity of low-cost, hydro-generation resources, but these are 1,000  MW and cost about US$1.2 billion. In con- mostly far from the load they could serve. Transmis- trast, the Central Africa interconnection will cover a sion investment is needed to connect these resources 3,800  km line. Reaching from Chad to South Africa, to consumers, including investment in transmission the project is expected to have a transmission capac- connections between countries. As an illustration, ity of 17,000 MW and cost about US$10.5 billion. the transmission investment needed for the Grand Investments in transmission are also needed INGA hydro project (of more than 40 GW) to supply to reduce costs by connecting large generators to the Democratic Republic of the Congo (DRC) and the consumers within countries, stabilize national wider region is estimated at US$40 billion.12 transmission systems, and meet growing demand. Figure 2.4 locates potential large-scale, hydro-­ For example, in 2014 the Transmission Company of generation plants and major transmission inter- Nigeria (TCN) estimated that the country needed connections to be developed in Africa by 2020 and to expand its transmission capacity from 7  GW to 2040.13 The figure shows almost twenty generation 10  GW by 2017, and to 20  GW by 2020. Expanding projects (hydro dams), and four major transmission the transmission capacity will require an expan- projects that will connect the dams to the load, and sion of the transmission network. TCN prepared an so help foster regional trade. The four projects are expansion plan that specifies transmission lines to be West Africa Power Transmission Corridor, the Cen- installed by 2017 and by 2020. Figure 2.5 shows a map tral Africa Transmission interconnection, the North of Nigeria’s transmission system in 2014. It includes South Transmission Corridor, and the North Africa transmission lines being developed in 2014 and the Transmission interconnection. transmission lines included TCN’s expansion plan (to The projects range in length, transmission capac- be installed by 2017). These lines are divided between ity, and estimated cost, but all require substantial 132  kV and 330  kV lines. The existing transmission investment. For example, the estimated length of lines were removed from the map, reflecting how the West Africa Power Transmission Corridor is important the transmission in Nigeria needs are. 10 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Figure 2.4 Major potential generation and transmission projects in Africa Source: Figures sourced from African Development Bank (2013), Annex 1. In-country investments are also of diverse types. 2,000 km of 400 kV lines, and 612 km of 500 kV High Projects range in length, voltage, and estimated Voltage Direct Current (HVDC) lines. Some of these costs. In Kenya, the Kenya Electricity Transmission lines are being developed; others are yet to be imple- Company (Ketraco) expects to develop approximately mented. Table 2.1 shows a sample of the transmission 7,000  km of transmission lines by 2020—including lines planned for 2020 but not yet being developed, 2,200  km of 132  kV lines, 2,400  km of 220  kV lines, including the estimated cost of each line. AFRICA NEEDS TRANSMISSION INVESTMENT AND NEW APPROACHES TO FINANCING AND DELIVERING IT 11 Figure 2.5 Map of Nigeria’s transmission system, showing transmission lines being developed and proposed Source: Transmission Company of Nigeria, “Appraisal of Transmission Projects,” (2014), (pers. comm. with Patricia Mong, November 17, 2016). Table 2.1 Sample of Ketraco’s planned transmission lines Estimated costs Project Scope (US$ million) Gilgil-Thika-Nairobi East and 205 km 400 kV Line with Substations in Longonot, 128.7 associated substations Thika, Kangundo and Konza Isinya-Konza-Nairobi East 105 km of 400 kV double circuit line and Konza 41.9 400/132 kV Substation Nyahururu-Maralal and associated 148 km 132 kV Line and 1 No. 7.5 MVA 25.3 substation Substation at Maralal Garsen-Hola-Garissa and associated 240 km 220 kV or 132 kV single circuit Line and 1 90.6 substations No. 7.5 MVA Substation at Hola Garissa-Wajir and associated 330 km 132 kV single circuit Line and 1 No. 23 92.6 substations MVA Substation at Wajir Source: Kenya Electricity Transmission Company (Ketraco), “Transmission System Planning and Implementation: Planned Projects and Financing Gap,” Presentation from consultation workshop, Nairobi, Kenya, September 26, 2016. 12 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Transmission can also increase security very weak performance are a mix of high costs and of supply and enable integration of low revenues. Costs are high because of small size, intermittent renewables weaknesses in operational efficiency, and the share Transmission infrastructure also allows consumers of high-cost oil generators. Revenues are low due to to connect to diverse sources of power generation underpricing and poor recovery. that draw on a range of fuels. This reduces the risks In part, these financial problems are caused by to power supply. For example, the central region of high costs. African countries have a high share of Mozambique has important hydropower and coal expensive oil-fired generation and a range of other reserves. These reserves give it the potential to gener- cost inefficiencies. A move to best practice could help ate high amounts of electricity that the south region to reduce costs. could also benefit from. But the transmission system But this will not be sufficient to move most in the central region and the transmission system in African utilities to financial viability. Those utilities the south region are not connected to each other. If would continue to make a loss even if efficiency were consumers in the south region are to benefit from the raised to international benchmarks. The study looked additional diverse generation sources, a transmission at how the finances of African utilities would improve line is required. The Government of Mozambique has if the cash collection was 100 percent, network losses had plans to develop this line for several years—under were reduced to 10 percent or lower, and staffing lev- a project known as Sociedade Nacional de Transporte els were the same as well-performing utilities in Latin de Energia (STE)—but the project has not progressed America. If these assumptions became reality, the further. This project would be one key way to improve change would be sufficient to move another 11  Afri- Mozambique’s security of supply.14 can utilities to viability.16 Even so, most utilities would Transmission also enables the integration of inter- still fail to recover costs—even after the ambitious mittent renewables (such as wind power and solar improvements in efficiency. power). Transmission ensures that the power system In addition, African governments cannot provide remains in balance, by keeping reserves to offset funds for the utilities to reach financial viability. Gov- power fluctuations from such renewables. Providing ernments are constrained by fiscal limitations originat- reserves to support the integration of renewables has ing outside the power sector, and market perceptions substantial economies of scale: the costs are lower based on their overall fiscal position and on aggregate for larger regions. Transmission achieves these cost indicators, such as the ratio of annual deficits or total reductions and ensures that the costs of integrating debt to GDP. This means that they may not be able to renewables are minimized. borrow to invest, even on financially viable projects that could eventually improve their fiscal position. New approaches to 2.4  Private sector participation can help finance and delivery of unleash the financing constraints transmission are needed A greater role of private finance could help ease the financing constraints and overcome the transmission In most countries in Africa the government-owned deficit. companies finance all transmission investments. Project finance can allow state-owned utilities Africa has much lower installed transmission capac- to raise additional finance that would otherwise ity than other regions and needs to substantially be unavailable. Project finance separates out a por- increase that capacity to meet the access and con- tion of cash flows (and risks) related to particular sumption targets. investments. For example, if a government increases Historic investment in the power sector under this electricity tariffs slightly to finance a transmission model has been well below the forecast investment project, it will not be able to raise additional finance if needs. Estimates of annual investments required for the borrowing entity (the state-owned company or the the power sector between 2015 and 2040 range from government) remains non-creditworthy. However, US$33.4 billion to 63.0 billion. The average annual if a government increases electricity tariffs slightly, spending in the past decade in the African power sec- and credibly dedicates the increase to servicing the tor has been about US$12 billion. finance of a viable transmission project developed A recent World Bank study15 shows that only 2 of under a project finance structure, then that increase 39 utilities in Africa collected enough cash to recover in revenue will secure additional financing. These their operational and capital costs. The causes of this AFRICA NEEDS TRANSMISSION INVESTMENT AND NEW APPROACHES TO FINANCING AND DELIVERING IT 13 increases are likely to be minor given the contribu- these companies have to transfer knowledge and tion transmission tariffs in the cost buildup.17 skills, and to develop in-country management and Under a project finance structure, the govern- technical capability. ment’s guarantee on payment does not make the Private investments can also bring stronger fiscal position worse. Rather, it makes it credible accountability. The contract between the government that a small increase in electricity tariffs that was and the private company will include performance intended to pay for a financially viable project is obligations. These are specific outputs defined in the really dedicated to that, and not to other debt service contract (project timeline, quality, and quantity). If or expenditure. the private company does not meet these obligations, This approach can bring costs down in the medium the government will reduce the payments to the pri- term. This is possible by achieving cost recovery vate sector. through cost reflective transmission tariffs. Private Given these conditions, utilities in Africa are already finance would allow the state-owned utility, or the looking to the private sector to finance transmission government, to pay competitive and cost-­ reflective investments. Ketraco, the transmission utility owned transmission prices. For example, in all the case stud- by the Kenyan Government, estimates a financing ies the use of transmission tenders led to strong com- gap of at least US$5.9  billion between 2013 and 2030. petitive tension and downward pressure on prices. As This represents a financing gap of at least 90 percent. described in the Brazilian and Peruvian case studies, Ketraco is interested in exploring how Public Private the winning bid was often well under the price cap. Partnerships (PPPs) could assist in financing the trans- Box 5.1 also discusses how IPTs can reduce whole of mission projects included in its 2013–2030 Least Cost life costs. Power Development Plan (see Box 2.1). As the private sector invests in financially viable Public finance will likely continue to play a role in transmission projects, this can also have spillover funding the transmission sector, but its funding will effects. With higher transmission capacity, utilities not meet the energy targets and private finance can can also increase electricity sales and reduce gener- help bridge the gap. ation costs. African governments could develop an approach Private involvement can also bring managerial to increase private investment in power transmis- skills, technical knowhow, and performance incen- sion, based on international experience and African tives. Tenders to finance transmission investments experience in generation. In other countries, privately will attract international bidders. Several firms are financed transmission has achieved efficiency gains, already monitoring possible opportunities for IPT reduced costs, and opened up access to new sources of tenders in Africa, a project finance model. Interna- finance. African countries would benefit from intro- tional investors would have an equity exposure to the ducing at least some degree of private finance in the performance of the transmission lines they develop. transmission sector, following their successful experi- African countries will benefit from the incentives ence attracting private investment in generation. Box 2.1 Funding gap in transmission sector in Kenya Ketraco is the government-owned transmission company of By September 2016 Ketraco had completed 13 trans- Kenya, incorporated in December 2008. mission projects (1,099  km), and more than 4,200  km of Ketraco’s mandate is to plan, design, build, own, oper- transmission lines were being built. Ketraco also plans to ate, and maintain HV electricity transmission grid and build about 7,000 km of transmission lines and associated regional power interconnectors (132 kV, 220 kV, 400 kV and substations from 2015/16 to 2019/20. These lines include: 500 kV HVDC lines). Ketraco estimates that their Least Cost Power Devel- • 2,200 km of 132 kV lines, opment Plan 2013–2030 requires US$6.5  billion in invest- • 2,400 km of 220 kV lines, ments in transmission. The committed funds amount to • 2,000 km of 400 kV lines, and about US$615 million, leading to a financing gap of at least • 612 km of 500 kV HVDC lines. US$5.9 billion. Source: Ketraco, (2016). 14 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Notes 8. “Energy Transmission in the United states,” Tribal Energy and Environmental Information https:// 1. N. Ouedraogo, “Modeling sustainable long-term teeic.indianaffairs.gov/er/transmission/restech/ electricity supply-demand in Africa,” Applied Energy dist/index.htm (accessed March 13, 2017). 190, (2017): 1047–1067, http://www.sciencedirect. 9. The indicator is based on kilometers of transmis- com/science/article/pii/S0306261916319420 sion lines (excluding lines below 200 kV). This (accessed March 11, 2017). provides some indication of comparative transfer 2. R. Golumbeanu and D. Barnes, “Connection capacity, but it should be recognized that the share Charges and Electricity Access in Sub-Saharan of transmission by voltage—and so the ability of Africa,” World Bank, Policy Research Working Paper these networks to provide transmission services— 6511, (2013), https://openknowledge.worldbank.org/ varies greatly between these countries. bitstream/handle/10986/15871/WPS6511.pdf? 10. South Africa has 31,107 km of transmission lines. sequence=1&isAllowed=y (accessed March 11, 2017). 11. A. CASTELLANO ET AL. (2015); A. MIKETA AND N. 3. Federal Republic of Nigeria, “Sustainable Energy SAADI (2015). for All Action Agenda (SE4ALL-AA),” July 2016, 12. A. Castellano et al. (2015). http://www.se4all.org/sites/default/files/NIGERIA_ 13. These projects are those included in the project SE4ALL_ACTION_AGENDA_FINAL.pdf (accessed investment portfolio of the Programme for Infra- March 11, 2017). structure Development in Africa (PIDA) Priority 4. A. Castellano et al. (2015). Action Plan (PIDA-PAP) up to 2020, and up to 2040, 5. A. Castellano et al. (2015). in Sub-Saharan Africa and North Africa. Data from 6. A. Castellano et al. (2015); A. Miketa and N. Saadi African Development Bank, “Interconnecting, inte- (2015). Estimates of transmission and distribution grating and transforming a continent,” Programme needs are bundled in Miketa and N. Saadi (2015). for Infrastructure Development in Africa, 2013, The range included in the report assumes that https://www.afdb.org/fileadmin/uploads/afdb/ the allocation of transmission and distribution Documents/Project-and-Operations/PIDA%20 investment needs (as a share of the bundled figure note%20English%20for%20web%200208.pdf included in the A. Miketa and N. Saadi, (2015)) is (accessed March 11, 2017). equal to the allocation in A. Castellano et al. (2015). 14. M. Hussain, “Republic of Mozambique—Energy 7. Data sourced from Trimble, C. et al., “State owned Sector Policy Note” (World Bank), November national grid T&D data,” 2014, http://data.worldbank 2015, http://documents.worldbank.org/curated/ .org/data-catalog/affordable-viable-power-for-africa en/135711468180536987/pdf/ACS17091-REVISED- (accessed October 30, 2016). Data available for the PUBLIC-Mozambique-Energy-Sector-Policy-Note following countries: Angola, Benin, Botswana, .pdf (accessed March 11, 2017). Burkina Faso, Burundi (x), Cameroon, Congo, Dem. 15. M. Kojima and C. Trimble, “Making Power Afford- Rep., Congo, Rep., Côte d’Ivoire, Ethiopia, Gabon, able for Africa and Viable for Its Utilities,” World Ghana, Guinea, Guinea-Bissau (x), Kenya, Lesotho, Bank Group, 2016, https://openknowledge Liberia (x), Madagascar (x), Malawi, Mali, Mauritius .worldbank.org/bitstream/handle/10986/25091/ (x), Mozambique, Namibia, Niger (x), Nigeria, 108555.pdf?sequence=7 (accessed March 17, 2017). Rwanda, São Tomé and Príncipe (x), Senegal, 16. Excluding the costs of making the improvements. Seychelles (x), Sierra Leone, South Africa, Sudan, 17. In Vietnam for example, the transmission charge is Swaziland, Tanzania, Togo (x), Uganda, Zambia, and 5.5%–6% of the end-use tariff. Zimbabwe. The nine countries marked with an (x) have no transmission lines above 100 kV. Section 3 Private finance of transmission has worked well internationally Private companies finance all or a large share of new Merchant investments have been relatively transmission investment in many countries. common in the United States, the European Union, Several different business models have been used and Australia. Neptune Transmission Line—a 104 km to attract private investment in transmission. The line between the states of New Jersey and New York four main business models are privatizations, whole- in the United States—had an estimated cost of over of-grid concessions, IPTs, and merchant investments. US$600 million. The estimated investment cost of Private finance under these models has brought three transmission lines financed on a merchant substantial investment of new transmission to the basis in Australia was US$1,094 million.4 countries using these models. All these models can work, but they work best Many member countries of the Organisation for under different conditions. International experience Economic Co-operation and Development (OECD) provides lessons on the preconditions necessary for have privatized over the last two decades. The United different business models to work well. These lessons Kingdom privatized three transmission companies can help policymakers in Africa decide which busi- in 1991: National Grid, Scottish Power, and Scottish ness models are most appropriate and how best to and Southern Energy (SSE). The three companies implement them. invested GBP5.6 billion between 2013 and 2016. The The main characteristics of these different busi- forecasted investment for the 2013–2021 period is ness models are summarized in Table 3.1. The follow- GBP 16.6 billion.1 ing sections describe each business model in detail, The Philippines currently applies the whole-of- including information about the term and coverage grid concession model. The concession was awarded under each model, the way revenues are set, how to the National Grid Corporation of the Philippines incentives are defined, and whether the model pro- (NGCP) in 2009. Since then, NGCP has invested over vides open access or proprietary access. Examples of US$1.9 billion in transmission. countries that have attracted private investment in IPTs have also enabled major investment in trans- transmission under each model are also provided. mission. IPT tenders in Brazil, Peru, Chile, and India The term concession is used to refer to different mobilized over US$24.5 billion from the private sector types of contracts in different countries. The liter- between 1998 and 2015, enabling close to 100,000 km ature on PPPs often uses the term loosely. In some of new transmission lines. IPTs are also increasingly cases the term concession is used to refer to O&M being used in countries that previously provided contracts, where the concessionaire is not obliged to exclusivity to a private transmission company— finance new assets. including the United Kingdom, the United States, In this report, and as described in Section 3.2, the Canada, and Australia. Canada has awarded 400 km term “whole-of-grid” refers to a contract where the of 230  kV transmission lines, for a total of US$452 private company is responsible for operating and million.2 The United States has also awarded more managing the existing transmission network and than sixty IPTs, and more are expected in the coming for financing and building all new transmission years.3 investment. 16 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Table 3.1 Business models for private investment in transmission Indefinite Whole-of-grid Independent Power Merchant privatization concession Transmission (IPT) investment Term Indefinite Long term: often Long term: often Indefinite 25 years or more 25 years or more Coverage All existing and new All existing and new Individual line or Single major line, lines within a country lines within a country package of lines. often HVDC or region or region New lines only Revenues Annual revenues set Annual revenues set Annual revenues Revenues dependent by the regulator to by the regulator to largely or entirely set on MWh of flow ensure a reasonable ensure a reasonable by the winning bid along the line and return on and of return on and price differentials capital, and subject of capital, and between the two ends to periodic regulatory subject to periodic of the line review regulatory review or to arbitration clauses under concession law Incentives Related to whole-of- Related to whole-of- Availability for the Ability to move power grid performance grid performance line (typically 98%) from lower-price areas to higher-price areas Access Open access to all Open access to all Open access to all Proprietary access. transmission users on transmission users on transmission users on Access rights used by an equal basis an equal basis an equal basis owner or on-sold Model 1: Privatizations 3.1  Scotland through a wholly owned subsidiary, SHE Transmission. The transmission company is sub- Privatizations provide ownership of the transmis- ject to general license conditions that apply to all sion network in a defined area to a private com- transmission companies in the United Kingdom pany. In most cases the government implements and special license conditions that only apply to this business model by privatizing all or a part of a the company. The first special license condition ­ government-owned transmission company. This can (Condition AA) defines the company’s transmis- be done through a trade sale or a public flotation. sion area in northern Scotland. The second special Once privatized, the private transmission owner is license condition (Condition B) states that the responsible for operating and managing the existing licensee shall not make transmission assets avail- network and for financing and carrying out all new able outside this area.6 The license also defines the transmission investment. connection between SSE’s region and the region of The main characteristics of this model are: the neighboring transmission company, Scottish Power. • Term: The private transmission company owns the • Revenues: Transmission systems are considered transmission assets they have acquired and new a natural monopoly and are subject to economic transmission assets they finance. They own both regulation. The private transmission owner for an unlimited time. plans require investment. The regulator confirms • Coverage: The private transmission company has the prudence of the investment proposals. The obligations and rights within a defined geographic approved investment costs are included in the area. This may be a whole country or a region regulatory asset base for the private transmission within a country. company and are recovered through transmission Many countries have a single transmission com- charges. pany. The geographic nature of these rights and The application of this approach varies greatly obligations is clearer when the transmission com- between countries, but has shared characteristics: pany covers a region rather than the whole country. • Transmission companies are subject to a cap on The United Kingdom provides an example.5 overall revenues rather than on the price they Two transmission companies operate in Scot- charge per MWh that they transfer. A revenue land. SSE is the transmission owner in northern PRIVATE FINANCE OF TRANSMISSION HAS WORKED WELL INTERNATIONALLY 17 cap is typically used because their costs do not in 1991. National Grid now owns and oper- vary in relation to changes in the MWh flowing ates 7,200  km of overhead lines, 1,400  km of across the system. A price cap would expose the underground cable, and 329 grid substations.7 transmission companies to risk on the demand The three companies invested GBP5.6 billion for transmission network services, but they are between 2013 and 2016. The forecasted invest- unable to manage this demand, ment for the 2013–2021 period is GBP16.6 billion. • The revenue cap is set at a level that provides a National Grid and SSE are currently investing in reasonable return on capital and return of cap- the first bi-directional subsea interconnector— ital. “Return on capital” means that the returns Western Link—to transport renewable energy are sufficiently high for the company to finance from Scotland to consumers in Wales and its investments; “return of capital” means that England. The project is valued at GBP1 billion the revenues cover the depreciation of the and will be operational by the end of 2017,8 assets, and • The Government of Victoria privatized genera- • Regulatory independence is important to avoid tion, transmission, and distribution during 1995- political pressure to keep down electricity prices. 1999.9 The privatizations in the electricity sector Regulatory independence is secured through raised A$22.5 billion,10 legislation and governance arrangements for • The privatization of electricity transmission in the regulatory body (such as protection from the State of South Australia in 2000, and dismissal). • The progressive sale of government interests • Incentives: The regulatory regime establishes in German transmission companies during the incentives for the privatized transmission com- 1990s.11 panies. The use of a revenue cap means that the transmission company has incentives to minimize Examples of mixed ownership also exist. For costs, while meeting the required quality of service. example, the Réseau de Transport d’Électricité (RTE) The privatized transmission company typically is a wholly owned subsidiary of Électricité de France owns the whole transmission grid for a defined (EDF). EDF is 85 percent owned by the Government of area. As a result, the regulatory incentives can France, with the remaining 15 percent traded on the relate to the overall performance of the grid. Paris stock exchange. One example is the reliability incentive for trans- Full privatization of the transmission network mission companies in the United Kingdom. This has been less common in low-income countries. gives the companies incentives to maintain the net- Some countries in South America privatized part or works well and avoid disruptions to supply caused the entire transmission sector in the 1990s. However, by the transmission network. For each of the three the focus of this report is on financing greenfield transmission companies in the United Kingdom, transmission. The private transmission companies in a reward or penalty is calculated each year based South America do not have exclusivity for financing on the total volume of energy not supplied during new transmission investment, like the case of Argen- loss-of-supply events on their networks. tina and Chile, or did not last long, like the case of • Access: All users of the transmission networks Bolivia. have to get access on a consistent and nondiscrim- In 1993, the Government of Argentina granted a inatory basis to ensure that the wholesale compet- 95-year concession (in effect privatizing) to operate itive markets work well. This is typically achieved the national transmission grid (Transener). The con- by requiring the transmission companies to pub- tract is to operate and maintain the transmission lish tariffs and minimum terms and conditions for networks, and the private company is not responsible access to, and use of, the networks that apply to all for the expansion of the system.12 New transmission potential users. investments in Argentina are publicly and compet- • Examples: Many member countries of the OECD itively tendered by the Government. Transener can have privatized transmission and have since relied bid in the tender. purely on private finance for new investment. The Government of Bolivia privatized Ende13 Examples include: Transmisión, the country’s largest transmission • The three private transmission companies in company, in 1997. In this case, the private company the United Kingdom (National Grid, Scottish had the obligation to invest in new assets. However, Power, and SSE) following the privatizations Ende Transmisión was nationalized in 2012, as part of 18 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA a broad program, which also included nationalizing companies. These incentives also relate to the over- generation and distribution companies. all performance of the grid. The transmission concession in the Philippines concession provides an example. The performance Model 2: Whole-of-grid 3.2  incentive scheme (PIS) is based on availability, fre- concessions quency and severity of interruptions, compliance Whole-of-grid concessions provide similar rights with frequency and voltage limits, and customer and responsibilities to privatizations, but for a shorter satisfaction. The regulatory approved payment period. In most cases, the government implements (under the PIS) of 609 million Philippine Peso (PhP) this business model by the competitive tender of the in 2012. This compares with a maximum annual concession and enters a concession contract with the revenue of around PhP45 billion. The PIS is low in winning bidder. relation to total revenues, but significant enough to Once the concession contract is awarded, the affect the equity returns and to provide an incen- private concession company (the winning bidder) is tive to the concessionaire to act. responsible for operating and managing the existing • Access: All users of the transmission networks get network and for financing and carrying out all new access to the transmission network on a consistent transmission investment. and nondiscriminatory basis. The main characteristics of this model are: • Examples: The transmission concession in the Philippines provides an example of significant • Term: The concession term is defined in the con- investment under this model. Total investment tract. The typical duration is 20–30 years. Some in transmission in the Philippines was close to contracts include an option to extend the time for US$4.2 billion. Over US$1.9 billion was invested in a further period. physical assets.14 NGCP has also reached perfor- • Coverage: The concessionaire has obligations and mance targets. NGCP has consistently exceeded rights within a defined geographic area. In most grid loss thresholds and reduced losses through cases this covers the whole country. The conces- reducing tripping frequency and improving avail- sion may be limited to the main grid and exclude ability. For example, availability for the regions of small, isolated grids. Visayas, Mindanao, and Luzon was between 99.6 • Revenues: The revenues for the concessionaire are and 99.8 percent in 2016.15 set through a regulatory process. This may be an Whole-of-grid concessions have also been used independent economic regulator. Alternatively, the in Africa, including in Cameroon, Mali, and Sene- concession contract may define processes for mod- gal (see Section 4.1). In these cases, the government ifying the concessionaire’s revenues as the cost has retained a considerable share of ownership. In base changes and may define processes for arbi- the case of Mali, the Mali Government granted a tration of any disputes between the concessionaire concession in July 2000, retaining 40 of the shares. and the government. However, in October 2005, one of the private con- The Philippines transmission concession pro- cessionaires sold its shares and the Government vides an example of the revenues being set by an kept 66 percent of the shares, and has been the independent economic regulator. The Electricity majority owner of EDM since then. Power Industry Reform Act 2001 authorizes the Energy Regulatory Commission (ERC) to estab- Model 3: Independent 3.3  lish and enforce a methodology for setting trans- mission wheeling rates. The rates must allow the power transmission recovery of just and reasonable costs and a reason- IPTs provide rights and obligations associated with a able return on the rate base to enable the entity to single transmission line or a package of a few lines. In operate viably. The ERC has developed rules for set- most cases the government implements this business ting a cap on the maximum annual revenues that model by tendering the contract. In some cases the the concession company can earn from wheeling contract is directly awarded. charges. Once the contract is awarded, the IPT (the win- • Incentives: The regulatory regime establishes ning bidder) is responsible for building and operating incentives for the concession company in a similar the line or package of lines defined in the contract. way to the incentives for privatized transmission The IPT has no rights or responsibilities for the PRIVATE FINANCE OF TRANSMISSION HAS WORKED WELL INTERNATIONALLY 19 Box 3.1 Summary of outcomes of IPTs internationally IPTs have led to successful results in various countries: 2002–2007 Electricity Plan, and 6.1 percent of the total network • Brazil organized 38  tenders of multiple lots from 1999 • Canada has awarded 400  km of 230  kV transmission to 2015. These resulted in the award of 211 concessions lines, for a total of US$452 million. In 2014, the Alberta and 69,811 km of transmission lines designed, built, and Electric System Operator also awarded a 500 km 500 kV operated under BOOT contracts transmission line for US$1.4 billion.16 The estimated oper- • Peru has organized 18 transmission tenders since 1998. ations start date is 2019 These have resulted in more than 6,000 km of transmis- • The Federal Energy Regulatory Commission (FERC) of sion lines (and associated substations) designed, built, the United States removed automatic rights of incum- and operated by the private sector under BOOT contracts bent transmission companies in 2011. Since then, over • Chile has organized 7  tenders since 2006. Ten proj- sixty IPTs have been awarded, and more are expected in ects were awarded for a total of almost 1,200 km. This the coming years, and includes a recently awarded 140 km, 500 kV line to inter- • Australia recently tendered a contract to upgrade the connect their two main systems Heywood Interconnector (a transmission line between • In India, the private sector has developed over 21,000ct South Australia and Victoria) for an estimated cost of km of lines between 2006 and 2016. This is equivalent close to US$80 million.17 to 10.4 percent of new lines built since the start of the existing network or to new transmission investment • Examples: IPTs are widely used around the world, other than the rights or responsibilities defined in the including Mexico, South America (Brazil, Chile, contract. Colombia, and Peru) and India. An IPT for Pakistan The main characteristics of this model are: is also being negotiated. IPTs are also increasingly being used in coun- • Term: The term ranges from 25 years to 45 years. tries that previously provided exclusivity to a Some contracts include an option to extend the private transmission company. The United King- term for a further period. dom, Canada, Australia, and the United States • Coverage: The IPT provides a single line or pack- have introduced IPTs alongside existing private age of lines. It has no other obligations in the region or ­government-financed transmission companies or country concerned. that previously had regional exclusivity. • Revenues: The required annual payment is a bid Box 3.1 provides a summary of the outcomes of parameter. The winning bid largely establishes the IPTs in several countries around the world. payments to be received over the contract term. As discussed in Section 6.6, there may also be limited scope for regulatory review of some aspects of the Model 4: Merchant 3.4  payment. investments • Incentives: The contract establishes incentives Merchant investors build and operate a single trans- for the IPT. The IPT has incentives to reach timely mission line (“merchant line”). In many cases this is commissioning of the transmission line and to an HVDC line. The merchant investor will build the minimize the whole-of-life costs. The main perfor- convertor stations at either end of the line. These mance incentive is to ensure high availability for stations will convert the current from AC to DC and the transmission line over the contract term. back again. In most cases, merchant lines are a private The IPT is not responsible for how the integrated initiative and not initiated by the government. transmission grid performs, other than ensuring the transmission line, or lines that it owns, is • Term: The term depends on the life of the mer- available. chant line and of any associated agreements. • Access: All users of the transmission networks get • Coverage: The merchant investor provides a access to the transmission network on a consistent single line and has no wider rights or obligations and nondiscriminatory basis. 20 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA for developing transmission within the region or Australia, and Tasmania). Merchant investments country. are possible between these five regions but not • Revenues: Under a “pure” merchant model, the within them owner of the merchant line uses or sells the rights An example of a merchant line in Australia to flow power along the line, and the revenues for is Basslink, a 370  km HVDC interconnection, the merchant line depend on the MWh of energy connecting Tasmania to the NEM. The rationale that flows along the line and the price differences for the project was to enable Hydro Tasmania to between the two ends of the line. As described earn higher revenues for its energy by exporting below, regulatory intervention may affect the reve- energy during peak periods when prices are nues and also how the owner sells the transmission higher and importing off-peak. Hydro Tasma- capacity. nia retains the rights to use the line. Figure 3.1 • Incentives: The merchant investor has incentives shows Basslink’s route from the island of Tas- to maximize revenues. They can mostly achieve mania to the mainland in Australia. The project this by ensuring high availability of the transmis- required 290 km of subsea HVDC cable (then the sion line during periods when there are large price longest HVDC cable in the world), 13 km of AC differentials between the two ends of the line. line in Tasmania and 63 km in Victoria. The line • Access: Under a “pure” merchant model, the owner has a rated continuous power of 500 MW and a of the line sets the price and the terms and condi- dynamic power capacity of 630 MW for shorter tions for its access. The regulator does not establish periods. regulated terms for access by a third party. Possible The regulatory framework also has a bearing variations to these arrangements are discussed in on the approach taken to merchant investments: the examples below. • In the United States, the owners of merchant • Examples: The scope for merchant links is lines need authority from the Federal Energy strongly influenced by the effect of market design Regulatory Commission (FERC) to enter into on locational price signals and by the regulatory negotiated transmission rates with users of arrangements. the line. FERC has established four factors to Merchant investments are based on the price determine whether it will approve the rates. differentials between the two ends of the line. The These are the justness and reasonableness of case for merchant lines depends on the nature rates; the potential for undue discrimination; and strength of locational price differences in the the potential for undue preference, including market: affiliate preference; and regional reliability and • Many markets in the United States have operational efficiency requirements. At first, locational marginal pricing—that is, different FERC required merchant transmission to allo- wholesale prices at each transmission node. This cate capacity using an open season, but it now strengthens the case for merchant investments. allows up to 100 percent to be allocated through Examples of merchant lines in the United direct agreement. States include: The Cross-Sound Cable, a 39 km • In the European Union, regulation favors devel- submarine cable that connects New England to opment of regulated transmission by the Trans- Long Island, New York, acquired by a private mission System Operators (TSOs). However, the firm in 2006 for US$213  million;18 Neptune European Commission can exempt merchant Transmission Line, a 104  km undersea and investments from regulations under defined underground transmission link between Long circumstances. Island and Sayreville, New Jersey (with an esti- mated cost of over US$600 million19); and Path 15, a transmission line constructed in the mid- 3.5 Interconnection projects 1980s that connects the northern and southern can also use some sections of the California power grid,20 and of these models • The Australian National Electricity Market (NEM) establishes prices for five regions (these This report focuses on in-country transmission regions coincide with the five members of the investments. That is, investments within one single NEM: Queensland, New South Wales (including jurisdiction. However, transmission investments can the Australian Capital Territory), Victoria, South also provide interconnection between two or more countries. PRIVATE FINANCE OF TRANSMISSION HAS WORKED WELL INTERNATIONALLY 21 Figure 3.1 Basslink transmission line route Tasmania Source: Basslink webpage, “Maps,” http://www.basslink.com.au/basslink-interconnector/maps/ (accessed March 15, 2017). Government-ownership is also the dominant (South Africa), EDM (Mozambique), and SEC (Swa- approach to financing interconnection projects, par- ziland). MOTRACO owns the assests and the three ticularly in Africa. However, as the project requires utilities each own a third of the shares. Other Afri- investment in two or more countries it is no longer can countries are also exploring similar approaches feasible for a single government-owned company to financing regional interconnection lines— to undertake the project. At least two companies including the Côte d’Ivoire, Liberia, Sierra Leone, are involved. There are two main options for how and Guinée (CLSG) interconnection, a 225 kV and the two or more companies involved manage the 1,300  km transmission line; or the Organisation interconnection: pour la Mise en Valeur du fleuve Gambie (the Gambia River Basin Development Organization, • Government-owned companies in each country OMVG) interconnection project, a 1,677 km line of can finance their side of the transmission line. 225 kV capable of handling 800 MW. This is the model used for the Cahora Bassa line between Mozambique and South Africa, and for However, some of the four business models the Ethiopia-Kenya interconnector. described above can also be used for interconnec- • The utilities can establish an SPV to invest in the tions. International experience shows examples of interconnection. An example is MOTRACO, an SPV privately financed interconnection projects using formed by three state-owned utilities—ESKOM merchant investment or the IPT models. 22 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Most interconnection projects have used the mer- • Channel Fixed Link, a 1,000 MW line linking Brit- chant investment model. There are various examples ain and France via the Channel Tunnel. in Europe. Most European countries have a single wholesale price across the country. The price differen- Interconnection projects can also use IPT con- tials that drive merchant investments can only arise tracts. There are two possible models to using IPT ten- for connection between two countries. To date, five ders for an interconnection investment. One, running transmission lines connecting countries in Europe an IPT tender on at least one side of the frontier, and have achieved some level of exemption from regula- the other, running a joint IPT tender. tory requirements and can be considered merchant In the first case at least one country uses the IPT investments. Several more are being developed. model for the investment on their side of the fron- Examples of merchant lines in Europe include: tier. This is the case of the 1,200 km HVDC Tala line connecting Bhutan to the Indian grid. The line runs • EastLink, a 105  km submarine HVDC merchant from a substation at Siliguri, close to the border, to link that enables transfer of power from Estonia to a substation close to Delhi. The Tala line enables the Finland export of power from the Tata-owned hydro plant in • BritNed, a 260 km submarine HVDC line connect- Bhutan. The line is owned by Powerlinks, which in ing the United Kingdom and the Netherlands. The turn is majority owned by Tata Power Company. line has a capacity of 1,000 MW, and was developed The second case is possible, but has not been com- in 2011 for €600 million pleted yet. There is no evidence of two or more coun- • East-West Interconnector, an HVDC interconnec- tries granting an interconnection through a joint IPT tion linking the United Kingdom and Ireland. The tender. 700 MW line was developed in 2012 and cost €600 Countries cannot use the privatization or whole- million, and of-grid concession model to finance interconnections. These generally apply to an exclusive obligation to Figure 3.2 The SIEPAC interconnection Source: Comision Regional de Interconexion Electrica, “Mapa con línea SIEPAC,” http://crie.org.gt/wp/mapa-con-linea-siepac/, (accessed May 10, 2017). PRIVATE FINANCE OF TRANSMISSION HAS WORKED WELL INTERNATIONALLY 23 finance new transmission within a country rather Bid_Transmission_Investments_in_the_U.S._and_ than between countries Abroad.pdf?1408140050 (accessed March 16, 2017). An alternative approach is a hybrid business 3. NERA Economic Consulting, “US Transmission model between government-owned and private Planning Arrangements—Competitive Procurement and Independent Planner Model. A report for Grid companies. The utilities can set up an SPV and Australia,” November 2012, http://www.nera.com/ involve third party equity participation. An example content/dam/nera/publications/archive2/PUB_ is the Empresa Propietaria de la Red (EPR), formed GridAustralia_1112.pdf (accessed March 16, 2017). to design, engineer, construct, and own 1,793  km of 4. Australian Energy Regulator, “Electricity trans- a 230  kV interconnector that links the power grids mission,” State of the energy market, 2009, https:// of Panama, Costa Rica, Honduras, Nicaragua, El Sal- www.aer.gov.au/system/files/Chapter%205%20%20 vador, and Guatemala. The line is called the Sistema Electricity%20transmission%202009.pdf (accessed de Interconexión Eléctrica de los Países de América March 15, 2017). Central (SIEPAC) interconnection. 5. This report uses the United Kingdom to refer to Figure 3.2 shows the route of the interconnection power sector and transmission arrangements under line in the different countries. UK legislation, including both UK-wide arrange- ments and those that only apply in Great Britain, EPR is an SPV owned by:21 excluding Northern Ireland. 6. The general license conditions and the special • The government-owned transmission companies license conditions in the Scottish Hydro-Electric or utilities of Guatemala, El Salvador, Honduras, Transmission Limited Transmission Licence are Nicaragua, Costa Rica, and Panama. available on Ofgem’s electronic public register • A private company: ENDESA (Spain). at https://epr.ofgem.gov.uk/Document (accessed • Two other regional government-owned trans- March 17, 2017). mission companies: ISA (Colombia), and CFE 7. National Grid, Our UK Profile, http://investors (Mexico).22 .nationalgrid.com/about-us/our-markets/uk-profile .aspx (accessed March 17, 2017). Each of the nine shareholders has an equal own- 8. Western Link Project, “Welcome page,” http://www .westernhvdclink.co.uk/ and http://www ership stake. .scottishpower.com/pages/our_major_projects.aspx EPR obtains revenues from regulated transmission (accessed March 15, 2017). charges set by the Regional Electric Interconnection 9. R. Nepal and J. Foster, “Electricity Networks Privat- Commission (CRIE), the regional regulator.23 CRIE is ization in Australia: An Overview of the Debate,” the regulating entity of the Central American market. School of Economics, University of Queensland, CRIE consists of one Commissioner drawn from the http://www.uq.edu.au/economics/abstract/541.pdf electricity regulatory agency of each country. This (accessed March 16, 2017). was intended to minimize the scope for inconsistency 10. CEDA, “Privatisation: A Review of the Australian between national and regional regulatory approaches Experience,” December 2002, http://adminpanel. and encourage the standardization of technical and ceda.com.au/FOLDERS/Service/Files/Documents/ operating standards and procedures. 15230~growth50.pdf (accessed March 17, 2017). 11. M. Heddenhausen, “Privatisations in Europe’s liber- alized electricity markets – the cases of the United Notes Kingdom, Sweden, Germany, and France,” Research Unit EU Integration (2007), https://www.swp-berlin 1. Office of Gas and Electricity Markets, “RIIO-ET1. .org/fileadmin/contents/products/projekt_papiere/ Annual Report 2015–2016,” February 2017, https:// Electricity_paper_KS_IIformatiert.pdf (accessed www.ofgem.gov.uk/system/files/docs/2017/02/ March 10, 2017). riio-et1_annual_report_2015-16.pdf (accessed 12. “El sector eléctrico de Argentina,” Pampa Energía, March 16, 2017). The allowed total expenditure is http://ri.pampaenergia.com/pampaenergia/web/ intended to give incentives to seek the most effi- conteudo_es.asp?idioma=2&conta=47&tipo=24234 cient solutions and avoid any regulatory incentives (accessed May 11, 2017). to prefer capital expenditure over other solutions. 13. “Nuestra historia,” Empresa Nacional de Elec- 2. J. Pfeifenberger et al., “Contrasting Competitively- tricidad, http://www.ende.bo/historia (accessed Bid Transmission Investments in the U.S. and May 11, 2017). Abroad,” Presented at UBS conference call, May 14. PPI Project Database, World Bank and PPIAF, 2014, http://www.brattle.com/system/news/pdfs/ ppi.worldbank.org 000/000/719/original/Contrasting_Competitively- 24 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA 15. “NGCP exceeds performance targets for 7th 19. Starwood Energy Group, “Neptune transmission straight year,” NGCP, September 2016, http://ngcp system, financed by energy investors funds and .ph/article-view.asp?ContentID=8360 (accessed 26 Starwood Energy Group, begins delivering power September, 2016). to Long Island,” July 2, 2007, http://starwoodenergy 16. Alberta Electric System Operator, “AESO Awards group.com/wp-content/uploads/2014/06/6_ Alberta PowerLine Limited Partnership with Fort NeptuneAnnouncement.pdf (accessed March 15, McMurray West 500 kV Transmission Project,” 2017). December 2014, http://www.marketwired 20. Line was upgraded in 2002, adding a 500 kV .com/press-release/aeso-awards-alberta-powerline- transmission line, and approximately 1,500 MW of limited-partnership-with-fort-mcmurray west-500- capacity, to the 135 km Los Banos-Gates link. kv-transmission-1978463.htm (accessed March 16, 21. Empresa Propietaria de la web, “Accionistas,” http:// 2017). www.eprsiepac.com/contenido/accionistas/, 17. Australian Energy Market Operator, “South (accessed May 10, 2017). Australia—Victoria (Heywood) Interconnector 22. The Government of Colombia is a majority owner Upgrade,” January 2013, http://www.aemo.com.au/ of ISA and CFE is Mexico’s government-owned and media/Files/Other/planning/RITTs/SA_VIC_ vertically integrated utility. Heywood_Interconnector_Upgrade_RIT_T_PACR 23. Economic Consulting Associates, “The Potential of .pdf (accessed March 16, 2017). Regional Power Sector Integration. Central Amer- 18. Babcock & Brown Infrastructure, “ASX Announce- ican Electric Interconnection System (SIEPAC), ment. Completion of Acquisition: New England– Transmission & Trading Case Study,” Submitted New York Cross Sound Cable,” February 28, 2006, to ESMAP, 2010, http://documents.worldbank.org/ http://www.crosssoundcable.com/doc/Acquisition curated/en/117791468337281999/pdf/773070v100 .pdf (accessed March 15, 2017). ESMA0297B00PUBLIC00SIEPAC.pdf, (accessed May 10, 2017). Section 4 Africa has little privately financed transmission, but substantial private investment in generation The experience of private investment in the African transmission, though they have brought operational power sector also provides guidance on the business benefits. models that can work in the continent. Africa has no experience of privately financed Africa has attracted little private investment in transmission lines through IPTs or merchant lines. transmission under whole-of-grid concessions and a Some preliminary steps have been made to prepare small number of transmission lines connecting gen- for IPT tenders, but no projects have been awarded. erators and the main grid, financed by IPP developers. This has brought operational benefits—like expan- African experience with whole-of-grid sion of access and investments in generation—but concessions only a low level of investment. No African countries This report describes the experience of three coun- have introduced private finance in transmission tries that have introduced PSP in transmission through IPTs or merchant investments. through whole-of-grid concessions in recent years. By contrast, Africa has attracted over US$25 billion The countries are: in private investment in IPPs since 1994, creating installed generation capacity of over 11 GW. • Cameroon, from 2001 to 2021, This section first summarizes Africa’s experience • Mali, from 2000 to 2020, and with private finance of transmission. It then draws on • Senegal, from 1999 to 2001. the relative success in the generation sector to show how investment can be attracted into the African Table 4.1 summarizes these three cases, with infor- transmission sector. mation on the period and date of the concession, the scope of the concession, the name of the utility under concession, the parties involved, and their shares in There has been little 4.1  the concession. private investment The Governments of Mali and Senegal each in transmission granted a concession for the vertically integrated util- ity, including the transmission activities. In the case In most countries in Africa the government-owned of Cameroon the Government granted four separate utilities have exclusivity over the transmission grid concessions to a single concessionaire, including one and finance all transmission investments. In some for the state-owned transmission company. cases, this is required in legislation. Other countries in Africa have also introduced pri- Since 1999 three countries in Africa have intro- vate sector participation in transmission, but not as duced private sector participation (PSP) in the trans- whole-of-grid concessions. For example, the utilities mission sector, through whole-of-grid concessions. in Gabon and Cote d’Ivoire signed an affermage1 with These have not achieved significant investment in 26 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Table 4.1 Examples of concessions and affermages in Africa Name of utility under Country Period Scope of concession concession Parties and shares Cameroon 20 years Concession for generation, SONEL (Société • AES SONEL (United States): 51% (2001–2021) transmission, and Nacionale d’Électricité) • Government: 44% distribution. However, the • Company’s personnel: 5% transmission concession ended in August 2015 • In 2014, AES sold its stake in AES SONEL to Actis. The company was renamed ENEO Mali 20 years Concession for generation, EDM (Électricité du Mali) • SAUR/IPS-WA(France/Canada): (2000–2020) transmission, distribution, 34% and supply of electricity • Government: 66% and water SAUR and IPS-WA had 39% and 21% of the concession, respectively, until 2005 Senegal 2 years Concession for generation, SENELEC (Société • Elyo (France) and Hydro-Québec (1999–2001) transmission, distribution, National d’Éléctricité du (Canada): 34% and sale of electricity Sénégal) • Government: 66% Country Period Scope of affermage Related utility Parties and shares Gabon 25 years O&M contract SEEG (Société d’Énergie • Veolia2 (France): 51% (1997–2021) et d’Eau du Gabon) • Government: 49% Cote d’Ivoire 20 years O&M contract CIE (Compagnie • SAUR (France/Canada): 51% (1990–2020) Ivoirienne d’Électricité) • Government: 49% Source: Developed by Castalia. Table contains examples of African countries that introduced concessions (including transmission) and affermage contracts since 1990. private parties. In these cases, the private investors supported by the Multilateral Investment Guarantee had a contract to operate and maintain the transmis- Agency (MIGA) which provided Political Risk Insur- sion lines, but were not obliged to finance transmis- ance (PRI) coverage to Actis through its subsidiary sion assets. The last two rows of Table 4.1 summarize Energy Cameroon Cooperatief B.A. The company was these two cases. renamed ENEO. The Government of Cameroon granted a conces- The concessionaire in Cameron has increased sion for the government-owned and vertically inte- customer numbers by over 340,000,5 investing in grated utility, Société Nacionale d’Électricité (SONEL), more than 304  MW of new generation capacity,6 as part of a larger power sector reform introduced and increasing low-voltage (LV) and medium-voltage in the end of the 1990s. The International Finance (MV) lines by 37 and 21 percent respectively (between Corporation (IFC) supported the Government of 2001 and 2010), as Figure 4.1 shows. However, there Cameroon with the bidding process to grant a 20-year was minimal expansion of the transmission network. concession to generate, transmit, and distribute elec- In 2001, the network in Cameroon had 480  km of tricity in Cameroon. 225 kV lines and 337 km of 110 kV lines. By 2010, the Five bidders were prequalified; one submitted a network had only 3 km more of 225 kV lines. bid. The prequalification was based on technical and ENEO operates under separate production, trans- financial requirements. AES Corporation from the mission, and distribution concession contracts, and United States was the only bidder. AES signed the an electricity sales license. A contract renegotiation concession agreement in 2001, paying US$71 million3 in August 2015 led to the transfer of the transmission to acquire 56  percent of the company.4 The Govern- assets to a new public corporation. ENEO will con- ment of Cameroon kept the remaining 44  percent. tinue to carry out generation, distribution, and sales.7 The utility became AES SONEL. AES sold its stake The Mali Government also granted a concession in AES SONEL to British group Actis at the end of for the government-owned and vertically integrated 2013. Actis’ equity investment in AES SONEL was utility, Électricité du Mali (EDM), in July 2000. SAUR AFRICA HAS LITTLE PRIVATELY FINANCED TRANSMISSION, BUT SUBSTANTIAL PRIVATE INVESTMENT IN GENERATION 27 Figure 4.1 Length of transmission and distribution lines in Cameroon (km), 2001–2010 21% 14,000 37% 12,000 10,000 8,000 6,000 4,000 2,000 1% 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 High voltage Medium voltage Low voltage Source: Castalia. Data sourced from G. Tchatat, “Raport Final Cameroun,” (Contribution à la préparation du rapport national pour la formulation du livre blanc régional sur l’accès universel aux services énergétiques intégrants le développement des énergies renouvelables et de l’efficacité énergétique, PNUD), 2014, http://www.se4all.org/sites/default/files/Cameroon_RAGA_FR_Released.pdf (accessed March 10, 2017). International acquired 39  percent of the shares In July 2001 the Government started the tender of EDM, and Industrial Promotion Services (IPS) process to re-concession SENELEC. The Government acquired 21  percent. The Ministry of Mines, Energy launched a Request for Proposals (RFP) and selected and Water Resources retained the remaining 40 per- a preferred bidder (Vivendi), but did not complete the cent. The private consortium entered a concession to negotiation process. generate, transmit, distribute, and supply electricity and water. CEC in Zambia: Indefinite ownership In October 2005 SAUR International sold its of share of the transmission grid shares to the Government of Mali and IPS. The sale The transmission sector in Zambia is owned and increased the Government’s shares to 66 percent and operated by the state-owned power utility, ZESCO, IPS’ shares to 34  percent. The Government of Mali and the private company Copperbelt Energy Corpora- has been the majority owner of EDM since then. At tion (CEC). CEC has exclusive rights over, and owns a the same time the concession was converted to an share of, the transmission grid in Zambia. affermage. Transmission received little investment The origins of this alternative model lie in historic during the period of the concession.8 contracts for supply of electricity to the mining sec- The Government of Senegal let a concession for tor, located mostly in the Copperbelt region. Through the electric utility, Société National d’Éléctricité du several changes of ownership, described below, the Sénégal (SENELEC) in 1999. The Government kept company has ended up owning transmission assets 66 percent of SENELEC’s shares. The concessionaire, in the mining region and combining this with supply a consortium between Hydro-Québec (Canada) and of power to the mines under long-term agreements. Elyo (France) acquired 34 percent.9 The concession The supply to the mines includes charges for lasted less than 2  years (18 months). At the end of wheeling power across CEC’s grid. The company 2000 the private consortium and the Government earns additional revenue from wheeling charges decided to end the agreement as the objectives of the in two ways: when ZESCO wheels power to supply concession had not been achieved. Little investment non-mining customers connected to CEC’s grid, and was done during the concession period.10 when third parties wheel across CEC’s grid to connect with the South Africa Power Pool (SAPP). CEC owns 28 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA 80  MW of generation capacity, though ZESCO gen- • International wheeling: CEC wheels power erates most of the energy that CEC supplies. CEC’s traded within the SAPP through its share in the business model is described more fully in this section. ­ Zambia-DRC interconnector and earns revenue CEC’s shareholders are divided into four groups: from these wheeling services. • Domestic wheeling: CEC wheels transports power • Zambian Energy Corporation (Irish company): on behalf of ZESCO to the latter’s substations. 52.0 percent, ZESCO receives the power for onward supply to • Private individuals and institutions (listed shares): mostly non-mine customers. 21.4 percent, • ZCCM Investments Holdings PLC (Government of CEC is of interest. Its private ownership of a Zambia): 20.0 percent, and regional transmission grid is unique in Africa, • African Life Financial Services (employee share although consistent with private ownership in other scheme): 6.6 percent. continents. This experience makes it an important example as Africa explores greater private financing ZESCO owns and operates the main transmission of transmission. network in Zambia. CEC owns and operates a regional However, CEC is distinctive in bundling its owner- transmission and distribution network in the Cop- ship of transmission networks with supply to mining perbelt region. CEC’s network consists of 246 km of customers only, and no other customers, within its 220  kV lines (7.5  percent of Zambia’s HV network), region. This is for historical reasons, and it is unlikely 678 km of 66 kV lines, and 41 substations. this model would be fully duplicated elsewhere. CEC’s network assets in Zambia include 36 percent of the 142  km 220  kV line that connects the grid in Africa has no investments in transmission Zambia to the DRC border. ZESCO owns the remain- infrastructure through an IPT or merchant ing 64 percent. This line has operated since 1956 and investment model has a transmission capacity of 250 MW. No African countries have introduced private finance CEC’s business in Zambia is divided into three in transmission through IPTs. However, Nigeria main services: undertook preliminary steps for tendering transmis- sion projects, as described in Box 4.1. • Power sales to mines: CEC sources power from No African countries have introduced merchant ZESCO under Bulk Supply Agreements, and sells investments in transmission. As illustrated in Sec- it on to several mines located in the Copperbelt tion 3, other countries have developed HVDC lines area under Power Supply Agreements (PSAs). This connecting hydro generators to markets using a is CEC’s largest source of revenue. The charges for merchant investment model. In Africa, these types this service include charges for using CEC’s trans- of investments have been publicly funded—like the mission assets.11 Cahora Bassa HVDC line. Box 4.1 The only attempt in Africa to tender for IPTs The Transmission Company of Nigeria (TCN) requested moved to the next stage (commercial stage). The respon- bids for prequalification of a group of projects in November dents to the request for prequalification were from Nigeria 2014, under a privately financed business model similar to and elsewhere, including Australia, Brazil, China, France, the IPT. The bids were to rehabilitate, repair, replace, and India, Italy, Lebanon, South Africa, South Korea, Spain, expand 330 kV and 132 kV lines, as well as the 330/132 kV Switzerland, Turkey, the United Arab Emirates, and the and 132/33  kV substations and transformers. The projects United States. were based on recommendations from a study prepared by TCN did not take this shortlist or the bidding process Manitoba Hydro International (MHI) published in 2013.12 further. Two reasons were the weak financial viability of TCN received 73  applications for prequalification. TCN the power sector in Nigeria, and the lack of clarity over the evaluated the technical and financial capability on a pass/ transmission business model. fail basis. Twenty-nine applications were prequalified and AFRICA HAS LITTLE PRIVATELY FINANCED TRANSMISSION, BUT SUBSTANTIAL PRIVATE INVESTMENT IN GENERATION 29 The Cahora Bassa interconnection is a HVDC revenues from transmission charges collected by transmission line (533 kV) from the 2,075 MW Cahora ESKOM and EDM. Bassa hydropower plant to the Apollo converter The green line in Figure 4.2 illustrates the route of station near Johannesburg. The total length of the the transmission line. The figure also shows the three interconnector is 1,420 km and it can transport up to separate grid systems (northern, central, and south- 1,920 MW. ern). The Cahora Bassa interconnection connects The transmission line on the Mozambican part with the northern and central system, but not with of the frontier is owned by Hidroélectrica de Cahora the southern system. Bassa (HCB) while the line inside South Africa is owned by the South African government-owned util- Independent Power Producers have ity ESKOM. HCB also owns the Cahora Bassa hydro- invested in short transmission lines power plant. HCB was originally majority owned by to connect to the grid the Government of Portugal, but the Government A small number of transmission lines connecting of Mozambique has been the majority shareholder generators (IPPs) to the grid have been privately (85 percent) since 2007.13 financed. These investments are always attached to The interconnection was built mainly to export generation projects and are most likely a small por- energy from HCB to South Africa (backed by a tion of the overall investment in the project. supply agreement between ESKOM and HCB). Figures vary by project and are generally bundled However, 500  MW of power stay available to the with the IPP investment. The private investor financ- government-owned utility EDM.14 The line earns ­ ing the connection line is the same IPP developer Figure 4.2 Route of the Cahora Bassa interconnection line Source: M. Hussain (2015). 30 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA (generally a Special Purpose Vehicle (SPV)) that builds This contrasts with 4.2  and finances the generation plant. The IPP developer may own and operate the transmission line under a Africa’s success in long-term contract, or transfer the line to the system attracting private operator or government-owned transmission utility investment in generation once the line is commissioned. In cases where the IPP continues to own and oper- Between 1994 and 2014 the region has attracted ate the connecting line, costs are generally factored in US$25.6  billion into more than 126  IPPs, with a the price set in the Power Purchase Agreement (PPA). combined capacity of 11GW. IPPs have been devel- One example of a connection line under long-term oped in 18 countries in Africa.20 While 43 percent of private ownership in Africa is the 18 km, 225 kV line the investment was in South Africa, this still leaves that forms part of the Azito project in Cote d’Ivoire. US$11.1  billion in private finance of generation The line evacuates power from the 300 MW gas-fired outside South Africa, for a total of 59  projects with generation plant (upgraded in 2015 to 430 MW) to a a combined capacity of 6.8GW.21 IPP investments substation. Cinergy, the SPV developing the project, have occurred across a wide range of technologies has a 24-year build, own, operate and transfer (BOOT) and scale, including Azito in Cote d’Ivoire (300 MW agreement with the Government of Cote d’Ivoire gas-fired IPP); OrPower4 (100  MW geothermal IPP) for the generation plant and transmission line.15 The and Lake Turkana (300 MW wind IPP) in Kenya; and SPV also signed a 15-year agreement—with a private Bujagali in Uganda (250 MW hydro power IPP).22 company owned by two of the SPV shareholders—to Figure 4.3 shows the MW capacity of IPPs by year operate and maintain the plant and line.16 The value of financial close, between 1994 and 2014, excluding of generation plant and connection line combined South Africa. The figure shows that the additional MW was US$223  million. The transmission portion was per year under IPPs has been quite volatile. The invest- 14 percent. ments can be grouped into three periods: 1990–2002, The Kabompo Gorge project in Zambia, once 2008, and 2011–2014. The spike in the first two periods completed, would also include a 35 km, 132 kV line.17 was due to a few large IPPs reaching financial close. The line would connect the 40  MW hydro power The increase in investment in the third period was plant to the grid, at Kalumbila mine substation. The because IPP investments started to emerge.23 combined generation and transmission investment Between 1990 and 2013, almost a quarter of new is US$210 million. The private company CEC (the IPP generation capacity (excluding South Africa) was pri- developer) would own and operate the line. However, vately financed through IPPs, from near zero in 1990. the project is still being discussed. African governments and utilities have financed just An alternative approach is for the IPP to finance over 50  percent of total investment in generation. the line and transfer it to the system operator or the Other forms cumulatively contributed 27 percent.24 power utility once the line is commissioned. An exam- IPPs are generally contracted under long-term ple is a 1 km, 330 kV line connecting the Azura 459MW PPAs, structured as two-part contracts, with fixed gas-fired plant to a substation (Benin North)18 in Nige- payments for availability (per MW) and variable ria. The project has reached financial close with the payments for energy (per MWh). Under this business support of the World Bank Group, including Partial model, investors carry the risks they are well placed to Risk Guarantees from the World Bank, PRI coverage manage. Investors face four risks: the costs of build- from MIGA, and senior and mezzanine debt from ing the generation plant; its timely commissioning; IFC (for further details please see Box 6.8). The project its availability after commissioning; and its operating is currently under construction. The SPV that owns costs. But they do not carry risks they cannot manage, Azura will transfer the line and substation once built. such as demand or how many hours the power station Senegal has several examples of IPPs developing and must run. Investors will be profitable provided they then transferring the connection line to SENELEC, manage costs well and ensure the plant is available the government-owned utility. In Senegal, the law and performs efficiently. governing the electricity sector states that SENELEC The risk allocation for IPTs is similar to that for will have exclusivity over electricity transmission IPPs. The implementation of IPTs in Africa could during the concession period—though this aspect of build on Africa’s largely successful experience with the law is being reviewed.19 IPPs. AFRICA HAS LITTLE PRIVATELY FINANCED TRANSMISSION, BUT SUBSTANTIAL PRIVATE INVESTMENT IN GENERATION 31 Figure 4.3 IPPs by year of financial close: Africa (excluding South Africa), 1994–2014 1,000 900 800 700 600 Megawatts 500 400 300 200 100 0 10 11 12 13 14 94 96 97 98 99 01 02 03 04 05 06 07 08 09 20 20 20 20 20 20 19 19 20 19 19 20 19 20 20 20 20 20 20 Source: A. Eberhard et al. (2016). Years 1995 and 2000 are missing from the figure because, as noted in the original document, no projects reached financial close in 1995 or 2000. Notes les expériences: colloques 1998-2005,” Collection Actes 5 (2005): 236 at page 160. http://toolkits.reeep 1. An affermage is a form of lease used widely in .org/file_upload/296_tmpphpRZPikL.pdf (accessed France. A private entity (the concessionaire) is March 10, 2017). granted a long-term right to operate and manage 9. P. Plane, “Privatisation et réseaux d’électricités en the government’s assets, and “the government still Afrique de l’Ouest”, CERDI-CNRS, Université maintains responsibility for investment and thus d’Auvergne (2004). http://publi.cerdi.org/ed/ bears investment risk.” M. Kerf et al. (1998). 2003/2003.22.pdf (accessed March 10, 2017). 2. Originally Groupe Générale des Eaux. 10. Institut de l’énergie et de l’environnement de la 3. IFC, “Public-Private Partnership Stories. Cameroon: Francophonie, (2005), page 200. SONEL,” 2012, http://www.ifc.org/wps/wcm/ 11. “Overview of CEC business,” Media Briefing, http:// connect/577489804a5b844a93e59f8969adcc27/ www.slideshare.net/AfricanisCool/overview-of- PPPStories_Cameroon_SONEL.pdf?MOD=AJPERES cec-presentation-to-the-media (accessed January 10, (accessed March 10, 2017). 2017). 4. The concessionaire had to transfer 5 percent of its 12. MHI is a private company that entered into a man- shares to SONEL’s employees. agement contract with TCN in July 2012 that lasted 5. IFC, “Public-Private Partnership Stories. Cameroon: four years. SONEL” (2012). By 2011, connections had risen to 13. Economic Consulting Associates, “The potential 792,000 from 452,000 in the late 1990s. of power sector integration,” (Cahora Bassa. 6. Two thermal plants were developed: Dibamba Generation case study, ESMAP), June 2010, Power Development Corporation (DPDC; 88 MW, https://openknowledge.worldbank.org/bitstream/ commissioned in 2009) and Kribi Power Develop- handle/10986/17518/773070v30ESMAP0ora0 ment Corporation (KPDC; 216 MW, commissioned Bassa0Generation.pdf?sequence=1 (accessed in 2012). March 10, 2017). 7. “Electricity concession agreement: More horizons 14. M. Hussain (2015). opened to investors,” CRTV, http://crtv.cm/fr/ 15. World Bank, “Sub-Saharan Africa Benefits from the latest-news/top-news-24/electricity-concession- first IDA Guarantee for Azito,” (Project Finance and agreement-more-horizons-opened-to-investors- Guarantees), June 1999, http://siteresources 15286.htm (accessed December 10, 2016). .worldbank.org/INTGUARANTEES/Resources/ 8. Institut de l’énergie et de l’environnement de la Azito_PFG_Note.pdf (accessed March 10, 2017). Francophonie, “Vers de nouvelles organisations 16. World Bank, “Project appraisal document on a du secteur électrique : les réformes, les acteurs et proposed IDA guarantee of up to US$35 million 32 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA of a syndicated commercial bank loan to Cinergy ci-après. Pendant la période visée au présent alinéa, for the Azito power project in the Republic de la SENELEC a la qualité d’acheteur unique.” Cote d’Ivoire,” (Report No: 1 8580-IVC), November 20. Includes greenfield, grid-connected IPPs above 1998, http://documents.worldbank.org/curated/ 5 MW. en/990051468749754026/pdf/multi-page.pdf 21. A. Eberhard et al. (2016). (accessed March 10, 2017). 22. In 2011 MIGA provided PRI coverage to Ormat 17. Copperbelt Energy Corporation Plc webpage, Holding Corp. for its equity investment in the https://cecinvestor.com/kabompo-hydro-power/ OrPower4 geothermal IPP. In 2012 MIGA provided (accessed March 10, 2017). PRI coverage to Globeleq through its subsidiary 18. “Azura says Nigeria must expand grid to boost Globeleq Holdings (Azito) limited for its equity power supply,” Bloomberg, http://www.bloomberg investment in the Azito gas-fired IPP and expan- .com/news/articles/2016-01-28/azura-says-nigeria- sion. In 2014 MIGA provided PRI coverage to both must-expand-grid-to-boost-power-supply (accessed debt and equity investors for their investments in January 12, 2017). the Bujagali hydro power IPP. 19. Law n° 98-29 (from April 14, 1998), relative to the 23. A. Eberhard et al. (2016). electricity sector. The Act states: “La SENELEC 24. Other forms of finance include Official Development est seule habilité à exercer une activité d’achat en Assistance (ODA); DFIs; Chinese-funded projects— gros, de transport et de vente en gros d’énergie with funding mainly from the China ExIm Bank électrique sur toute l’étendue du territoire national, (soft loans and export credit), the Industrial and pour une période qui sera définie par un contrat Commerce Bank of China, and the China Develop- de concession signé avec le Ministre chargé de ment Bank (commercial loans); and Arab funds. l’Energie et dans le cahier des charges qui lui sera A. Eberhard et al. (2016). annexé, sous réserve des dispositions de l’article 24 Section 5 Independent power transmissions are the most broadly applicable business model for increasing privately financed transmission in Africa IPTs are the business model best suited to the con- • It can create more competitive pressure, compared ditions in Africa. They have performed well in other to other business models, by running a tender for low-income countries. The risks that IPT investors each line or package of lines (Section 5.3), carry are similar to those that IPP investors carry, and • It requires a lower need for investor confidence in the IPP business model has worked well in Africa. the country’s regulatory capacity (Section 5.4), This section sets out why a primary focus on IPTs is • It is consistent with policies being developed by the best approach. African governments and regional power pools African governments need to implement a model (Section 5.5), for private finance of transmission. The four business • It can be tested, while keeping other funding models discussed in Section 3 have all successfully arrangements in place (Section 5.6), and mobilized private finance for transmission. All can • It is a demonstrated model in low-income coun- work well under the appropriate conditions. The key tries, and so is more likely to apply than other busi- question is how well they will work in Africa. ness models (Section 5.7). Criteria for assessing the suitability of the different models to Africa’s requirements and the performance of each model against the criteria are summarized in Applicability of the 5.1  Figure 7.2  Responsibilities under early-stage tenders model to all types of and late-stage tenders and then discussed below. transmission investment IPT is the most broadly applicable business model for increasing privately financed transmission in in Africa Africa because: Africa will need transmission investments at differ- ent voltages; providing transmission services within • It can be applied to all of Africa’s investment needs and between countries; and using both HVAC and (Section 5.1), HVDC technologies. It is desirable that the business • It can realize economies of scale. However, small model can be applied to all these investments. African countries with a low need for new trans- Privatizations, concessions, and IPTs can be mission investment may need to consider whether applied to all types of transmission investment. the IPT model can realize economies of scale (Sec- Where interconnection is needed between countries, tion 5.2), 34 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Table 5.1 Performance of the business models against assessment criteria Whole-of-grid Independent Power Indefinite privatization concession Transmission (IPT) Merchant line Applicability Yes Yes Yes No. Typically used for a Is the model applicable single major line, often to all types of HVDC, between two transmission investment markets in Africa? Economies of scale Yes Yes Yes in most cases, Most merchant lines are Can the model achieve but may not realize major enough to realize economies of scale in economies of scale in economies of scale African transmission? small countries in Africa Competition Only on the initial Only on the initial Yes, through competition Yes, but only for the Does the model ensure transaction transaction and on for each new line merchant line competitive pressure (infrequent) rebidding on private providers of on contract expiry transmission in Africa? Investor confidence No Uncertain Yes. Much less need Not relevant. Merchant in African regulatory for periodic review by projects are not subject capability regulators to regulated charges Can the model proceed despite the limited track record of economic regulators in Africa? Consistency with Yes Yes Yes No. Works better as a power sector reform link between markets Is the model consistent rather than within with the intention in all markets. Also at risk African pools to promote of stranding from non- open access networks merchant investments and competition in generation? Policy flexibility No. Requires No. Requires Yes Yes Can the model be commitment to significant commitment to significant tested while African reform reform governments keep existing approaches in place? Track record No. Few examples of Yes, but limited track Yes, with substantial No Is the model proven successful privatization record track record in other low-income in low-income countries countries? independent power transmissions are the most broadly applicable business model in Africa 35 these models can be applied to the required transmis- Most African countries can realize economies of sion in each country. These models could be used for scale under all business models. However, small Afri- all transmission investment required in Africa. can countries with a low need for new transmission Merchant links might make sense to link coun- investment may need to consider whether the IPT tries with low generation costs to those with higher model can realize economies of scale. generation costs and high demand. One example could be the major transmission investments to move large volumes of energy from DRC to Southern Africa. 5.3 Competitive pressure However merchant lines are unlikely to make on private providers of sense within a single country. Some African power transmission in Africa pools (such as SAPP) have zonal price differences, but within African countries the prices are the same at all under the model nodes of the main transmission grid. A business of African governments can benefit from business mod- buying low at one point and transporting the power els that put competitive pressure on the transmission to sell high at another point—which is the essence of companies to offer the lowest prices they can accept. the merchant line—will not be suitable within single Privatizations and concessions are both imple- countries. mented through one major competition, leading to As a result, this business model is not generally the sale of the transmission company or the award of suitable for in-country transmission investments. the concession. Privatizations are usually awarded on The need to control the power flows also means that highest purchase price bid (given a regulated tariff). merchant links are best suited to HVDC links. Concessions are often, though not always, awarded Merchant lines could be a very effective business on the least cost bid to enter the obligations in the model for some projects, but could not be used for all concession contract. Neither provides ongoing com- of Africa’s investment needs. The other models are petitive pressure on the cost of future investments. suitable for all transmission investment. IPTs create more competitive pressure by running a tender for each line or package of lines. Several countries with a long experience of privatizations are Ability of the model 5.2  introducing IPTs, as discussed in Box 5.1. The main to achieve economies rationale is the stronger competitive pressure of the of scale in African IPT business model. This competitive pressure means that the use of transmission IPTs can also reduce costs by bringing in experience Unit costs will be lower for large-scale transmission from other countries in managing the lifetime costs projects. Some African countries have low needs for of transmission investment—compared to the current transmission investment and will need to ensure the business models that focus on contractors managing business model adopted can achieve economies of capital costs. scale. Using IPT tenders also presents disadvantages rel- Privatizations and concessions would result in ative to other business models. Procuring transmis- a single company responsible for all transmission sion infrastructure through the IPT model requires investment. These models would ensure economies running frequent tenders. This generates higher of scale are realized in the transmission sector as transaction costs than other business models. This is far as possible given the scale of the investment especially true if compared to procuring transmission requirement. lines through a whole-of-grid concession. The cost of IPTs require a tender for each line, or each pack- designing, preparing for, and running a tender for age of lines, and could result in several different a whole-of-grid concession may be higher than that transmission investors within one African country. for one IPT tender, but the frequency of IPT tenders The model also requires enough projects of sufficient increases transaction costs. size to attract bidder interest and to realize economies IPTs may also have a lower purchasing power of scale, even if these projects are awarded to several than the incumbent transmission utility—generally different bidders. “Sufficient size” is not a precise a larger company than an IPT, and with a longer measurement, but international experience sug- track record in the country. The higher purchasing gests a line or package of lines with a capital cost of power of the utility might mean that, for example, it US$100 million should be “sufficient.” could obtain better deals with equipment suppliers. 36 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Box 5.1 IPTs can reduce whole-of-life costs IPTs transfer risk on the costs to build and operate the Evidence shows that developers under IPT contracts transmission line over the contract term. They also transfer respond to this incentive. For example, Sterlite Power in risk on availability. This can lead to innovative solutions that India introduced the use of unmanned aerial vehicles to can reduce costs. inspect overhead transmission lines in response to avail- Governments can already gain the benefits of compe- ability incentives under its IPT contract. tition through engineering, procurement, and construction The benefits from a whole-of-life focus are likely to be (EPC) tenders. However, IPT tenders require bidders to significant. The potential efficiency gains in the African consider efficient investment and operations over a period energy sector are estimated at US$6  billion a year. More of up to 35 years. This brings substantial additional bene- than half of these gains come from eliminating operational fits. This should ensure that the full value of investments is inefficiencies.1 realized through good maintenance over the contract term. However, this is probably less of an issue in Africa Africa has made substantial progress in creating compared to other countries given the relatively regulators for the energy networks. Twenty-seven small scale of the African transmission utilities. countries—more than half the countries in Africa— In addition, IPT contracts also lock in the O&M have established economic regulators for their net- costs over the contract period, which is typically works.2 African power pools have also established between 20 years to 45 years. This excludes the pos- regional associations of network regulators, and the sibility to periodically review the O&M costs, and African Forum for Utility Regulators was established potentially gain from more efficient costs in the in 2002. future. However, this still means that many African coun- After thorough reviews, other countries have con- tries have no network regulators. Many of the regu- cluded that the benefits of IPTs outweigh the costs of lators established have a relatively short track record. implementing them. Box 6.1 describes how the Gov- Twelve of the twenty-seven regulators have been ernment of the United Kingdom recently reached this operating for less than 15  years.3 In nearly all those conclusion as it moved towards introducing IPTs. 27 cases, government-owned networks are regulated rather than private networks. African countries vary in how long regulators have 5.4 Requirements for been established and the adequacy of their resourc- investor confidence ing. The willingness of international investors to in network regulation take a risk on the performance of regulators will also vary. Discussions with international equity investors in Africa suggest a general reluctance to rely on discretionary Transmission networks are a natural monopoly and regulatory regimes that lack a long track record in are usually subject to economic regulation of trans- regulation of private investment in transmission, and mission charges. However, Africa has a limited track a preference for low-discretion contracts in which record of independent economic regulation that payments are not subject to periodic review, and would help investors assess the risks. Models that enforcement rights are clear. expose investors to regulatory risk may be less suc- This may limit the suitability of privatizations cessful than models that minimize this risk. and whole-of-grid concessions within some African Privatizations and whole-of-grid concessions are countries. Concessions may perform better than similar. Both work well where regulatory capacity privatizations against this criterion. In some cases, is well developed and where investors are willing to concessions can put greater reliance on the conces- take on the risk of the future performance of the reg- sion agreement and the arbitration clauses in those ulatory regime. agreements. independent power transmissions are the most broadly applicable business model in Africa 37 Box 5.2 Merchant transmission faces risks from open access, regulated networks Two onshore merchant HVDC lines in Australia were pri- regulated alternating current interconnector between the vately financed against the price differences between two two States, known as QNI, with a transfer capability of States. These price differences were later reduced when the about 700/750 MW. regulated transmission companies expanded. In 1998 TransEnergie proposed DirectLink, a 180  MW In New South Wales the government-owned trans- HVDC merchant interconnector between the two States, mission company, TransGrid, had sought approval for a with a capacity of 180 MW. The merchant line (Directlink) regulated interconnector between New South Wales and began operating in June 2000. QNI started operating in South Australia. In 2001, private company TransEnergie February 2001. built a merchant interconnector called Murraylink between Both merchant lines subsequently transferred to reg- Victoria and South Australia close to the same route. While ulated status, with the regulator setting the maximum Murraylink was being built, the regulated interconnector allowed revenue. TransEnergie later commented: “Mixing received approval. Murraylink appealed the approval, but regulated and merchant transmission investment regimes the appeal tribunal upheld the approval decision. is clearly difficult. It can lead to controversies, litigation, In 1997 the Governments of New South Wales delays, and inefficiencies.”4 and Queensland announced and approved a new IPTs have a lower requirement for investor con- Privatizations, concessions, and IPTs are all con- fidence in a well-developed regulatory capacity. The sistent with these policy reforms. All three business annual revenues for the IPT are largely established models provide open access to the transmission net- up front through the tender process. Regulators still work under regulated and nondiscriminatory trans- play a vital role in ensuring the tender is consistent mission charges. with the expansion plan and in approving the tender Merchant lines do not provide open access and process. However, these roles do not create risk for the are less consistent with this wider reform agenda. private investor. This again suggests that merchant lines may be more Merchant lines may also have a lower exposure to suitable for links between markets rather than within regulatory determinations. Much will depend on how them. this model is implemented. As discussed in Section 3, Merchant lines also work best where they are not intervention by regulators in some countries affects exposed to competition from regulated transmission the revenues for merchant lines. companies. If this precondition is not met, a regulated business that invests later may threaten the merchant transmission. Box 5.2 illustrates this risk with an Consistency of the 5.5  example from Australia. model with directions in power sector reform Extent to which 5.6  African governments and regional power pools are the model can be developing reforms to how the power sector operates. They need to ensure the business model for transmis- tested while African sion is consistent with these reforms. governments maintain The long-term reform objectives are very varied. A existing models common theme is a desire to develop a greater role for competition within the country and regionally Africa relies almost entirely on government-financed in the provision of wholesale electricity. The SAPP transmission. Introducing a new business model has is the most advanced regional power pool and has a risks. So, testing the model to demonstrate its suit- competitive day-ahead market. Other regional power ability is preferred. pools may follow this lead. 38 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA been minimal, and several concessions have ended after a few years in operation. However, to date, the Box 5.3 IPTs can bring in new Philippines has been more successful at achieving sources of finance substantial private investment under its transmis- sion concession. In India, non-recourse bonds have been issued for IPT IPTs perform particularly well against this crite- transmission lines and received an AAA credit rating. In rion. IPTs in both middle-income and low-income 2016 Sterlite Power in India issued bonds to refinance countries have led to substantial private investment loans for one of its power transmission subsidiaries. The in transmission, significant cost savings through ten- bonds did not have a government guarantee, had a 17.5- ders, and (to date) to stable contractual agreements. year tenor, and received a AAA credit rating. Box 3.1 provides a summary of the outcomes of IPTs in several countries around the world. The use of IPTs for transmission projects in Brazil, Chile, India and Peru in the last 20  years is discussed in more detail Privatizations and concessions both require a one- in Appendix A. off major change to the ownership and operation of Brazil has seen 38  tenders of multiple lots since the whole transmission network. 1999. These tenders have resulted in the award of IPTs can be introduced on a project-by-project 211  transmissions, with a total combined length of basis. IPTs have been successfully introduced in 69,811 km. countries where all other transmission is financed by It is also essential to ensure that private finance government. They are also used in countries where does not adversely affect consumers. Transmission all other investment is by an incumbent private accounts for around 10 percent of the costs of supply. transmission company. Existing arrangements can Generation accounts for around 55 percent, and dis- remain. This reduces the level of risk in testing IPTs tribution for around 35 percent.5 There is considerable compared with the first two models. It also might variation and the share can be higher. Any increase in lower the challenges of implementing this model. costs would adversely affect the affordability of elec- The IPT business model enables project finance tricity. However, IPTs have resulted in lower costs. for transmission investments. This means investors In most cases the tenders include a price cap will focus on the costs and revenues of the project based on expected costs. Bids may be well below this itself, and on the ability of the IPT to manage them. price cap. The Brazilian regulator ANEEL estimates This model can bring in additional sources of finance, the annual revenue required. The average weighted compared to now where government-owned utilities discount for all tenders awarded between 2000 in Africa finance all transmission investments. Box 5.3 and 2015 was 22.8  percent of ANEEL’s estimate of provides one example of an IPT that has successfully the AR required. Individual line discounts reached accessed new sources of finance in India. 59.2 percent. In Peru, the regulator also sets a price cap on Evidence that the model 5.7  investment and O&M costs. Table 5.2 shows that winning bids were, on average, 36 percent lower than has worked well in other the estimated annual costs, according to a sample of low-income countries 15 tenders between 1998 and 2013. Business models that work well in OECD countries may not work well in low-income countries. Africa Notes should prefer those business models for transmis- 1. V. Foster and C. Briceño-Garmendia (2010). sion that have been proven to perform in low-income 2. A. Eberhard (2015), “Powering Africa: Facing the countries. Financing and Reform Challenges,” AFD Research No low-income countries have adopted the model Paper Series, No. 2016-21, February. https://www of full privatization combined with the establishment .gsb.uct.ac.za/files/PoweringAfricaChallenges.pdf of independent regulation. Merchant investment has (accessed March 17, 2017). also been minimal in low-income countries. 3. A. Eberhard (2015), “Powering Africa: Facing the Several countries in Africa and Asia have used Financing and Reform Challenges.” whole-of-grid concessions. Private investment in 4. S. Littlechild, “Transmission regulation, merchant African transmission under these concessions has investment, and the experience of SNI and Murray- link in the Australian National Electricity Market,” independent power transmissions are the most broadly applicable business model in Africa 39 Table 5.2 Information of Winning Bids for Transmission Lines in Peru (1998–2013) Annual transmission cost (US$ millions) Length Capital Cost Discount Year of of line Capacity investment Winning estimate on cost award Project (km) (MVA) (US$ million) bid (price cap) estimate 1998 Mantaro–Socabaya 700 300 179.0 27.6 42.6 35 1999 Southern electric transmission system 444 180 74.5 11.5 14.3 19 reinforcement 2008 Eléctrica Carhuamayo–Paragsha– 696 360 106.1 10.0 42.6 77 Conococha–Huallanca–Cajamarca–Cerro Corona–Carhuaquero 2008 Eléctrica Mantaro–Caravelli–Montalvo and 200 350 35.7 5.4 5.6 4 Machupicchu Cotaruse 2008 Chilca–La Planicie–Zapallal and substations 94 1,400 52.2 8.1 14.5 45 2009 Zapallal–Trujillo 530 1,000 167.5 25.8 32.0 19 2010 Chilca–Marcona–Montalvo 872 700 291.0 48.2 61.6 22 2010 Tintaya–Socabaya and associated 207 400 43.6 6.7 12.3 46 substations 2010 Talara–Plura 102 — 14.6 2.3 2.5 9 2010 L.T. Machupicchu–Abancay–Cotaruse 204 500 62.5 9.8 14.2 31 2011 Trujillo–Chiciayo 325 — 101.4 15.6 15.8 1 2012 Carhuaquero–Cajamarca Norte–Cáclic– 402 450 106.9 16.2 22.2 27 Moyobamba 2013 Machupicchu–Quencoro–Onocora–Tintaya 356 354 114.3 16.7 28.5 41 and substations 2013 Mantaro–Marcona–Socabaya–Montalvo 900 — 278.0 41.4 63.5 35 Source: S. Oguah and P. Sanchez, “Private Sector Participation in Transmission Systems: Making It Work. Live Wire,” (World Bank Group), 2015, http://documents.worldbank.org/curated/ en/337861467990990322/pdf/100989-BRI-VC-PUBLIC-ADD-SERIES-Box393254B-Knowledge-Notes-LW52-OKR.pdf (accessed March 10, 2017). 12 June 2003. https://www.hks.harvard.edu/hepg/ sourced from Table A8. Electricity supply, disposi- Papers/Littlechild.Transmission.Regulation.Austra- tion, prices, and emission, 2015, https://www.eia lia.pdf (accessed March 17, 2017). .gov/outlooks/aeo/pdf/0383(2015).pdf (accessed on 5. Energy Information Administration, “Annual May 12, 2017). Energy Outlook 2015 with projections to 2040,” data part B how to scale-up private investment in Transmission in africa Section 6 Steps to realize the potential of IPTs for Africa Introducing IPTs for electricity transmission in Africa • Conduct trials of IPTs alongside existing business could result in similar benefits to those achieved by models of transmission (Section 6.3) IPTs in other countries, and by IPPs in Africa. • Introduce new models for concessional finance The approach to introducing IPTs can draw on the (Section 6.4) lessons from introducing IPPs in Africa, and interna- • Decide the stage at which to tender transmission tional experience in IPTs. projects (Section 6.5) Legislation, licenses, and other legal instruments • Determine payments to IPTs based on transmis- can be amended to provide for multiple transmission sion availability (Section 6.6) providers. Concessional finance can be adapted to • Ensure adequate revenue flow and credit enhance- this new business model, in the same way that con- ment for projects (Section 6.7) cessional finance has supported both debt and equity • Tailor IPT projects to attract international inves- for IPPs in Africa. tors (Section 6.8) A small percentage of power sector revenues can • Prepare to implement IPT transactions (Sec- be placed into an escrow account to enable a trial of tion 6.9), and IPTs. Where necessary, additional financial security • Run competitive tenders for IPTs (Section 6.10). can be provided, including by Development Finance Institutions (DFIs), until the point is reached where The following sections describe each of the steps African power sectors are sufficiently profitable. above. African governments can build capability in-house and appoint transaction advisors. They can identify projects for initial tenders, prepare the TSAs, run ten- Develop policies that 6.1  ders, evaluate bids, and award the contracts. support IPTs The World Bank has also developed a toolkit to Introducing private finance in transmission is a help decision makers in African governments imple- major shift. It will require changes to legislation, reg- ment IPT projects. Over time, the pipeline of trans- ulation, and to the financing arrangements currently mission projects in Africa to be implemented using used for transmission investment. Governments the IPT model will demonstrate that the IPT business control these issues; potential private investors in model is suitable for Africa. This will create further transmission cannot control them. It will therefore be investor interest. important for African governments to develop a clear The 10 steps needed to realize the potential of IPTs policy direction on how to introduce IPTs. in Africa are: The policy development will need to consider the arguments for and against using IPTs to meet gov- • Develop policies that support IPTs (Section 6.1) ernment policy objectives, and reach a final decision. • Develop the legal and regulatory frameworks to Box 6.1 illustrates how the United Kingdom conducted support IPTs (Section 6.2) Steps to realize the potential of IPTs for Africa 43 Box 6.1 Introducing onshore transmission tenders in the United Kingdom The United Kingdom has three transmission companies: Regulated transmission companies already have National Grid in England and Wales, Scottish Power in incentives to minimize costs and already tender elements southern Scotland, and SSE in northern Scotland. of the projects they undertake. However, the assessment These three companies were responsible for all trans- concludes that the control of all procurements by a single mission investment within their transmission regions. The transmission company is likely to lead to a lower level of first move to use competition was for offshore transmission. innovation. Information asymmetry between the trans- Ofgem considers that introducing competition for mission companies and the regulator may also reduce the offshore transmission has saved between £0.6  billion and benefits to consumers. In other words, the businesses know £1.2 billion since 2009. The vast majority of these savings more than the regulator about the costs of the project. By were associated with the operation of the assets. Anal- contrast, they will only win an IPT tender if they reveal the ysis of those assets found that competitive tendering led efficient costs. to savings through innovation and different contracting Since then, Ofgem has developed proposals for compet- approaches. itively appointed transmission owners for onshore trans- An Integrated Transmission Planning and Regulation mission. Competition will only be used for new, separable, review concluded in 2015 was that competition should and large projects. The projects will be greenfield, but exist- extend to onshore transmission.1 ing assets may need altering to ensure interconnection. The An assessment of the expected impact of competition construction cost will be at least £100 million. In November was published in January 2016.2 The assessment allows for Ofgem consulted on a possible first project to be procured transaction costs of 3  percent of asset value. However, it using onshore transmission.3 The line is proposed to con- concludes that cost savings from competitive tendering will nect to 3.8  GW of new nuclear generation in northwest more than offset this, drawing in part on the experience of England, and has an estimated construction cost of about offshore transmission. £2.5 billion. Source: Department of Energy and Climate Change, “Impact Assessment: Extending competitive tendering in the GB electricity transmission network,” January 2016, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/493712/Impact_Assessment_-_Extending_ competitive_tendering_in_the_GB_electricit___.pdf (accessed March 10, 2017). this assessment before deciding to proceed with ten- Kingdom is only now moving to use this model for ders for major onshore transmission. onshore transmission, as described in Box 6.1. The context for transmission investment in Africa Drawing from international experience also differs from those in most countries with IPTs. International experience in using IPTs to increase The differences include the financial viability of the private investment in transmission will help Afri- power sector and the industry structure. can governments, but they will also face challenges Most other countries using IPTs have sufficient in drawing on and applying that experience. IPTs revenue from electricity consumers to ensure the are a recent development, initially adopted mainly profitability of generators, network businesses, and in ­Spanish- and Portuguese-speaking countries. As supply businesses. In most African countries this a result, many African governments are unfamiliar is not the case. However, India’s experience demon- with the potential of IPTs. strates that overall power sector profitability is not a The DFIs that currently support transmission necessary precondition for IPTs to work well. investment in Africa may also have limited famil- Low tariffs and high losses in some states in India iarity with IPTs. The United States made the regula- create problems in funding private transmission. If tory changes that enabled IPTs in 2011. The United revenues are insufficient, the state can obtain support 44 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA from the Central Government through Viability Gap African governments can review existing leg- Funding (VGF). The transmission tariff is determined islation and regulation to ensure that it enables up front rather than by bids, and the bids determine the introduction of IPTs. Where change is needed, the level of additional funding required. Bidders governments can draw on the substantial body of sign a Model Transmission Agreement developed international experience to identify the lessons from by the Planning Commission. Three projects to date elsewhere and in legislation and regulations that sup- have used the VGF mechanism, in Haryana, Madhya port IPTs. Pradesh, and Rajasthan. A supportive legislative and regulatory framework This model could be used in Africa, if a funding will be important for investors. Primary legislation source was available. The scale of funding required may be required. The United Kingdom introduced for an IPT trial is discussed later in this section. legislation to allow competition in offshore transmis- A further difference is that most countries using sion in 2009, and made further legislative changes in IPTs have already introduced vertical separation 2016 to extend competition to onshore competition. between generation, transmission, and distribution. The legislation may also need to evolve over time. Some African countries have introduced vertical sep- Box 6.2 describes how Peru modified its initial legis- aration, but most have not. lation to ensure continued investor interest in IPTs. In this case, African experience of IPPs is encour- African governments should also consider what aging, as it shows that full unbundling is not a nec- changes are necessary to regulations such as licenses essary precondition for introducing private finance. and the Grid Code. Box 6.3 illustrates the potential African countries have successfully attracted IPP issues. investors without full unbundling of the generation sector. The important issue has been the risks borne by the IPP investor, not the industry structure. As Conduct trials of IPTs 6.3  described in Section 6.6, the risk allocation to IPTs can alongside existing follow the model used for IPPs. business models for African governments can be reassured that other countries—including other low-income countries— transmission have successfully attracted large volumes of trans- Moving to a new model that has worked well inter- mission investment using IPTs. They should draw nationally but is unproven in the country-specific on this international experience to develop their context involves risk. Governments should therefore own policies and their own approach to the practical maintain existing approaches while conducting trials steps for introducing IPTs as set out in this section. of IPTs. DFIs can assist through dissemination of knowledge International experience demonstrates that IPTs products and technical assistance, including peer- can be introduced alongside other business models to-peer advice from other developing countries with for transmission without causing problems. IPT experience as well as mobilizing commercial In India, the majority of transmission investment financing. is by government-owned businesses. India has intro- duced IPTs alongside this business model. Over time the share of new transmission investment financed Develop the legal 6.2  by IPTs has steadily grown. This is shown in Box 6.4. and regulatory IPTs can also be introduced alongside privately frameworks to owned transmission. In the United Kingdom all transmission is privately owned. The Government support IPTs has passed legislation to enable large new transmis- In most cases, introducing IPTs will require changes sion projects to be procured through competitive to legislation and regulation (for example, changes to tender. The United States has also combined existing the form of the license for transmission companies private ownership of transmission with tender for and the establishment of clear grid codes). new lines. Steps to realize the potential of IPTs for Africa 45 Box 6.2 Peru passed new legislation to maintain investor interest in transmission Peru’s “Law of Power Concessions” in 1992 enabled PSP in the change in the tariff setting to ensure that payments under the con- electricity sector. IPT contracts were initially based on efficient costs tracts directly reflected the prices from the winning bid. This change drawing on both bids and the regulator’s model, which was revised to legislation gave bidders a clear understanding of what their periodically. This exposure to regulatory risk led to a reduction in revenues would be, and private transmission investment increased. private investment by the early 2000s. Private investment fell from The new legislation also included changes to transmission plan- more than US$160 million in 1999 to around US$10 million in 2003, ning and to the governance arrangements for the system operator. as illustrated in Figure 6.1. In 2006, Peru introduced the “Law to Ensure the Efficient Devel- opment of Electricity Generation.” The new legislation established a Figure 6.1 Investments in transmission in Peru (1991–2000) 350 300 250 Million $ 200 150 100 50 0 2010 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Public investment Private investment Source: ESMAP (2015). Source: World Bank, “International Experience with Private Sector Participation in Power Grids: Peru Case Study,” (Energy Sector Management Assistance Program,” 2012, http:// documents.worldbank.org/curated/en/498461468000021182/pdf/101753-WP-P146042-Box393265B-PUBLIC-Private-Sector-Participation-in-Power-Grids-Peru.pdf (accessed March 10, 2017). Introduce new models 6.4  cost to consumers. Any shift to IPTs must safeguard these benefits. for concessional lending Currently, concessional lending is provided to African governments need to maintain their access ­ government-owned transmission companies. No to concessional lending for transmission projects, examples are available of concessional loans to pri- but can utilize this lending differently by not tying vate transmission in Africa. If this situation contin- it to delivery of the projects by government-owned ues, it will distort the decision on the best business businesses. model for future transmission projects. African The low cost of concessional lending helps African governments could continue with existing models governments meet their targets for access at a lower and retain access to concessional finance. If they 46 Box 6.3 Developing regulations suitable for IPTs Nigeria is one of the African countries that have gone the The Grid Code may need further development to enable furthest in preparation for IPTs. The Electric Power Sector IPT tenders. The Code states that it is designed to facilitate Reform Act 2005 established the framework for competi- competition in generation and supply, but does not refer to tion in transmission. A transmission licensee is authorized competition in transmission. Section 1.4 states that the Grid to carry out construction, operation and maintenance of Code applies to TCN and Users of the Transmission System, the transmission systems within Nigeria, or that connect but does not state that it applies to other parties such as Nigeria with a neighboring jurisdiction. The Act establishes IPTs. The Code defines the responsibilities of transmission no restriction on the number of transmission licensees. The service providers. Some of these responsibilities, such Act details the application procedure for securing a license. as accepting grid connections to the networks they own, The Act also establishes vertical separation by requir- would normally be applicable to IPTs. However, the Code ing that no person shall engage in electricity transmission defines the transmission service provider as “the division among other business activities, except in accordance with of TCN that owns and maintains the Transmission Network.” a license issued under the Act. The changes required are not major, illustrating Nigeria’s The Transmission Company of Nigeria, TCN, is a preparation for possible IPTs. Other African countries may ­ government-owned transmission company. The Grid Code need to make greater changes to their Codes, licenses, and sets out the operating procedures and principles governing other documents. the Transmission System. This will be a sensitive document for IPT investors. It defines their rights and obligations, and also the rights of TCN and other parties. Source: Castalia review of Nigerian Grid Code. Box 6.4 Privately financed transmission in India has been growing In India, transmission is planned over five-year periods. financed or financed in joint ventures (JVs) with Power Grid Figure 6.2 shows the total kilometers of new transmission Corporation of India Ltd. (PGCIL). The Government holds a investment in the last six five-year plan periods. It also majority ownership of PGCIL. breaks this down between publicly financed transmission Privately financed transmission, including JVs with (investments by utilities owned by state governments or PGCIL, has taken a growing share of new transmission the national government), and transmission that is privately investment, reaching 14 percent in the current plan period. Figure 6.2 Evolution of new transmission lines in India, 1985–2017* (ct km of new transmission lines) 100,000 80,000 60,000 40,000 20,000 0 1985–90 1992–97 1997–2002 2002–07 2007–12 2012–17* Total public JV/private Source: Castalia. Growth in transmission network (ct km). Data sourced from Ministry of Power of the Government of India, http://powermin.nic.in/en/ content/growth-transmission-sector, (accessed March 10, 2017); * To end-July 2016. Available data do not include figures for the 1990–1992 period. Steps to realize the potential of IPTs for Africa 47 Box 6.5 Example of concessional lending to IPP The Tobene IPP in Senegal is a 96 MW heavy-fuel, oil-fired arrangements the IPP (Melec PowerGen) will own at least plant. The IPP agreed to a 20-year PPA with SENELEC, 90  percent of the plant, and IFC will retain a 10  percent the government-owned power utility in Senegal. In 2014 stake in the project upon completion of a proposed equity the World Bank Group signed a €93.4  million financing investment. agreement for the Tobene Power IPP. Under the financing Source: “World Bank Group Finances 96 megawatt Tobene Power Plant in Senegal,” IFC, http://ifcextapps.ifc.org/ifcext/pressroom/ifcpressroom.nsf/ 1f70cd9a07d692d685256ee1001cdd37/e9c240ad1e4953a885257d2c006e9e78?OpenDocument (accessed January 20, 2016). introduce IPTs, they may achieve some efficiency African reality is one in which most IPPs carry gains but will face higher financing costs. substantial risks. Without DFI financing, key proj- Transmission projects are capital intensive. ects would not have reached financial close and If concessional finance is tied to delivery by commercial operation. DFIs have also reduced the government-owned transmission companies, then ­ chances of investments and contracts unraveling— the case for IPTs is likely to be difficult or impossible. in part because of rigorous due diligence practices, In an environment of limited concessional financing, but also because of the pressure governments IPTs bring a much needed complement through or multilateral institutions might bring to bear commercial funds. This may very well be a strategic around honoring investment contracts.4 Credit decision by the government on which part of the enhancement instruments offered by multilateral transmission network should be funded through finance institutions have also played an important concessional funds and which parts can be procured role in IPP financing. through IPTs. African governments should work with DFIs An example of the approach to concessional lend- to ensure that DFI lending policies are not biased ing for an IPP is shown in Box 6.5. towards government ownership of transmission and do not impede the use of privately financed transmission. Decide the stage 6.5  at which to tender Concessional lending for IPTs can draw on transmission projects African experience with IPPs The development of new lending policies for the Governments can choose between early- and late- transmission sector can draw on Africa’s experience stage tenders but this should be decided early in the of working with concessional lenders to support IPPs project design. This decision has a major impact on in the generation sector. A recent study concluded how the project is prepared, the contract designed, that the role of concessional finance has been key to and the tenders prepared. the successful introduction of IPPs in generation: • Under an early-stage tender, the government sets There has been a wide variety of African IPP out the broad transfer requirements between two sponsors and debt providers. State institutions points. The private investor is responsible for iden- have invested in some IPPs, but private sponsors tifying the best solution and preparing all prelimi- are prominent, including private African partners, nary works. European entities such as Globeleq, Aldwych, and • Under a late-stage tender, the government does Wartsila, and numerous European bilateral DFIs. preliminary work, such as selecting the route and A smaller number of sponsors are from North acquiring the right of way (ROW).5 The private America, Asia, and the Middle East. A few multilat- investor is responsible for building and operating eral agencies also hold some equity. the transmission project in accordance with the In addition to equity investments, DFIs are specification developed by the government. prominent in the debt financing of IPPs. The 48 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Figure 6.3 Responsibilities under late-stage tenders and early-stage tenders Transmission planning Government Route selection Government ROW acquisition Late-stage EIA Early-stage tender Private developer tender Project design Construction Private developer Line commissioning Operation and maintenance Preliminary works Early-stage tenders transfer more risk on prelim- • To avoid investors being exposed to risks on route inary works to private developers, including route selection, ROW acquisition, and permitting on selection, acquisition of ROW, environmental impact the initial projects. It can be hard to assess, price, assessments, and project design. In contrast, late- and manage these risks. Later procurements could stage tenders have a high degree of project definition, explore whether these risks could be transferred to and the government needs to prepare all preliminary bidders once they are more familiar with the use of works before tendering. The responsibilities under IPTs in Africa, and the two approaches are shown in Figure 6.3. • To ensure a simpler evaluation task for the initial International experience shows that both tenders. Late-stage tenders are simpler to evaluate, approaches can work. In South America, most coun- based on the price offered by different bidders tries have used late-stage tenders. However, Peru to build and operate a line according to a single has moved to a more output-based approach, leaving detailed design. By contrast, early-stage tenders scope for bidders to offer innovative solutions to pro- lead to offers with different designs and require viding the required transfer capacity. India has also more assessment of the viability of the proposed used late-stage tenders. solutions. In the United Kingdom the initial tenders will all be late-stage, with the incumbent transmission com- pany developing the detailed design. Ofgem has left 6.6 Determine payments open the possibility of using early-stage tenders later. to IPTs based on In the United States, the Regional Transmission transmission availability Organizations (RTOs) distinguish between an “Early methodology” and a “Late Methodology.” Under the African governments will need to determine the per- early methodology the RTO identifies the required formance they want from IPTs and develop key per- upgrades during expansion planning and solicits formance indicators (KPIs) under the contract. This innovative solutions and proposals. Under the late will be a sensitive issue for investors as it will affect methodology the RTO also provides the solutions. their revenues. The Transmission Service Agreement The developers compete to build, own and operate (TSA) with the IPT will need to set out the require- this solution. The early methodology is used in five ments on commissioning and the performance after regional markets and the late methodology in four.6 commissioning. Both alternatives could be used in Africa. But The TSA should include an obligation to commis- African governments should consider procuring the sion the line in accordance with the technical spec- first IPT projects through late-stage tenders for two ifications by a defined date (often referred to as the reasons: Commercial Operation Date). If the obligation is not met, the contract should impose penalties. Prolonged Steps to realize the potential of IPTs for Africa 49 failure to achieve commissioning should lead to con- load within the network, and on the system operator’s tract termination. decisions on the dispatch of a generation plant. Under the IPT contract, payment can start: As a result, established international practice for IPTs in South America, India, the United States, the • On the Commercial Operation Date, provided the United Kingdom, and other countries is to make line plant has been successfully commissioned, or availability the dominant KPI as the basis for pay- • Immediately on commissioning, even if this occurs ment (as opposed to energy delivered or line use). The before the due date in the contract. availability target is typically close to 98 percent. The second approach provides an incentive to achieve early commissioning. This requires confir- 6.7 Ensure adequate mation that it is desirable for the line to commission revenue flow and credit early. For example, if the commissioning of a new enhancement power station affects the use of the new line, early commissioning may have little value. for projects In India the Ministry of Power introduced a policy It will be critical for African governments to take all nec- to incentivize early commissioning in July 2015, with essary steps to ensure that IPT projects are bankable in payment to start from the Commercial Operation the near future, while continuing long-term measures Date even if this is before the date specified in the to move the entire power sector to profitability. contract.7 IPTs will be implemented on a project finance The Rajasthan Atomic Power Project (RAPP) line basis. Typically, investors will set up a Special Purpose achieved early commissioning in 2016 and was the Vehicle (SPV) to undertake the project. The investors first project to benefit from this new policy. The RAPP will provide the equity for the SPV. The SPV will also Transmission Project is a 200  km, 400  kV double- borrow from providers of debt finance. circuit transmission line crossing two Indian states Transmission projects are capital-intensive and (Rajasthan and Madhya Pradesh). The project was their costs are directly affected by the cost of capital completed in less than 12 months. for the SPV. Equity costs more than debt (that is, the The TSA will need to set performance incentives required returns are higher). The SPV will therefore after commissioning. African governments should aim for a high share of debt. It may also refinance ensure that their approach to IPTs follows the model after the project has reached commissioning, when that has successfully attracted IPP investment. the risks are lower. The SPV may be able to reduce IPP investors are typically at risk for the capital financing costs by increasing the share of debt and operating cost associated with their plant and for finance. It may also be able to agree to lower costs its operating performance. However, they are not at with existing debt providers. risk for the level of demand and whether the plant is The returns to debt and equity will depend on the operated at a high or low load factor. (The load fac- cash flows for the SPV. Debt providers will not have tor is the output during the year as a percentage of recourse to the balance sheets of the parent compa- what could be achieved if the plant ran at full capac- nies. As a result, they need to be confident that the ity throughout the year. Load factors can vary from cash flows will enable the SPV to cover its debt pay- only a few percent for a peaking plant to levels above ments. Equity investors also need confidence that the 90 percent for a heavily used baseload plant.) cash flows will be sufficient for the SPV to be prof- IPP investors cannot determine how the system itable and to provide the expected returns on equity. operator wants to run the plant. This depends on The SPV will bid a yearly payment that covers the demand and on the availability of other generating costs of the project, and that provides the returns to plants. As a result, IPPs typically enter two-part debt and equity. As described in the previous section, contracts with a capacity payment and an energy after the transmission line is commissioned the SPV payment. The capacity payment is made provided the will receive a fixed payment based on its availability capacity is available. This payment covers the IPP’s performance. This payment will enter the cost base fixed costs. The energy payment varies with the elec- to be recovered from transmission charges, and ulti- trical energy delivered by the power station. mately from final consumers. Transmission lines have high fixed costs, and the This model has enabled IPT investment in many owners cannot influence the flow of energy along the countries, but Africa is different in one important line. This depends on the location of generation and aspect. Box 6.6 shows that the power sector is not 50 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Box 6.6 Most African utilities do not collect enough cash to cover costs A study in 2016 found that 37 of 39 countries in Africa did not Figure  6.4 shows the relationship of cash collected to capital and collect enough cash to recover both operational and capital costs.8 operating costs in 2014, by country. These figures are reflected in the Only 19  utilities collected enough cash to cover operational costs. financial viability of the utilities.9 Figure 6.4 Comparison of electric supply costs with cash collected in 2014 (US$/kWh billed) Liberia Comoros Sierra Leone São Tomé and Principe Cape Verde Gambia, The Rwanda Guinea Senegal Mauritania Burkina Faso Togo Mali Madagascar Seychelles Benin Gabon Kenya Botswana Nigeria Côte d’Ivoire Mauritius Burundi Operating expenditure Central African Republic Capital expenditure Niger Cash collected Swaziland Congo, Rep. Ethiopia Tanzania Malawi Cameroon Uganda Zimbabwe Sudan Ghana Mozambique South Africa Lesotho Zambia 0.0 0.10 0.20 0.30 0.40 0.50 0.60 0.70 Dollars Source: M. Kojima and C. Trimble (2016). Steps to realize the potential of IPTs for Africa 51 Box 6.7 The use of escrow accounts to attract IPP investments Revenue escrow arrangements require cash collected from thermal plant), and LTWP (310 MW wind farm) are exam- electricity consumers to be deposited into a special bank ples. In the case of LTWP (also known as “Lake Turkana”), account, and paid out in accordance with special rules that for example, the money for the escrow account was “to be ensure monies owed to privately owned generators or raised by a tariff increase starting in 2013.” Subsequent transmission providers are paid first. Kenya has success- IPPs used IDA Payment Guarantee instead and currently, fully attracted IPP investment, supported through escrow payment securities are no longer required due to the good accounts. Westmont (46 MW thermal plant), Tsavo (46 MW track record in payments to IPPs. Source: A. Eberhard et al. (2016). profitable in most African countries. As a result, This sensitivity may be reduced because the total investors may attach a high degree of risk to the antic- share of revenues that would need to go through an ipated revenues from transmission charges. escrow account to support IPT trials would be low. In most countries in Africa, the power sector’s International data illustrates this: A recent tender in financial weakness means that power sector invest- Peru resulted in annual payments of US$16.7 million, ment cannot be secured against power sector reve- to build, own, and operate a 356 km, 220 kV transmis- nues. In other words, the sector’s total income does sion line, and a transmission capacity of 354 Mega- not provide the required returns to debt and equity if volt Ampere (MVA).10 If similar annual payments investment is privately financed. were needed for a trial of IPTs in Kenya, 3 percent of In almost all cases the revenues are sufficient to total power sector revenues would have to be secured cover part of the required investment, and so can to cover the repayments. In practice, initial trials may be used to secure private investment in generation well be on a smaller scale and so require a lower share (IPPs) and transmission (IPTs). However, as total rev- of power sector revenues. enues are insufficient, investors want to be sure that Where escrow arrangements are not enough to they will have first claim on these funds. make the project bankable, governments may also One option for ensuring that first claim to the cash have to use a government guarantee to back payment flows is to use revenue escrow arrangements. Box 6.7 obligations to IPTs. If the sovereign guarantees are shows how this approach works for IPPs. insufficient, multilateral guarantees may be needed Escrow arrangements may be a sensitive issue. If (from the World Bank, MIGA, African Development IPP and IPT investors have a first claim on the rev- Bank, or other DFIs). enues, then other claims by the government-owned Again the experience of IPPs in Africa gives confi- transmission company and its suppliers will be dence that these guarantees can be provided. Box 6.8 weakened. shows the financing structure for the Azura IPP Box 6.8 The role of guarantees in ensuring the Azura IPP (Nigeria) was bankable IPP projects can include one or various guarantee products to The project is to develop, build, and operate a 459  MW open- ensure bankability and reassure the investor on risks. Africa has cycle, gas-fired plant in Benin (Edo State). The IPP is owned by the significant experience structuring bankable IPPs in recent years. Fig- SPV “Azura Power West Africa.” The IPP has a 20-year PPA with the ure 6.5 presents the financing structure of the Azura IPP project in Nigerian Bulk Electricity Trader (NBET) backed by a Put-Call Option Nigeria—the first project-financed generation investment since the Agreement (PCOA) with the Government of Nigeria.11 reform of Nigeria’s power sector. (box continues on next page) 52 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Box 6.8 Continued To make the project bankable, multiple credit-enhancement • The Multilateral Investment Guarantee Agency (MIGA) pro- mechanisms were used: vided Political Risk Insurance (PRI), to: (i) equity investors, through Azura Edo International Mauritius, for their equity and • The World Bank provided: (i) a loan guarantee to cover defaults quasi-equity investments in Azura Power West Africa; (ii) a con- ­ of debt service payments in the form of Partial Risk Guarantees sortium of commercial lenders for their non-shareholder loans (PRGs); and (ii) a payment guarantee to cover payment defaults to Azura Power West Africa; (iii) hedging instruments, including by NBET of payment obligations not related to loans from interest rate swap, were also covered against the risk of breach of government, contract, and • The IFC (and other DFIs) provided senior and mezzanine debt. Figure 6.5 Financing structure of Azura IPP (Nigeria) Guarantee Amaya Capital Standard American Capital chartered bank Energy & Infrastructure Rand Aldwych Azura Merchant Bank Interest rate swap cover Africa Infr. Invest. Fund 2 power holding FGN Asset & resource Equity & management Siemens Bank quasi-equity Indemnity cover KfW IPEX-Bank Azura PCOA Edo International Mauritius Guarantee Rand Merchant Bank Azura Power L/C bank Standard bank West Africa Reimbursement PPA agreements Standard chartered Senior as agent debt NBET DFIs Local lender Guarantee holder Senior & Project enterprise mezzanine debt Obligor under BOC Source: Multilateral Investment Guarantee Agency. “Political Risk Insurance and Credit Enhancement Solutions” 2016 (pers. comm. with Annabelle Libeau, February 3, 2017). BOC refers to Breach of Contract. Steps to realize the potential of IPTs for Africa 53 project in Nigeria, and how loan and payment guar- The case studies attached to this report describe antees made the project bankable. the different approaches taken to TSA contracts. The key issues include: Tailor IPT projects to 6.8  • Contract term: A long-term contract is required attract international to transfer risk on whole-of-life cost and perfor- investors mance to the IPT. International experience shows contract terms vary from 20  years to 45  years. In IPT opportunities will only attract sufficient interna- Chile, contracts are to 20  years, but after that the tional bidders and ensure bids are competitive if the IPT continues to own the transmission line and the projects are carefully selected and designed. regulator sets the payments. The United Kingdom Governments should focus on projects that are is considering 25-year terms for the first onshore technically, economically, financially, and environ- IPTs. In Peru and Brazil, contracts are for 30 years. mentally feasible. They should avoid projects that India started with 25-year terms, with an option of raise controversial environmental or other sensitivi- a further 10-year extension, and moved to 35-year ties, especially for the first tenders. terms from 2008. A 45-year term has reportedly The projects should be large enough to justify been agreed for the first IPT in Pakistan. the transaction costs. In some cases, this may mean • Specification: Late-stage tenders, which include bundling several projects into a single tender. In Peru, a detailed design for the project are recommended capital costs ranged between US$52.2  million and for African countries. US$291.0  million, from a sample of 14  transmission • Commercial operations: Contract payments projects tendered between 1998 and 2013. On average, could start on the due date required under the capital costs were US$116.2  million. Alternatively, contract, subject to successful commissioning. governments can also attract investor interest by con- Alternatively, commercial operations could start as firming a pipeline of future IPT projects. soon as commissioning is achieved. These options are described in Section 6.6. Prepare to implement 6.9  • Payment: The TSA should set out the payment arrangements over the contract term. This may IPT transactions be a fixed annual payment, but some variation is Designing an IPT transaction requires expertise in possible (for example, higher payments during the multiple fields. Governments often lack this exper- initial 15 years). In India, the phasing of payments tise. They will need to develop in-house capacity and has been a bid parameter. appoint international transaction advisors. In Peru the contract is awarded to the bidder that To prepare for IPT transactions, each government proposes the lowest Total Service Cost. This cost and their advisory team will need to prepare TSAs to is equal to the sum of the annuity of investment be signed with the IPT, define the eligible bidders, and costs (calculated using a 12 percent real annual rate conduct a market sounding. for a 30-year period), and the annual O&M cost. Using IPTs will require more frequent transac- The bidder also has to present the details of how tions than other approaches. Preparing for this well the investment costs are formed—including value will reduce implementation costs. The Toolkit in Sec- of supplies, transport and insurance, construction tion 7 provides guidelines on how to do this. and assembly, indirect costs, administration costs, engineering, surveillance, and financial expenses. Prepare TSAs If the tender is for a package of lines, or includes The government advisory team should prepare a substations, the bidder needs to present the disag- model TSA that can be used for all transactions. The gregate data for each asset. team should draw on this model to prepare a TSA spe- Box 6.9 describes how transmission companies cific to each IPT tender. are paid in Peru, adjusting the total service cost for under or over-recovery in the previous year. 54 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Box 6.9 Tariff for IPT Contracts in Peru The transmission companies operating in the main trans- • Annual O&M cost (defined during the bid), and mission system in Peru are remunerated according to a base • Annual settlement. This component corresponds to the tariff as follows: difference between the base tariff set the previous year and the money effectively collected by the transmission • Annuity of investment costs (defined during the bid), company in the current year. In Chile, the bid price is defined in a similar term. IPTs in Chile do not have to transfer the way but they refer to it as transmission value per assets. In Peru the IPT contracts state that the segment (Valor Anual de Transmisión por Tramo, investor must transfer the assets to the govern- or VATT). The tender is awarded to the bidder that ment at the end of the contract term. India also proposes the lowest VATT which is equal to the includes a transfer option. Where the government sum of annual value of investment (Anualidad del includes an obligation to transfer the asset, the TSA Valor de la Inversión or AVI) and the maintenance, will also need to provide incentives for the IPT to operation, and administration cost (Costos de maintain the condition of the asset towards the end Operación, Mantenimiento y Administración, or of the contract term. COMA), calculated using a 10 percent real annual • Force Majeure: The Force Majeure clauses should rate for 20 years. protect investors from unforeseeable circum- • Performance obligations and incentives: The stances that prevent them fulfilling their contrac- main performance obligation should be to ensure tual obligations. availability of the line, with a target of about 98 per- cent. The TSA should set out the penalties (and The preliminary works will include route selec- possibly incentives) for availability below or above tion, environmental approvals, and permitting. the target. African governments should start with late-stage • Indexation: A large share of the costs can be fixed projects, and the preliminary works should be under- up-front through an EPC contract. Other costs are taken within the government, for example by the likely to be subject to inflation over the contract government-owned transmission company. period. The TSA should define which costs are sub- Governments will need to consider how best to ject to indexation and the index to be used. Interna- transfer these approvals to the successful bidder. tionally, TSAs vary in how they treat indexation. In Local regulations will affect the approach they select. some cases, this can be a bid parameter. It is possible that approvals and permits can be trans- • Foreign exchange risk: Transmission projects ferred to the successful bidder. In some cases, approv- have a large share of offshore costs. Investors will als are specific to a particular company. If so, an SPV want to ensure that the payments they receive can be set up to hold these permits and approvals, and cover these offshore costs. Approaches vary inter- the SPV can be transferred or sold to the winning bid- nationally. In Chile and Peru the payments are fixed der together with the approvals. in US dollars. Foreign exchange risk is borne by the off-taker and ultimately by power consumers. In Define eligible bidders Brazil the payments are fixed in Brazilian reals, and It will be important to resolve the role, if any, of in India they are fixed in Indian rupees, with the government-owned companies in the IPT tenders. investor carrying the foreign exchange risk. The The options are discussed in Box 6.10. International approach in African countries should be based on bidders are likely to be concerned about the transpar- consultation with potential investors. ency of the evaluation process if government-owned • End of the term: The TSA should define the obli- companies are allowed to bid. This decision will also gations of the IPT at the end of the contract. The influence which institution manages the preliminary options may include an obligation to transfer the works and the IPT tender. assets, or an option to extend the TSA for a further Steps to realize the potential of IPTs for Africa 55 Box 6.10 The role of government-owned bidders There are arguments for and against allowing government- of Senegal in SENELEC. In India, private bidders can form JVs owned companies to participate as bidders in IPT tenders. with PGCIL and jointly bid for an IPT contract. One option is to allow government-owned businesses to This may reassure bidders that the government has bid. Examples include India, Brazil and Colombia. If existing full insight into the operations of the SPV. However, if the government-owned businesses are allowed to bid, this government has to buy the equity stake, it is less successful could assist with buy-in from the existing utility. However at reducing the financial demands on public funds. If the allowing government-owned bidders could prove sensitive equity stake is required to be provided free, as a condition and risks discouraging bidders. of bidding, then it increases costs of the bids. Another option is for the government to take a stake in A third option is for all bidders to be fully private, with the SPVs that own and operate transmission lines under IPT no incumbent utility or other government-owned business tenders. This would be similar to the Government of Mali’s taking part in the bidding process. This approach is recom- majority stake in EDM, the concessionaire, or the Government mended for those African governments trialing IPTs. Run market soundings Allowing government-owned companies to bid is A market sounding evaluates how attractive the likely to deter private bidders, and will not meet the business model is for investors. It also tests whether objective of raising additional finance. investors will be able to assume the risks that are to be transferred to them through the IPT contract, and generates inputs and requirements from investors 6.11 Next Steps and other parties.12 There is potential to develop IPT programs that will Market sounding involves gathering information be attractive to international bidders. To achieve this, about the viability of the business model, the ability governments can work with international investors of the private sector to meet the requirements, and and potential providers of loan finance to build the the market’s capacity and maturity.13 Section 7.2.1 of detailed business models that will attract interna- the Toolkit included in Section 7 provides further tional interest and can be replicated across the Afri- information about this. can continent. The key next step is to move beyond merely considering how this business model applies within 6.10 Run competitive Africa. This report provides a Toolkit to help practi- tenders for IPTs tioners progress with implementing the model in a real setting. African governments will need to decide whether to run competitive tenders as the basis for entering contracts with IPTs. Notes Internationally, almost all contracts have been 1. Office of Gas and Electricity Markets, “Integrated awarded through competitive tenders. However, in Transmission Planning and Regulation (ITPR) Proj- some cases contracts have been allocated without ect: Final conclusions,” March 2015, https://www tender to a government-owned company. The reason .ofgem.gov.uk/publications-and-updates/integrated- has usually been that the projects have tight timelines transmission-planning-and-regulation-itpr-project- and this avoids any delay in the tendering stage. final-conclusions (accessed March 10, 2017). African governments will also need to determine 2. Department of Energy and Climate Change (2016). whether they will allow government-owned com- 3. Office of Gas and Electricity Markets, “North panies to participate in the bids (see discussion in West Coast Connections—Consultation on the Box 6.10). International experience shows that some project’s Initial Needs Case and suitability for countries have allowed this, while other countries tendering,” February 2017, https://www.ofgem.gov .uk/publications-and-updates/north-west-coast- have not. 56 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA connections-consultation-project-s-initial-needs- 8. M. Kojima and C. Trimble (2016). case-and-suitability-tendering (accessed March 10, 9. The cash collected approach covers cash payments 2017). for minor capital expenditures, but does not include 4. A. Eberhard et al. (2016). future investment needs for “significant replace- 5. Preliminary works do not necessarily involve the ment or upgrading of existing capacity as well as actual acquisition of the ROW. This can be left for capacity expansion.” M. Kojima and C. Trimble the IPT developer to conclude. The government (2016). generally reaches an agreement with the land- 10. S. Oguah and P. Sanchez (2015). owners and the IPT (after tender is awarded) pays 11. A PCOA provides a framework to protect the for the land or ROW. However, this may vary by interests of the IPP (supplier) in the event of an country. early termination of the PPA. Early termination will 6. The early methodology is used by the Alberta result in the government buying out the facility. Electric System Operator (AESO), the California The amount paid will be calculated based on clear Independent System Operator (CAISO), the Electric and predetermined rules, and will differ depending Reliability Council of Texas (ERCOT), the Southwest on which party caused the early termination. The Power Pool (SPP), and Midcontinent Independent Put option is the supplier’s right to require the System Operator (MISO). The late methodology government to acquire the plant (under events is adapted by the New York Independent System specified in the PCOA). The Call option is the buy- Operator (NYISO), the Independent System er’s right to require the wholesale supplier to sell Operator of New England (ISONE), SPP and PJM the plant to the government (under events specified Interconnection. Source: “Competition in Electricity in the PCOA). Transmission: An international study on customer 12. World Bank and Public-Private Infrastructure interests and lessons learned” (2015). The report Advisory Facility, “Market Sounding” (Toolkit for was prepared by Navigant as part of National Grid’s PPPs in Roads and Highways), 2009, https://ppiaf response to Ofgem’s consultation on the introduc- .org/sites/ppiaf.org/files/documents/toolkits/ tion of onshore competition. highwaystoolkit/6/pdf-version/5-92.pdf (accessed 7. Government of India, Ministry of Power, “Order March 10, 2017). No. 15/1/2013,” July 2015, http://www.powermin.nic 13. World Bank and Public-Private Infrastructure Advi- .in/sites/default/files/webform/notices/policy_ sory Facility, “Market Sounding” (Toolkit for PPPs for_incentivizing_early_Commissioning_of_ in Roads and Highways), 2009. Transmission_Project_0.pdf (accessed March 10, 2017). Section 7 Toolkit to introduce independent power transmission tenders This Toolkit is a guide for government officials and government-owned utilities finance all transmission policymakers (“the government”) in Africa who are investments), and allow more projects to get done. For considering whether to seek private finance for a further discussion on this, see Section 5. investments in transmission using the IPT model. Under the IPT model, a private investor enters a IPTs have been successful internationally long-term contract to build, operate, maintain, and IPTs are widely used around the world, including in finance a transmission line for a defined period. The Mexico, South America (Brazil, Chile, Colombia, and contract may be for a new single line or a package of Peru) India, and Pakistan. IPTs are also increasingly several transmission lines. It may also include trans- being used in countries that previously provided mission substations or (in a few instances) only be exclusivity to a private transmission company. The for substations. For simplicity, this Toolkit uses the United Kingdom has tendered all offshore transmis- phrase “transmission projects” to refer to projects sion using the IPT model, and is moving to tender that include transmission lines, substations, or both; major onshore projects. IPT tenders have also been and to refer to both single projects and a package of a used in Australia, the United States, and Canada. few projects. Countries that have used IPT contracts have raised The IPT receives annual payments typically in large amounts of funds from the private sector for monthly instalments. The payments are largely deter- transmission investments. For example, IPTs in Bra- mined by the winning bid. The revenues to make zil, Peru, Chile, and India collectively attracted over these payments are usually based on revenues from US$24.5 billion from the private sector between 1998 wheeling charges. However, the IPT investor does not and 2015. For more information about the experience carry the risk for the level of wheeling charges or the of each of these four countries, see Appendix A (which Megawatt-hour (MWh) of energy that is wheeled. includes each of these countries as a case study). The IPT typically becomes a licensed transmission company and is subject to a set of obligations and Summary of the process standards set out in the licenses and in associated Governments can develop and implement IPT trans- Codes and other documents. The privately financed actions through the process described in this Toolkit, line is integrated with the rest of the transmission grid and summarized in Figure 7.1. The process consists of through connection to one or more grid substations. six stages: An IPT also enables the use of project finance. This means investors will focus on the costs and revenues • Validate Project: The purpose of this stage is to of the project and on the ability of the IPT to man- validate that the transmission project is part of age them. This, in turn, means that procuring trans- an optimized transmission expansion plan and is mission projects through the IPT model can unlock a feasible project. This stage is described in Sec- additional finance for transmission projects in Africa tion 7.1 of this Toolkit. (compared to the business-as-usual case in which 58 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Figure 7.1 Summary of the process • Confirm the project is part of PF = Private finance an optimized transmission Validate the ROW = Right of way expansion plan project • Check project is feasible ESIA = Environmental and Social Impact Assessment • Evaluate if the project Evaluate the could be privately financed suitability • Assess if project serves the for PF public interest • Appoint the government Select the team team and • Decide on an early-stage or tender type late-stage tender Late-stage tender Early-stage tender • Select the route Prepare the • Acquire the ROW preliminary • Prepare an ESIA works • Prepare the project design • Hire the transaction advisors • Hire the transaction advisors • Manage the risks • Manage the risks Design the Design the • Design the contract • Design the contract transaction • Design the tender process transaction • Design the tender process and draft bidding documents and draft bidding documents • Issue the bidding documents • Issue the bidding documents Run the • Evaluate the bids Run the • Evaluate the bids tender • Award the contract tender • Award the contract • Reach financial close • Reach financial close • Evaluate Suitability for private finance: The between two points. The private investor is purpose of this stage is to evaluate if the project responsible for identifying the best solution and could be privately financed and if the project serves preparing all preliminary works. If the govern- the public interest. This stage is described in Sec- ment decides to pursue an early-stage tender, it tion 7.2 of this Toolkit. should follow the process described on the right • Select Team and Tender Type: The purpose of side of Figure 7.2. this stage is to select the government team who will This stage is described in Section 7.3 of this manage the transaction. The team may be a single Toolkit. committee, or a working committee that reports to • Prepare Preliminary Works: The purpose of this a steering committee. This team’s first decision will stage is to prepare the project’s detailed design, be to decide on the type of tender for the transac- select the route, acquire the right of way (ROW), tion. IPTs have two types of tender process: and prepare the Environmental and Social Impact • Under a late-stage tender, the government does Assessment (ESIA).1 This stage is described in Sec- preliminary work such as selecting the route tion 7.4 of this Toolkit. and preparing the project’s detailed design. The • Design Transaction: The purpose of this stage is private investor is responsible for building and to design a transaction that promotes competitive operating the transmission project in accor- bidding, delivering value to the public. At this stage dance with this. If the government decides to the government should hire transaction advisors pursue a late-stage tender, it should follow the to help it manage risks, design the contract, and process described on the left side of Figure 7.2. design the tender process and draft the bidding • Under an early-stage tender, the govern- documents. This stage is described in Section 7.5 of ment sets out the broad transfer requirements this Toolkit. TOOLKIT TO INTRODUCE INDEPENDENT POWER TRANSMISSION TENDERS 59 • Run Tender: The purpose of this stage is to imple- Developing credible scenarios is key to develop- ment the transaction designed in the previous ing the transmission expansion plan. The scenarios stage. The government, assisted by its transaction should consider existing energy policy objectives advisor, should: issue the bidding documents, eval- set at a countrywide level, and accurate assumptions uate bids, award the contract, and reach financial about the evolution of the generation sector, demand close. This stage is described in Section 7.6 of this forecasts, and technology and fuel costs. Toolkit. 7.1.2  Check project is feasible The government should check that the project is 7.1 Validate the project technically, economically, financially, and environ- mentally feasible as part of the optimal transmission Confirm the project is part Check the system expansion plan. To do this, the government Validate of an optimized project is should find out if a recent feasibility study shows project transmission feasible the project is feasible.3 If this is the case, the govern- expansion plan ment can move to the next stage. A feasibility study assesses whether the risks and uncertainties have To validate a project, the government should confirm been properly modeled, that the costs are accurate, that it results from an optimized transmission expan- and that the preliminary works (if applicable) are fit sion plan (Section 7.1.1) and check that the project is for purpose. Feasibility studies can focus on different feasible (Section 7.1.2). dimensions of the project. Given the characteristics of transmission projects, feasibility studies should Confirm the project is part 7.1.1  consider the technical, economic, financial, and envi- of an optimized transmission ronmental dimensions.4 expansion plan If no recent feasibility study shows the project is The government should confirm the project was feasible, the government should find out if any recent defined as a result of an optimized transmission pre-feasibility study shows the project could be feasi- expansion plan. This ensures that the project is ble. Pre-feasibility studies are commissioned before consistent with the power sector strategy and the investing a considerable amount of time and money electricity development plans, considers uncertainty, into the project (and before commissioning a feasi- is used and useful for the long run, and takes into bility study). A pre-feasibility study does not ensure account different costs and benefits. feasibility, but should at least: (i) exclude projects that Preparing an optimized transmission expansion are evidently not feasible; and (ii) suggest how likely plan is a rigorous process that requires: it is that the project will be feasible, and identify the key factors in determining feasibility. If this is shown • Estimating transmission needs for a horizon year in a recent pre-feasibility study, the government can (for example, five to ten years into the future) and move to the next stage. However, the government working backwards to plan implementation from should also start any additional work that may be present year up to horizon year, needed to confirm feasibility—like obtaining permits • Preparing system simulation studies based on and approvals. This additional work could be done accurate data, while undertaking other tasks in Stage 3. • Meeting standard planning criteria (for example, If no recent feasibility or pre-feasibility studies an n-1 criteria2), have been completed, the government should com- • Following an unbiased regional approach (country- mission a study to identify whether the project is wide, pool-wide, multi-country, etc.), likely to be technically, economically, and financially • Modelling uncertainty by assuming different feasible; the ROW can be acquired, and environmen- future scenarios, tal permits are likely to be obtained. Route selection • Doing a rigorous cost–benefit analysis of transmis- and project design can be prepared at a later stage—by sion alternatives, and either the government or bidder, depending on the • Updating the plan frequently. tender type. 60 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Evaluate the suitability 7.2  • The transaction has a credit-worthy public counterparty, or it is plausible that credit for private finance enhancements to create a bankable arrange- Evaluate ment can be arranged. If the power sector is not Evaluate if Assess if financially viable, investments have to be secured the project could project suitability through revenue escrow accounts or other liquid- be privately serves public for private ity arrangements. However, escrow accounts financed interest finance may not be enough to make the project bankable. Governments may also have to back payments obli- The government should evaluate if the transmis- gations to IPTs with government guarantees, and sion project could be privately financed (Section 7.2.1) sometimes also guarantees from multilateral insti- and assess if the project serves the public interest tutions like the Work Bank, African Development (Section 7.2.2). This Toolkit presents several factors Bank, or other DFIs. This point is discussed in more that the government should consider when evaluat- detail in Section 6.7. ing if the project is privately financeable, and sug- • Bidders are interested in the project, because it gests organizing a market sounding to consult the is large enough to justify the transaction costs level of interest of private investors. It also defines for them. However, bidders will also evaluate if what a Value for Money (VfM) analysis is, and how it there are reasonable prospects of a future pipe- could be applied to quantify the costs and benefits of line of other investment opportunities. Therefore, developing the transmission investment through an governments should frame the project within a IPT model, compared to being publicly financed. broader pipeline (if it is the case), or consider devel- oping a pipeline of future IPT projects. Evaluate if the project could 7.2.1  be privately financed It is in the interest of the government to organize The government should consider the following four a market sounding to consult the level of interest factors to evaluate if a project could be privately of private investors. A market sounding evaluates financed: how attractive the business model is for investors, tests whether investors will be able to assume the • The legal and regulatory framework to support risks that are to be transferred to them through the private investment in transmission is in place. IPT contract, and generates inputs and requirements Depending on the country, reforms may need to be from investors and other parties.6 made to electricity laws, licenses, and Grid Codes, Market sounding involves gathering informa- as well as to regimes for the economic regulation of tion regarding the viability of the business model, the monopoly networks or the vertically integrated the ability of the private sector to meet the require- utility. Economic regulators will also need to adapt ments, and the market’s capacity and maturity.7 The their approaches to accommodate charging models government can find further information about used by IPTs. what market sounding involves and how to prepare • The costs of the project can be recovered from a market sounding in the “Market Sounding” volume users of the transmission grid. International of the World Bank “Toolkit for PPPs in Roads and experience shows there is not a unique way to struc- Highways.” ture the contract payment. In Peru, for example, investors sign the IPT contract with the Ministry 7.2.2 Assess if the project serves of Energy and obtain rights to operate the trans- the public interest mission line and receive transmission revenues. In The government should ensure that financing trans- India, IPT contracts are signed with regional Long mission projects through the private sector benefits Term Transmission Customers (LTTCs). LTTCs the country. This involves quantifying the costs and are generators, distribution companies, and major benefits of developing the transmission project under load centers. In the future, investors will sign the an IPT contract, compared to a scenario where the contract with distribution companies, based on use project is publicly financed. To do so, the government of the transmission network.5 In Chile, the winning should prepare a VfM analysis. bidder becomes party to a multilateral agreement Value for money refers to “achieving the opti- that provides transmission providers with access to mal combination of benefits and costs, in delivering the transmission revenues. TOOLKIT TO INTRODUCE INDEPENDENT POWER TRANSMISSION TENDERS 61 services users want.” VfM typically involves a com- 7.3.1 Appoint the government team bination of qualitative and quantitative approaches, The government needs to appoint the Government where qualitative analysis “involves sense-checking Team to manage the process successfully. The team the rationale for using PPP [Public Private Partner- may be a single committee, or a working commit- ships]” and quantitative analysis “typically involves tee that reports to a steering committee. A contract comparing the chosen PPP option against a ‘Public management committee may also be part of the Gov- Sector Comparator’ (PSC)—that is, what the project ernment Team, responsible for managing contract would look like if delivered through conventional arrangements after financial close. Box 7.1 defines procurement.”8 each of these committees. The government can refer to the World Bank’s Deciding the best option to assemble the team will “Public-Private Partnerships. Reference Guide” to depend on the government’s experience with similar find further information about what VfM is, and what processes, whether the IPT transaction is the first one qualitative and quantitative VfM analysis involves. or if the government has tendered IPTs previously, The Guide also includes various references to other budget constraints, and other factors. useful related documents.9 For simplicity, from now onwards this Toolkit refers to the appointed Government Team as ‘the government’. Select the team 7.3  and tender type Team composition and responsibilities Members of the government—either a single, dou- Select Decide on ble, or triple committee—typically include officials team and Appoint an early- government stage or from the Ministry of Power (or analogous ministry tender type team late-stage or agency), the Ministry of Finance, the regulatory tender agency, the government-owned utility (if this is the case), and external consultants (if hired). The government should appoint a Government Team The team is responsible for completing all the to manage the process (Section 7.3.1). Managing an following stages. This includes deciding the tender IPT transaction requires decision making, time, type (including preparing preliminary works if the resources, and coordination among stakeholders. government decides on a late-stage tender), design- Appointing a specific team to be responsible for this ing the transaction, and running the tender. is key to ensuring a smooth process. Once appointed, the Government Team should 7.3.2  Decide on an early-stage tender or a decide whether to conduct an early-stage tender or a late-stage tender late-stage tender (Section 7.3.2). This decision deter- First, the government should decide between the mines the point in the process at which the tender two tender types: an early-stage tender or a late- takes place. It also impacts on who prepares prelimi- stage tender. The main difference between the two nary works, on risk allocation, on contract design, and approaches is who is responsible, and who carries the on other tasks. Box 7.1 Definition of different committees A steering committee is typically formed by high-level committee typically comprises experts in specific areas of government officials who prepare the strategy, make the knowledge, and is designated by the steering committee. main decisions, and set out the timelines and working A contract management committee is usually formed arrangements, including responsibilities of each steering to manage contract arrangements after reaching financial committee member. A steering committee generally has an close. A contract management committee can be formed by explicit mandate and is headed by a committee chair. a group of people or one person, and is typically appointed A working committee is generally formed by a more by the Ministry of Power. junior group of government officials who prepare the day- to-day work, guided by the steering committee. A working 62 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA risk, for preliminary works. Box 7.2 describes the two apply in other countries, but these can at least provide types of tenders for IPTs. a reference. In addition, Ofgem states that early-stage Early-stage tenders transfer more risk on prelim- tenders would allow for innovation on technology, inary works to private developers, including route asset design, and routing and planning approvals. selection, acquisition of ROW, environmental impact The level of innovation in designs will vary according assessments, and project design. In contrast, late- to the performance requirements set by the tender stage tenders have a high degree of project definition, guidelines. Late-stage tenders focus more on procure- and Government needs to prepare all preliminary ment, construction, and financing solutions. works, as described in Section 7.4. The responsibilities Both tender types could be used in Africa. How- under the two approaches are shown in Figure 7.2. ever, as discussed in Section 6.7, African governments Early-stage tenders require greater time. The should consider procuring the first IPTs through Office of Gas and Electricity Markets (Ofgem), the late-stage tenders. This alternative would avoid inves- regulator in Great Britain, consulted on the choice tors being exposed to risks associated to preliminary between early- and late-stage tenders. Ofgem con- works (which they may not be best placed to manage sidered that late-stage tenders would need to be con- at the start), and would involve a simpler bid evalua- ducted four to five years before the transmission asset tion process. is required. Early-stage tenders would need eight to The costs associated with preparing preliminary nine years. Identical timelines would not necessarily works are significant. If the government decides on Box 7.2 Early-stage tenders and late-stage tenders IPTs have two types of tender: • Under an early-stage tender, the government sets out the broad transfer requirements between two points. • Under a late-stage tender, the government does pre- The private investor is responsible for identifying the liminary work such as selecting the route and preparing best solution and preparing all preliminary works. the project design. The private investor is responsible for building and operating the transmission project in accordance with this. Figure 7.2 Responsibilities under early-stage tenders and late-stage tenders Transmission planning Government Route selection Government ROW acquisition Late-stage ESIA Early-stage tender Private investor tender Project design Construction Private investor Line commissioning Operation and maintenance Preliminary works TOOLKIT TO INTRODUCE INDEPENDENT POWER TRANSMISSION TENDERS 63 a late-stage tender, it should also discuss and define bidder. In some countries, the ROW can sit with a the following activities before preparing preliminary shell company which is sold or transferred to the works: winning bidder. In other cases, preliminary works end once the government reaches an agreement • Setting the scope of work and the expected costs with the owner(s) or occupant(s) of the land and the of preparing preliminary works, and the ability to winning bidder makes payments for the land or ROW recover these costs from users of the transmission easements. grid, The responsibility of preparing preliminary works • Identifying who will prepare the preliminary under a late-stage tender generally rests with the works, sector entity in charge of planning (generally within • Establishing the role of the government in oversee- the Ministry of Energy or similar) or the transmission ing the preliminary work, and utility. In addition, the government should consider • Defining how the ROW gets transferred to the suc- obtaining support from multilateral agencies to fund cessful bidder. or provide technical assistance for these activities, especially if the government has little or no experi- The government may wish to obtain legal advice ence running IPT tenders. on how best to transfer the ROW to the successful Prepare the preliminary works 7.4  Prepare Prepare the Acquire the Prepare the project preliminary Select the route ROW works ESIA design If the government decides on a late-stage tender, it • Evaluating options: This involves analyzing the must prepare the preliminary works. These involve data gathered in the previous activity and selecting selecting the route (Section 7.4.1), acquiring the ROW the preferred and alternative routes. (Section 7.4.2), preparing the ESIA (Section 7.4.3), and preparing the design (Section 7.4.4). Once prelimi- The sector entity in charge of transmission plan- nary works are completed, the project will be clearly ning is the party best suited to carry on both activities. defined. The private investor will be responsible for In many countries, this is the Ministry of Energy or building and operating the transmission project in similar. In others it will be the planning department accordance with that process. of the transmission utility (can be a local, regional, or national company, depending on the country). If 7.4.1 Select the route it is the Ministry of Energy or similar, it should also The government should select the route of the trans- request the opinion and participation of the planning mission line. Selecting the route is typically an itera- department of the transmission utility when it per- tive process that requires aerial and field surveys. The forms these activities. result of this task is a preferred route and alternative routes if permits and ROW cannot be obtained for the 7.4.2 Acquire the ROW preferred route. The government should acquire the ROW for the To complete this task, the government should per- selected route. The ROW is the right to cross privately form two main activities: or publicly owned property to build the transmission project. • Postulating potential routes and gathering To acquire the ROW, the government will need to data: This involves conducting aerial and field sur- negotiate with the owner(s) or occupant(s) of the land. veys and considering ancillary facilities required to The negotiations are often based on the quantifica- access the transmission project tion of the economic losses that the landowner will 64 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA bear due to the impact of the project, or the restric- next stage. For example, the EIS may suggest that tions imposed on the use of land once the landowners obtaining the environmental permits may be feasible. provide the ROW. However, getting the environmental permits may Acquiring the ROW is one of the highest risk take time. In that case, it may be reasonable to proceed tasks of the process and can require years to accom- with the next stage, especially if the project is urgent. plish, depending on the characteristics of the project. It is also a sensitive task that must be handled with 7.4.4 Prepare the project design care. As with the previous task, the party best placed The government should also prepare the project to perform this task is the sector agency in charge design. This involves defining the project characteris- of transmission planning (after they have consulted tics and the specifications needed to procure materi- with the planning department of the transmission als and equipment. utility). The major project characteristics include: Accomplishing this task can also depend on both property rules and regulations relating to local land. • Year when the transmission project must be in In some cases, the government may have to amend service, the existing rules and regulations to allow for private • Start point and end point for the transmission line investors to acquire the ROW. (or the locations for substations), • Voltage of line (kV), 7.4.3  Prepare an ESIA • Nominal capacity (MVA), The government should commission an ESIA to eval- • Approximate length (km), and uate the expected environmental and social impacts • Number of circuits. of the project, and identify potential environmental and social limitations of the project. Typically, state The main set of specifications to procure materi- regulatory agencies require an ESIA to issue permits als and equipment include: for the project. The document that results from the ESIA is called • Mechanical specifications of tower (for example, an Environmental Impact Statement (EIS). The EIS lattice or tubular), should state whether the project complies with envi- • Type of conductors, number of conductors for each ronmental and social impact standards, or whether phase, and number of earth conductors, the government should put in place mitigation mea- • Grounding, insulator and hardware requirements, sures to reduce or avoid those impacts to obtain the • Construction methodology, and necessary permits. However, sometimes mitigation • Design norms and standards. measures can be implemented in parallel with the Design the transaction 7.5  Design tender Design Hire transaction Manage Design the process transaction advisors risks contract and draft bidding documents The government should design a transaction that the transaction will depend not only on designing the results in a transparent, open, and competitive tender contract correctly, but also on designing an appro- process. To achieve this, it should start by hiring priate tender process, and drafting the bidding doc- transaction advisors (Section 7.5.1), especially if this is uments. Section 7.5.4 discusses how the government the first time the country will tender an IPT contract. can design the tender process and draft the bidding The government will also need to identify the risks documents. associated to the project, evaluate who is best placed Procuring IPTs will require frequent tenders to carry each risk and how to allocate those risks (compared to other business models). Preparing for (Section 7.5.2). This will be a key step in designing the this well will reduce implementation costs. IPT contract (Section 7.5.3). However, the success of TOOLKIT TO INTRODUCE INDEPENDENT POWER TRANSMISSION TENDERS 65 7.5.1 Hire the transaction advisors best manage the risk or the party that can mitigate Designing an IPT transaction requires expertise in the risk at least cost. Managing risks appropriately multiple fields: legal and regulatory issues, commer- minimizes project costs and attracts high-quality cial and financial issues, technical issues, or specifi- investors. cally to draft bidding documents. Governments often The government may wish to complete this task by lack this expertise and may desire to hire experts to filling in a risk matrix like the one shown in Table 7.1. support the process. Transaction advisors are espe- To complete a risk matrix, the government should: cially important when countries are introducing IPT tenders for the first time. They can also build capacity • Identify the project risks (first column), within the government, reducing the need to hire • Evaluate how the risks arise (second column), and advisors in future transactions. • Assess how to allocate the risks (third column). When hiring transaction advisors, the govern- ment will face choices: hire local or international The government can refer to the World Bank’s advisors; hire all advisors from one entity or from “Concessions for infrastructure. A guide to their different entities; or hire advisors for specific tasks design and award” to find further information about or for all stages of the transaction process. The need identifying and allocating risks, and to help it com- for advisors may vary according to the project char- plete the risk matrix in Table 7.1.12 acteristics, but the hiring process should always be In addition, Table 7.2 describes the main risks of an “transparent, fair, cost-effective and free of conflict of IPT project (including the risk, and its risk category interest.”10 in bold), most common reasons why each risk arises, The World Bank toolkit for hiring advisors for pri- and details of how to allocate the risk. The table also vate participation in infrastructure11 provides more clarifies differences, if any, between the risks of late- details on the hiring process. The toolkit includes stage and early-stage tenders. guidelines for setting realistic timelines, preparing the budget to pay for advisors, selecting advisors, and 7.5.3 Design the contract paying for advisors. The government should design an IPT contract Hiring advisors can be expensive. The government that clearly specifies the rights and obligations should consider contacting multilateral agencies— between the government and private investor. The like the World Bank, the African Development Bank, IPT contract—also known as a Transmission Service and others—to help fund its hiring of advisors. Alter- Agreement (TSA)—should be drafted in a way that is natively, these agencies can also provide technical enforceable and consistent with any other associated assistance for the transaction process. This is also dis- agreements (like guarantees or other credit enhance- cussed in the World Bank toolkit for hiring advisors. ment mechanisms). A well-defined TSA is key to making the project 7.5.2 Manage the risks bankable. The contract should include provisions to The government should identify the main risks asso- mitigate some of the risks identified in Task 7.5.2. In ciated with the project, evaluate which party is best all cases, the terms and clauses in the TSA must be placed to carry each risk, and analyze how to mitigate drafted in clear and measurable terms, ensuring that them. Risks should be allocated to the party that can they can be legally enforceable. Table 7.3 summarizes Table 7.1 Risk matrix 1. What is the risk? 2. How does the risk arise? 3. How should the risk be allocated? Source: Adapted from Table 3.2. M. Kerf et al., “Concessions for infrastructure. A guide to their design and award,” Technical Paper no. 389, (1998), https:// tinyurl.com/zgamefg (accessed March 13, 2017). 66 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Table 7.2 Main risks of an IPT project What is the risk? How should the risk be (Risk category; risk) How does the risk arise? allocated? Preliminary works; Landowners along the route refuse Can be allocated to government Failure or delay in obtaining to grant the necessary ROW rights (late-stage) or IPT (early-stage). to the developer; or Government Where the risk allocated to IPTs ROW, permits, or other approvals agencies unreasonably withhold the Government should ensure timely (not applicable to late-stage tenders) granting of permits decision making/arbitration processes and provide reasonable relief measures to IPT in case ROW, or necessary permits, or approvals cannot be secured by the IPT developer, despite best efforts. Construction risk; Within IPT’s control (for example, Contractor to carry the risk through Cost overrun due to inefficient construction fixed-price construction contract practices) (typically an EPC contract) Construction risk; Within IPT’s control (for example, IPT faces penalties for late Delay in completion due to lack of coordination of commissioning subcontractors) Outside IPT’s control (for example, Force Majeure risk borne by due to force majeure events) government, dependent on detailed design of Force Majeure clauses Construction risk; Required geotechnical studies are IPT to carry the risk Finding adverse soil conditions generally not available during the early stages of project development (for example, before construction) Operating risk; IPT mismanaging operating costs IPT to carry the risk Operating cost overruns Off-taker; Off-taker faces cash flows constraints Government to carry the risk. To Nonpayment by off-taker (due to and cannot cover payment mitigate this risk the government commercial causes) obligation with IPT can provide, for example, escrow arrangements, credit enhancement mechanisms, or engage DFIs. Financing; A committed lender or sponsor of IPT to carry the risk Funds needed to finance the project the IPT project decides to abandon are not obtained project, faces, for example, insolvency issues or bankruptcy, etc. Exchange rate; Devaluation or fluctuations of local Government to bear risk if revenues currency defined in US$. IPT to bear risk if portion of revenues defined in local currency—IPT may hedge against this risk. Regulatory; The general legal framework Normally, IPT to carry the risk Changes in law changes (taxes, or environmental (government could carry the risk standards) when changes are fundamental and completely unforeseeable; for example, switch from free market to central planning) Changes in legal or contractual Government to carry the risk framework directly and specifically affecting the project company (table continues on next page) TOOLKIT TO INTRODUCE INDEPENDENT POWER TRANSMISSION TENDERS 67 Table 7.2 Continued What is the risk? How should the risk be (Risk category; risk) How does the risk arise? allocated? Force Majeure; Through Acts of God, which include Insurer risk, if risk was insured; Acts of God (but are not limited to) floods, otherwise, Force Majeure risk borne earthquakes, riots, and strikes by government, dependent on detailed design of Force Majeure clauses Environmental and social; Communities are engaged too late Early-stage: IPT to bear the risk Consultations with affected in the process which can be mitigated by engaging communities are not successful (not local consultants with experience in applicable to late-stage tenders) this process Late-stage: Government to bear risk. Environmental and social; Upon the completion of the Early-stage: IPT to bear the risk. Environmental and Social Impact Environmental and Social Impact Mitigation will generally entail Assessment studies discover Assessment changes to the preferred route. sensitive areas along the route (not Late-stage: Government to bear risk. applicable to late-stage tenders) Political Through actions such as breach Insurer’s risk (PRI), if risk was or cancellation of contract; insured; otherwise the IPT will carry expropriation, creeping the risk; if the contract terminates, expropriation, etc. the government will pay a compensation Transfer; Quality transfer specifications were Detailed quality and price Disputes when asset is transferred to not (or poorly) defined specifications should be included in government the contract Source: Adapted from Table 3.2. M. Kerf et al., “Concessions for infrastructure. A guide to their design and award,” Technical Paper no. 389, (1998), https:// tinyurl.com/zgamefg (accessed March 13, 2017). Table 7.3 Summary of key provisions to include in the TSA and associated agreements Provision Description Output specifications Exact specification of the output—whether a transmission line, substation, or both; location; length; voltage; transmission capacity, etc. Exceptions are also clearly stated. This provision determines the output that society will obtain from the privately financed transmission project. It must be drafted in clear and measurable terms, ensuring that it is legally enforceable. Validity and term Definition and specification of project timeline, key milestones, contract term, and expected end date. Key performance indicators (KPIs) KPIs need to be defined and clearly specified in the contract. The main KPIs in a TSA are requirements on: • Commissioning (for example, an obligation to commission the line by a defined date), and • Line availability after commissioning (as opposed to energy delivered or the usage of the line). The availability target is typically close to 98 percent. Monitoring and enforcement How KPIs will be monitored, the auditing arrangements, and the consequences arrangements of performing outside the levels required by the KPIs. Consequences may include penalties and bonuses. For example, the contract should impose penalties if the investor does not meet the obligation to commission the line by a defined date. Prolonged failure to achieve commissioning should also lead to contract termination. (table continues on next page) 68 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Table 7.3 Continued Provision Description Payment mechanisms How the private party will be paid for providing the output, and by whom. Payments to IPTs are generally largely determined by the winning bid and are based on line availability. The IPT receives annual payments, typically in monthly instalments. Payment starts once the line is successfully commissioned.13 In addition, the design of payments mechanisms typically specifies: • How payments may be adjusted in response to performance, • Currency of payments, • Indexation arrangements and parameters to be used, and • Frequency of payments. Response to changes outside the The contract should specify how the rights and obligations of the parties will contract change in response to changes outside the contract, including: • If and under which circumstances a change in law that changes project costs would trigger a change in payments to the private party, • If and how changes in economic variables that could affect the project costs (like interest rates or exchange rate) would be treated, • What would happen if the private party refinances its debt—if potential savings are, or are not, passed on to the public sector, and • Provisions to evaluate changes unspecified in the contract. Dispute resolution mechanisms The contract should specify the dispute resolution process. Generally, this involves defining a series of steps before any interested party invokes arbitration to resolve the dispute or terminates the contract. Steps may include notification at a working level, escalation to a senior management level, issuance of formal notice, and submission of a plan by a non-performing party. Other government obligations Definition and specification of the Government’s obligations. These may include project functions that the Government retains (for example, operating the system, assisting in land acquisition, or waiving of taxes or duties). Termination provisions The TSA should clearly state what happens when the contract ends, including: • Clauses of contract close. Procedure for end-of-term arrangements, including (but not limited to) transfer obligations if BOOT or similar contract type, or termination payments. • Clauses of early termination. The TSA should clearly specify the conditions for contract termination (by either of the parties or force majeure), the compensation payments in case of, for example, early termination. Source: Development Bank of Jamaica, “Privatisation Policy Framework & Procedures Manual,” http://dbankjm.com/services/ppp-and-privatisation-division/ privatisation/privatisation-policy-framework-procedures-manual/ (accessed March 15, 2017). the key provisions to include in the TSA and associ- included in the analysis. For this reason, the table does ated agreements. not include management, O&M, or lease contracts. The government should also evaluate and define There is not one unique or best structure for which is the best alternative to structure the IPT— IPTs. Rather, “designers of PPP projects need to whether the private company will own the transmis- consider advantages offered by numerous projects sion assets, if these will be transferred at the end of and approaches. The analysis of what is needed for the term, etc. Table 7.4 presents the main PPP struc- a particular project or program needs to be made tures to consider when designing the most applicable on a country-by-country, sector-by-sector and pro- IPT contract for a country. PPP structures where the ject-by-project basis.”14 private company is not responsible for financing and The selected countries reviewed for this report did building all new transmission investments are not not have identical structures for IPTs but they were TOOLKIT TO INTRODUCE INDEPENDENT POWER TRANSMISSION TENDERS 69 Table 7.4 PPP structures for IPT contracts Who funds the capital Who bears Who bears Who owns # PPP structure investment? construction risk? operation risk? the assets? 1 Build, Own, Private company Private company Private company Private company Operate, Transfer (BOOT) 2 Build, Own, Private company Private company Private company Private company Operate (BOO) 3 Build, Transfer, Private company Private company Private company Government/SOE Operate (BTO) 4 EPC+Finance Private company Private company Government/SOE Government/SOE all successful in attracting private finance to invest in traditional IPT contracts. However this requires that new transmission assets. One point of difference is the transfer of ownership is purely on paper and does the stage at which the asset is transferred. not lead to any intervention by the new owner that In Brazil, Peru, and India tenders are for BOOT affects cost or performance. It also requires that secu- contracts (type 1 in Table 7.4). The asset is transferred rity is provided in some way other than the ultimate at the end of the contract term. As transmission assets security which arises from ownership of the asset. are long lived assets they will have a remaining use- A final option is that the private developer finances ful life at the end of the term. The transfer condition the transmission asset; transfers ownership after therefore requires measures such as valuation of the commissioning and has no further operating respon- asset condition, or requirements for minimum main- sibility; and is paid back over, for example, 30 years. tenance spend towards the end of the contract term We refer to this model as EPC+Finance (type  4 in to ensure the asset is transferred in good condition. Table 7.4) There are no efficiency gains from this Chile’s IPT contracts are BOO (type 2 in Table 7.4). approach as the developer does not bear whole-of-life The private companies own the assets indefinitely performance risk. and do not transfer the transmission assets at the end of the contract term. In Chile’s case the contract Credit enhancement arrangements establishes revenue certainty for an initial period may be needed and is followed by regulatory determinations later in During this task, the government should also consider the asset life. This was the only example in the case if credit enhancement arrangements are needed. studies of indefinite private ownership of the trans- These mechanisms may be necessary to make the mission asset financed under an IPT tender. project bankable. If so, the government should design An alternative is that the private company these arrangements during this task. These arrange- finances the asset; receives long term payments ments are typically governed by separate documents based on operational performance; and transfers the supporting the TSA. asset ownership at a much earlier stage. We have Examples of credit enhancement arrangements referred to this as Build, Transfer, Operate, or BTO include Government Support Agreements, Partial (type 3 in Table 7.4). For example, the asset could be Risk Guarantees (PRG), and credit guarantees. Gov- transferred to the government-owned transmission ernments may be interested to contact institutions company immediately after commissioning, while like the Multilateral Investment Guarantee Agency the capital costs would be recovered over a contract (MIGA), or other multilateral organizations that offer term of 30 years. and provide support in designing credit enhance- The selected countries did not present examples ment products. The World Bank and other multilat- of the BOT type. An early transfer of ownership is eral organizations also provide model templates for also not a usual approach under project finance. It these arrangements, which the government can also may in theory be able to provide similar incentives to consult as reference. 70 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA 7.5.4  Design the Tender Process and Draft Governments or contracting entities typically pre- Bidding Documents qualify bidders to ensure that they only receive bids The government should design the tender process by from well-qualified parties. Bidders are also likely to which bidders will be qualified and then invited to invest more in their bids if the number of comparable bid. In this task the government should: bidders is limited. This is generally the case with IPT tenders. • Define the evaluation process and the criteria to To prepare the prequalification phase, the gov- qualify bidders, ernment should define the qualification criteria and • Define the timeline of the tender, and the method to assess the applications to prequalify. • Draft the bidding documents. The qualification criteria generally include meeting technical and financial requirements, providing bid To complete this task successfully, the government bonds, and others—whether government-owned should consider appointing an Evaluation Commit- companies would be allowed to bid or not (see discus- tee to carry out this and all tasks until financial close. sion in Box 6.10). The assessment to prequalify appli- The Evaluation Team may be formed by members of cations can be pass-or-fail or through the scoring of the Committee, other governments officials, transac- the criteria. tion advisors (those hired in Task 7.5.1, or others), or To prepare the bidding phase, the government any combination of them. should also develop the process and criteria to evalu- ate bids. This includes: Define the evaluation process and the criteria to qualify bidders • Defining the process by which to evaluate bids— The process can be designed in different ways. It this typically involves bidders restating their may involve one or two stages. Bidders may, or may qualifications, and presenting a technical and a not, be prequalified before bidding starts. To choose financial proposal, the design process, the government should study the • Developing the bid evaluation criteria—including different alternatives, review the international expe- the method by which the technical proposals will rience, and take advantage of the publicly available be weighted, whether the technical proposal must standardized templates. meet minimum thresholds, and setting a price cap, The government will first have to decide whether and to prepare a one-stage or two-stage tender process. • Establishing how to present bids—format, delivery The main differences between these two approaches method, etc. are at the bidding stage, as described in Box 7.3. Box 7.3 One-stage and two-stage tender process The World Bank “Toolkit for PPPs in Roads and Highways” undesirable or impractical to prepare complete technical defines the two approaches as: specifications in advance. This is typical for large and complex PPP [Public Private Partnerships] projects. In • One-stage process: “When the Government has a pre- such a case, a two-stage bidding procedure may be used. cise idea on the technical options and specifications to In stage 1, unpriced technical proposals based on a con- be chosen. Prequalified firms are asked to submit bids ceptual design or performance specifications are invited. in strict accordance with the specifications imposed by They then are subject to technical and commercial clari- the Government. Final selection is made on a “financial” fications and adjustments. In stage 2, amended bidding basis alone and little room for negotiation is left to the documents are issued and final technical proposals and selected candidate.” priced bids are submitted and evaluated.” • Two-stage process: “In particular when uncertainties remain on technical options to be retained, it may be Source: World Bank (2009). TOOLKIT TO INTRODUCE INDEPENDENT POWER TRANSMISSION TENDERS 71 The case studies included in Appendix A provide required to meet the timeline above. This includes examples of evaluation processes and qualification assessing applications, evaluating bids, and finalizing criteria used in IPT tenders internationally. For exam- and approving the bidding documents. Some steps ple, in Peru the bidder must have a minimum level may require Ministerial or Cabinet approval—like of equity and assets (which varies according to the credit enhancement agreements generally—and the specifications of the transmission project) and must government should factor in these issues. show experience operating electricity transmission systems that satisfy minimum conditions regarding Draft the bidding documents length, voltage, and transmission capacity. Bids must The package of bidding documents typically includes: be quoted in US$ and the tender is awarded to the bid- der that proposes the lowest service cost—­ calculated • A draft of the TSA as the sum of annual O&M costs and the annual • The Request for Proposal (RFP), and repayment of investment costs, calculated using a • Other agreements. If the government decides to 12 percent real annual rate for a 30-year period. provide credit enhancement arrangements, these Module  5 of the “Toolkit for PPPs in Roads and should also be specified, and a draft included in the Highways” provides further details on how to imple- bidding package. ment and monitor the procurement process, and describes the steps to follow when designing the The RFP generally contains a memorandum tender process (see Stage 3: Procurement).15 of information to bidders, Instructions to Bidders, description of the criteria to qualify bidders and eval- Define the timeline of the tender uation process, and bid templates. Defining a realistic timeline prepared in advance is To draft the bidding documents, the govern- key to running a smooth tender. The government ment may find it useful to review the international should define a timeline that includes all key mile- experience or model templates from multilateral stones for the investor until financial close, including: organizations. Many countries publish their bidding documents online. For example, the World Bank • Invitation to applicants, offers online templates of standardized bidding doc- • Deadline to submit applications, uments, guidelines to draft the documents, examples • Notice to prequalified applicants, of project bidding documents from countries around • Issuance of bidding documents, the world, and other useful references—like examples • Bidding conference (if planned), of procurement laws or checklists for governments to • Deadline to request clarifications (and changes to use while running the tender process.16 draft documents if allowed), The government may also wish to hire legal • Deadline to submit bids, and experts (if it has not done so yet) to draft the docu- • Notification of contract award. ments (particularly the TSA). However, the government will also need to prepare an internal timeline that includes all the internal steps 7.6 Run the tender Issue the Evaluate Award the Reach Run tender bidding financial the bids contract documents close The government should run the tender according to Issue the bidding documents 7.6.1  the timeline defined in Task 7.5.4. The government, The government will issue the bidding documents to assisted by its transaction advisor, should issue the the prequalified bidders. To do so, all bidding docu- bidding documents, evaluate bids, award the con- ments need to be finalized and approved before the tract, and reach financial close. agreed date for the “Issuance of bidding documents” milestone. 72 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA The government can choose whether or not to and the procedure to reach financial close. In some charge bidders for these bidding documents. If the cases, those tasked to evaluate the process may be government decides not to charge, it may wish to empowered to decide who the preferred bidder is. publish the documents on the webpage of the entity The recommendation should build on the Evalu- in charge of the tender process. ation Report (prepared in Task 7.6.2), but should also The timeframe given to bidders to prepare their include: bids will depend on whether the government decided on an early-stage tender or late-stage tender. During • A detailed description of the project presented by this period, the government should manage inter- the preferred bidder—and how it meets the evalu- actions with bidders. This includes responding to ation criteria requests for clarification (and changes to draft docu- • The main project risks and estimated costs ments if allowed) and providing additional informa- • A statement recommending the project and the tion. Sometimes, governments create a virtual Data preferred bidder—including opinion statements Room where bidders can access and obtain all the from other related and interested government relevant information in one centralized place. entities (for example, the Ministry of Energy and The government will also be responsible for Ministry of Finance) receiving and handling the bids. This involves ensur- • The main negotiating items that the government ing that bidders will be able to submit their bids in should consider, and line with the Instructions to Bidders. For example, if • The procedure to reach financial close. bidders need to provide hard copies, the government must ensure that a tender box is available at the date The main negotiating items can include various and place specified. The government should also plan aspect of the project—issues regarding the ROW or a secure place to keep the bids until evaluation. land, the concession term, renegotiation alternatives, technical and financial parameters included in the 7.6.2 Evaluate the bids RFP, and other items. However, it is recommended the The government should evaluate the bids by follow- government limits the number of negotiating items ing the criteria and process included in the RFP. This and focus on, generally, two or three of the items task generally involves various steps, such as: listed above.17 • Checking that the bids include all required forms 7.6.4  Reach financial close and these are fully completed. Otherwise, the bid(s) Many steps need completing between awarding the should be rejected, contract and the private investor starting work. The • Confirming that the bidders continue to meet government needs to ensure that contract negoti- qualification criteria. Otherwise, the bid(s) should ations are finalized and the contract—as well as all be rejected, other related agreements—are signed, and all permits • Reviewing the technical proposal and evaluating it and approvals obtained. But this is not sufficient. The against the technical criteria defined in Task 7.5.4. funds needed for the project must be secured. This If a threshold was defined for technical proposals, step is referred to as “financial close.” bids that score below it should be rejected, and Financial close “means that the project’s entire • Reviewing the financial proposal and evaluating it equity has been unconditionally committed, all loan against the financial criteria defined in Task 7.5.4.— documents have been signed, and disbursement of for example, ranking the bids from lowest to high- the loans can start without further problems.” How- est bid price. ever, this definition may vary according to the coun- try and contract or project type—some also refer to Once evaluation is completed, the government it as “financial closure.” A definition more specific to should prepare an Evaluation Report. This should financial close of greenfield projects and concessions specify if bids were rejected (which, how many, and is: “the existence of a legally binding commitment why); and include a list that ranks all bidders, clearly of equity holders or debt financiers to provide or stating which bidder was evaluated highest. mobilize funding for the project. The funding must account for a significant part of the project cost, 7.6.3 Award the contract securing the construction of the facility.”18 The Team should recommend to the government who the preferred bidder is, the main negotiating items, TOOLKIT TO INTRODUCE INDEPENDENT POWER TRANSMISSION TENDERS 73 Box 7.4 Contract management Designing the Contract Management Plan includes: • Defining the responsibilities of the private investor and the government entities, and how they will be made • Establishing the main rules—such as: accountable, • How the contract management committee will ensure • Monitoring and managing contract risks, and establish- that the required quality and technical specifications ing an early warning system to inform the Ministry of are met during construction, Finance if necessary, and • The process to monitor and report the project’s per- • Planning how to address changes in the TSA. formance during operation, and • Which party pays the monitoring costs. • Defining the communication and reporting protocols between the private investor, the government, and all other parties, This task involves: As described in Task 7.3.1, the contract management committee should be responsible for monitoring and • Securing all necessary permits and approvals (par- managing all contract issues. This committee will be ticularly in early-stage tenders), key to, for example, supporting the TSO in managing • Securing land and ROW if not completed (particu- the IPT (including all communication and reporting larly in early-stage tenders), between the parties), or establishing an early warning • The stakeholders’ agreement—among the stake- system to inform the Ministry of Finance of any risks holders forming the project company (most likely that could eventually trigger a government guarantee. an SPV), The government can find further information, • The credit enhancement agreement (if planned), and guidelines, to prepare and implement the Con- • The financing agreements—the project lenders tract Management Plan in Module  5 of the “Toolkit typically prepare their own due diligence (where for PPPs in Roads and Highways” (see Stage 5: Con- they review the main agreements, especially the tract Management). Box 7.4 summarizes the main TSA and credit enhancement agreement) before activities the government needs to consider when ensuring and providing their funding sources, and designing the Contract Management Plan. • The agreements with sub-contractors, insurers, and others—including, for example, the EPC contract with the sub-contractors in charge of the construc- Notes tion and the O&M contract with sub-­contractors in 1. Preliminary works do not necessarily involve the charge of operation and management. actual acquisition of the ROW. This can be left for the IPT developer to conclude. The government Designing and agreeing on a Contract generally reaches an agreement with the land- owners and the IPT (after tender is awarded) pays Management Plan and its implementation for the land or ROW. However, this may vary by The government also needs to design and agree country. on the process to manage and monitor the contract 2. The n-1 criteria involves, among other things, arrangements. This will constitute the Contract Man- that: (1) no system equipment operates outside its agement Plan. long-term design capability and no system voltage Designing the Contract Management Plan needs is outside safe limits, under “normal” operating to start during Task 7.6.4, but its implementation will conditions (for example, if the system is intact); continue until the end of the contract—throughout and (2) unscheduled outages will not cause circuit the construction phase of the project, operation and loadings to exceed applicable ratings, instability or maintenance, and the transferring of the assets (if the cascading outages, excessive voltage variation, or case). widespread interruption of load. 74 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA 3. Ideally, the feasibility study should not be older bQeTXIeuSYUxbPFWlysuyNI5rL6b2Ms/PPP than two years, but this may vary by project and ReferenceGuidev02Web.pdf (accessed March 17, 2017). country. 9. Section 3.2.3. “Assessing Value for Money.” 4. It is not possible to evaluate the feasibility of a 10. World Bank, “A guide for hiring and managing transmission project in isolation. It must be evalu- advisors for private participation in infrastructure,” ated as part of a transmission expansion plan. The Volume 3, PPIAF (2001), http://documents.worldbank feasibility study should validate that the project can .org/curated/en/347941468766772652/pdf/multi0page be financed or, more accurately, that the time slice .pdf (accessed March 10, 2017). of the transmission expansion plan can be financed. 11. World Bank (2001). 5. The Power Grid Corporation of India Ltd (PGCIL), 12. M. Kerf et al. (1998), See Section 3. a utility owned by the national government, acts as 13. IPT contracts vary in whether payment is made the Central Transmission Utility (CTU). The CTU after early commissioning (before the due date in acts as an intermediary, receiving and distributing the contract). the revenues from wheeling charges. 14. Delmon, J., “Understanding Options for Public-­ 6. World Bank, “Toolkit for PPPs in Roads and High- Private Partnerships in Infrastructure. Sorting ways: Market Sounding,” Public-Private Infrastructure out the forest from the trees: BOT, DBFO, DCMF, Advisory Facility (2009), https://ppiaf.org/sites/ppiaf. concession, lease . . . ,” Policy Research Working org/files/documents/toolkits/highwaystoolkit/6/ Paper 5173, World Bank, 2010, http://documents. pdf-version/5-92.pdf worldbank.org/curated/en/999661468323693635/ 7. World Bank, “Toolkit for PPPs in Roads and High- pdf/WPS5173.pdf (accessed May 10, 2017). ways: Market Sounding.” 15. World Bank (2009). 8. International Bank for Reconstruction and 16. Public-Private-Partnerships in Infrastructure Development, the World Bank, Asian Develop- Resource Center, “Procurement Processes and Bid- ment Bank, and Inter-American Development ding Documents,” Last updated August 2016, https:// Bank, “Public-Private Partnerships. Reference ppp.worldbank.org/public-private-partnership/ Guide,” Version 2.0, Public-Private Infrastructure overview/practical-tools/procurement-bidding# Advisory Facility (2014), http://api.ning.com/ guidelines (accessed March 15, 2017). files/Iumatxx-0jz3owSB05xZDkmWIE7GTVY 17. World Bank (2009); see Module 5, Stage 4. A3cXwt4K4s3Uy0NtPPRgPWYO1lLrWaTUqy 18. World Bank (2009); see Module 5, Stage 4. Appendix A Case studies This appendix provides five case studies that describe Government2 set both wholesale and retail rates. the experience of Brazil (A.1), Chile (A.2), India (A.3), The Government used rates as a means of curbing Peru (A.4), and the Philippines (A.5) introducing pri- inflation, and non-cost-reflective tariffs led to severe vate investment in transmission. The first four coun- underinvestment. tries provide examples of countries that scaled up The Government embarked on a major reform transmission investments through the Independent program in 1995. The sector was unbundled and pri- Power Transmission (IPT) business model, while the vatized. A new regulatory framework was established last country introduced private sector participation to bring in private investment to deliver services that (PSP) through a whole-of-grid model. Brazil could not otherwise afford. The structure of each case study is: One key objective for reform was the need for expansion to ensure adequate supply. Other objec- • Motivations for private investment in transmission, tives included improving the efficiency of utilities, • The structure of the power sector, enhancing economic competitiveness, and improv- • Overview of PSP in transmission, ing quality of service. To meet these objectives, • Legislative and regulatory framework, initial reforms included establishing “free” (large) • Transmission planning, consumers who could negotiate contracts directly • Contract form, with generators, conditions to allow for independent • Procurement process, and power producers, and equal access to distribution and • Outcomes. transmission grids. A.1.2  The structure of the power sector Case 1: Brazil A.1  Hydropower accounts for 75  percent of Brazil’s This section describes the motivations for private installed capacity and almost 80 percent of the energy investment in the power sector in Brazil; the structure produced.3 The hydro plants are spread across 12 main of the sector; the overview of PSP in transmission; the river basins and often have large reservoirs with legal and regulatory framework that enabled PSP; the multi-year storage capacity. Brazil’s hydro resource ­ contract form and procurement process for tender- has heavily influenced the development of the power ing transmission lines; and the outcomes of PSP in system. The generator mix also includes natural gas, transmission. coal, oil-fired, and nuclear power. Ownership of transmission and generation assets A.1.1 Motivations for private investment is split between state-owned companies belonging in transmission to the federal or state Governments, and private Until the mid-1990s, Brazil’s power sector was ownership. Eletrobras, the largest federal-owned vertically integrated under state management. utility, owns 37 percent of total installed capacity. The All distributors were owned by the state in which 64 distributor–retailers are either owned by the state they operated. Generation and transmission com- Governments or the private sector. panies were state-owned, belonging to either the The customer base is divided into regulated and federal Government or the states of Brazil.1 The unregulated (large) customers. Large customers 76 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA consume a fourth of the demand. They have the right ensuring continuity, quality and cost-efficient to contract directly with generators. Regulated clients supply of power for the national interconnected have to buy electricity from distribution companies. system (SIN) users, • Empresa de Pesquisa Energética (EPE), the energy Government stakeholders research company responsible for conducting stra- The main government stakeholders in the power sec- tegic research in the electricity and energy sectors. tor are: EPE’s research supports the MME in its role of devising sector programs, and • The Ministry of Mines and Energy (MME), respon- • The Cámara de Comercialização de Energia Elétrica sible for power sector policy. The MME is also in (CCEE) is the electricity commercialization cham- charge of planning, granting hydro and transmis- ber, the market operator. sion line concessions, and issuing bidding process guidelines for public services concessions, Figure A.1 illustrates the relationship structure of • The Conselho Nacional de Política Energética the power sector public instructions. The president’s (CNPE), a council for energy policy under the energy advisory group, CNPE, is the highest author- MME. The CNPE advises the President on energy ity, although MME formulates and implements pol- matters. It also formulates policies and guidelines icy. EPE and ANEEL are constituted under the MME, for energy, which help the Government develop while ANEEL regulates and supervises ONS and national energy resources, CCEE. • Agência Nacional de Energia Elétrica (ANEEL), the Energy Regulatory Agency, a Government agency A.1.3 Overview of PSP in transmission responsible for administering and supervising Brazil has approximately 65 transmission companies power sector concessions, regulating tariffs, set- (including private and state-owned companies).4 tling administrative disputes among agents of the Federal-owned Eletrobras is the largest and owns power industry, and defining the criteria and meth- approximately 57  percent of transmission assets. odology for the determination of transmission and The Government of Brazil owns almost 54  percent distribution tariffs, of Eletrobras. Several companies have a mix of public • The Operator of the National Electricity System and state government ownership. For example, the (ONS), the system operator, is responsible for private sector owns 89.5 percent of the transmission Figure A.1 Brazil’s power sector main institutions CNPE CMSE MME EPE ANEEL ONS CCEE Source: Data sourced from ONS webpage, “Relacionamentos,” http://www.ons.org.br/institucional_linguas/relacionamentos.aspx (accessed March 15, 2017). CMSE refers to Comitê de Monitoramento do Setor Elétrico. CASE STUDIES 77 company of São Paulo (Companhia de Transmissâo A.1.6 Contract form de Energia Elétrica Paulista, CTEEP); the state of São Transmission companies enter into BOOT contracts Paulo owns the rest. for 30 years. Companies sign contracts with all trans- Almost 70 percent of investments in transmission mission network users. Transmission service users between 2000 and 2010 came from the private sector. include generation companies, distribution compa- Private investors are both local and international. nies, and large customers located within the region Foreign companies invested 30 percent, local private where the transmission line is located. companies invested 39 percent, and federal and state- The contract is awarded to the bidder that proposes owned companies invested 31 percent. the lowest AR. The transmission company will receive the AR in monthly payments, for the entire contract A.1.4  Legislative and regulatory framework term. The price is defined in the local currency (the Liberalization reforms undertaken in the mid-1990s real), and subject to indexation.7 The price is largely were the first step to shape Brazil’s current power sec- set by the outcome of the tender. However, the regu- tor. Concessions for public utilities were introduced lator can review aspects of the price during five-year by Law 8.987 in 1995. The law sets out the main rules price determinations. Revisions are set every fifth for the concession and permission for tendering pub- July after the concession contract is signed. ANEEL lic services and specifies that concessions must be reviews the cost of capital, adjustments for efficiency awarded through a competitive process.5 gains, and other items.8 The Government also introduced legislation in Adjustments in the way ANEEL reviews tariffs 2004 as a response to major supply shortages in 2001. have increased perception of regulatory risk since Law 10.847 (2004) created EPE and established EPE as 2012. These adjustments include ANEEL’s review of the main entity in charge of transmission planning. compensation of assets and renewal of concessions, Law 10.848 of 2004 and Decree 5.163 of 2004 defined how sub-transmission assets owned by transmission energy trading between the various sector agents by companies are transferred to distribution companies, establishing two markets (regulated and unregulated) and minimum schedules and procedures for O&M for the negotiation of PPAs. costs.9 Brazil uses a revenue cap scheme to regulate Network users provide financial guarantees to transmission. Transmission lines are subject to a reg- transmission companies. Network users establish a ulatory cap on AR. This annual cap is mainly set by revolving fund holding three months of transmission the outcome of the tenders. As described below, there charges. If the account falls below the three-month is also limited scope for regulatory review of aspects threshold, users may be disconnected from the of the AR. network. The contract specifies that the transmission A.1.5 Transmission planning company: Planning is centralized by the MME, through research and input from EPE and ONS. The three types of plan- • Is responsible for obtaining the environmental per- ning reports are:6 mit. The contract only comes into force once the permit is obtained, • A long-term plan (10 years) prepared by EPE, • Must provide access to third parties who may want • A short-term plan (5 years) prepared by EPE, and to connect to the transmission line, • A three-year document prepared by ONS listing • Will be paid on availability, and are required to reinforcement and extension transmission needs. meet 97 percent availability. If the availability of the transmission line falls below the target, the trans- The long-term plan is indicative. The short-term mission company will be penalized and will receive plan determines the required investment in new a lower payment. However, penalties are capped to transmission lines. This plan is updated each year 12.5 percent of the permitted AR,10 and forms the basis of the tenders. In addition, the • Will be penalized for delays to commissioning after ONS is responsible for identifying reinforcement and the Commercial Operation Date (COD), and extension projects. • Must post a bid guarantee equivalent to 1  per- The MME has to approve all plans. When the plan cent of the estimated investment needed. ANEEL is approved, ANEEL carries out the tendering process returns the bid guarantee to all except the winning to procure the transmission projects approved in the bidder within five business days after publication short-term plan. 78 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA of tender adjudication. The winning bidder has to maintaining, and operating transmission systems substitute the bid guarantee with a performance and substations with a voltage equal to 220 kV or guarantee equal to 10 percent of ANEEL’s estimated higher, and cost for the project. This replaces the bid bond and • Financial: The bidder must have a minimum level is repaid in installments subject to meeting set of liquidity, equity and capital. The bidder must also milestones and timelines. fulfill fiscal requirements such as tax compliance with the federal government and state treasury. In addition, the contract includes a termination clause that specifies the conditions under which the In addition, transmission companies that have Government may buy the transmission asset. had delays in past tenders cannot participate in ten- ders for a certain period. A.1.7 Procurement process ANEEL publishes details of all auctions, including ANEEL runs the tendering process. ANEEL starts the size, location, winning party, price, and construction process by publishing a tender notice and the techni- costs. It also publishes the contracts. The data are cal specifications. published in Portuguese. The evaluation of bids is done through reverse bidding and has one stage. The award is subject to a A.1.8 Outcomes price cap defined by ANEEL. ANEEL sets a benchmark ANEEL has held 38  public auctions of multiple maximum AR. This parameter is calculated based lots since 1999. These have resulted in the award of on various factors, including the cost of equipment, 211  transmission line concessions. The line conces- the depreciation rate of equipment, O&M costs, and sions total 69,811 km in length. The average length is the cost of capital. Bidders must propose a price at or 295 km. Projects range from 2 km to over 2,500 km.11 below the benchmark AR. Competitive tendering has also reduced costs. Bidders must comply with the following The average weighted discount on the winning bid requirements: stood at 22.8 percent of ANEEL’s estimated AR, for all awarded tenders between 2000 and 2015. Individual • Technical: The bidder must be registered in the line discounts reached 59.2 percent. However, various CREA (a regional council that that registers and tenders have been unsuccessful during the last few regulates which companies and individuals are years, and others postponed for later. Thirty-seven qualified in their area of work). The bidder must percent of the lots tendered from 2012 to 2015 were provide proof of contracts or commitment let- unsuccessful (there were no bids). In contrast, all ters with all relevant subcontractors. The bidder tenders between 2005 and 2009 were successful. must also provide proof of experience building, Figure  A.2 shows the number of lots that were Figure A.2 Successful and unsuccessful tenders (2005–2015) 40 Removed for later 35 Unsuccessful 30 Successful 25 20 15 10 5 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Data sourced from ANEEL, “Resultados dos Leilões de Geração.” Resumo dos resultados dos leilões de transmissão até, 2015, http://www.aneel.gov.br/resultados-de-leiloes (accessed January 10, 2017). CASE STUDIES 79 unsuccessful, the lots that were removed to a later Central or SIC) is the largest electric system, corre- tender, and the number of lots that were successfully sponding to 79  percent of Chile’s installed capacity, tendered, from 2005 to 2015. located in the central and southern regions of Chile.13 Tenders have been unsuccessful due to various The northern system, the North Interconnected Sys- factors. First, the weighted average cost of capital tem (Sistema Interconectado del Norte Grande or (WACC) used by ANEEL to define the maximum AR SING), has 20  percent of the installed capacity. The was too low, discouraging investors to bid. Second, generation mix is primarily hydro and thermal in the implementation risks have increased, mainly related SIC, and thermal in the SING. to environmental issues. Several projects have faced Customers are divided between regulated and non delays in the start of operations due to delays in -regulated customers. Regulated customers are retail obtaining the environmental permit. ANEEL released consumers with a connected capacity less than or details in mid-2016 that 62  percent of the late proj- equal to 2,000 kW. Non-regulated (“free”) customers ects at the time had faced delays when obtaining the are large customers with a connected capacity greater environmental permit.12 Third, from Banco Nacional than 2,000  kW. Free customers are mainly mining de Desenvolvimento Econômico e Social (BNDES), companies and other industries. the national development bank, has provided fewer low-cost funding as Brazil’s economy has slowed in Government stakeholders recent years. Brazil’s GDP annual growth decreased The main actors in the power sector are: 3.8 percent in 2015 and forecast growth for 2016 was –3.3 percent. • The Ministry of Energy (MINENERGIA), respon- sible for policy design and planning, as well as providing concessions for hydroelectric plants, Case 2: Chile A.2  transmission lines, substations, and electricity dis- This section describes the motivations for private tribution areas, investment in the power sector in Chile; the structure • The Comisión Nacional de Energía (CNE), the of the sector; the overview of PSP in transmission; the Government’s National Energy Commission in legal and regulatory framework that enabled PSP; the charge of setting tariffs and defining the technical contract form and procurement process for tender- norms of the system. The CNE depends on the ing transmission lines; and the outcomes of PSP in MINENERGIA, transmission. • The Centro de Despacho Económico de Carga (CDEC), the system operator. The CDEC is divided A.2.1  Motivations for private investment in in two, with separate operators in the SIC and the transmission SING. Each CDEC is composed by representatives During the 1970s the power sector in Chile was verti- of generation and transmission companies, free cally integrated and mostly state-owned. Investment customers, and owners of facilities connected to in the sector was low and inflation high. In 1982 the system, and Chile’s economy decreased at an annual rate of 10 per- • The regulator (SEC), responsible for overseeing the cent. Given the economic situation, the Government legal and regulatory norms, and technical stan- introduced a reform in the power sector in early 1982 dards for liquid fuels, gas, and electricity. to unbundle the sector and attract investment with a market-oriented approach. Today, Chile is seen as a A.2.3  Overview of PSP in transmission leading example of power sector reform. Chile has about seven main transmission companies in Chile. Transelec is one of the main companies in A.2.2  The structure of the power sector the transmission sector, operating most of the trans- The main characteristics of the Chilean power sector mission lines in the SIC. The company has 6,682 km are a result of the Law of General Power Services of transmission assets, divided as follows: 548  km introduced in 1982 (Ley General de Servicios Eléctri- of 110  kV lines, 1,163  km of 154  kV lines, 3,961  km of cos or LGSE) to privatize and vertically and horizon- 220 kV lines, and 1,010 km of 500 kV lines. tally unbundle the power sector. Other companies include Compañía Transmisora Chile has about 25  generation companies, and del Norte Chico, Transchile, Transnet, Sistema de the total installed capacity is 20,662  MW. The Cen- Transmisión del Sur, Transquillota, Transemel, and tral Interconnected System (Sistema Interconectado ISA Colombia. 80 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA A.2.4 Legislative and regulatory revision evaluates whether to include new lines, or to framework delay or eliminate some of the projects in the long- The regulatory framework for electricity in Chile is term plan. The lines included in the short-term plan based on the LGSE and the following laws: are tendered out. • The Ley Corta from 2004 and Ley Corta II from 2005, A.2.6 Contract form introduced to ensure an efficient development of When the Government awards the tender to a the power sector. The Ley Corta I was particularly transmission company, the company obtains the important to regulate the remuneration of the lines rights to build and operate the transmission line, by included in the SIC and SING, according to an effi- a Ministerial decree. The decree also gives the com- cient model. It also created a “Panel of Experts” to pany rights to transmission revenues. Transmission resolve controversies between parties, and companies do not sign a concession contract with any • In July 2016, the Government approved the Law of counterparty. Transmission and Interconnection (LTI), introduc- Tenders are awarded according to the lowest ing various changes. annual transmission value per segment (Valor Anual de Transmisión por Tramo, or VATT). The VATT is The new legal framework states that: equal to the sum of annual value of investment (Anu- alidad del Valor de la Inversión or AVI) and the main- • The Government must create a new independent tenance, operation, and administration cost (Costos entity in charge of coordinating the national elec- de Operación, Mantenimiento y Administración, or tric system (Coordinador Independiente del Sis- COMA), calculated using a 10 percent real annual rate tema Eléctrico Nacional, or CISEN). CISEN started for 20 years. The VATT and indexation formula agreed functioning on January 2017 and: with the winning bidder are fixed during five “tariff • Is a non-profit entity, periods” (20  years).14 After that, the transmission • Carries out the functions previously managed assets are reviewed and updated during each tariff by the CDEC, and period. • Is financed by the national annual budget, sub- Transmission companies are paid against timely ject to approval by the CNE. commissioning and availability of the line. Transmis- • The transmission charge will be paid directly by sion companies do not incur demand risks or other end users, both regulated and unregulated custom- risks related to the operation of the whole grid. ers, twice a year. Until the end of 2016, generation companies paid • The MINENERGIA will prepare a Strategic Envi- transmission tolls in proportion to their use of the ronmental Evaluation (EAE) to define a preliminary transmission lines. However, since 2017, the transmis- strip of land where the transmission projects could sion charge is paid directly by end users, both regu- be located. The EAE will consider land, environ- lated and unregulated, twice a year. mental, social, technical, and economic aspects. In The Government does not own power sector the previous regulatory framework, the winning assets, and transmission companies never transfer bidder had to define the final route of the transmis- the assets to the Government. sion line and arrange the corresponding ROW. A.2.7 Procurement process A.2.5 Transmission planning The procurement process can be summarized as Until mid-2016 the CDEC developed a long-term follows: transmission plan every four years, to define the main transmission lines needed to guarantee a well-­ • The procurement uses an international and public functioning system. The LTI states that, starting in competitive tender process, 2017, the MINENERGIA will develop a long-term plan • CISEN will run the competitive tender process. The for the electricity sector every five years. The long- CDEC ran the process before the law changed in term transmission plan will be based on different sce- 2016, narios of expansion of generation and consumption, • The bidding documents include reference values of for a 30-year horizon or longer. the investment and O&M costs (the latter defined In addition, every year the CNE develops a short- as a percentage of the investment costs), and con- term transmission plan with a timeframe of at least struction time (in months), and 20  years based on the long-term plan. The annual CASE STUDIES 81 • The bidding process has one stage. First, CISEN best technical offer. If a tie occurs again, CISEN will will evaluate if the bidder complies with the mini- apply a mechanism to select one bid randomly. mum requirements (financial, technical, and legal). Then, CISEN will select the compliant bidder that A.2.8 Outcomes offers the lowest VATT. Chile has organized at least seven tenders since 2007.16 Ten projects were awarded for more than 1,200  km, Bidders can be Chilean citizens and foreign- under build, own, and operate (BOO) contracts. This ers. They can be individual citizens, companies, or includes a recently awarded 140  km, 500  kV line to consortiums, and must comply with the following interconnect the country’s two main transmission requirements: systems.17 • Have experience in the power sector, • Be registered with CISEN (previously with CDEC), A.3 Case 3: India • Have a risk rating of at least BB internationally and This section describes the motivations for private at least BBB locally,15 and investment in the power sector in India; the structure • Have a minimum amount of net assets. of the sector; the overview of PSP in transmission; the legal and regulatory framework that enabled PSP; the Bids must be prepared in Spanish. Prices must be contract form and procurement process for tender- in US$ and valid for 120 days. Every bid must include ing transmission lines; and the outcomes of PSP in three proposals: transmission. • An administrative offer. This offer must include the A.3.1  Motivations for private investment in legal, commercial, and financial documents of the transmission bidder. This offer must also include: The economic crisis of 1991 led to wide-ranging eco- • A bank guarantee equal to 2.5 percent of the ref- nomic reform, including of the power sector. The erence value of the investment (the percentage crisis was mainly driven by unsustainable fiscal may vary according to the tender). The guaran- imbalances. Chronic losses in the power sector were tee must be issued by a bank incorporated in a large contributor. The Government set electricity Chile and addressed to the MINENERGIA, and prices, which were often below costs. The resulting • Records proving the bidder’s experience and financial inadequacy heavily constrained public technical skills working in transmission-related investment in the sector. Power sector reform was projects. The bidder must have had a share of at intended to draw in private sector investment and least 30 percent in the reference projects, management capability. • A technical offer. This offer must include the proj- ect schedule in detail, a warranty that the bidder A.3.2  The structure of the power sector will comply with the schedule, and a technical India has a federal structure. Electricity is a concur- description of the project, and rent issue, managed by both the Central and State • An economic offer. This offer must include the Governments. The Central Government has limited VATT, detailing the AVI and COMA. influence on energy policy at the state level. State Gov- ernments are responsible for implementing national The evaluation process has the following steps: laws, but can also issue state laws and regulations. The Central Government is responsible for HV • Opening of the administrative offer (step 1), inter-state transmission and large-scale power proj- • Opening of the technical offer (step 2), ects providing power to several states. The generation • Evaluation of the administrative offer (step 3), projects are all privately owned. Transmission has • Evaluation of the technical offer (step 4), and been developed by a government-owned company • Opening and evaluation of the economic offer and by private developers. (step 5). The State Governments are responsible for gener- ation, transmission, and distribution within the state. Steps 3 and 4 are performed on a pass-or-fail basis. The majority of this capacity remains state owned, The contract is awarded to the bidder that proposes but some private investment has occurred across the the lowest VATT. If two or more economic offers tie, supply chain. the winning bidder will be the one that presents the 82 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Government stakeholders dominate at the state level and are owned by the State The main actors in the power sector are: Governments. Historically the Government-owned companies • The Ministry of Power (MoP) is responsible for undertook transmission projects on an un-competed designing and implementing power sector policies basis. The 2003 Act laid the basis for private invest- and for developing a National Electricity Policy. ment in transmission. Investment began in 2006 State Ministries set policy at the state level, when the National Tariff Policy (NTP) established • The Central Electricity Authority (CEA) prepares that tariffs would be set by multiyear, tariff-based National Electricity Plans (NEP) consistent with competitive bidding (TBCB).20 the National Electricity Policy,18 The NTP required that all transmission be on the • Regulatory Commissions operate at the central basis of competitive bidding “after a period of five and state levels. The Central Electricity Regulatory years or when the Regulatory Commission is satis- Commission (CERC) regulates generation owned fied that the situation is ripe to introduce such com- or controlled by the Central Government, and reg- petition.”21 Since 2006 inter-state transmission has ulates and licenses inter-state transmission and mainly been tendered, although exceptions remain trading. The State Electricity Regulatory Commis- for projects of “strategic importance or time-bound sion (SERC) regulates generation, transmission, delivery.” These are given to PGCIL on a nomination distribution, and supply at the state level. Each basis.22 STUs have undertaken most projects at the SERC also issues licenses for transmission, trading, state level. Some projects have been tendered and pri- and distribution within the state, vately financed, and that share is likely to grow. • The Central Transmission Utility (CTU) is respon- The private sector can only participate in trans- sible for developing the inter-state transmission mission through competitive bidding (TBCB). The network and for ensuring open access to the net- procurement process and contract form are described work. PGCIL is currently the CTU. Each State has a below. In addition to bidding in their own right, pri- State Transmission Utility (STU) with a similar role vate bidders can form JVs with PGCIL for tendered for the intra-state transmission network. The CTU projects. Until recently, the private sector could also and STUs also prepare shorter-term plans consis- be part of a JV for projects provided to PGCIL on a tent with the NEP, and nomination basis. This is no longer the case. • System Operation is managed at the central, PGCIL is involved in 13  JVs, with private compa- regional, and state levels. POSOCO manages the nies (some with IPPs to evacuate power from genera- central and regional dispatch centers. These cen- tion centers) and state-owned utilities for intra-state ters coordinate with State Load Dispatch Centers. projects.23 The longest transmission JV with a private POSOCO is currently a wholly owned subsidiary of partner is PowerLinks. This is a 1,200 km HVDC line PGCIL. from Siliguri to a substation close to Delhi, enabling the export of power from the Tata-owned Tala hydro A.3.3  Overview of PSP in transmission plant in Bhutan. PGCIL owns a 51 percent interest in The transmission network covers five regional grids, PowerLinks and Tata owns 49 percent. recently integrated into one synchronous grid. That Eight JVs are with private businesses. They make grid has 347,741 circuit kilometers (ct km) of transmis- up a small share of PGCIL’s network, yet account for sion lines of 220 kV or above. Inter-state transmission 13 percent of privately developed transmissions since provides HV connection between two or more states 2002.24 at 400 kV or 765 kV. Transmission within the states is Low tariffs and high losses in some states can mostly at 400 kV or below, although there have been create problems in funding private transmission. If recent state transmission investments at 765 kV. revenues are insufficient, the state can obtain sup- Transmission is mainly owned by ­ government- port from the Central Government through VGF. owned companies. PGCIL dominates the transmis- The transmission tariff is determined up front rather sion sector. It owns 131,728ct km of transmission lines than being determined by bids. The bids determine and nearly 265,663  MVA transformer capacity as at the level of additional funding required. Bidders the end of July 2016.19 PGCIL is 57.9 percent owned by sign a Model Transmission Agreement developed the Government of India and 42.1  percent listed on by the Planning Commission. Three projects to date the Bombay and National Stock Exchanges. The STUs CASE STUDIES 83 have used the VGF mechanism, in Haryana, Madhya The approach to regulating inter-state transmis- Pradesh, and Rajasthan. sion charges is closely related to the contracting About ten private companies are involved in pri- arrangements: vate provision of transmission in India.25 Some are transmission specialists. Others are integrated power • Currently, the transmission developer signs a companies or part of broader industrial conglomer- Transmission Service Agreement (TSA) with Long ates. The largest private investors are Sterlite Power, Term Transmission Customers (LTTCs). These are Reliance Infrastructure, Essel Infrastructure and generators, distribution businesses, and major Adani Transmission. loads in the states concerned. Transmission charg- Sterlite and Reliance are exploring the possibility ing is on a “postage stamp” basis, effectively charg- of wrapping their assets into investment trusts to ing these users for their contracted capacity, and reduce the cost of borrowing.26 The government is also • Under new arrangements, transmission charges considering relaxing rules to allow investment funds will be based on use of the network, drawing on to participate directly in transmission projects.27 load flow analysis. Developers will sign the trans- mission agreement with Designated Inter-State A.3.4  Legislative and regulatory Customers (DICs). As India now operates as one framework synchronous grid, this will be a much larger set of Power sector reform started in 1991, with the pri- customers (including more than 80  distribution vate power policy, and legislative amendments to businesses). Given the large numbers involved, the liberalize generation and introduce IPPs. The main CTU will become responsible for collecting and obstacle was the financial weakness of the State settling transmission charges from all transmis- Electricity Boards (SEBs) as counterparties. Orissa led sion users, on behalf of all the transmission service the reforms at the state level. These reforms included providers. unbundling, the establishment of independent regu- lators and, in some cases, privatization. The central government also sought large-scale private genera- A.3.5 Transmission planning tion and established the Power Trading Corporation The transmission network is divided into five syn- as an intermediary between investors and the SEBs. chronously interconnected regions—Northern, North In 1998 the Government passed the Electricity Eastern, Eastern, Western, and Southern—each oper- Regulatory Commissions Act, which led to the estab- ated by Regional Load Despatch Centres. lishment of SERCs and greater regulatory consistency Transmission planning is done centrally under between states. In 1999 Orissa privatized distribution, the direction of the CEA. The CEA issues a NEP every followed in 2002 by Delhi. five years, with annual updates. The current 12th NEP Despite the reforms in the 1990s, the economic runs from 2012 to 2017. performance of the sector worsened and arrears The NEP has a 5–15 year perspective. The CTU and grew. The Electricity Act 2003 introduced comprehen- STUs are responsible for shorter-term transmission sive reforms in the sector and consolidated various planning and development based on the NEP. national and state initiatives. That Act unbundled Developers are able to propose lines that are not in the SEBs, and introduced competition across the the NEPs. These proposals can be included in annual value chain and open access in transmission and amendments to the current Plan if the CEA approves distribution. the result of relevant studies. Studies are funded by Following these reforms, private investment in the developer and conducted either by the developer transmission was slow to materialize due to tar- or by the CTU. iff uncertainty. This was addressed by the NTP in January 2006.28 The policy mandated that a TBCB A.3.6 Contract form process determine tariffs for transmission projects. Currently, the winning transmission developer signs The winning bid set the annual charge, which cre- a TSA with all concerned utilities (LTTCs). These may ated price certainty. The use of TBCB became man- include the utilities falling in the region where the datory for all privately financed projects in 2006. load is located, any intervening region, and the inter- Government-owned ­ ­ companies—PGCIL and the regional transmission lines between the regions. In STUs—were given a five-year transition period to 2011. 84 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA the future, the transmission developer will sign the managed by state or central Government-appointed TSA with DICs. Bid Process Coordinators (BPCs). While the process is The contract is awarded to the bidder that pro- the same, inter-state and intra-state projects are man- poses the lowest transmission tariff. Lines are built aged by different bodies: on a build, own, operate, maintain (BOOM) basis for a 35-year period. The term was shorter (25 years) before • Inter-state lines: Tenders are managed by one of 2008. two BPCs preselected by the EC (PFCCL and RECT- The minimum line availability is defined in the PCL). Both are state-owned enterprises, and contract in accordance with CERC regulations. The • Intra-state lines: The relevant state government minimum line availability for AC systems is 98  per- may appoint an organization or the central Gov- cent and 95 percent for HVDC. Availability above this ernment may appoint one of its BPCs to be the BPC level is rewarded with a percentage premium on the for the state. agreed tariff for the period of excess availability. Pen- alties are incurred if availability falls below the target. PGCIL can bid in auctions on an equal basis as If line availability is below this target for six consecu- private developers. All bidders must demonstrate tive months, the Transmission Service Provider (TSP) experience in the sector and financial strength. The risks having its license revoked. TSPs are not penal- bidder quoting the lowest levelized tariff is consid- ized for outages due to factors beyond their control, ered for award. The proposed levelized tariff must such as problems with lines or substations owned by be below a reserve price set by CERC. If PGCIL (the other providers. CTU) is bidding for a project, the CTU members on Obtaining the ROW for the transmission line is the committee are excluded from discussions related critical. The Bureau of Indian Affairs (BIA) grants the to bidder selection. ROW. BIA revised the ROW rules in 2015 to accelerate The TSP must seek a license within a month from the approval process. Even so, projects still face delays selection. Once the license is granted, the TSP must related to approval of the ROW. commission the project within the stated timeframe. As one of the first steps to obtaining the ROW, the The BPC is responsible for helping the successful bid- winning bidder has to survey the potential location. der secure any necessary ROWs. Until 2015, BIA had to approve the survey. However, According to the MoP guidelines, the time between surveys no longer demand BIA’s approval, which the publication of a Request for Qualification (RFQ) helps to speed up the process. In addition, BIA has to and contract signing should ordinarily be no more act on an ROW application within 60 days of receiv- than 240  days. This is condensed to 180  days if the ing a complete application, with a one-month exten- RFQ and Request for Proposal (RFP) are combined. sion. Even so, completing an application requires In August 2016, the Government created a new gathering various documents (including reviewed online bidding portal for generation and transmis- environmental studies) that can take time to approve. sion projects and medium-term power purchasing. This also provides a central source of information to A.3.7 Procurement process track transmission projects.29 The Ministry of Power has constituted an Empow- ered Committee (EC) chaired by a representative of A.3.8 Outcomes the CERC, with other members drawn from the CEA, Private investment in transmission lines has grown MoP, Planning Commission, CTU, plus two sector rapidly since the late 2000s. Figure 6.2 illustrates the experts nominated by the Ministry. The purpose of length of new transmission lines by source of finance the Empowered Committee is to: and the percentage of privately financed new lines. The share of private investment—including JVs with • Identify projects to be developed, PGCIL—has grown in each plan period:30 • Facilitate evaluation of bids, and • Facilitate development of projects. • In the 10th five-year NEP (2002–2007), the private sector developed 2,284ct km31 of new transmission Once projects have been identified by the EC, they lines, 5  percent of total investment during the are put out to competitive bidding. The process is period,32 CASE STUDIES 85 • During the 11th plan period (2007–2012), privately and almost three-quarters (72 percent) accrued to the developed lines were 6,131ct km, 10 percent of total private sector. PSP in the power sector can be summa- new developments, and rized as follows:35 • Four years into the 12th plan (2012–2017), new lines developed by the private sector have more than • The generation sector has almost 60  privately doubled to 12,719ct  km or 14  percent of total new owned companies. Those companies account for construction. 83 percent of the installed capacity and 77 percent of the annual generation. The country’s installed Privately financed and owned lines at 220 kV and capacity is 11,711 MW. The majority of the capacity above now total 21,134ct km, equivalent to 6.1 percent (87 percent) is part of the National Interconnected of the national network. The private sector invested System, SEIN (Sistema Eléctrico Interconectado a total of US$5.5 billion in transmission lines up to Nacional). The rest is located in isolated systems 2015, and there is a pipeline of US$5 billion worth of around the country,36 projects for the following years.33 • The transmission sector is entirely private, oper- ated by 13 companies. The public sector owns a few MV—to LV transmission lines, in isolated areas of A.4 Case 4: Peru the country. Red de Energía del Peru (REP) and Con- This section describes the motivations for private sorcio Transmantario (CTM) have 40  percent and investment in the power sector in Peru; the structure 20 percent of the market share, respectively, and of the sector; the overview of PSP in transmission; the • The distribution sector has 11  private companies, legal and regulatory framework that enabled PSP; the representing 66  percent of the revenues. These contract form and procurement process for tender- companies provide electricity to 40  percent of ing transmission lines; and the outcomes of PSP in the customers. The customer base is divided into transmission. regulated and unregulated (also known as “free”) customers. Unregulated customers are those with A.4.1 Motivations for private investment in an installed capacity of at least 1 MW, or a demand transmission of at least 20 percent of the maximum demand by Before 1993, the Peruvian state had a monopoly over the distribution concessionaire in the customer’s the power sector. Two vertically-integrated state- region. owned companies, Electrolima and Electroperu, served the capital, Lima, and the rest of the country. Government stakeholders The power sector was characterized by power short- The main Government stakeholders in the power ages and low quality of service, and imposed a finan- sector are: cial burden on the state. In the 1990s, the Government of Peru undertook • MEM, in charge of designing the policies of the a series of economic reforms to reduce the size of energy sector and granting concessions, the state and privatize state-owned enterprises. • OSINERGMIN, the regulator, a Government entity The transmission sector was privatized as part of a responsible for the control and supervision of broader wave of reform to attract private capital to electricity- and hydrocarbon-related companies, the power sector and to improve the efficiency of the regulating tariffs, ensuring service quality, and sector.34 protecting the consumers, • COES, the system operator, is made up of represen- A.4.2  The structure of the power sector tatives of agents in the SEIN (generation, transmis- Since 1993 Peru has undergone a process of unbun- sion, and distribution companies, and unregulated dling and privatization in the power sector. This customers). COES is in charge of planning and started with generation and distribution, and was operating the system using merit order (least cost) later extended to the transmission sector. Transmis- criteria and administering the spot market, and sion was fully privatized by the early 2000s. • PROINVERSIÓN, a Government entity responsible Today, the power sector is mostly private. The for promoting investment and privatization, and in revenues of the sector were US$6.37  billion in 2015 charge of tendering concessions. 86 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA A.4.3  Overview of PSP in transmission In 2006 the LGE was introduced, modifying the PSP in transmission has come about in two main legal framework of the transmission sector. Three of stages. The first stage started with the introduction of the main changes were as follows: the “Law of Power Concessions” (Ley de Concessiones Eléctricas, or LCE) in 1992. The sector was unbundled • COES became the entity responsible for under- and two public transmission companies were cre- taking the planning of transmission nationwide. ated, Etecen and Etesur. These companies owned and COES prepares a transmission plan that OSINERG- operated the north-central system and the southern MIN then reviews and MEM approves, system. • The LGE established the “Guaranteed Transmis- Etecen and Etesur entered Public Private Part- sion System” (Sistema Garantizado de Transmi- nerships (PPPs) to expand the transmission system sion, or SGT). The SGT includes transmission by tendering single lines. This was done through projects identified in the transmission plan, and international tenders for 30-year BOOT contracts. the law requires those projects to be tendered in The transmission companies retained 15  percent of competitive and public processes, and ownership of the tendered lines. Once the south and • The contract price of transmission lines included north system interconnected (creating one main in the SGT is defined during the tender process transmission network for the country), the residual (by the winning bid), and is not subject to periodic public assets were privatized in 2002, under 30-year review. concessions.37 The second stage started once the “Law to Ensure These changes helped encourage investment the Efficient Development of Electricity Generation” again. Total investment in greenfield transmission (Ley para Asegurar el Desarrollo Eficiente de la Gen- projects from 2006 to 2015 was US$1.5 billion. This is eración Eléctrica or LGE) was introduced in 2006, to 85 percent of the greenfield transmission projects in complete the regulatory framework. At this stage, the 1998–2015 period.38 the transmission system was expanded by tender- ing lines in competitive and international tenders, A.4.5 Transmission planning according to a transmission plan prepared by the The transmission plan is prepared by COES, accord- Government. ing to criteria and a methodology developed by OSINERGMIN, and approved by MEM.39 ­ A.4.4  Legislative and regulatory Each plan has two products: (1) a short-term plan; framework and (2) a long-term plan. The short-term plan includes The LCE and LGE were key to establishing the current the transmission lines to be tendered out within the legislative and regulatory framework for transmis- first two years. Projects in the long-term plan are sion in Peru. The LGE was introduced to complete the indicative and reviewed every two years when the framework shaped by the LCE. transmission plan is updated. The LCE unbundled the power sector and created COES prepares the transmission plan with a the COES and OSINERGMIN. The LCE aimed to 10-year horizon and taking into account: promote competition in the market and established the basic principles that still exist today. The LCE • Generation plant in operation, generation being also established that the OSERGMIN established tendered or under construction, and planned new transmission revenues according to: (i) the Net generation, Replacement Value of existing lines; and (ii) O&M • Demand projection according to three different costs calculated based on an “economically adapted” scenarios, and model (based on simulating a hypothetical efficient • Technical and economic criteria. The economic transmission system), with a 15-year timeframe. criteria include, for example, that the plan must However, this exposure to regulatory risk led to satisfy conditions related to economic dispatch and a reduction in private investment by the mid-2000s. the level of unserved energy. Private investment fell from more than US$160 mil- lion in 1999 to about US$10 million in 2003, as shown Once the regulator accepts the plan, COES sends in Figure 6.1. By then it was clear that the legal it to MEM for final approval. MEM transfers it to framework was not enough to promote private sector PROINVERSIÓN, which tenders the transmission investment. lines. CASE STUDIES 87 A.4.6 Contract form between the parties up to 60 days from the date one Private investors enter into BOOT contracts for party communicates the dispute to the other. If the 30 years. Investors sign the contract with MEM and dispute is not resolved, the parties will go to inter- obtain rights to operate as a transmission company national arbitrage. Second, the contract includes a and obtain transmission revenues. clause called “Economic-Financial Equilibrium” that Distribution companies charge end users a tariff provides an additional protection for the investor. If that includes three components: generation, trans- an unexpected event modifies the market conditions mission, and distribution. Distribution companies (not a force majeure event) and the tariff becomes and large customers have contracts with generation significantly affected, this clause allows for a rene- companies where they pay a fee that includes charges gotiation of the contract terms. Third, concession for generation and transmission. Generators, through contracts in Peru have the force of law, providing money collected from distribution companies, then additional guarantees for private investors. pay transmission companies. The contract is awarded to the bidder that pro- A.4.7 Procurement process poses the lowest Total Service Cost. This cost is equal PROINVERSIÓN runs the tenders to procure to the sum of annual O&M cost and the annuity of transmission lines. The process has only one stage: investment costs, calculated using a 12  percent real PROINVERSIÓN does not issue a RFQ before the annual rate for a 30-year period. The price is subject RFP. During the first phase of the evaluation, PROIN- to indexation.40 VERSIÓN assesses whether bidders comply with the The contract specifies that the concessionaire: minimum technical and financial requirements, on a pass/fail basis. PROINVERSIÓN then ranks the pro- • Must define the path and alignment of the trans- posals of bidders that passed the technical and finan- mission line. During the contract term the con- cial criteria and awards the contract to the bidder that cessionaire owns the transmission line and other proposes the lowest transmission charge. The award project-related assets. The concessionaire must is subject to a price cap defined by PROINVERSIÓN. transfer them at the end of the concession, Bidders (single firm or consortium) must assign • Is responsible for obtaining environmental per- up to two people who reside in Lima, must quote mits, licenses, etc., the bid in US$, and must comply with the following • Must provide access to third parties who may want requirements:41 to connect to the transmission line (as long as their access does not affect the performance of the line), • Financial: The bidder must have a minimum • Will be paid on availability, and are required to level of equity and assets (the levels required vary meet 97 percent availability, according to the specifications of the line), and • Will be penalized for delays to commissioning • Technical: The bidder must show experience oper- after the Commercial Operation Date (COD), ating electricity transmission systems that satisfy • Must comply with technical requirements minimum conditions regarding length, voltage, throughout the lifetime of the contract. For exam- and ability to transform a minimum level of MVAs ple, lines are subject to a maximum proportion of in substations. losses. This figure varies between 2  percent and 5 percent, A.4.8 Outcomes • Will become a member of COES, The Government of Peru has organized 18 transmis- • Must pay several compulsory insurance policies sion tenders since 1998. These tenders have resulted during the contract period (such as civil respon- in US$1.8  billion of investment and more than sibility, and covering the value of the concession 6,000  km of transmission lines (and associated sub- assets), and stations) designed, built, and operated by the private • Must provide a letter of guarantee to assure the sector under BOOT contracts.42 concessionaire’s obligations. Contracts also include provisions to resolve con- Case 5: Philippines A.5  troversies between parties and provide protection for This section describes the motivations for private investors. First, the contract specifies that disputes investment in the power sector in the Philippines; between the parties will first be resolved directly the structure of the sector; the overview of PSP in transmission; the legal and regulatory framework 88 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA that enabled PSP; the contract form and procurement in charge of monitoring competition within the process for tendering the national grid; and the out- power sector, comes of PSP in transmission. • TransCo, a Government agency created in 2003 under EPIRA. TransCo owns all transmission assets, A.5.1 Motivations for private investment in including those financed by the concessionaire, transmission • The Power Sector Assets and Liabilities Manage- The state-owned National Power Corporation (NPC) ment Corporation (PSALM), a Government agency was indebted and had to be recapitalized various overseeing the privatization of state-owned power times during the 1960s and 1970s. The Government assets. PSALM also manages the liabilities of NPC, embarked on a reform to attract private sector funds. • NGCP, a private consortium holding the transmis- The reform started with the introduction of IPPs in sion concession. NGCP is owned 60  percent by the late 1980s. Monte Oro Grid Resources Corporation and Calaca Generators had to contract with NPC. Demand High Power Corporation (both incorporated in the continued to exceed supply. A power crisis in the Philippines) and 40 percent by the State Grid Cor- early 1990s prompted radical reform. In 1990 the poration of China, and Government enabled generators and end users to • The Philippines Electricity Market Corporation negotiate supply contracts. In 2001 it introduced the (PEMC), in charge of managing the Wholesale Electric Power Industry Reform Act (EPIRA). EPIRA Electricity Spot Market (WESM). WESM began was intended to bring in private investment and operations in 2006. improve electrification rates. The Government used a grid-wide concession A.5.3  Overview of PSP in transmission as the means of attracting private participation in Under the concession, NGCP is responsible for O&M, transmission. In 2007, the National Grid Corporation planning, financing of network expansion, and sys- of the Philippines (NGCP) won the concession. NGCP tem operations. NGCP develops new assets and trans- started operations in 2009. fers ownership to TransCo upon commissioning. The concessionaire also acts as system operator. A.5.2  The structure of the power sector NGCP paid an up-front fee for the rights to reve- Under EPIRA, the Government unbundled the nues from the existing transmission assets. Its costs electricity sector into generation, transmission, of financing new investments are recovered through distribution, and supply. Generation and supply to changes to the maximum allowed revenues under large customers operate under a competitive environ- periodic regulatory determinations. ment. The transmission and distribution sectors are The Philippines has three regional interconnected regulated. grids: Luzon, Visayas, and Mindanao. Table A.1 shows Ownership or interests in more than one sub- the evolution of the transmission lines in each region sector is precluded under EPIRA. A number of distri- from 2011 to 2015. Luzon is the largest region and bution companies have structured their holdings to accounts for over 80 percent of the national electric- enable them to move into generation. The regulator ity demand. Manila, the national capital, is located in is trying to push back, but is facing resistance from Luzon and accounts for 53 percent of Luzon’s demand. business groups.43 National power demand has grown at an annual rate of 3.4  percent. Even so, the national transmis- Stakeholders sion network shrank between 2012 and 2014, despite The main stakeholders in the power sector are: investment over the period. This shrinkage was due to divestment of sub-transmission lines to distribu- • The Department of Energy (DoE), responsible tion companies.44 for managing all activities related to energy exploration, development, use, distribution, and A.5.4  Legislative and regulatory conservation, framework • The Energy Regulatory Commission (ERC), the EPIRA is the main legislation governing the power regulator, responsible for setting regulations, sector. EPIRA introduced unbundling and privatiza- guidelines, policies, and rates; enforcing regula- tion; established a new regulator, retail competition, tions (including issuing permits and licenses); and rules of open access and power trading; and man- and resolving cases and disputes. The ERC is also dated the privatization of TransCo. CASE STUDIES 89 Table A.1 Transmission lines by region, 2011–2015 (ct km) Region 2011 2012* 2013* 2014* 2015 Luzon 9,529 9,374 9,439 9,370 9,428 Visayas 4,918 4,971 4,840 4,821 4,821 Mindanao 5,257 5,257 5,146 5,272 5,832 Total 19,704 19,490 19,425 19,463 20,073 Source: NGCP, “Transmission Development Plan 2014–2015,” Volume I. Major network development, December 2015, http://www.ngcp.ph/beta/cms/ Attachment-Uploads/TDP_2014-2015_Vol_I%20-_Draft.pdf (accessed March 15, 2017). *The number of lines do not sum to the total, as total transmission line length in circuit-km decrease. This was because various sub-transmission assets were modified or divested. In 2003, the ERC issued the Transmission Wheel- of transmission projects that must be a least-cost ing Rate Guidelines (TWRG) for the 2003–2027 transmission expansion option, and has to meet the period. In 2009, ERC updated and renamed the TWRG Grid Code performance standards and the ERC per- to Rules for Setting Transmission Wheeling Rates formance targets. (RTWR). The RTWR outline the methodology for set- ting the maximum transmission wheeling rates that A.5.6 Contract form TransCo or its concessionaire can charge customers. NGCP won the 25-year concession in 2007. The Gov- Under these rules, NGCP proposes the Maximum ernment tendered the concession through an open, Annual Revenue (MAR) and the performance bonus public, and competitive bidding process. NGCP began (or penalty) for each year, to be approved by ERC. The operations as the power transmission service pro- RTWR also states that ERC has to approve the pro- vider in 2009. posed capital investment program for each regulatory Congress approved a franchise period of 50 years. period (5 years). The concession contract is for 25 years, with an option ERC produces a Grid Code that establishes the to extend. basic rules, procedures, and standards that govern The rights and responsibilities of NGCP under the the operation, maintenance, and development of the terms of the concession are:45 transmission system, as well as the obligations of the grid owner, grid operator, and system manager. • To construct, install, finance, manage, improve, The Open Access Transmission Service Rules expand, operate, maintain, rehabilitate, repair, refur- cover the rules and regulations related to open access. bish, and replace TransCo’s transmission assets, The rules define the responsibilities of the transmis- • To prepare the TDP and to implement the projects sion provider, the functions of the system operator, included in the TDP (after authorization from the and the conditions accepted by transmission custom- ERC), ers for receiving the transmission services. • To provide transmission services and enter into connection agreements with transmission A.5.5 Transmission planning customers, NGCP is responsible for network planning. NGCP • To procure Ancillary Services necessary to support prepares a Transmission Development Plan (TDP) on a safe and reliable operation of the transmission an annual basis with a 10-year time horizon. The ERC assets, and has to approve the TDP. Once approved, it is incorpo- • To collect the universal charge payable by end users rated into the DoE’s annual Philippine Energy Plan and self-generating entities not connected to a dis- (which covers the whole energy sector) and submit- tribution utility, and remit this to PSALM. ted to Congress every September. The TDP must include power demand projec- NGCP won the concession with a bid of US$3.95 tions, network performance parameters, current billion, representing the Net Present Value of future and projected generation capacity, and identified cash flows. NGCP paid 25  percent (US$987  million) transmission constraints. The TDP provides a list immediately, with the balance to be paid in US$ 90 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA denominated installments converted to Philippine Performance criteria Pesos (PHP) at exchange rates prevailing on the trans- NGCP calculates the performance levels, for review action dates, over the next 15  years. NGCP funded by the ERC. Rewards and penalties may take the form the down payment through loans and equity, with of increases or decreases in the MAR for a regulatory the remaining 75  percent to be financed using the year. company’s earnings.46 By mid-2013, NGCP had paid Performance is measured against eight criteria for US$1.5 billion of the outstanding fee. quality and reliability (set out in Chapter 3 of the Grid Code).50 Each criterion is weighted as follows: Regulation of transmission revenues NGCP proposes the MAR that NGCP can receive as • System Interruption Severity Index, 25 percent, revenues. The MAR is made up of three components: • Frequency of Tripping, 20 percent, • System Availability, 10 percent, • Power Delivery Service: The cost of transporting • Frequency Limit Compliance, 10 percent, electricity through the grid, payable by generators • Voltage Limit Compliance, 10 percent, and load customers, • Congestion Availability for Luzon grid, 10 percent, • System Operation: The costs associated with sys- • Ancillary Services Availability Indicator, 5 percent, tem operation as defined under the WESM Rules, and paid by both generators and load customers, and • Customer Satisfaction Indicator, 10 percent. • Metering Service Provider: The cost of metering, testing, maintaining, and reading the meters, paid For each criterion, ERC sets targets and bands (a by all connected transmission customers accord- lower and upper cap). The reward or penalty is lim- ing to the voltage level. ited to 3 percent of the MAR. Last, NGCP is not liable for performance failures beyond its control, such as In addition to these three components, NGCP interrupted generation. earns (and collects on behalf of other organizations) other revenues and charges, such as connection A.5.7 Procurement process charges or rental of assets. The additional revenue is The transmission concession was awarded to NGCP used to reduce customer rates. in 2007 through an open bidding process, after three ERC has to make a determination on the proposed previous failed attempts. MAR. The MAR is converted to a per unit wheeling The first attempt was in 2003. The process failed at rate. Rates are set in PHP per kW per month. Cus- the prequalification stage as only one party submitted tomers are charged based on the per unit wheeling a proposal when a minimum of two were required. rate. NGCP collects revenues directly from large Soon after, a second attempt failed for the same customers, distribution companies, and electricity reason. PSALM tried again between 2006 and 2007, cooperatives (member-owned utilities that provide attracting three prequalified bidders. However, only the majority of power in rural areas). Transmission one of these proceeded to make a formal bid when a accounts for around 10 percent of a consumer’s bill.47 minimum of two were required. PSALM decided to The MAR is developed on a standard ­ building- re-tender rather than negotiate directly, eventually block approach. NGCP is compensated for O&M costs, awarding the concession to NGCP. depreciation, return on capital for the regulatory asset base (including adjustments to the regulatory A.5.8 Outcomes asset base for new investment), and under- or over-re- NGCP has invested in new transmission lines and covery in the previous year. The MAR is recovered reached performance targets. Between January 2014 from users through the charges for the three services and December 2015, NGCP developed 647  ct  km of described above. The Philippines has fully cost-reflec- new lines, 1,350  MVA, and 600  MVA of substation tive tariffs, without a need for subsidy.48 capacity over 28  projects. Twenty-six projects (lines In October 2015 NGPC sought an increase from and substations) were due for completion by the end PHP43.08bn in 2015 (equivalent to PHP308.67 of 2016, and another 19 projects by the end of 2019.51 per  kW), to PHP45.3bn in 2016. NGCP referred to NGCP has met its performance targets since 2011. the need to create a buffer to cover the risk of under-­ NGCP has consistently exceeded grid loss thresholds recovery of revenue form customers.49 However, in and reduced losses by reducing tripping frequency February 2016 the ERC recommended lowering the and improving availability. Availability for Visayas MAR to PHP41.65 billion. and Mindanao held at 99.8 percent and 99.7 percent CASE STUDIES 91 respectively in 2016, and in Luzon it improved from the rating must have been obtained within the 99.4  percent to 99.6  percent. Availability of critical last 12 months. lines also improved from 99.6 percent to 99.7 percent.52 16. Six projects included in the World Bank and PPIAF, PPI Project Database (ppi.worldbank.org) (accessed September 1, 2016), plus the SIC-SING interconnec- Notes tion project. 17. Transelec, “Transelec se adjudica proyecto de expan- 1. E. Melo, et al. “The New Governance Structure of sión complementario para la interconexión SIC- the Brazilian Electricity Industry: How Is It Possible SING por US$174 millones,” March 12, 2016, http:// to Introduce Market Mechanisms?,” Section 3, (2009), www.transelec.cl/transelec-se-adjudica-proyecto-de- http://www.usaee.org/usaee2009/submissions/ expansion-complementario-para-la-interconexion- OnlineProceedings/papermeloelbia.pdf (accessed sic-sing-por-us-174-millones/ (accessed March 15, March 15, 2017). 2017). 2. “Government” in the Brazil case study refers to the 18. Ministry of Power, India, “Statuory bodies,” http:// central (federal) Government. powermin.nic.in/en/statutory-bodies (accessed 3. IEA, “Brazil (Partner country),” https://www.iea.org/ March 15, 2017). countries/non-membercountries/brazil/ (accessed 19. PowerGrid, “Our Network,” http://www.powergrid October 20, 2016). india.com/_layouts/PowerGrid/User/ContentPage 4. F. Salcedo and K. Porter, “Regulatory framework .aspx?PId=80&LangID=English (accessed Septem- and cost regulations for the Brazilian national grid,” ber 12, 2016). Final Report, RAP, (2013), http://www.raponline.org/ 20. S. Mishra, “A Comprehensive Study and Analysis of wp-content/uploads/2016/05/exeter-salcedoporter- Power Sector Value Chain in India, Management braziltransmissioncostregulationreport-2013- & Marketing,” Challenges for the Knowledge Society, october.pdf (accessed March 15, 2017). Vol. 8, No. 1, (2013): 25–40, http://www.management 5. The regulator can authorize minor upgrading marketing.ro/pdf/articole/299.pdf (accessed of existing transmission lines to incumbent March 15, 2017). concessionaires. 21. National Tariff Policy January 2006, Clause 5.1. 6. Mercados, “Current practices in electricity trans- 22. “Power Grid to close central transmission utility mission. Case studies,” Global Power Best Practices status,” Business Standard, http://www.business- Series, RAP, (2013), http://www.raponline.org/wp- standard.com/article/economy-policy/powergrid- content/uploads/2016/05/rap-globaltransmission to-lose-central-transmission-utility-status- practices-2013-dec.pdf (accessed March 15, 2017). 115051800029_1.html (accessed July 20, 2016). 7. Indexation index: WPSFD4131 (Finished Goods 23. PGCIL, “JVs & Subsidiaries. Powergrid Group,” Less Food and Energy Seasonally Adjusted), or one http://www.powergridindia.com/_layouts/ that substitutes it, published by the Department PowerGrid/User/ContentPage.aspx?PId=81& of Labor, United States Government. This index is LangID=english (accessed September 12, 2016). agreed at the contract stage, and does not change. 24. Castalia. “Growth in transmission network (ckm),” 8. F. Salcedo and K. Porter (2013). Data sourced from Ministry of Power of the Gov- 9. R. Ferreira, “Private Participation in Transmission ernment of India, http://powermin.nic.in/en/ Expansion: the Brazilian Model,” Presentation from content/growth-transmission-sector (accessed consultation workshop, Nairobi, Kenya, September March 10, 2017); * To end-July 2016. 26, 2016. 25. Other industrial groups have also bid on projects, 10. Mercados (2013). but have so far been unsuccessful. 11. Data sourced from ANEEL, “Resultados dos Leilões 26. “Reliance Infrastructure files papers with Sebi for de Geração.” Resumo dos resultados dos leilões de InviT” (interview with Ajay Bhardwaj, President of transmissão até 2015, http://www.aneel.gov.br/ Sterlite), Economic Times, http://economictimes. resultados-de-leiloes (accessed January 10, 2017). indiatimes.com/news/economy/infrastructure/ 12. “Aneel aponta atraso em 60% das obras de trans- reliance-infrastructure-files-papers-with-sebi-for- missão de energia,” Globo Economia, http://g1.globo. invit/articleshow/54428336.cms (accessed Septem- com/economia/noticia/2016/05/aneel-aponta-atraso- ber 26, 2016). em-60-das-obras-de-transmissao-de-energia.html 27. “Transmission sector needs investment and mon- (accessed October 20, 2016). etization can be used: IS Jha, Power Grid,” Economic 13. Energia Abierta, CNE, “Capacidad instalada (MW),” Times, http://economictimes.indiatimes.com/ http://energiaabierta.cne.cl/visualizaciones/ opinion/interviews/transmission-sector-needs- capacidad-instalada/ (accessed March 15, 2017). investment-and-monetisation-can-be-used-is-jha- 14. A “tariff period” equals four years. power-grid/articleshow/52880178.cms (accessed 15. The bidding documents include an annex with a list December 9, 2016). of the acceptable risk rating companies. In addition, 92 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA 28. KPMG, “Power Sector in India. White Paper on Elaboración del Plan de Transmisión,” December implementation challenges and opportunities,” 2007, http://www2.osinerg.gob.pe/Proyecto_ Infrastructure & Government, January 2010, Normas/2007/CritMetElabPlanTransm/071203- https://www.kpmg.de/docs/PowerSector_2010.pdf INF-0403-Norma-Plan-de-Transmision.pdf (accessed March 15, 2017). (accessed March 15, 2017). 29. “New steps to enhance transparency in Power 40. Indexation index: WPSFD4131 (Finished Goods Sector,” Ministry of Power (India), http://pib.nic.in/ Less Food and Energy Seasonally Adjusted), or one newsite/PrintRelease.aspx?relid=148982 (accessed that substitutes it, published by the Department August 17, 2016). of Labor, United States Government. This index is 30. The share of private investment includes JVs with agreed at the contract stage, and does not change. PGCIL, but not investments by PGCIL without JVs. 41. According to information obtained in bidding docu- 31. Circuit kilometer is a measure of distance between ments and contracts in PROINVERSIÓN, “Procesos two points multiplied by the number of circuits. A concluidos,” http://www.proyectosapp.pe/modulos/ double circuit line means that two cables run the JER/PlantillaStandard.aspx?ARE=0&PFL=2 length. For example, a 50 km double circuit line will &JER=1593 (accessed March 15, 2017). be 100ct km. 42. PPI Project Database. Greenfield projects, Peru. 32. “Growth in transmission sector,” Ministry of 43. Interview with Dennis Ibarra of Enfinity Philip- Power (India), http://powermin.nic.in/content/ pines Renewable Resources, October 8, 2016. growth-transmission-sector (accessed July 20, 2016). 44. NGCP. TDP 2014–2015. 33. PPI Project Database. Greenfield projects, India. See 45. ESMAP (2015). also A. Bhardwaj, “Indian Power Transmission: A 46. “The Privatization of the National Transmission success story of PPP,” Presentation from consulta- Corporation,” PSALM, https://www.psalm.gov.ph/ tion workshop, Abuja, Nigeria, September 29, 2016. transmissionassets (accessed October 10, 2016). 34. World Bank, “International Experience with Private 47. ESMAP (2015). Sector Participation in Power Grids: Peru Case 48. KPMG, “The energy report: Philippines, Growth Study,” (Energy Sector Management Assistance and opportunities in the Philippines electric power Program), 2012, http://documents.worldbank.org/ sector,” KPMG Global Energy Institute, 2013–2014 curated/en/498461468000021182/pdf/101753-WP- edition (2013). P146042-Box393265B-PUBLIC-Private-Sector- 49. “NGCP seeks higher revenue target,” Philstar Participation-in-Power-Grids-Peru.pdf (accessed Global, http://www.philstar.com/business/2015/ March 10, 2017). 10/06/1507470/ngcp-seeks-higher-revenue-target- 35. Ministerio de Energia y Minas de Peru, “Anuario p45.3-b-2016 (accessed October 8, 2016). Estadístico de Electricidad 2015,” Parte 9, http:// 50. NGCP, “Regulatory Reset of the Regulated www.minem.gob.pe/_estadistica.php?idSector=6 Transmission Services for 2016 to 2020: Issues &idEstadistica=10179 (accessed March 10, 2017). Paper,” 4th Regulatory Period Reset Process, 36. Ministerio de Energia y Minas de Peru, “Anuario May 2014, http://www.erc.gov.ph/Files/Render/ Estadístico de Electricidad 2015,” Anexo 1, http:// media/2014.05.30_4thRPTransmissionIssues www.minem.gob.pe/_estadistica.php?idSector=6 Paper_NGCP_FINAL_forsubmissiontotheERC.pdf &idEstadistica=10179 (accessed March 10, 2017). (accessed March 15, 2017). 37. World Bank Group (2012). 51. NGCP TDP 2014–2015. 38. PPI Project Database. Greenfield projects, Peru. 52. “NGCP exceeds performance targets for 7th straight 39. OSINERGMIN, “Resumen de los Estudios para year,” NGCP, http://ngcp.ph/article-view.asp? Establecer los “Criterios y Metodología para la ContentID=8360 (accessed September 26, 2016). Appendix B Pipeline of IPT projects in Kenya and the Southern African power pool The IPT is the most broadly applicable business Overview of Kenya’s B.1  model for attracting privately financed transmission investments in Africa. This model can bring addi- Power Sector tional sources of finance, compared to the dominant The power sector in Kenya is partially unbundled. case in Africa in which government-owned utilities Transmission and distribution have been bundled, finance all transmission investments. but separate from generation, since the late 1990s. African governments should consider procuring IPPs have been able to invest and participate in transmission investments through IPT tenders, the generation sector since the mid-1990s, and in alongside the existing business model. Section 6 2008 the Government of Kenya created a separate discusses the steps to realize the potential of IPTs ­ government-owned transmission company. Box  B.1 in Africa and Appendix B includes a guide for gov- describes the main companies in Kenya’s power ernment officials and policymakers in Africa who sector. are considering whether to seek private finance for In addition, the Ministry of Energy and Petroleum investments in transmission using the IPT model. designs and implements the energy policy, the Energy This appendix presents a potential pipeline of Regulatory Commission (ERC) is the sector’s single transmission projects to be implemented in Kenya regulatory agency (dealing with technical and eco- and the SAPP, using the IPT model. The pipeline nomic issues), and the Rural Electrification Authority focuses on one country and one power pool that have is responsible for scaling up rural electrification. a relatively developed legal and regulatory framework in the power sector, and have defined interest in con- Financial viability of the power sector sidering a privately financed model for transmission. The financial viability of Kenya’s power sector is rel- With time, this pilot project could demonstrate that atively weak. The World Bank study “Making power the IPT business model is applicable in all African affordable for Africa and viable for its utilities”1 shows countries, creating further investor interest in the that Kenya’s utility (where KPLC is used as reference) sector and in the region. collects enough cash to recover its capital costs, but This appendix provides an overview of the power not its operational costs. The study also estimates that sector in Kenya (Section B.1), and the SAPP (Section Kenya’s quasi-fiscal deficit—defined as “the difference B.2), and identifies a pipeline of potential IPT projects between the net revenue of an efficient electricity in Kenya and the SAPP (Section B.3). sector covering operational and capital costs and the 94 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Box B.1 Main companies in Kenya’s power sector The main companies are divided between the generation Companies in the transmission and distribution sector and transmission and distribution sectors, as summarized include: below. Companies in the generation sector include: • The state-owned Kenya Power and Lighting Company (KPLC, also known as “Kenya Power”)—owns and oper- • The state majority-owned Kenya Electricity Generation ates the existing transmission and distribution network, Company (KenGen)—responsible for all public power and generation activities except those related to geothermal • The state-owned Kenya Electricity Transmission Com- resources, pany (Ketraco)—mandated to plan, design, construct, • The state-owned Geothermal Development Company and maintain new transmission lines and associated (GDC)—responsible for all public geothermal generation substations. activities, and • Almost 10 IPPs. • Source: A. Eberhard et al. (2016). net cash collected by the utility—is US$486 million, or hydropower generation, 26  percent geothermal, 41 percent of the cash collected by the utility. and 21  percent fuel oil—and the government owned However, Kenya has attracted US$2.4  billion in 70 percent of the capacity. private investment in IPPs since 1996, in more than Though IPPs currently account for 30 percent of the 10  projects.2 installed electricity generation, the share of IPP capac- ity has increased considerably since 2005 when IPPs Demand and electricity generation are had 12 percent. Electricity production from IPPs rep- expected to grow substantially by 2030 resents around a third of the total energy generated— Kenya has a target of 100  percent electricity access 31 percent in the July 2013–June 2014 period.6 by 2022—more than four times the 23 percent access level in the baseline year, 2012. By 2015, 37  percent Transmission lines will also be needed of the population had access to electricity.3 Improve- to transport the electricity and connect ments have been achieved, though reaching the consumers target will be challenging. Those with access also use Kenya currently uses 220 kV and 132 kV lines for its relatively little. Kenyans consume 168 kWh per capita transmission network. The length of transmission a year of electricity.4 lines in Kenya in 2015 was 4,054  km, compared to Demand for electricity has shown a rising trend 3,443  km in 2009. This represents an overall 18  per- since 2004, and is expected to continue growing in the cent increase. Figure B.1 shows the evolution of next decade. Estimates suggest that energy demand 100–200  kV and 200–300  kV transmission lines in will increase by almost four times by 2022, and ten the period, as well as the accumulated increase (in times by 2030—compared to the baseline year. Energy percentage) over the period. Kenya had no in-country demand would increase from 8,010  GWh in 2012 to transmission lines above 300 kV. 32,150 GWh in 2022 and 81,352 GWh by 2030.5 MV lines (between 1–100  kV) increased faster. Kenya’s installed generation capacity is projected Lines between 1 kV and 65 kV increased by 45 percent to increase by almost nine times by 2030—from in the 2009–2015 period (up to 1,212 km), while lines 1,645  MW in 2012 to 14,676  MW in 2030. Installed between 66 kV and 99 kV increased by 87 percent in generation in 2015 was 2,298  MW—36  percent the same period (up to 54,193 km). PIPELINE OF IPT PROJECTS IN KENYA AND THE SOUTHERN AFRICAN POWER POOL 95 Figure B.1 Evolution of transmission Currently transmission services are not separately lines, by voltage (2009–2015) regulated. ERC sets “just and reasonable” tariffs. Retail tariffs are determined at economically efficient levels, 20% to recover the costs of generation, transmission and 2,500 distribution. Retail tariffs are reviewed every three 2,000 years. KPLC collects revenues from consumers. KPLC 15% keeps part of these revenues to recover its own trans- 1,500 mission and distribution costs. However, KPLC also 1,000 pays transmission charges to Ketraco, generation charges to KenGen, GDC, and IPPs, and distribution 500 charges to the Rural Electrification Authority. The introduction of IPTs might require some 0 modification to regulatory arrangements. The ERC 2009 2010 2011 2012 2013 2014 2015 needs to set charges which it considers are just and 200–300 kV lines 100–300 kV lines reasonable. This requires periodic consideration of Source: Castalia. Data sourced from Trimble, C. et al., “T&D Data—State the efficient costs of providing transmission services owned national grid T&D data,” 2016, http://data.worldbank.org/data- to enable the three-yearly review of retail tariffs. catalog/affordable-viable-power-for-africa (accessed October 30, 2016). Once IPTs are introduced, the review process will be simplified. The tender process will have revealed the Despite these increases, Kenya still has a low level efficient costs of the services the IPT will provide. of transmission per capita (see Section 2.2). Combined However, the ERC may play a role in ensuring that transmission and distribution losses were 17.5  per- the tender process is well conducted and can form cent in 2015.7 Transmission will also be needed to a sufficient basis for passing the costs on to final meet Kenya’s electricity access targets and generation consumers. expansion plans. Ketraco expects to develop approximately 7,000  km of transmission lines by 2020—including Overview of the B.2  2,200  km of 132  kV lines, 2,400  km of 220  kV lines, Southern Africa Power 2,000 km of 400 kV lines, and 612 km of 500 kV High Voltage Direct Current (HVDC) lines.8 Pool SAPP is a membership of electricity utilities of ERC is tasked with sector planning and Southern Africa, created in 1995. SAPP currently has regulation 16  members from 12  different countries, as listed in The ERC is the entity responsible for power sector Table B.1. All members, except CEC, are (majority) planning in Kenya since the Energy Act 2006. Pre- ­government-owned companies. viously, the Ministry of Energy and Petroleum was To be a member, the utility must be located in in charge of planning. ERC prepares the Least Cost a country that was a member of the South Africa Power Development Plan (LCPDP) with a 20-year Development Community in September 1994. Utili- horizon, and updates the LCPDP every two years— ties located in countries that are not members of the including demand forecasts, generation and trans- Community could also be members. The SAPP Exec- mission planning, and an investment plan. The most utive Committee would need to approve the utility’s recent plan covers the 2015–2035 period. membership.9 ERC is also responsible for regulating prices in the SAPP has operated for over 20 years, with impor- power sector. Part 3 of the Energy Act 2006 requires tant results in the generation and transmission ERC to license transmission. The license shall include sector. Over 15,000  MW were commissioned in the charges for the transmission of electrical energy. 2004–2015 period, as well as a diverse range of trans- Contracts for the sale of transmission services (such mission interconnection projects—including the as a Transmission Services Agreement with an IPT) 400  kV interconnector between Mozambique and require ERC’s prior approval. Zimbabwe (commissioned in 1997), the 400  kV line 96 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Table B.1 Members of SAPP Name of the utility Country Botswana Power Cooperation Botswana EDM Mozambique Electricity Supply Commission of Malawi Malawi HCB Mozambique CEC Zambia ESKOM South Africa Nam Power Namibia Swaziland Electricity Company Swaziland Zimbabwe Electricity Supply Authority Zimbabwe Empresa Nacional de Electricidade Angola ZESCO Zambia Tanzania Electric Supply Company Limited Tanzania Société National d’Électricité Democratic Republic of the Congo Lesotho Electricity Corporation Lesotho Mozambique Transmission Company10 Mozambique Lunsemfwa Hydro Power Company Zambia Source: Southern Africa Power Pool, “Annual Report 2016,” http://www.sapp.co.zw/areports.html (accessed March 13, 2017). between South Africa and Mozambique, via Swazi- The planning subcommittee prepares the land (commissioned in 2000), and the 350 kV HVDC transmission plan line between Namibia and Zambia (commissioned in SAPP is based on an inter-governmental agreement. 2012). It is supported by a Memorandum of Understanding Figure B.2 illustrates the interconnections between the utilities participating in SAPP. Article between the SAPP member countries, by voltage. It 13 of that Memorandum sets out the representation also specifies the transmission capacities of the inter- on the planning subcommittee and the duties of the connections lines, and the available peak generation subcommittee. capacity of each country. The duties included an overall Pool Plan that draws on the plans prepared by individual members of SAPP. SAPP’s current generation and A Regional Generation and Transmission Expansion transmission capacity Plan Study was developed by SAPP in 2009 and pre- SAPP has an installed generation capacity of pared by Nexant. The plan identified several major 61,959 MW, and 75 percent of this installed capacity transmission investments with major benefits to is considered available for operations. SAPP members the region—including projects to link nonoperating plan to commission 32,695  MW of new generation members of SAPP (for example, the Zambia–Tanzania capacity by 2022. Over 60  percent of the installed and Mozambique–Malawi interconnections), reduce generation capacity in 2016 comes from coal, while congestion (for example, the Kafue–Livingston hydropower was the second source of generation, Upgrade in Zambia), or related to generation projects with 21 percent. (for example, the Mozambique Backbone–STE Proj- SAPP is the most developed power pool in Africa. ect).11 The World Bank and other DFIs are supporting As described in Box B.2, its market structure can pro- SAPP with these transmission projects, by providing vide useful information to help those planning future technical assistance and grant funding. transmission investments. PIPELINE OF IPT PROJECTS IN KENYA AND THE SOUTHERN AFRICAN POWER POOL 97 Figure B.2 The SAPP grid SNEL TANESCO DRC TANZANIA Pk = 1317 MW PK = 935 MW 280 MW 1000 MW ESCOM ZESCO Malawi Zambia Pk = 326 MW RNT Pk = 2287 MW Angola Pk = 1599 MW 1400 MW 400 MW ZESA 500 MW Zimbabwe HCB/EDM Pk = 1589 MW Mozambique EDM Pk = 880 MW 300 250 350 MW MOZAL Pk = 900 MW MW MW 600 MW 250 BPC MW Botswana 150 1450 Pk = 610 MW MW MW 1450 MW 150 MW 650 2000 MW 500 MW MW NAMPOWER ESKOM SEC Nambia 250 South Africa Swaziland Pk = 629 MW MW Pk = 34481 MW Pk = 227 MW 230 MW 1450 MW 533 kV DC 275 kV LEC 400 kV 220 kV Lesotho 330 kV 132 kV Pk = 150 MW Pk = Peak demand 350 kV DC 110 kV Source: Southern Africa Power Pool, “Annual Report 2016.” B.3 Pipeline identification Selection criteria includes project stage, size, and degree of wayleave risk Ketraco and SAPP are evaluating privately financed Ketraco and SAPP are identifying transmission proj- models to attract investment to transmission projects. ects to pilot IPTs. To do this, they have developed cri- The IPT business model is being considered as one teria to select the projects. The selection criteria are: likely suitable model. Public finance will continue being the dominant model, but alternative financ- • Project has undergone preliminary developments, ing methods could help obtain additional sources of • Project size is sufficiently large to attract investors, finance to the sector, and relieve the financing con- and straint that these African countries face. • Risk of wayleave is appropriate. 98 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA Box B.2 SAPP’s experience shows how regional power pools can assist transmission planning The market structure of SAPP can provide useful infor- used for trade on the DAM, after allowing for the capacity mation to help those planning future transmission invest- reserved for bilateral contracts. ments. SAPP operates a day-ahead, regional net market. Bids and offers are submitted for each bidding area. These terms are explained below: Generators can only bid where they are located (or where they are party to contracts relating to physical delivery). • “Day-ahead” means that bids are submitted 24  hours Offers to purchase on the DAM are also based on the bid- before real time. This contrasts with some markets that ding area where the purchaser is located. have intra-day trading nearer to real time, As is common in markets with this structure, the pric- • “Regional” means that SAPP is divided into several bid ing rules result in a uniform price when constraints are areas. Those bid areas are determined by the location of not binding. When transmission constraints between the grid constraints. As the networks were originally devel- bidding areas occur, prices also separate. This is known as oped primarily to serve country demand, the borders market splitting. of the bid areas are primarily the geographical borders The price separation also results in settlement residues. between the countries in the SAPP area, and This means the market operator buys more power in bid • “Net” means that the transmission capacity between areas with a low price and sells more power in bid areas bid areas is first allocated to bilateral trades. SAPP rules with a higher price. While different markets use different state: “Firm Bilateral Agreements between Participants terms, the existence of these residues is a feature of all will be given priority [. . .] for transmission on the SAPP regional markets. interconnectors.”12 Where bilateral agreements exceed As a result the DAM provides a high level of transparency the transmission capacity, the allocation is based on the maturity of the agreements. on the frequency of transmission constraints across the regional interconnections and on the materiality of those The transmission capacity remaining after the allocation constraints. SAPP also provides a high level of certainty over to bilateral agreements is available for trade on the Day access rights when transmission lines are constrained. The Ahead Market (DAM). The system operators determine the information on the frequency and materiality of constraints available transmission capacity between the bid areas. The does not remove the need for transmission planning, but market operator then calculates the capacity that can be provides useful input to the planning process. The first criterion considers the stage of develop- regional context. Investors will also evaluate if there ment of the project, and whether feasibility studies are reasonable prospects of a future pipeline of other (ESIA) have been completed. Long-term or urgent investment opportunities. projects are also not prioritized, as both Ketraco and The third criterion requires that the risk associated SAPP aim to trial IPT tenders in the short term. Pilot- to acquiring the land and ROW is appropriate, given ing urgent projects could also prevent focusing on the the project characteristics. Selected projects can only learning process. have low to medium wayleave risks. Projects with The second criterion refers to the project size and high wayleave risk were removed from the pipeline. whether projects are large enough to justify the trans- action costs (see related discussion in Section 6.8). Six identified potential transmission To comply with this criterion, the pilot project may projects to pilot IPTs in Kenya and SAPP have to bundle several projects into a single tender, After applying these criteria to Ketraco’s overall trans- particularly for in-country projects. According to mission pipeline and SAPP’s priority transmission consultations with private investors and World Bank projects, six potential pilot projects are obtained—four experts, an estimated minimum threshold (for con- in Kenya and two interconnections within SAPP. The struction costs) would be around US$80–100 million. selected pipeline of IPT projects in Kenya is shown in However, this figure may depend on the project or PIPELINE OF IPT PROJECTS IN KENYA AND THE SOUTHERN AFRICAN POWER POOL 99 Table B.2 Pipeline of potential IPT projects in Kenya Est. cost14 Need to bundle (US$ Length Voltage and with another Project name13 million) (km) line type Wayleave risk project(s)? Kiambere–Maua–Isiolo 81 288 220 kV; double Low: [Ketraco] had successful No circuit wayleave experiences with these communities, despite high population density Kisumu–Kakamega– 35  72 220 kV; double Low: [Ketraco] has had wayleave Yes Musaga circuit experiences with population Menegai–Nyandarua– 21  70 132 kV; double Medium: Registered land but high Yes Rumuruti circuit population density in Menengai Karbanet–Rumuruti 20 111 132 kV; double Partially Low, Partially High: privately Yes (Nyahururu) circuit owned land, but some pastoralists in Kabarnet Source: Ketraco, “Support to develop a framework for transmission infrastructure through PPP,” Draft Report, March 2017, (pers. comm. with Samuel Oguah, March 6, 2017). Adapted from Table 12. We need to select pilot line(s) from the shortlist of 11 lines. Table B.3 Pipeline of potential IPT projects in SAPP Estimated cost Capacity Project name Countries involved (US$ million) Length (km) and line type Zambia–Tanzania Zambia and   78015   70016 400 MW; 330 kV; Tanzania double circuit Mozambique Mozambique 1,70017 1,30018 3,100 MW; 800 kV; Backbone (STE) HVDC line Source: World Bank, “Project appraisal document on a proposed grant in the amount of SDR13.2 million to the Southern Africa Power Pool for a Southern Africa Power Pool (SAPP)—Program for accelerating transformational energy projects,” (Report No: 86076-AFR), October 2014, http://documents.worldbank. org/curated/en/988471468002999129/pdf/860760PAD0P126010Box385343B00OUO090.pdf (accessed March 15, 2017). Adapted from Table 5. Priority Transmission Projects. Table B.2 and the selected pipeline of IPT projects in Notes SAPP is shown in Table B.3. As suggested in the last column of Table B.2, three 1. M. Kojima and C. Trimble (2016). 2. A. Eberhard et al. (2016). of the selected projects in Kenya would need to be 3. “National Workshop Targets Kenya’s Electrification bundled to fulfill the criteria. Bundling the three proj- Challenges,” Energy Sector Management Assistance ects (those in the last three rows of the table) would Program, https://www.esmap.org/node/55495 involve an estimated cost of US$76 million, which is (accessed March 10, 2017). almost the minimum suggested threshold. 4. World Bank, “Electric power consumption (kWh per The Zambia–Tanzania project shown in Table B.3 capita),” OEDC/IEA, 2013, http://data.worldbank.org/ is a priority transmission project for SAPP that will indicator/EG.USE.ELEC.KH.PC (accessed January help relieve congestion in the power pool, and the STE 10, 2017). project is related to the development of low-cost gen- 5. Sustainable Energy for all, “Kenya Action Agenda,” eration. The STE project connects the Zambezi Basin January 2016, http://www.se4all.org/sites/default/ hydropower region downstream of Cahora Bassa to files/Kenya_AA_EN_Released.pdf (accessed March 14, 2017). southern Mozambique and South Africa. The World 6. A. Eberhard et al. (2016). Bank is currently updating feasibility studies of this 7. Trimble, C., et al., “T&D Data – T&D Network Losses project. (as percent of total dispatch),” 2016, http://data 100 LINKING UP: PUBLIC-PRIVATE PARTNERSHIPS IN POWER TRANSMISSION IN AFRICA .worldbank.org/data-catalog/affordable-viable- 12. Southern Africa Power Pools, “Day Ahead Market. power-for-africa (accessed October 30, 2016). Book of rules,” January 2009, http://www.sapp.co/ 8. 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