Solar power in Africa is on its way to becoming a market commodity: there has been a shift in the African solar photovoltaic (PV) sector away from donor-driven projects towards marketdriven investments. This transition has been stimulated, in part, by a substantial reduction in the cost of PV panels over the last decade, which has improved the competitiveness of PV. Perhaps even more important has been the development of an attractive investment climate across much of Africa, combined with robust project agreements and appropriate credit enhancements. This paper analyses the development of East Africa’s first utility-scale solar field from a legal practitioner’s perspective. Tracing the lessons learned, it highlights how the reforms in Rwanda’s energy policies have contributed to success, at both the country and the project level.
This paper seeks to use the plant located in Rwanda as a case study for analysing the elements needed for the successful implementation of bankable utility-scale solar energy
projects—projects that have the potential to help reduce Africa’s acute power supply gap.
I. Introduction
Perhaps the most pressing environmental issue today is the impact of carbon dioxide emissions on the environment. The 2015, the United Nations Climate Change Conference set out an action plan to avoid dangerous climate change by limiting global warming to well below 2°C.1 Yet side by side with the need to limit emissions stands the arguably equally acute humanitarian concern of providing energy for developing nations. The World Bank estimates that the direct cost of power outages to African nations is typically 2% of GDP, or nearly USD 5.25 billion per year.2 The indirect costs are even higher, as the lack of energy impacts a spectrum of issues
Project finance lawyer specializing in the renewable energy sector in Africa, with experience in Zambia, Tanzania, Rwanda, Benin, Burundi, Togo, Ghana, Egypt and Nigeria. Employed at Gigawatt Global. Previously employed at Slaughter and May, London and Herzog Fox, Tel Aviv. Visiting lawyer at leading Nigerian law firm Aluwko & Oyedobe, Lagos.
Contact: chana.gluck@gigawattglobal.com
1 A summary of the Paris Agreement is available on the European Commission (European Commission,
December 2015) http://ec.europa.eu/clima/policies/international/negotiations/paris/index_en.htm accessed 10 February 2016.
2 M O Oseni, “Power Outages and the Costs of Unsupplied Electricity: Evidence from Backup Generation among Firms in Africa,” (2013) Cambridge Working Papers in Economics, Judge Business School, University of Cambridge 12: 2013; V Foster, J Steinbuks, “Paying the Price for Unreliable Power Supplies: In-House Generation of Electricity by Firms in Africa,” (2009) World Bank Policy Research Working Paper No. 4913 <http://poseidon01.ssrn.com/delivery.php?ID=52700006712402706808811507406710710800700302404207107
ranging from lowered education, to negative impact on health and female empowerment.3 These environmental and humanitarian concerns may be seen as standing in opposition to each other—unless Africa’s energy deficit can be filled through renewable energy sources. Africa as a continent has abundant amounts of solar radiation and available landmass. According to the World Bank, if around 0.02–0.05% of landmass would be covered by solar panels, sub-Saharan Africa should be able to deliver 11.4 terawatts of solar capacity. 4 Experts estimate that aggressively promoting renewable energy could achieve a 27% reduction in carbon dioxide emissions.5 The question is how to translate policies and ideas into tangible outcomes.
There is a tendency to consider environmental or humanitarian projects as “donor” cases. Yet if we want these projects to have long-term viability and greater impact, it is vital
to make them profitable. Only thus will they become self-sustaining, and only thus will they be expanded. The goal should be to reduce carbon-dioxide emission, reduce Africa’s energy shortage, achieve social objectives and make money.6 What is more, if the humanitarian elements were taken into account from the inception, these projects could be set up in such a way as to advance and develop other humanitarian organisations by providing a source of funding. For example, if renewable power projects were to be set up on lands owned by orphanages, hospitals, or schools, they could directly impact society at a micro-level while also providing electricity to the national grid. The key is to ensure that humanitarian and business concerns are developed hand in hand, so that making a profit does not negate the humanitarian element, and the humanitarian element does not negatively impact profitability. The two should rather feed each other, each making the other viable.
5093046015037008014012047124039014001108100006068050033054127067004030084108001112124067084024077120126027086021125031065095027065067112&EXT=pdf> accessed 10 February 2016. 3 Department for International Development, UK, “Integrating Gender, Poverty Reduction, and Energy” (World Bank, 2015) http://siteresources.worldbank.org/INTGENENERGY/Resources/LiteratureInternetReviewDFIDBib.pdf accessed 15 December 2015.
4 D Wheeler, T T That, C Meisner et al, “Country Stakes in Climate Negotiations: Two Dimensions ofVulnerability,” (World Bank Group, August 2007) accessed 10 February 2016.
5 A Castellano, A Kendall, M Nikomariv et al, “Brighter Africa: The Growth Potential of the Sub-Saharan Sector” (McKinsey and Company, February 2015) accessed 15 December 2015. On more on possible alternative energies in Africa, see A Niyibizi, “SWOT Analysis for Renewable Energy in Africa: Challenges and Prospects” [2015] RELP 6:4 276.
6 For more on balancing between the competing demands of economics, politics and the environment, see G Mete and R Heffron, “Renewable Energy Law and Policy in Turkey” [2015] RELP 6:4, 1, 1-2.
This was the aim of Gigawatt Global’s Rwanda project, 7 which set up East Africa’s first utility-scale solar photovoltaic plant. Gigawatt Global obtained a mandate to develop,
finance and construct a solar power plant located in Rwanda (the “Project”). The 8.5 MW solar power plant (the “Plant”) is built on land owned by the Agahozo-Shalom Youth Village
(the “Youth Village”),8 whose mission is to care for Rwanda’s children orphaned or affected by the Rwandan genocide. The village leases land to the Project Company, which helps pay for the village’s operating expenses, and Gigawatt Global has provided free training to furnish the local workforce with the skills required to join the operations and maintenance team.
Funding was provided by an international consortium of financing partners.9 On 9 February, 2015, the Plant began exporting solar-generated electricity to Rwanda’s national grid. Twelve months after the Project Company10 reached financial close, 11 the $23.7 million plant was interconnected, increasing Rwanda’s generating capacity by 6% and electrifying 16,000 new households.12
7 Gigawatt Global Coöperatief U.A. is a multinational renewable energy company, incorporated in the Netherlands, which is focused on the development and management of utility-scale solar fields in emerging markets. For more information see http://gigawattglobal.com accessed 9 February 2016. 8 Agahozo-Shalom Youth Village, Rwanda, is an Edmond J. Safra Philanthropic Foundation Project. For more
information, see www.edmondjsafra.org/general-philanthropy/agahozo-shalom-youth-village accessed 9 February 2016.
9 Debt was provided by FMO (Netherlands Development Finance Company) and the London-based EAIF (Emerging Africa Infrastructure Fund). Mezzanine debt was provided by Norfund (the Norwegian Investment Fund for Developing Countries). Equity was provided by Scatec Solar ASA (which also served as the engineering, procurement and construction contractor and continues to serve as the operations and maintenance provider), Norfund and KLP Norfund Investments (a vehicle jointly owned by KLP, the largest pension fund in Norway, and Norfund). (The terms “debt” “mezzanine debt” and “equity” refer to three types of financing: “debt” refers to loans made by banks to the Project Company, with lenders seeking repayment mainly from cashflows arising out of the Power Purchase Agreement, with limited recourse to sponsors; “mezannine debt” falls between senior debt and equity—its cost is greater than senior debt, as there is more risk involved; “equity” refers to the cash or assets contributed by the Project sponsors.) Grants were received from the United States Government via the United States Overseas Private Investment Corporation’s ACEF (Africa Clean Energy Finance) grant and from the EEP (Energy and Environment Partnership) Programme, a partnership of the Finnish, Norwegian and Austrian governments. For more on FMO (the Netherlands Development Finance Company), see www.fmo.nl accessed 8 February 2016; for EAIF (Emerging Africa Infrastructure Fund) see www.eaif.com accessed 8 February 2016; for Norfund (the Norwegian Investment Fund for Developing Countries) see www.norfund.no accessed 8 February 2016; for Scatec Solar ASA seewww.scatecsolar.com/About accessed 8 February 2016; for OPIC’s ACEF (Africa Clean Energy Finance) see www.opic.gov/opic-action/power-africa accessed 8 February 2016; for EEP (Energy and Environment Partnership) Programme, see accessed 8 February 2016.
10 Gigawatt Global Rwanda Ltd, the special-purpose entity created to develop, own, and operate the Project. Gigawatt Global is a shareholder in Gigawatt Global Rwanda Ltd.
11 By “financial close,” I refer to the date on which all project contracts and financing documentation are signed, and conditions precedent to initial drawing of the debt have been satisfied or waived.
12 For more information, see James Ayre, “First Utility-Scale Solar Energy Project in East Africa Now Online — Rwanda’s Total Grid Capacity Surges 6%” (Clean Technica, 9 February 2015) accessed 2 December 2015.
In recognition of its achievements, the Project was nominated for a Nobel Peace Prize in March 2015, 13 and it has been selected by the U.S. Department of State Bureau of Economic and Business Affairs as a finalist for the Secretary of State’s Award for Corporate Excellence for important contributions to the growth and sustainable development of the local economies.14 As Gigawatt Global’s General Counsel, I was intimately involved in the development of the Project from inception to completion, working out the details of how to move policy and ideals into implementable action. This Project was groundbreaking in that it successfully combined socially driven investment with commercially viable returns. In this paper, I share the legal perspective on developing and streamlining the process of constructing Rwanda’s first utility-scale solar PV plant. While the intricacies of negotiating the finance and equity agreements go beyond the scope of this paper, I hope to provide a roadmap of the steps required to develop successful utility-scale solar energy projects in Africa. Specifically, I will examine the current situation of Rwandan governmental institutions, laws and policies from a practitioner’s perspective, demonstrating how they enabled the implementation of the Project, in the hope they can be applied elsewhere in the region.
The government of Rwanda recognises the essential importance of an efficient and reliable energy supply. It therefore invested in several reports pertaining to the development of Rwanda’s renewable energy resources. Especially noteworthy is the Ministry of Finance and Economic Planning’s “Rwanda Vision 2020” (2000), which introduced a twenty-year development strategy to help Rwanda overcome various growth and development challenges.15 This was followed by the “Green Growth and Climate Resilient Strategy” (2011), which set developmental goals up until 2050: it seeks to guide national policy and energy planning, positioning Rwanda for access to international funding.16 Rwanda also instituted an Energy
13 For more information, see, for example S Udasin, “Gigawatt Global, Responsible for East Africa’s First Solar Field, Nominated for Nobel Prize,” (Jerusalem Post, 14 March 2015) accessed 8 February 2016.
14 See United States Department of State, “Finalist for the 2015 Secretary of State’s Award for Corporate Excellence” (US Department of State, 2016) http://www.state.gov/r/pa/prs/ps/2016/01/251710.htm accessed 8 Febraruary 2016.
15 Republic of Rwanda Ministry of Finance and Economic Planning, “Rwanda 2020” (Gesci, 2000)
www.gesci.org/assets/files/Rwanda_Vision_2020.pdf accessed 8 February 2016.
16 See Republic of Rwanda, “Green Growth and Climate Resilience: National Strategy for Climate Change and Low Carbon Development” (UNCSD, 2011) accessed 8 February 2016.
Policy (2015)17 to encourage the integration of renewable energy into the national grid. From this point, I will refer collectively to this suite of policies as the “Energy Framework”. Perhaps the most important contribution of the Energy Framework is its focus on the development of good governance, “which can be understood as accountability, transparency and efficiency”, 18 as well as the implementation of policies to encourage foreign direct investment into Rwanda. These policies form the basis on which the Project was successfully completed. I will point to the ways in which the development of Rwanda’s governmental institutions, laws and policies facilitated the development of the energy sector by positioning Rwanda as a “credit-worthy” state for foreign investment.
In “Part II: Rwanda Power Sector and Energy Framework Overview”, I provide an summary of the Rwandan Energy Framework, power sector and regulatory framework structure, analysing how it paved the way for Gigawatt Global’s decision to invest. In “Part III: Applicable Laws and Institutional Set-up”, I analyse how the Energy Framework is implemented via specific legislation. In “Part IV: Renewable Energy Considerations”, I point to elements that developers of independent power projects in emerging markets should take into consideration when selecting a site for a renewable energy plant, and highlight some steps that the Energy Framework has yet to implement. In “Part V: Key Transaction Documents”, I detail the requisite contracts that needed to be negotiated and drafted between the various parties. In “Part VI: Mitigation of Investment Risk”, the possible risks to investors is explored, and I highlight the importance of credit enhancements and risk-mitigation in the Rwandan context. In “Part VII: Negotiating a Power Purchase Agreement for Renewable Energy”, I point to some of the unique challenges associated with setting up a renewable energy project, and detail the issues that arose in negotiating the solar Power Purchase Agreement. I conclude by outlining the lessons learned from my experience in Rwanda, examining how the Energy Framework has
been implemented, and how it can be turned into a successful model to be replicated throughout Africa.
17 Republic of Rwanda Ministry of Infrastructure, “Rwanda Energy Policy” (MININFRA, 2015) accessed January 10, 2016. 18 See “Rwanda 2020”, 12 n15.
II. Rwanda Power Sector and Energy Framework Overview
Currently, 39% of Rwanda’s electricity generation capacity is dependent on oil-based products, which must be imported. 19 As a landlocked country, transport is limited to road and air, and import costs are very high. Any increase in oil price thus has a significant negative effect on GDP and economic growth. Rwanda is fortunate that it has large untapped clean energy resources, which have the potential to exceed its electricity needs and even fully replace its oilfuelled power plants. The challenge lies in financing the exploitation of these energy resources. At the beginning of the 1990s, virtually all major power generation throughout Africa was financed by public monies. 20 In the early 1990s, however, a number of factors, such as insufficient public funds for new power plants and poor performance by state-run utilities, brought about change.21The Energy Framework sets out to introduce private participation and competition into the electricity sectors. This with the specific aim of reducing dependence on oil in favour of domestic alternative energy resources. The various reports each play a part in enabling this private participation :
1. Rwanda Vision 2020 (“Vision 2020”)
The basis of Rwandan energy policy is laid out in Vision 2020. Issued by the Ministry of Finance and Economic Planning in July 2000, Vision 2020 lays out a plan for developing Rwanda from the humanitarian assistance phase associated with the 1994 genocide into one of sustainable development. The major aspiration of Vision 2020 is to transform Rwanda’s economy from a subsistence agriculture economy to a knowledge-based society, thereby reducing Rwanda’s dependence on external aid.
Vision 2020 is based on the following pillars:
• Reconstruction of the nation and its social capital on the basis of goo governance, underpinned by a capable state;
• Development of an efficient private sector, spearheaded by competitiveness and entrepreneurship;
• Infrastructural development, with a special focus on energy;
• Positioning Rwanda’s access to international markets and finance.
19See “Green Growth and Climate Resilience: National Strategy for Climate Change and Low Carbon Development” ii n16.
20 See A Eberhard, O Rosnes, M Shkaratan et al, Africa’s Power Infrastrucutre: Improving Investment, Connectively, Realiability and Efficiencies. (Vivien Foster and Cecilia Briceño-Garmendia ed, World Bank, 2010).
21 Ibid.
Vision 2020 puts an emphasis on energy, arguing that Rwanda’s inadequate and expensive electricity supply constitutes a limiting factor to development, while noting that imported petroleum products consume more than 40% of foreign exchange.22 It therefore set out that Rwanda should increase energy production, while diversifying into alternative energy sources, including solar PV. The goal is that by 2020, at least 35% of the Rwandan population will be
connected to electricity.
Vision 2020 further posits that “weak institutional capacity” hinders the development of the Rwandan economy, detracting investors. It therefore also set out the principles for developing governmental institutions, laws and policies which would facilitate foreign investment into the energy sector b positioning Rwanda as a “credit-worthy” state. These principles indeed enabled the Project to be financed (see Section VI).
2. Rwanda Energy Policy23(“Energy Policy”)
The Energy Policy was introduced in 2012 to guide decisions on the extraction, development and use of Rwanda’s energy resources. It is founded upon three principles:
• A commitment to transparent and effective energy-sector governance;
• A focus on facilitating business and reducing barriers to private investment;
• Enhancing institutional and organisational capacities as well as the legal and regulatory framework.
The Energy Policy notes that ensuring access to substantial and affordable energy services is integral to Rwanda’s economic development. Such access is dependent on increasing electricity generation from renewable energy sources, as the cost of electricity is not currently cost reflective (i.e. what the end user/consumer pays) and is heavily subsided. The Energy Policy seeks to address these critical sector challenges by creating an environment that will attract private companies to invest, and fill the energy gap. In particular, it recommends the implementation of a sound suite of contracts that will serve to protect foreign investors, including a bankable Power Purchase Agreement (see below). The overarching policy goals of the Energy Report include:
22 See “Rwanda 2020”, 17 n15. 23Issued by the Ministry on Infrastructure in 2012, and approved by Cabinet in 2015 n17.
Ensuring sufficient, reliable and affordable energy for all Rwandans;
• Increasing the share of renewable energy into the Rwanda power mix;
• Developing the requisite institutional capacity to increase accountability, transparency
and implementation of sustainable energy service delivery.
3. Green Growth and Climate Resilient Strategy (“Strategy”)
Whilst Vision 2020 describes Rwanda’s short-term aspirations for achieving economic development and poverty reduction, the Strategy looks beyond 2020 to 2050. It focuses on the steps Rwanda should take in the short- and medium-term in order to ensure stability and prosperity in light of climate change. The Strategy aims to develop low-carbon domestic energy resources and practices—both to reduce contribution to adverse climate change, as well as to achieve independence from imported oil for power generation. In this, it sees Rwanda as a model for other countries in the regional hub.
The purpose of the Strategy is threefold:
• To guide national policy and planning in an integrated manner;
• To make climate change a mainstream concern in all sectors of the economy;
• To position Rwanda for access to international funding in order to achieve climate resilience and low-carbon development.
The Strategy specifically notes that bankable Power Purchase Agreements (PPAs), with appropriate risk allocation and mitigation, are a pre-requisite for the development and participation of the private sector in the energy industry, thus reinforcing the focus of the Energy Framework on creating an enabling environment for foreign investment.
All in all, the Energy Framework seeks to introduce independent power projects to Rwanda, as they are seen as a quick and relatively easy solution to the persistent supply
constraints. 24 In particular, the Energy Framework favours privately-financed greenfield generation, supported by non-recourse or limited recourse loans and long-term PPAs with the
24 See, for example, APEC Energy Working Group, Manual of Best Practice Principles for Independent Power Producers. (Canberra: APEC Secretariat, 1997).
state-owned utility or another offtaker. 25 These changes set the stage for the entrance of Independent Power Producers such as Gigawatt Global into Rwanda’s energy sector.
III. Applicable Laws and Institutional Set-up
The Energy Framework aims to attract investors to renewable energy projects, both by reducing taxes and by providing an enabling legal, regulatory and political environment. Whilst not the only factor in influencing the development of the Project, the favourable investment climate, with its clear and coherent legislation governing the energy sector, contributed to the Project’s success. To implement the sector reform set out in the Energy Framework, the government launched a number of legal-, regulatory- and private-sector development initiatives. Several laws have been approved, which together define the structure of the energy sector, as well as its institutional framework.
In my experience, the Energy Framework succeeded in making the legislation and policies transparent and comprehensive. Gigawatt Global had a clear understanding of business facilitation measures (such as investment incentives); an understanding of the legislative framework; and the rules and regulations pertaining to the entry and operations of foreign investors in Rwanda’s energy sector.
1. Laws
The Energy Framework is implemented via several laws. The Organic Law on Environment (2005), which is Rwanda’s National Environment Policy Law, establishes a taxation policy that is attractive for investment in clean energy.26 According to this Act, the Treasury is entitled to establish regulations to reduce income taxes for individuals or companies undertaking activities that promote the environment. This optimised the economics of the Project for the benefit of
the Project Company.
Another significant law is the Electricity Act of 2011, which governs all activities of
25 See the World Bank report “The World Bank’s Role in the Electric Power Sector: Policies for Effective Institutional, Regulatory and Finance Reform,” (World Bank, 1993) accessed 8 February 2016. 26Law N°. 04/2005 of 2005. The full text of the law is available online at accessed 8 February 2016.
electric power production, transmission, distribution and trading within Rwanda. 27 The Electricity Act provides the legal basis for determining the roles of public and private entities in each sector, as well as the electricity-sector activities that are subject to licensing. It also sets out the requirements and procedures for granting licences; 28 the rights and responsibilities of the licence holders; and provisions on the electricity market.29 The Electricity Act specifies that the electricity sector is market-based, safeguarding free and equal access to the activities of electricity production, transmission and distribution.30 It allows for cost-based tariffs to ensure adequate return on investments made by licence holders and for performance-based pricing and benchmarking. 31 The principles that determine the electricity tariffs are prepared by the regulatory agency, and require approval by the Energy Minister, thus ensuring that the investor receives a normal return on investment.32
2. Institutions
A clear and consistent institutional set-up played a key role in the successful outcome of the Project. In general, the degree of risk to an investor is inversely proportional to the strength of the governmental institutions and the rule of law. When dependable, government institutions stabilise the investment environment by providing oversight that assures investors that their rights will be upheld. Vision 2020 therefore called for a rapid development of the institutions governing the energy sector. It noted the need to streamline the institutional framework in order to integrate resource planning, thus improving inter- and intra- institutional decision-making, and avoiding a duplication of efforts.
In my experience working with Rwandan institutions, Vision 2020 has indeed been successful in restructuring and optimising the institutional framework. As envisaged in the Energy Framework, the governmental institutions engaged with the Project had distinct roles and responsibilities, each of which facilitated the development process for Gigawatt Global. Given the complexity and diversity of the energy sector, multiple institutions play a part, and the Project engaged with the following key institutions:
27 Ministry of Infrastructure, “Electricity Act”, law N°21/2011 of 23/06/2011 “Governing Electricity in Rwanda,” Article 1. Full text can be found at Legal Office FAOLEX accessed February 9, 2016.
28 Electricity Act, 2011, Article 7n27.
29 Electricity Act, 2011, Article 13 n27.
30 Electricity Act, 2011, Articles 27 n27.
31 Electricity Act, 2011, Article 32 n27.
32 Electricity Act, 2011, Article 29 n27.
• The Rwanda Energy Group (REG). Formerly part of the Energy and Water and Sanitation Authority (EWSA), REG was incorporated in 2013,33 and serves as the “Offtaker” for grid-connected power projects in Rwanda. It purchases all of the electricity produced at the Plant in accordance with the terms of the Power Purchase Agreement (PPA).
• The Rwanda Development Board (RDB). The RDB is the agency for all private-sector investment as well as for foreign direct investment in the country. It negotiates all concession agreements with private project developers. In the case of the Project, it led the negotiations on behalf of the Government of Rwanda.34 The RDB proved to be helpful in assisting Gigawatt Global in navigating both pre-development milestones (such as the environmental and social impact assessment) and the negotiation and execution of the project agreements.
• The Ministry of Infrastructure (MININFRA). MININFRA is responsible for infrastructure policy and strategy formulation, including the energy sector. It is the entity that grants concessions to investors.35
• Rwanda Utility Regulatory Authority (RURA). As envisioned in Vision 2020, RURA was created in 2001, and is defined by law as an autonomous entity with its own board of directors, appointed by order of the Prime Minister. RURA’s mandate is to regulate the sector in an efficient, sustainable and reliable manner. In line with this mandate, the agency is responsible for promoting competition, advising the government during formulation of energy policy, protecting consumers, educating stakeholders, as well as approving contractual undertakings with regard to distribution, transmission of electricity or assessing the tariff structure. RURA is an independent regulatory agency that acts as the “Regulator”.36 It is
33Ministry of Infrastructure, Law N°97/2013 of 30/01/2014, repealing Law N°43/2010 of 07/12/2010, “Establishing Rwanda Energy, Water and Sanitation Authority (EWSA) and Determining Its Responsibilities, Organization and Functioning”. The full text of the law can be found at Legal Office FAOLEX http://faolex.fao.org/docs/pdf/rwa132964.pdf accessed 9 February 2016.
34 For more on the role of the Rwanda Energy Group and the Rwanda Development Board, see African Development Bank Group, “Rwanda Energy Sector Review and Action Plan” (AFDB, 2013), 27 www.afdb.org/fileadmin/uploads/afdb/Documents/Project-and-Operations/Rwanda__Energy_Sector_Review_and_Action_Plan.pdf accessed 9 February 2016; as well as Rwanda Electricity Policy, 2015, 33; II-4 n17.
35 As per Rwanda Electricity Policy, 2015 n17. 36 Ibid.
mandated to set tariffs, regulate, and award licenses in the energy sector.37 The Project Company had to apply for an Electricity Generation License from the Regulator, in accordance with the provisions of the Electricity Act.38 This was a condition precedent for the PPA to come into full force and effect. RURA also instituted the Grid Code (released August 2013), 39 which established the rules and procedures in relation to the national grid. It includes the relevant technical guidelines that allow all participants to use the interconnected power system. RURA monitors and evaluates the quality of services provided by electricity service providers, to ensure conformity to the Grid Code and licensing requirements. This improvement in grid management is a milestone in establishing a clear legal and regulatory structure for the energy sector. It is worth noting that, from a practical perspective, the Regulator’s involvement was beneficial for the Project: it increased transparency and managed the overall interface between the private and public sector. Whilst the mere presence of an independent regulator was not in itself a defining feature in Gigawatt Global’s decision to develop a solar PV plant in Rwanda, the Regulator’s reputation for being transparent, fair, and accountable in its regulatory governance certainly contributed to prioritising Rwanda as a country in which to invest.
Further to the implementation of Vision 2020, the Rwandan Government set up a legal framework to ensure that investors take environmental concerns into account when developing projects that can affect the environment and society (such as infrastructure projects). The Strategy noted that one of Vision 2020’s big successes was the institution of the mandatory Environmental and Social Impact Assessment (“ESIA”)—a report detailing the potential impact and consequences of a proposed project on the local community and environment.40This state-mandated study is required in order to receive an Environmental Impact Assessment
37Ministry of Infrastucture, Law N°39/2001 of 13/09/2001 “Establishing Agency for the Regulation of Certain Public Utilities.” The full text of the law is abailable at www.rura.rw/fileadmin/laws/LawAgencyforRegul.pdf accessed 9 February 2016.
38 Electricity Act, 2011, Article 4 n27.
39 See Rwanda Utilities Regulatory Agency, “The Rwanda Grid Code” (Rura, 2012) www.rura.rw/fileadmin/docs/Rwanda_Grid_Code_Final_Draft.pdf accessed 10 February 2016.
40 From a practical perceptive, when developing a project it is important to check the requirements for both rainy and dry season environmental studies, as this can extend the development timeline.
Certificate from the Rwanda Development Board.41 The Certificate is a prerequisite for receiving an Independent Power Producer license to generate electricity in Rwanda.
Gigawatt Global was indeed obliged to undertake the ESIA. The results indicated that there would be no significant negative social-economic impact from the Project. On the contrary, the ESIA indicated that the Project would have a strong positive impact, both by decreasing the share of traditional, polluting sources of energy through introducing renewable energy to meet Rwanda’s growing energy demand, and also by reducing the severe shortage of electricity.
Gigawatt Global’s initial decision to invest in Rwanda was driven in large part by Rwanda’s lack of connectivity to grid-connected electricity. Rwanda’s per capita electricity consumption, at only 42 kWh/year/capita, is one of the lowest in the world (cf approximately 478 kWh for sub-Saharan Africa and 1,200 kWh for developed countries).42 Rwanda has about 100 MW of installed capacity, and only 16% of Rwanda households are connected to the national grid.43 Increasing access to electricity is thus of primary concern to a socially conscious investor.44The Energy Framework provided the legal structure that enabled Gigawatt to enter the market. The Project thus serves as an example for how the Energy Framework is generating tangible results in the renewable energy sector.
41 In Rwanda, the rules surrounding ESIA testing are governed by three laws. (I) Organic Law N°. 04/2005 of 8 April 2005, which determines the modalities of protection, conservation and promotion of the environment in Rwanda. It is the reference text for all forms of environmental protection. (II) Ministerial Decree N°. 03/2008 of 15 August 2008, which determines the requirements and procedures for environmental impact assessments. (III) Ministerial Decree N°. 004/2008 of 15 August 008, which establishes the list of works, activities and projects subject to environmental impact assessment. 42 For more on Rwanda’s energy consumption, see the African Development Bank Group report, “Rwanda Energy Sector Review and Action Plan” (AFDB, 2013) accessed 4 Novemeber 2015. See also the U.S. Energy Information Administration (EIA)’s International Energy Statistics, available at www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=2&pid=2&aid=2 accessed 10 Novemeber 2015; World Bank Data, available at http://databank.worldbank.org/data/reports.aspx?source=2&country=BDI&series=&period=# accessed 10 November 2015.
43 As per the Rwanda Infrastructure Ministry. See “Sustainable Energy for All: Rapid Assessment and Gap Analysis” (Rwanda Infrastructure Ministry, November 2014) accessed 8 February 2016.
44 As argued by the background paper for the World Bank Group Energy Sector Strategy, “Addressing the Electricity Access Gap” (World Bank, June 2010) http://siteresources.worldbank.org/EXTESC/Resources/Addressing_the_Electricity_Access_Gap.pdf accessed 8 February 2016.
IV. Renewable Energy Considerations
The Energy Framework establishes a role for an Independent Power Producer (IPP) to play in the Rwandan energy sector, leaving considerable freedom for the investor to decide how to structure the energy project. Upon entering the sector, Gigawatt needed to identify a location that would be suitable for solar PV. It was necessary that the Plant receive sufficient solar radiation to generate electricity, which in turn would increase sales revenue of energy to the buyer. The requirements for location were therefore twofold: that it fulfil a social need on the one hand; and that it be suitable for solar-power generation and cost-effective grid connection on the other.
Locating the Plant at the Youth Village would fulfil the first criterion, as it would help fund the humanitarian project, while also providing jobs and training to Rwanda’s vulnerable youth. 45 Regarding the second criterion, Gigawatt Global ascertained that the site was environmentally suitable from the perspective of radiation. The connection of the Plant to the national grid was the most complicated of the criteria. Whilst the Energy Framework calls for more access to electricity, it provides no tangible recommendations for actual upgrades to the national grid. A preliminary step in the development of the Project was thus to commission a study of the Rwandan national grid, in order to determine if it was capable of sustaining the additional power generated by a solar facility. Generally, the injection of power into an electricity network increases the local grid voltage. A sudden addition of a large share of renewable energy in a certain region may result in overvoltage, causing disconnections and loss of energy. Gigawatt Global therefore had to ensure that the national grid would be capable of evacuating the electrical energy produced by the Plant, both during normal and contingency cases.
As Gigawatt Global was at the vanguard of solar PV projects in Rwanda, the analysis of the grid was complex, and necessitated a review of the Grid Code from both a technical and legal perspective.46 On a legal level, Gigawatt Global noted that it would be unable to comply
45 Although it is hard to quantify, the social-responsibility policies adopted by sponsors of the Project played a significant part in its success. On a business level, these policies demonstrated to the local community that the company takes an interest in wider social issues that have no direct impact on profit margins. By providing a free training program to give the local workforce the requisite skills, Gigawatt Global ensured that the resident community constituted part of the Operations and Maintenance Project team. Such relationship-building has allowed the local community to feel a sense of ownership in the Project. This is crucial. When setting up a renewable energy project, one must remember that PPAs are long-term agreements governing infrastructure that will be an inherent part of the community, perhaps for generations, long after the PPA expires. As such, they must be built into the community, and the community must be given a place within them.
46See “Rwanda Grid Code”, 2012 n39.
with certain requirements that were inapplicable to a utility-scale solar PV plant.47 Gigawatt therefore sought certain derogations to the Grid Code from the Regulator.48 On a technical level, Gigawatt Global reduced its initial plan for a 10MW to an 8.5 MW project, as the study concluded that the Rwandan grid would be unable to accept a 10MW injection of renewable energy without expensive systems upgrades.
The Strategy recommends upgrades to the Rwandan national grid, specifically to enable it to receive energy from renewable sources. However, as it stands today, these upgrades have not taken place: the grid in not capable of receiving significant amounts of renewable energy.49 If the Rwandan government truly wishes to implement the Energy Framework’s vision of developing renewable energy sources, it must invest in system upgrades to the grid as a whole. In addition, the Grid Code must be amended to include renewable energy components, so that clean energy projects can be compliant with the Grid Code without seeking derogations.
V. Key Transaction Documents
The Energy Framework recommends streamlining the process of setting up an Independent Power Project by clarifying the exact steps, as well as perquisite and outcome milestones for each major stage of an investment. In addition, it advocates “incorporating clear language” in the Power Purchase Agreement in order to ease the investment process into the energy sector, demanding visibility on the requisite contracts needed to formalise the various elements of energy projects. As the Rwanda electricity system is bundled,50 the Project required only three contracts: a Power Purchase Agreement, a Concession Agreement and a Government Guarantee. These comprised the full suite of agreements underlying the Project.
REG signed a long-term Power Purchase Agreement (PPA) with the Project Company detailing the terms upon which it agreed, as Offtaker, to purchase all the electricity generated by the Plant. The PPA was the sole cash-flow-providing document, and clearly laid out the guaranteed performance ratio of the plant; the energy charges; interconnection; insurance; force
47 For example, reactive power, voltage control, frequency regulation and black start capability.
48 By “derogation”, I refer to an exemption from complying with a particular law—in this case, the regulations in the Grid Code that were not applicable to a solar plant.
49See “Green Growth and Climate Resilience: National Strategy for Climate Change and Low Carbon Development”, 15 n16.
50 By “bundled system,” I refer to a system in which the market roles of power purchasing, transmission, and distribution are all “bundled” into one entity: the buyer. In such a system, the buyer usually bears responsibility for transmitting the power that is produced and sold by the seller. In an “unbundled system,” by contrast, one or more of these roles is not the responsibility of the buyer, and is handled by a different entity. Thus, had the system been unbundled, more transaction documents would have been required
majeure; and transfer. It also set into place change-of-law provisions and refinancing arrangements, while providing a framework for international dispute resolution. Whilst the Plant remains under the ownership of the Project Company, the power generated by the Plant is sold to the Offtaker (REG) for retail distribution as a public service to customers. The PPA stipulates that in the event of Offtaker default, there is a compensation mechanism that allows for the return of debt and equity, together with all related costs and lost-assumed dividend flow, via a Government Guarantee (see below).
The PPA was the most complex and detailed of the Project contracts, and I will expand below on the specific implementation of elements (such as tariff structure and the incorporation of a Guaranteed Performance Ratio) that required innovative structuring for contingencies that were not included in the Energy Framework.
The Concession Agreement was concluded between the Government of Rwanda, represented by the Ministry of Infrastructure, and the Project Company, laying out the terms and conditions under which the Government of Rwanda granted the Project Company the right to develop the Project. Specifically, the Government of Rwanda granted the Project Company, as a concession, the exclusive right to develop, finance, design, engineer, construct, test, commission, manage and insure the Plant, as well as to operate and maintain it. In addition, it granted the Project Company the exclusive right to generate power at the Plant, and the exclusive right to own, use and exploit benefits from the Plant, including the right to sell power generated by the Plant pursuant to the Power Purchase Agreement.
As per the Energy Framework recommendation that the Rwandan government should “increase the attractiveness of power generation to the private sector by providing risk mitigation mechanisms such as government guarantee”,51 a Government Guarantee was concluded between the Government of Rwanda, represented by the Ministry of Finance and Economic Planning, and the Project Company. In the Concession Agreement, the Government of Rwanda agreed to issue and deliver the Government Guarantee to the Project Company in order to secure the timely and due performance of the Offtaker’s obligations under the Power Purchase Agreement. According to this guarantee, upon failure of the Offtaker to pay, the Government irrevocably and unconditionally undertook to pay the unpaid balance of every amount due or payable by the Offtaker to the Project Company under the PPA, as a continuing obligation. This was an important stipulation. Given that the Offtaker was not a creditworthy
51 Rwanda Energy Policy, 37 n17.
institution, it was the Rwandan government’s direct guarantee of all the amount owed to the Project Company by REG that made the Project viable.
As envisioned by the Energy Framework, the Government Guarantee provided certain protections to the Project Company. However, Rwanda is still considered an “emerging” market for investment purposes, and it was necessary for Gigawatt Global to ascertain the benefits of obtaining political risk coverage on an international level.
VI. Mitigation of Investment Risk
Political risk is unavoidable in any international investment transaction, particularly in emerging markets. Foreign investors can manage political risk in various ways, including reliance on bilateral investment treaties and credit enhancement strategies. A prudent investor will take steps to gain maximum protection for their investment. Ensuring that the investment is protected under an investment treaty should be the first step in mitigating foreign investment risk. As General Counsel, when entering into a market, one of the first action items is to examine the investment treaty climate. However, it is important to remember that whilst the presence of investment treaties complements a strategy for coping with political risk, it is not the decisive factor. Contractual protections and insurance coverage also play a part.
1. Relevance of Investment Treaties in the Rwandan Context
According to Rudolph Dolzer and Christopher Schreuer, investment treaties are an important component in the mitigation of investment risk: 52 they grant substantial rights to foreign investors; provide safeguards against expropriation; and ensure full compensation when expropriation does occur. They also enable foreign investors to remove investment disputes to the jurisdictions of neutral courts. What makes the risk-protection afforded by investment treaties unique is that they are available at no cost and with no strings attached other than fulfilling their nationality requirements.
The investment-risk-management strategic planning in relation to investment treaties is relatively simple. From a practical perspective, it requires (1) verifying the existence of an investment treaty that is in force between the investor’s state of nationality and the host country; (2) considering the availability of other investment treaties with third-party countries and
52 See R Dolzer and C Schreuer, Principles of International Investment Law (2nd edn, OUP 2008), 3A.
assessing whether channelling an investment through entities that are covered by those investment treaties is possible and convenient; and (3) carefully reviewing the express wording of available bilateral investment strategies to understand the scope of their protections.
Despite the fact that the Energy Framework seeks to broaden Rwanda’s access to international financing, Rwanda has a relatively low number of investment treaties in force at the moment. It has signed bilateral investment treaties (BITs) with only BelgiumLuxembourg,53 Germany,54 Switzerland,55 and the USA.56 The provisions in these agreements are standard: they provide for national treatment; guarantee transfer rights; and provide for automatic access to international arbitration if local court procedures have been ineffective for a certain period of time. However, since Rwanda’s network of BITs is limited, Gigawatt Global decided against incurring the costs of structuring the investment in Rwanda in such a way as to take advantage of protections afforded by the BITs (by incorporating a company in Belgium, Luxembourg, Germany or the USA, for example). Instead, Gigawatt Global decided to rely on agreements directly negotiated between the Project Company and the Government of Rwanda, containing change of law, force majeure and international arbitration provisions and purchasing insurance in order to mitigate foreign investment risk. These contractually negotiated provisions reduce the requirement for investment treaties.57
A “change of law” clause provides that the law in force at the time of signing a project agreement will continue to apply for the duration of the agreement.58 In current market practice, the concept of a “change of law” clause includes protection against: (i) the introduction of new law; (ii) modification of existing law; and, (iii) changes in the interpretation of law by anybody that has applicable jurisdiction or regulatory oversight with respect to the project or project companies. Subject to appropriate materiality thresholds, the PPA will agree that the project
53 Belgium-Luxembourg Economic Union and Rwanda Convention Concerning the Reciprocal Encouragement and Protection of Investments [1983] http://investmentpolicyhub.unctad.org/Download/TreatyFile/2975 accessed 9 February 2016.
54Treaty between Republic of Rwanda and the Federal Republic of Germany Relating to the Encouragement of Capital Investment [1967] http://investmentpolicyhub.unctad.org/Download/TreatyFile/1401 accessed 9 February 2016.
55 This BIT was published in Feuille fédérale 1964, p. 413, but was never ratified. It has been provisionally applied since its signature; however, its legal status remains questionable.
56 Treaty between the Government of the United States of America and the Government of the Republic of Rwanda Concerning the Encouragement and Reciprocal Protection of Investment [2012] http://investmentpolicyhub.unctad.org/Download/TreatyFile/2241 accessed 9 February 2016.
57 See P Comeaux N S Kinsella, “Reducing Political Risk in Developing Countries: Bilateral Investment Treaties, Stabilization Clauses, and MIGA & OPIC Investment Insurance” (1994) New York Law School Journal of International and Comparative Law 1 www.kinsellalaw.com/wp-content/uploads/publications/polrisk.pdf accessed 1 December 2015. 58Ibid
company will be in no better or worse position than if the relevant change in law had not occurred, entitling the project company to direct compensation for cost or revenue shortfall, or an appropriate tariff increase.
A “force majeure” clause protects each party in the contract from the obligation to carry out its performance if events that are outside of its control make this impossible. One of the most significant forms of “force majeure” clauses allocates the risk of governmental interference to the offtaker. In this formulation, force majeure protects only the foreign investor, and not the offtaker, against certain political risks such as cancellation of contracts, war, denial of licences and permits. When such a provision is included, the investor can be excused from its contractual obligations (eg delivering energy), whilst the offtaker would still be responsible to perform its obligations towards the project company (ie to pay for the energy as if it had been delivered by the project company. See “deemed energy” below).
An “international arbitration” clause provides that any disputes arising in relation to an agreement will be settled before an international tribunal. This clause guarantees the investor a neutral forum to protect the rights contained in the agreements, including its rights under the “change of law” clause. An investor can also purchase political risk insurance, available from a number of sources, including the World Bank’s Multilateral Investment Guarantee Agency (MIGA).This insurance typically provides coverage against risks such as currency inconvertibility, expropriation, war, and breach of contract.
Thus, although the existence or non-existence of investment treaties remains an important element to consider when making an international investment, there are other ways in which foreign investors may secure their investment and mitigate against damage from political risk. In certain cases, such as the Project, the presence of investment treaties need not end up not being a significant issue, and the decisive factors can be contractually agreed mechanisms and insurance coverage (see below). Still, the presence of investment treaties complements a strategy for coping with political risk. The Energy Framework is aware of the need for a comprehensive Government Guarantee to be provided to independent power producers, yet makes no mention of the protections that could be afforded through treaties. The Government of Rwanda would do well to expand their network of BITs in order to encourage more investment into the Rwanda energy sector.
2. Credit Enhancements in the Rwanda Context
In absence of meaningful BITs, the availability of credit enhancements for the Project became a significant part of Gigawatt Global’s investment strategy. This is because the creditworthiness of an offtaker is one of the major challenges when developing independent power projects in Africa. Energy utilities in certain countries have defaulted on payments due under existing PPAs. In emerging markets, where the offtaker is owned by the state, lenders tend to require a suite of credit enhancements such as guarantees and liquidity facilities to provide credit support for the payment obligations of the offtaker. Coverage would reflect, at minimum, the anticipated debt amortization schedule.59 If there are concerns about the creditworthiness of the offtaker, then credit products can be obtained to mitigate the risk of non-payment. Chief amongst them is a “Partial Risk Guarantee” (PRG),60 backed by a Letter of Credit for the account of the offtaker, issued by a commercial bank to the seller.61 Unusually, in the case of Rwanda, there was no liquidity support of any kind for the Offtaker’s obligations under the PPA, either by way of a Letter of Credit, cash collateral or a collection account mechanism, despite the fact that this is a standard feature in power projects in sub-Saharan Africa.
This was due, in large part, to the success of Vision 2020’s focus on access to external markets and finance. In contrast to many countries in Africa, Rwanda has an investment grade rating, and is currently rated by Moody’s and Fitch as B+—a tangible outcome of Vision 2020’s policies.62 As a general rule in project-finance transactions, the number of credit enhancements required diminishes as risk profiles improve. Because Rwanda’s sovereign credit rating and lower risk profile, the lenders and sponsors to the Project Company took the unusual step of agreeing to provide project debt and equity on the basis of the Government Guarantee, even without a Letter of Credit (or any other liquidity support provisions on behalf of the Offtaker).
Gigawatt Global looked to the precedent of KivuWatt, Rwanda’s first independent power project. In that case, the transaction was “banked”—ie capable of being financed—
59 Ie, the scheduled repayment of loan principal. A “loan amortization schedule” specifies the amounts of principal to be repaid and the dates on which repayments are to be made.
60 “Partial risk guarantee” is an instrument designed to cover private lenders against the risk that a government or a government-owned agency will fail to perform its contractual obligations vis-à-vis a private project. The PRG product is available from both the World Bank and the African Development Bank. Further details can be found on their respective websites.
61A “Letter Of Credit” is a payment mechanism consisting of a bank’s written promise that it will make good on a customer’s (the “Holder”) payment to a vendor (the “Beneficiary”) if the customer defaults. For more on the role of Letters of Creddit, see M S Lord, M A O Mohammadi, F G Rashtabadi, et al, “The Role of Letter of Credit in International Trade,” Universal Journal of Management and Social Sciences, (2013) 3 (11), 49 http://cprenet.com/uploads/archive/UJMSS_12-1291.pdf accessed 2 December 2015.
62 As reported by Trading Economics http://www.tradingeconomics.com/rwanda/rating accessed 5 January 2016.
without a Letter of Credit.63 This was enabled in part because the Government Guarantee included all payment obligations of the Offtaker (to both debt and equity), and not just energy payments (eg buyout payment sums and tariff amendments in the event of a change-of-law event). These contractually sound provisions in the Government Guarantee, combined with the creditworthiness of the Government of Rwanda (evidenced by its investment-grade ratings), led to a decision on the part of the debt and equity consortium that a liquidity facility was not absolutely necessary in respect to the Project. This, despite the lack of a short term liquidity facility in respect to PPA payments. The Project thus further established Rwanda’s precedent of not providing a Letter of Credit or other liquidity support provisions, balanced by a broad and contractually sound Government Guarantee. This arrangement was made possible by the Rwandan Energy Framework.
The Strategy notes that one of the biggest challenges that Rwanda faces is financing renewable energy projects. However, Rwanda serves as an exemplum for how obtaining a rating facilitates the access of African countries to international markets, unlocking funding for their huge development needs. This is because ratings do not only indicate the economic strength of a country, but also establish its ability and willingness to meet its debt obligations. The Project demonstrates how Rwanda’s positive investment-grade rating enabled an independent power project to be project-financed with reduced credit enhancements, thus fulfilling the Strategy’s aim “to position Rwanda to access international funding to achieve climate resilience and low carbon development”.64 The Project furthered a new trend to Africa: it was the first time in my experience in developing independent power projects that liquidity support provisions were not provided, yet a project was nonetheless banked. In my professional opinion, this trend will continue, and a liquidity facility will not be required to finance independent power projects in Rwanda, so long as its credit rating remains consistent. The Project represents an important step in Rwanda’s quest to move from being a donor receipt to a country that is part of the international financing markets.
63 For more details, see iPadRwanda: Energy Infrastructure Forum, http://www.ipadrwanda.com/Pages/Detail/16002 accessed 15 December 2015.
64 See “Green Growth and Climate Resilience: National Strategy for Climate Change and Low Carbon Development”, 2 n16.
VII. Negotiating a Power Purchase Agreement for Renewable Energy
As noted above, the Rwanda Energy Policy emphasises the need for “clear language” within the Private Purchase Agreement. In the case of a PPA for renewable energy, it is critical that two elements be clearly defined: (i) the methodology of measuring intermitted energy; and (ii) the tariff. While the Energy Framework lays out an overall structure for achieving a workable PPA, it was my role as General Counsel to negotiate and incorporate these vital aspects, thus ensuring that the PPA was bankable.
1.“Guaranteed Performance Ratio” Threshold – Introducing a New Concept to Rwanda
In general, it is not only the investor that requires surety, but also the offtaker. In tandem with ascertaining a clear investment-mitigation strategy, an Independent Power Producer must also demonstrate to the offtaker that the energy generated by the plant will be dependable, both from a contractual and technical perspective. The contractual perspective is set out in the PPA. From a technical perspective, the developer of a grid-connected solar project must establish to the offtaker that the amount of energy generated by the plant is reliable, even though it is not guaranteed. This is because the concept of a “guaranteed annual energy output”—which is usually a staple for fossil-fuel energy contracts—is not applicable for renewable energy technology that is dependent upon prevailing conditions, and is inconsistent with current market practice in any region. Unlike certain other forms of power generation, a utility-scale solar PV power project cannot, given current technology, store energy in a cost-efficient manner. In addition, after the initial selection and development of the site, the Project Company has no influence on its supply of fuel (ie sunlight) over any specific time period. Not only will solar projects face seasonal and day/night differences in solar irradiation, but variations in cloud cover, haze and other factors can reduce the energy output of the solar plant at any hour of any day.
As a result, the generator-performance obligations in a solar PPA cannot follow the format of PPAs for less intermittent resources, which often require the supply of a definite power generation capacity, or volume of energy, over a given time period. The offtaker nonetheless requires some form of assurance in regards to the level of power the plant will be able to generate. The Energy Framework does not provide guidance for how to deal with this unique aspects of renewable energy generation. This is therefore a key area in negotiation, and an appropriate mechanism must be incorporated into the PPA. The focus of the negotiations
should be: (i) making available whatever energy the project can generate at a given time, based on in situ conditions (which, as mentioned above, can vary daily or even hourly); and/or (ii) converting sunlight to AC energy output at an agreed performance ratio when compared with peak nominal rated capacity of the PV panel modules. These calculations typically involve consideration of solar-specific issues, factoring in solar irradiation and PV panel degradation, as well as spectrum, temperature, and the effects of seasonal weather variability on testing.
In my experience, including an obligation to meet a Guaranteed Annual Performance Ratio in the PPA is a bankable method for circumventing the request for a guaranteed energy output. A Guaranteed Annual Performance Ratio (set out below) tests the energy generated against a performance ratio threshold, with payment for liquidated damages for each kWh of shortfall when the amounts are aggregated at the end of each year. This is a reflection of the test that the Operations and Maintenance (O&M) contractor would be graded on each year, and therefore would meet the lenders’ requirement that the test and any consequential liability for poor performance of the Plant be passed down to the O&M contractor.
The key features of the Guaranteed Annual Performance Ratio test should include the following:
• At the end of each contract year, the theoretical output would be calculated by applying a formula (specified in the PPA) to specific inputs from the plant data devices in order to set the “Guaranteed PR Energy Output”;
• The Guaranteed PR Energy Output would then be compared against the actual output of the generating plant (the “Gross Annual Energy Output”);
• In the event that the Gross Annual Energy Output falls below the Guaranteed PR Energy Output during any year, the liquidated damages would equal a percentage of the prevailing energy purchase price, subject to a maximum cap;
• Payment of the liquidated damages would be the buyer’s sole remedy for this event, and no Project Company event of default would apply. The offtaker would therefore not be able to terminate the PPA should the plant not generate the contractually agreed amount of energy. A Guaranteed Annual Performance Ratio that includes these clauses would address the offtaker’s concerns by guaranteeing a certain amount of energy, while ensuring that the offtaker
will be compensated if said amount in not provided. Conversely, this formula also protects the solar energy project by setting the performance ratio a significant percentage below the optimal rates predicted for the plant, allowing leeway for the variability of weather. What is more, it protects against contract termination in the case of unforeseeable meteorological circumstances.
2. Challenges in Negotiating Rwanda’s First Utility Scale Solar Tariff
The fact that the energy generated by a renewable energy plant cannot be guaranteed changes not only the interaction between the buyer and the seller, but the payment structure as well. The Energy Framework sets out the broad vision for incorporating renewable energy into the Rwandan grid, but many details of how this vision can be brought to fruition still need to be worked out. The Project created a model for how to implement the Energy Framework on the ground by introducing into Rwanda a new tariff structure that is appropriate for renewable energy. The tariff structure for non-renewable technologies (ie thermal generation facilities such as gas turbines) will always include two elements: a “capacity charge” for the capacity the generation facility will have available to the offtaker (regardless of whether the offtaker dispatches the energy); and an “energy charge” for the actual energy that the plant generates. Energy at a renewable energy plant, however, continuously changes in response to prevailing weather conditions. Due to the intermittent nature of the renewable generation, the plant effectively has no “capacity” continuously available to the offtaker, and there is therefore no “capacity charge”. The tariff structure for renewable technologies is consequently fundamentally different, and consists only of an “energy charge” for the actual energy generated by the plant.
This is a basic tariff structure for all renewable energies. The amount of the actual energy payment changes from project to project, and is part of negotiations between the parties when signing the PPA. The PPA is an agreement to purchase electricity, and it must include a settled purchase price. Certain countries, in order to offer incentives for the production of energy from renewable sources, offer a “Feed-In” tariff— a policy mechanism designed to accelerate investment in renewable energy technologies. It achieves this by offering long-term contracts to renewable energy producers, typically based on the cost of the generation of each technology. This creates an energy price that is effectively subsidised.
Rwanda offers a feed-in tariff only for electricity generated from hydro sources.65 The solar tariff was therefore negotiated bilaterally between Gigawatt Global and RDB, and then approved by the Regulator.66 This tariff takes into account that there may be times when either the Offtaker or the transmission system operator may curtail the production of energy at the Plant.67 The parties included a concept called “deemed energy” into the PPA to cover this eventuality.
“Deemed energy” ensures that in the event that the offtaker is unable to take the electricity (for example, due to grid failure, or any other occurrence for which the offtaker has accepted the risk), the offtaker must nonetheless make energy payments to the seller amounting to the electricity that the power plant would have been able to generate, if not for that said occurrence—ie the offtaker is responsible for covering “what the plant would have produced but for the deemed energy event”. To calculate this “deemed energy”, a PPA for a solar-energy project must stipulate that prior to the Commercial Operations Date, the offtaker and the project company develop a formula for predicting the net electrical output that the solar plant can generate under certain conditions.68 When a curtailment occurs, the quantity of deemed energy the offtaker is required to pay is calculated according to this pre-agreed formula. The tariff structure for solar PV PPAs—at least as proposed by the emerging market utility offtakers— tend to be drafted in terms of: (i) energy output alone (meaning that the offtaker must pay for all energy generated by the facility); or (ii) a combination of energy output and deemed energy (ie, if the offtaker does not take all energy generated by the facility, then it pays for a theoretical energy volume).
Including deemed generation into the PPA agreement is essential, because some emerging-market utilities with dispatch regimes explicitly favour some forms of power generation over solar (eg, hydropower projects that are partially subsidized by the government). Demand and transmission constraint issues could result in an inability to dispatch the full energy available from the project. Unless the concept of deemed energy is incorporated into the PPA,
65 According to Rwanda Utilities Agency’s Law No 09/2013 of 1.3.2013 Rwanda has an available REFIT (Renewable Energy Feed-In Tariff) for hydropower, ranging from 50kW to 10MW: 16.6 USD-cents per kWh for installed capacity of 50 kW; up to 6.7 USD-cents per kWh for installed capacity of 10 MW. 66The price and the commercial considerations are confidential.
67 “Curtailment” refers to instructing the power-producer of a non-dispatchable plant to reduce generation. This may be motivated by a variety of reasons, such as end-user demand; availability of alternative generation resources; transmission network capacity; or grid stability.
68 This formula would be based on the solar insolation measured by one or more pyranometers or pyrheliometers, which gauge direct and indirect irradiation, as well as the direct radiance striking a plane, while taking degradation into account.
the project company would not receive energy payments in the event of a curtailment, making solar power projects unsustainable. As of today, the price for solar energy has not yet reached grid parity.69 There are other forms of energy that are cheaper for an offtaker to purchase. Nonetheless, in my opinion, the solar energy market in Africa will continue to expand. Despite the recent drop in oil prices, solar electricity will soon become competitive with retail electricity in an increasing number of markets—both because declining solar panel costs, as well as improving financing costs.70 As we harness Africa’s abundance of renewable energy sources, solar power could become a viable economic alternative to costly diesel generation.71
VIII. Conclusions
The Energy Framework demonstrates the Rwandan government’s ambitious plans for economic development. The government recognizes the role of the power sector in this development, and is willing to take meaningful actions to ensure that the electricity-supply capacity is expanded. What is more, Rwanda’s focus is specifically on renewable energy: the Energy Framework aims for Rwanda to become a climate-resilient, low-carbon economy, while overcoming the predominance of fossil fuel in energy production by developing alternative natural resources.
69“Grid parity” means that for a given area at a certain time of day, the cost of an alternative technology for electricity production matches the existing average for the area at that time. It is considered to be the point at which an energy-source becomes a contender for widespread development, without subsidies or government support. Some renewable energy projects are indeed reaching grid parity—see U E Hansen, M B Pederson& I Nygaard, “Review of Solar PV Market Development in East Africa” (2014) UNEP Risø Center Working Paper, Series 12, March 2014, accessed 9 February 2016. Although this was not the case in the Rwandan context, it nonetheless is notable when discussing the feasibility of future renewable independent power projects in the region
70 For more on the projected future of solar power, see the Deutsche Bank report, “Solar Grid Parity in a Low Oil Price Era” (Deutsche Bank, 10 March 2015) www.db.com/cr/en/concrete-deutsche-bank-report-solar-gridparity-in-a-low-oil-price-era.htm accessed 10 February 2016.
71 The lessons from Rwanda can be applied to other parts of the African continent. The prime driver for renewable energy in Africa is the continent’s extensive renewable energy resources: Africa receives 325 days of sunlight, at more than 2000 KW/h per square metre. This means that there is the potential for generating sufficient solar energy to replace a significant percentage of fossil fuel. See United Nations Environmental Programme, “Green Economy and Trade – Trends, Challenges and Opportunities” (UNEP, 2013) www.unep.org/greeneconomy/Portals/88/GETReport/pdf/FullReport.pdf accessed 9 February 2016.
Private sector investors should therefore consider engaging in Rwanda’s power sector. In particular, two factors should be of interest: (i) a reformist government that is willing and able to handle the emerging challenges; and (ii) an ambitious, robust program to guide the expansion of renewable-electricity generation capacity. This program was set into place with Vision 2020, which highlights the importance of private participation in the energy sector, seeing in it the key to mobilising finance resources that substantially exceed what the government and donors can provide. This approach was further developed in the Strategy, in which the government determined to promote public-private partnership in a green economy, with a focus on alternative- and renewable-energy production for sustainable development. The reformist government has indeed taken tangible steps towards implementing this vision. Through its provision of a Government Guarantee, as well as its achievement of a positive investment-grade rating, Rwanda has indicated that it can provide the risk-mitigation techniques required for foreign investment into its energy sector. Indeed, Rwanda is considered to have been successful in establishing a sound investment climate72
The Project is an indicator of the successful implementation of the Energy Framework, and can serve as a useful precedent for engagement in the electricity sector. In setting the Project into place, the government and the private sector developed various contractual arrangements that can be of use to future private-sector projects, among them the introduction of a tariff structure that is appropriate for renewable energy and the concept of a Guaranteed Annual Performance Ratio.
The Project, with all its successes, also points to possible avenues of further development. My experience makes clear that the Rwandan government could further the vision set out in the Energy Framework through several concrete steps. On a practical level, it should invest in a systems upgrade, so that it will be possible to inject more energy from renewable sources into the Rwandan national grid. On a policy level, expanding the network of BITs could significantly increase foreign investment, as it provides enhanced tools for risk mitigation.
Africa is suffering from a severe power deficit. Africa also has abundant amounts of sunlight. The economic rationale would be to harness the latter to solve the former. Yet even as African renewable energy projects offer great rewards, they also present a set of risks that
72 See the African Development Bank Group report, “Rwanda Energy Sector Review and Action Plan” (AFDB, 2013) accessed 4 November 2015
investors and developers may not have encountered in other markets. It is therefore important to adopt a long-term approach and to structure investment accordingly. My experience as General Counsel for the Project suggests several key lessons for successful renewable energy programs in other emerging markets. For example: private sponsors and financiers are more willing to invest in renewable energy if the investment process is cohesive and transparent; if transactions have reasonable levels of profitability; and if key risks are mitigated effectively. If these three elements are set into place, the development of utility-scale solar power project becomes a commercially viable investment. The importance of such investments cannot be overstated. Integrating renewable energy into the African electrical grid will decrease the dispatch of diesel and other fossil-fuel based generation, resulting in less pollution, and significant improvements in health and social structure. Competitively-priced solar energy has the potential to leverage local economic and environmental development, while increasing pressure for divestment from fossil fuels. The Energy Framework and the Project developed by Gigawatt Global provide a model for how to successfully implement large-scale future investment in grid-connected solar energy projects in Africa.
