Neglected chain: Alternatives to financing power transmission in Africa

Looming danger - Kenya Power transformers and power lines next to informal settlement / houses in Westlands adjacent to Loresho estate,Nairobi . The residents live in oblivious danger of a power trip or major electric fault . February 3rd,2024. [Elvis Ogina,Standard] Kenya has significant untapped potential for renewable energy. However, challenges in power supply and transmission have hindered progress. While substantial investments have been made in energy generation and distribution, power transmission has not received proportional attention. This imbalance has led to uneven development, particularly in rural areas, affecting healthcare, education, and business growth. To bridge this gap, both public and private investments are needed to expand and upgrade transmission infrastructure. A well-planned and reliable transmission network yields long-term benefits, including reduced electricity costs through economies of scale, cross-border power transmission for cost-efficient energy access, minimised power reserve requirements, and enhanced integration of renewable energy sources. Transmission line development in Kenya is predominantly led by the public sector, with minimal private sector involvement. Historically, investment in power generation has been four times higher than in transmission and distribution combined. Transmission projects are capital-intensive, and fiscal constraints among African governments have resulted in a major infrastructure deficit. According to the World Bank, annual investments of $3.2 billion (Sh412.8 billion) to $4.3 billion (Sh554.7 billion) are required in power transmission between 2015 and 2040. Private sector financing is essential to fill this gap, bringing expertise in project implementation and operation. Several models worldwide have successfully attracted private investment in power transmission. Countries like Brazil, Peru, Chile, and India have leveraged independent power transmission models to develop approximately 100,000 km of new transmission lines by 2016. Many OECD countries have privatised transmission, relying on private finance for new investments. Kenya can adopt similar models to enhance its transmission infrastructure. The Independent Power Transmission (IPT) model grants rights and obligations for a single transmission line or a package of transmission lines for 25-45 years. This approach resembles Kenya's Independent Power Producers (IPP) model used in power generation financing. Kenya has already embraced the IPT model in the development of the 400kV Lessos-Loosuk and 220kV Kisumu-Musaga transmission lines. Similarly, Uganda has partnered with Gridworks to upgrade its substations, addressing capacity constraints. Under the whole-of-grid concessions model, the rights and responsibilities of the state-owned transmission company are transferred to a private operator for 20-30 years. The concessionaire manages operations, maintenance, and investment in the transmission network. This model suits countries with regulatory frameworks allowing third-party transmission licensing. While most African nations lack independent electricity regulators, they can adopt regulation by contract, where the government monitors operator performance through key performance indicators. This model has been implemented in Cameroon, Mali, and Senegal, with governments retaining partial ownership. Merchant investors, on the other hand, develop and operate single transmission lines, often high-voltage direct current (HVDC) lines. Unlike IPT models with concession terms of 25-45 years, merchant investment terms are indefinite. The commercial viability depends on price arbitrage between markets or selling capacity to third parties. African nations with surplus power generation can use this model for inter-country transmission links to meet regional demand. However, merchant transmission lines are limited globally due to regulatory uncertainties that hinder long-term investments. Kenya could also adopt privatisation, which involves transferring ownership of State-owned transmission companies to private entities within a defined geographic area. This is achieved through trade sales or public flotations, with the private sector assuming responsibility for operations, management, and new investments. Full privatisation of transmission networks is uncommon in developing economies due to concerns over regulatory oversight. However, partial privatisation, where governments retain a stake, has proven effective in some regions. For these models to attract private sector investments, transmission projects must be bankable. A project is considered bankable if its risk-return profile aligns with investor criteria and can secure development funding. Key factors influencing bankability include: Probability of achieving financial, environmental, and social objectives; projected cash flows covering costs and delivering expected returns; regulatory framework ensuring project viability, value for money and affordability, particularly in a high-interest rate environment; and additional benefits, such as job creation and economic stimulation. A well-structured risk-sharing framework is critical to ensuring project bankability. Credit enhancement mechanisms can make projects more attractive to private investors by reducing financial risks. These mechanisms include short-term liquidity support, which lowers credit risks and improves funding conditions through guarantees and longer debt tenors. Examples include demand/revenue guarantees, partial risk guarantees (PRGs), and credit substitutions. Government support measures (GSMs), on the other hand, mitigate political and commercial risks while addressing termination compensation issues. Examples include government letters of support, escrow arrangements, letters of credit, ring-fenced funds, and political risk insurance. The Kenyan government is working on introducing Project Preparation Facilities (PPFs) to enhance the bankability of infrastructure projects. The private sector plays a vital role in closing Africa's power transmission financing gap. While many governments have opened power generation to private investors, transmission remains underdeveloped, leading to unreliable power supply. Involving private operators can drive cost efficiencies and improve power quality, particularly for utility networks requiring major upgrades. The writers are in the Transactions Advisory unit at PwC Kenya

Neglected chain: Alternatives to financing power transmission in Africa

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