cost and return of renewable energy in sub-saharan africa: a comparison of kenya and ghana

Ana Pueyo (IDS), Simon Bawakyillenuo (ISSER)

and Helen Osiolo (KIPPRA)IEW 2016

1-3 June 2016, UCC, Cork

Cost and return of renewable energy in SSA A comparison of Kenya and Ghana

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RE hailed as a win-win solution for SSA access deficit

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Financial viability and affordability are key in countries with severe budget constraints

• African leaders interested in getting power to 634 million without it at the least cost and fastest alternative, whatever the source.

• Financiers look for investment opportunities that can repay their debt and offer a return on equity commensurate with the risk

• Evidence of the cost and return of electricity generation with renewables in SSA is very thin outside of South Africa

• Low costs achieved in SA can mislead policymakers in other countries: 5.1 USDc/kWh for wind and 6.5 USDc/kWh for solar PV

• Models often assume uniform costs across the continent

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Questions

For solar PV, wind, hydro and geothermal in Kenya and Ghana:

• Are they least cost and affordable?

• Can they provide a healthy return on equity and repay their loans?

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Landscape for RE in Kenya and Ghana• Growing demand for electricity (around 9%)

• Insufficient capacity (2831 MW Ghana, 2177 MW Kenya for populations of 27 and 45 million)

• Large share of hydropower (65% in Ghana, 45% in Kenya)

• Desire to diversify

• Ambitious expansion plans (+5GW by 2017 in Kenya, +1 GW by 2015 Ghana)

• Low implementation rates

• Long lead times to financial closure and construction

• Social discontent due to unreliable power and lack of access

• Urgency: expensive short-term solutions

• Some disposition to support renewables- FiT and RE targets, plus Gov. investment in solar PV in Ghana and geothermal and wind in Kenya.

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Methodology

• Prioritise project specific data : documentation provided by regulators, CDM documentation, project websites, expert elicitation, interviews to project developers, press.

• Fill gaps with publicly available information: IRENA (2015), Ondraczek et al (2015), Central Banks for financing costs, regulators for FiT and grid tariffs; national planning documents; WB META database

Models Data collection

Internal rates of return

Levelised cost of energy

Affordability• Affordability threshold: 5%

of HH expenditure• Subsistence consumption

level: 50kWh/HH• HH budget: national poverty

line

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Projects Technology

Project Size (MW)

Ghana Solar PV Nzema 155GCP 28BXC 20

Wind Unidentified by ECG 100Hydro Unidentified by ECG 93

Unidentified by ECG 18Kenya Solar PV Isiolo 40

Wind Turkana 310Ngong 61Kipeto 100

Hydro Mutonga 60Lower Grand Falls 140Kiambere 160

Geothermal Olkaria I 140Olkaria IV 140Ormat Olkaria 120

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Capacity factors (%)

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Financing costs• Two measurements of interest rates:

– Social discount rates– Weighted Average Cost of Capital- including share and

rate of debt and equity. Two options: commercial and concessional

• Maturity and grace period required for cash flows

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Financing costs

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Financing costs

• State owned geothermal in Kenya pays 1-2% for debt, vs 8% IPPs• Treasury bills in Ghana provide a 24% vs 8.6% in Kenya• Commercial bank lending in Ghana mainly short term and at rates

of 21-37%, in Kenya is 16%

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Tariffs

• Both Kenya and Ghana have passed FiT• Kenya’s FiT guaranteed for 20 years and denominated in foreign

currency• Ghana’s FiT guaranteed for 10 years and denominated in local currency• Kenya’s FiT are not much higher than grid generation charges• Ghana’s FiT for all technologies are more than twice as high as grid

generation charges

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Average electricity end-user tariffs (USD/kWh)

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FiT (USD/kWh)

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Foreign exchange and inflation

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LCOE Kenya USD cents/kWh

Gas turbines 11.3 USDc/kWhCoal 12.7 USDc/kWhEmergency diesel 26-42 USDc/kWh

LCPD, 2011

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Equity rates of return in Kenya (%)

90 day treasury bills: 8.6%Investor interviews: 15-20%

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Sensitivity of solar equity IRR to FiT

A FiT of 18 USDc/kWh would start providing attractive return to investors

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Kenya affordability• 5% of monthly budget of a HH at poverty line: $10.7

• Monthly subsistence consumption cost:• $5 / month- Subsidised grid fee• $ 6.7/month – Wind power• $ 8.9/ month- Solar PV • $ 6.9/ month- Hydro power• $5.2/ month- Geothermal power

• RE affordable at the poverty line

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LCOE Ghana USD cents/kWh

Oil plants 19 USDc/kWhGas 13 USDc/kWh

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Equity rates of return Ghana

90 day Treasury Bill rates: 24%Investor interviews 20-30%

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Sensitivity of solar PV to investment costs

BCX solar PV

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Ghana affordability• 5% of budget of a HH at poverty line: $6.8

• Monthly subsistence consumption cost:• $5/ month- Subsidised grid fee• $9.9 /month – Power from wind power plants (including T&D)• $13.2/ month- Power from solar PV plants• $ 6.7/ month- Power from hydro plants

• Wind and solar PV would not be affordable without subsidies to the final consumer

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Conclusions• Kenya geothermal and wind energy are least cost and offer attractive

returns to investors

• Kenya offers lower risks for investors: FiT closer to electricity tariffs, guaranteed for 20 years and denominated in foreign currency

• Access to very low cost finance by Kenya’s state-owned projects

• Ghana’s RE struggle to provide affordable power to consumers and returns to investors commensurate with risks

• High financing costs and macroeconomic risks key constraints

• Low credibility of Ghana’s FiT scheme: social opposition due to high tariffs, inability of the Governement and state-owned utility to cover the gap, currency devaluation, movements away from FiT towards auctions

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Thank youA.Pueyo@ids.ac.uk