Emerging Market Attractiveness Index (for hydropower IPPs) Tyson Weaver- Researcher Centre for Sustainable Energy Studies, Norway

Transcription

1 Emerging Market Attractiveness Index (for hydropower IPPs) Tyson Weaver- Researcher Centre for Sustainable Energy Studies, Norway

2 Key question Which African markets are attractive for international hydropower producers? And WHY?

3 Rising energy demand Increasing: GDP growth in developing world Industrial output (resource extraction) Demand for modern energy services Demand growth outstripping pace of new generation facilities Load shedding constraining economic growth & development opportunities Country El Demand Growth (CAGR % 05-10) Global Rank Angola Mauritania Sudan Gambia Niger Ethiopia Burkina Faso Benin Uganda Botswana South Africa Data source: World Bank statistics 2013 (w/ own analysis)

4 SAPP unmet energy demand Reserve margins insufficient Many countries inadequate supply to meet load demands ESKOM 2010 IRP heavily reliant on cross border trade to meet growing energy demands Data source: Norconsult CESUL 2011

5 Brief history of IPPs Changing regulatory model over past 20 years opened opportunities for competition in gen. Rise of IPPs through 90s until East Asian crisis Mixed track record of IPPs on both sides New global rise of IPPs due to: Opportunity constraints in core markets Resource constraints Commercial constraints Full support from DFIs & IFIs Leads to firms seeking geographic / market risk diversification

6 Role of IPPs Considered viable solution to supply constraints Viewed as a way to alleviate financial strain on public budgets in monopsomy markets Bring requisite resources to provide solutions in adequate capacity additions Challenge is to create sustainable outcomes Whereas sustainable outcome should be defined as the appropriate balancing of development and investment outcomes (furthermore the probability of both sides willing to repeat transaction)

7 Former work- what do we know? IPPs in Africa have had mixed results Yet mostly positive (after some contract re-negotiations) Sustainable outcomes impinged upon Favorable investment climate Clear policy framework (licenses, tariffs, grid access) Consistent and fair regulatory oversight Coherent power sector planning Source: Eberhard & Gratwick 2011

8 But what do IPPs look for? Minimal government (political) interference, yet clear political support for private initiatives in power sector (positive attitude towards) Regulatory frameworks Stability and enforceability of laws and contracts Defined investor rights and obligations Payment enforcement Adequate cash flow in the sector Coupled with adequate risk adjusted returns Source: Lamech & Saeed 2003

9 Financial viability of the sector Attraction of IPPs inpinged upon tariff Tariffs generally need to rise Not to provide ample returns to IPPs but rather to Reach cost reflectivity in the sector and provide financial sustainability to the SOE Low tariffs hinder power sector investments and are largely to blame for power shortages and load shedding Source: Copperbelt Energy Corporation 2012

10 Most critical factors Retail tariff level and collection discipline Fair adjudication of tariff adjustments and disputes Operational control and management freedom Regulatory commitment sustained through a long-term contract Thus, a well functioning electricity market with confidence in the supporting judicial-regulatory system Source: Lamech & Saeed 2003

11 New answers to old questions How does an international independent hydropower producer choose a market to enter? What screening selection criterion is used?

12 May depend on entry mode Divestures Answering the WHY (it didn t work) Privatizations Opportunities for improved performance? Rehabilitate & upgrade facilities Symptoms of a failing market (financial underperformance) Has it changed? Greenfields Long lead times & gestation periods (demands stability in political / regulatory systems) Vested long term interest through FDI = JV with the economy in question Talking Macroeconomics

13 Screening metrics: not all the same But firms do share a number of commonalities: GDP GROWTH EL. LOAD DEMAND GROWTH SIZABLE RESOURCE BASE POLITICAL STABILITY MARKET SIZE

14 Market strategy in a nutshell We seek out markets that show signs of long term economic and load demand growth potential, with a stable and clear regulatory framework, political stability, and a sizable resource base

15 Research model Indexing model that depicts market attractiveness for hydro IPPs built upon the following metrics: GDP GROWTH (ex post & ex ante) 1 RESOURCE BASE (GWh potential) 2 EL. LOAD DEMAND GROWTH (ex post) 3,4 Ease of Doing Business Index 3 MARKET SIZE (ex post and ex ante) 1 Weighting criterion for each metric up for debate as it changes according to sponsors priorities Data sources: IMF 1, IJHD 2 World Bank 3, CIA 4, IPPs

16 Results Country Score Global Rank Angola Ethiopia Mauritania Ghana Niger Rwanda Uganda Kenya 39 Zambia 71 Nigeria 73 Mozambique 82 South Africa 96 Zimbabwe 135 Sierra Leone 179

17 Limitations Index only guides hydropower IPPs towards markets that meet their core criterion Thus only acts as a SCREENING tool, not designed for investment based decisions (Does not take market fundamentals into account) Does not account for cross border trading from regional power pools Does not account for new support programs (*REIPP)

18 Discussing results Angola Huge resources, load & economic growth Overly subsidized, non functioning market Ethiopia EPPC actively seeking intl. partners for PPP Rwanda Smaller market, but has all the right fundamentals Uganda Massive inflow of FDI into the sector in past 5 years

19 Conclusions Countries pursuing the monopsomy market model look towards IPPs to meet demand shortfall Finding ways to attract IPPs into the sector is critical to meeting growing load demand Achieving FDI in the power sector is possible without breaking the bank Focus should be placed on regulatory reforms and the long term stability/reliability of those reforms (commitment!) to attract IPPs

20 Moving forward Predictable outcomes (no surprises) reduces need for higher risk based returns Investor confidence in the market (across value chain) sustains the attractiveness of that market for IPPs Many international hydropower IPPs are seeking niche plays with potential for portfolio building in that market Stability, market transparency / liquidity, and long term predictability is ultimately what attracts IPPs

21 Uncertainty = risk = higher financing costs = higher returns demanded Single offtaker (monopsomy) Source: DB Climate Change Advisors

22 Moving forward Predictable outcomes (no surprises) reduces need for higher risk based returns Investor confidence in the market (across value chain) sustains the attractiveness of that market for IPPs Many international hydropower IPPs are seeking niche plays with potential for portfolio building in that market Stability, market transparency / liquidity, and long term predictability is ultimately what attracts IPPs

23 Tyson Weaver Centre for Sustainable Energy Studies

24 References Copperbelt Energy Corporation, Zambia s Untapped Electricity Generation Potential, Zambia International Mining and Energy Conference, Lusaka. DB Climate Change Advisors, Ebarhard & Gratwick, When the power comes: An analysis of IPPs in Africa, Management Programme in Infrastructure Reform and Regulation: University of Cape Town International Monetary Fund, Data and statistics International Journal of Hydropower and Dams, World Atlas Lamech & Saeed What International Investors Look For When Investing In Developing Countries, World Bank Group Norconsult, Mozambique Regional Transmission Backbone Project ( CESUL ): Presentation of Feasibility Study Report, Mapato. World Bank Group, Data