A shining beacon in Uganda

A new solar facility has begun to power the village of Soroti, in Uganda, an east African country where four out of five people still lack access to electricity. The project is relatively small at 10MW, but the light it is shining on how to build cheap and clean sources of energy in emerging markets has the potential to sweep across the continent.

The $19 million Soroti project is Uganda’s first utility-scale solar plant. The country, which suffers from frequent droughts, relies on hydroelectric power for over 80 percent of its energy generation, but such weather events makes this source unreliable.

The east African country, home to 36 million people, is also frequently susceptible to the type of political instability and emerging market risk that impedes projects and makes a lot of investors simply look away.

“From the day we signed the [power-purchase agreement] to the day we delivered the first electron on the grid and enabled businesses, schools and homes to function and to be lit, it was 12 months,” recalls Reda El Chaar, executive chairman of Access power, one of the companies that helped build and finance the new Soroti Solar Facility.

That is a remarkable achievement for an emerging market project. But it took a cast of characters including a committed government, creative financing from development institutions and capable emerging market developers to light up Soroti, El Chaar says.

GET FiT

The project began with Uganda’s need for private investment. Despite passing a series of reforms to attract foreign capital, developers still shied away from its energy sector. Risks were deemed too high and returns not good enough.

Uganda’s Electricity Regulatory Authority needed to guarantee investors that projects were profitable and would not fall through. Its government passed a framework to allow the Uganda Electricity Transmission Company to sign PPAs with private generation companies. And in 2013, it created the Global Energy Transfer Feed-in Tariff or GET FiT, as it is known.

“They saw that for investors to come to Uganda, there needs to be, for example, bankable contracts, [that is] power purchase agreements [and] contracts that address the political risk in Uganda,” Kathrin Kastle, senior project manager at German development bank KfW, recalls.

The feed-in tariff “created a unique momentum” for the private development of solar energy, ERA chief executive Benon Mutambi said in a speech in 2014. “Uganda has become a frontrunner for the swift implementation of small-scale renewable energy projects and the attraction of private finance into the domestic energy sector in sub-Saharan Africa.”

In a partnership with KfW, Uganda’s GET FiT programme would draw support from European donors to offset the costs of the Soroti facility. KfW is managing the $9.5 million GET FiT subsidy that is funded by Norway, the UK, Germany and the EU’s Africa Infrastructure Trust Fund.

This allowed Uganda and KfW to auction two projects. One is still under development, but the Soroti auction went to Access and French developer EREN Renewable Energy.

“They fulfilled our minimum criteria and they offered an attractive price,” Kastle says.

The government in Uganda was able to give its sovereign guarantee to help make the project bankable, El Chaar points out. And thanks to the reforms it passed to attract investors, it signed a 20-year government-backed PPA with the developers to ensure the project would be built.

“If you look at what has been the base case in Africa, you realise that generally companies sign PPAs, and probably one out of every three companies that sign PPAs eventually end up building a plant,” El Chaar says. It was Uganda’s guarantee to Soroti that allowed the facility, unlike so many other renewables projects in Africa, to be built “urgently, sustainably and affordably,” he adds.

Under the agreement, Access and EREN RE would build the Soroti facility for $19 million. The project was financed with 30 percent upfront equity provided by the developers and 70 percent debt through a 17-year tenor split between Dutch bank FMO and the Emerging Africa Infrastructure Fund, managed by the Private Infrastructure Development Group. That tenor, the PIDG points out, is “significantly longer than that offered by local or international commercial banks”.

The GET FiT programme paid half of its $9.5 million when construction finished in December. The second half will be paid over five years by decreasing UETCL’s per kilowatt/hour electricity payment from 17 to 11 cents – significantly “lower than existing market tariffs for hydropower, and significantly cheaper and cleaner than power from thermal sources”, according to the PIDG.

Kastle says it was important to Uganda and KfW to tie at least part of the subsidy to how well the facility operated. “You have no leverage after you’ve paid out all the money to get them to comply with environmental and social standards,” she argues.

THREE INGREDIENTS

The Ugandan government, KfW and its European donors, and Access and EREN – these are “the three ingredients” that enabled Soroti’s quick development, El Chaar explains. Kastle agrees, adding that without a committed government and stable policies, investors would never be lured to such a high-risk market.

Creativity from finance institutions is also crucial, El Chaar says. Funding mechanisms like GET FiT provide investors with bankable assurances that capital will not be left stranded.

Of course the last ingredient is a developer willing to take the risk.

Kastle says it seemed Access was capable of dealing with the challenges of developing a project like Soroti. Operating in Uganda and similar markets is exactly why Access was created, El Chaar states. “One of the biggest issues today in Africa […] is not really the availability of funds. It’s the availability of developers that are willing to take very early-stage project risk,” he argues.

HOW REPLICABLE IS SOROTI?

How to power Africa has been a burning question in the minds of investors. Finding a model that quickly develops solutions and protects capital that is usually coming from foreign markets has been the elusive answer.

That is the potential of Soroti – an operating renewable energy facility that is cheap to build, generating a cashflow and constructed within 12 months’ time.

From Kastle’s perspective at KfW, Soroti serves as a good example for other African countries that solar can be developed quickly. If power is needed fast, they do not necessarily have to turn to diesel generators for a quick fix or wait for costly projects like hydroelectric dams to be built.

She is cautious, however, about whether large portions of Africa can recreate Soroti’s success: “I think other countries need to do some of the reforms Uganda has done and introduce some of the incentives that Uganda has introduced, like having a feed-in tariff, etc. And then, yes, it’s definitely replicable.”

El Chaar believes that other African countries are likely to see the ease with which Soroti was developed and follow suit. As an emerging market developer, he is more bullish on where other countries in Africa are with their own renewable energy development.

“Ten years ago, it was very relevant to ask what countries actually worked, and then you had a few countries. Today, I think the easier question to answer is what countries still do not have the appropriate framework, and I think [the answer] is: very few,” he says.

If anything, Soroti has given investors hope that Africa can be the next renewables frontier, “a shining beacon of success”, as El Chaar calls it. If the political, financial and technical will exists, Soroti will not be a rare example of a successful solar project in Africa for long.