Model: BOT Concession
Electricity supply is tremendously important for national economic development, and PPP projects for the generation of electricity (in the form of IPP arrangements) have proven elsewhere to be effective and efficient. A proposal for the tendering of extra generation capacity has been submitted to the Ministry of Finance and Economic Affairs and the Gambia Investment and Export Promotion Agency (GIEPA). However, it is not clear that the problems with the regulatory and institutional framework, which have contributed to the failing of an existing IPP, have been addressed. These problems need to be resolved before the project can be designated as a fast-track PPP project. The results of the ongoing update of the the energy sector diagnostic review will shed light on this issue.
In 2014 the power sector in The Gambia experienced some important changes.
The import of fuel has been liberalized in May 2014. The fuel import monopoly of Gam Petroleum has been terminated. This has eliminated one of the risks for potential private investors or operators of generation plants based on diesel fuel. They are now able to set up their own supply network, and are not dependent on the supply of fuel by Gam Petroleum.
?Independent Power Producer (IPP) Global Electric Group (GEG) has handed Brikama Power Station over to the National Water and Electricity Company (NAWEC), apparently without a transfer price.
This means that NAWEC is now the sole generator of electricity in The Gambia, apart from a few, small wind power projects run by independent producers (the Tanji Wind Park of GAMWINDS and the Batakunku Wind Energy Project).
These developments have not changed, however, the key problems and challenges of the electricity sector in The Gambia. The findings of the first mission in 2012-2013 remain valid.
Effective generation capacity is far below demand, resulting in frequent load shedding. In the Greater Banjul Area (GBA) power outages averaged 4-5 hours a day in 2013 and 2014. The first half of 2014 saw a worsening performance, with power failures reaching an average of more than 7 hours a day in June.
?Only half about of installed capacity is effectively available. The rest of the capacity is shut down for maintenance or out of order due to mechanical problems. Most of the generation capacity consists of small diesel generators (3-10 MW) running on heavy fuel oil. Such units have many moving parts and are vulnerable to breakdowns.
NAWEC’s revenues are running structurally below costs. This problem is exacerbated by the payment arrears by customers (mainly large customers, as small consumers are increasingly connected by pre-paid meters). As a result the company has accumulated a large debt, and has insufficient financial resources to fund repair and maintenance costs.
There are different opinions on the causes and remedies of the problems of the electricity sector in The Gambia.
The management of NAWEC regards the generation gap (which they estimate at 20-25 MW) as the key problem. NAWEC therefore proposes to organize a tender for the installation and operation of generation capacity of 30-35 MW by an IPP. The company claims that there is substantial interest from the private sector for such a project. It has submitted a proposal for the organization of such a tender to the Ministry of Finance and GIEPA.
NAWEC asserts that the grid is capable of accommodating an extra load of 60% compared to the present, and is therefore capable of absorbing the additional capacity. The further rehabilitation and expansion of the distribution system should be accomplished with the help of grants, while PPP financing must be directed to generation.
The financial viability of an IPP is impeded by the large revenue risks (such as payment arrears, incomplete pass-through of fuel costs in electricity prices,…). NAWEC is therefore prepared to consider the possibility of direct sales by the IPP to blue-chip customers, so that the revenue risks of the IPP are reduced. However, given the large importance of blue-chip customers (in number they only represent 5% of the customers, but they generate 60% of revenues) they would only accept direct sales in case of a large-scale greenfield project (50-60 MW of new capacity).
The Public Utilities Regulatory Authority (PURA) has a different view. The staff of PURA points out that in recent years the electricity tariffs have been increased substantially (recently by 26%), but that the production volume has nevertheless declined. PURA identifies the following two key problems of both the low reliability of electricity supply and the bad financial situation of NAWEC:
- payment arrears (especially by a number of large customers, since small consumers increasingly buy electricity with pre-paid meters);
- very low availability of the generation capacity, which PURA ascribes to bad operational management.
PURA proposes the following remedies:
- outsourcing of the generation activities through Operations and Management Contracts (covering the rehabilitation and operation of existing capacity);
- privatization of retail activities;
- Focus of NAWEC on transmission and distribution;
- Split of electricity, water and waste services within NAWEC in separate companies or autonomous units, which can be managed more efficiently.
According to PURA no additional capacity is needed at this moment. The installed capacity is sufficient to cover the present generation deficit, provided it is rehabilitated and properly run and maintained. PURA also perceives no motivation for further rate increases before the problems of low availability and arrear payments are addressed.With more than 3000 hours sunshine per year20 the climate in The Gambia is excellent for the production of solar energy. Hotels increasingly invest in solar boilers (for the production of hot water) and photovoltaic panels.The investment costs need to be recovered mainly from the savings in electricity taken from the grid or produced by on-site generators (in case of power failure). Photovoltaic panels can be connected to the grid on a net metering system. However, due to the frequent grid failures (on average more 4 hours a day, especially during the daytime) the revenues from the net metering system are much lower than the theoretical maximum. The storage of excess solar electricity in batteries is presently not financially viable. The cost of batteries is too high and the lifespan of batteries is much reduced by the hot climate.
In a meeting with the Gambia Chamber of Commerce and Industry (GCCI) a project proposal by private companies for the construction of a 20 MW solar farm was mentioned. However, no further details were provided.
All segments of the electricity sector (generation, transmission and distribution and retail) are in principle eligible for PPP. During the mission only a number of generation projects have been identified and discussed, in particular:
- Installation of new generation capacity of 30-35 MW under an IPP arrangement;
- Solar farm of 20 MW;
- Transfer of existing power stations run by NAWEC (Kotu, Brikama I and II) to a private operator, for instance under an O&M contract (which would also include the rehabilitation of the existing plant.
The most concrete opportunity is the installation of new generation capacity, for which NAWEC has submitted a proposal to the Ministry of Finance and GIEPA. The team has not been able to review this proposal and cannot testify whether it offers a sufficiently solid base for the set-up of a fast-track PPP project. Before the launching of this project the following points need to be confirmed:
- the project offers the most cost-effective solution to increase generation capacity;
- the project is financially viable on the basis of user revenues, both for the IPP and for NAWEC (which will buy and distribute the electricity).
A first step is the examination of the proposal for the tender of new generation capacity under an IPP arrangement. If it can be confirmed that the project is based on realistic assumptions, and does not depend on conditions that are presently not satisfied (such as guarantees or a tariff reform), it can be put forward as a fast-track PPP project. If, on the other hand, the viability of the project cannot be confirmed, then it is not possible at this time to select a fast-track PPP project in the electricity sector. Before the launching of new projects the main stakeholders (Ministry of Energy, NAWEC and PURA) must agree on a realistic and rational energy strategy, to be submitted to the Government for approval and confirmation. After the adoption of this strategy by the Government, the ppropriate actions must be taken to create the framework for implementing the strategy. Only when this framework is in place, new investment projects - consistent with the framework - can be considered. Project initiatives like the solar farm would also be promoted by the presence of such a framework.