Renewable energy, a market under construction

By Delphine Iweins
Posted on Wednesday, 28 September 2022 10:42

Construction of a solar thermal power plant in Aïn Beni Mathar, Morocco, near the Algerian border, in 2009. With more than 300 days of sunshine a year, the site is ideal for building a hybrid power plant. © Rafael Marchante /Reuters

Rising costs and the entry of private players into the renewable energy market are leading to changes in contracts and the construction of regulatory frameworks by business lawyers on the continent.

It’s been another strange year in the African renewable energy market. “It’s a competitive market for lawyers. We have to make sure that we meet all parties’ requirements, that the project is able to generate sufficient revenues and adapt to ever-changing regulations,” says Pierre Bernheim, a partner at Trinity International, named the continent’s top renewable energy specialist in Jeune Afrique and Africa Business +’s “Top 100 Business Lawyers of 2022”.

Rising construction costs

Solar remains the star of governments’ renewable energy policies, but the tide could be turning. Since the start of the Covid crisis, the import of solar panels, mainly produced in China and India, has been severely curtailed, leading to a significant rise in costs coupled with that of raw materials, including steel.

“In all countries, developers are slowing down the pace of projects,” says Delphine Siino-Courtin, a partner at Clifford Chance. For example, the major Djermaya Solar project, developed in Chad, has still not been definitively concluded financially because of the exorbitant increase in construction costs. Algeria has twice extended the deadline for responding to the tender for Solar 1000, a solar photovoltaic power plant project that plans to deploy 1GW.

According to experts, the two major problems with this type of project are the availability of long-term financing and its profitability. “To finance these projects, lenders usually require that construction costs be fixed from the start. Builders will only agree to fixed prices if they significantly increase their prices to take into account the risk of volatility,” says Victor Grandguillaume of Gide law firm in Paris.

However, “this increase in costs can speed up certain projects. In a way, the builder is issuing an ultimatum to be paid within the given timeframe, otherwise his costs will increase,” says Bernheim, who is working on several dozen medium and large solar projects, in particular within the framework of the international Scaling Solar programme launched by the World Bank.

New contract clauses

The cost of transport will eventually come down once maritime traffic has returned to a more normal rhythm, but the price of raw materials looks likely to keep soaring. “All the players are aware of the price trend. The unknown at the moment is whether this increase can be absorbed or whether it will be reflected in the wholesale price of electricity or even in the retail price in regulated markets,” says Trinity International’s Bernheim.

Governments have to understand a project’s economics in order to negotiate the most appropriate clauses

This is the reason for modifying the contracts already concluded and considering new conditions – such as the “rendez-vous clause” – for those currently being negotiated. “This clause explains the price set at a given moment and the planned increase. The parties undertake to meet again six months after the conclusion of the contract to discuss the cost increase and the contract price. If they do not agree, the project can be scaled back, which then poses a financing problem,” says Clifford Chance’s Siino-Courtin.

The Cuamba Solar contract to build a 20 MW solar power plant in Mozambique, for example, contains such a clause. “Price clauses are just as important and varied, and governments must be able to understand a project’s economics in order to negotiate the most appropriate clauses,” says Eric Diamantis, founder of the firm Diamantis & Partners.

Private sector increasingly involved in electricity distribution

These new market practices have been added to more structural difficulties such as the difficult assessment of buyers’ solvency, which is taking longer, especially since the outset of the pandemic. It will be interesting to observe whether these economic difficulties will drive the development of private partner projects. More and more photovoltaic mini-grid projects are emerging. In the DRC, IFC will allocate $400 million to an initial pilot project, targeting 1.5 million households in the cities of Mbuji-Mayi and Kananga, in the Kasai region.

Togo and Benin have also organised calls for tenders for such projects. Governments have a general interest in providing access to reliable and cheap electricity – the concessionaire is paid based on the price at which it sells to consumers – but there are tensions with the national power companies, which are seeing their monopoly shrink.

“These projects are difficult to finance because this private and decentralised production is a departure from the traditional model of power stations connected to national networks. They often require viability gap funding”, explains Bernheim. This form of compensatory financing, particularly through donations, designed to ensure the viability of projects, is becoming increasingly common. This funding is an interesting lever for the local economy that should not be underestimated, even if it is not enough on its own to set up mini-networks.

Regulations still under construction

The regulatory framework applicable to these particularly special power plants is also rather complex for the moment since distribution and sales are carried out by a private player. With the support of lawyers, governments are trying to standardise it. “The regulations are not always well adapted. It is sometimes too rigid, and the tendering processes are not always adapted to small off-grid projects that do not pose competition problems and where costs can be easily controlled. We are talking to governments about this. Some recognise the problems, and some are dealing with them, but getting regulations to change takes time,” says Diamantis, who is involved in many mini-grid projects for photovoltaic plants.

This observation is valid for other renewable energies. Green hydrogen, in particular, is one of the major projects in Morocco and Namibia. Not long ago considered the next fuel to bet on, the manufacture of green hydrogen has taken a back seat since the start of the war in Ukraine on 24 February. All of these projects are state-led, and [given the context], governments have preferred to fully focus on gas production and export. And here too, the regulatory framework is in its infancy. “The advantage is that we can help governments put it in place by drawing inspiration from European and American models, for example,” explains Siino-Courtin, identified as one of the top three lawyers specialising in renewable energy on the “Top 100 business lawyers of 2022” list.

Accompanied by legal professionals, governments are implementing binding green hydrogen development policy programmes, with precise targets. This is the first step towards regulation to attract investors, as has been the case for wind power.

A more difficult regional climate profile

As the first energy developed in West Africa, well before solar, wind is still widely favoured. However, lenders are realising that global warming is having an impact on wind quality and strength. It is becoming difficult to predict the climatic profile of some parts of Africa over the next 25-30 years.

Could the solution lie with hydroelectricity, which has been so criticised for its environmental impact? Not so sure. Struck by drought in June 2021, Côte d’Ivoire had to ration its electricity. Hydroelectric dams were dry, and a breakdown in April at the Azito thermal power plant in Abidjan, which alone generates a third of the country’s electricity, caused major power cuts.

However, there is a huge need to build large dams to provide baseload power to the grid.

“Some players are beginning to consider financing the refurbishment and expansion of existing hydroelectric plants on the continent. This would release additional production capacity while limiting the environmental impact generally associated with new dams,” says Gide’s Grandguillaume.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options