The challenges and potential in development of utility-scale renewable projects in Tanzania

This Challenge Story summarizes some of challenges that project developers of utility scale renewable energy projects are facing during the development process. The story highlights the challenges of the industry and difficulties the EEP funded projects have faced in Tanzania when dealing with the PPAs (Power Purchase Agreements), EIAs (Environmental Impact Assessment) and other government regulated processes.

Current Challenges

The development of a utility-scale renewable energy project is complex, and it is not unusual to encounter a variety of challenges during the 3-5 years that it generally takes to complete the project development cycle from prospecting and site identification, through to agreeing an offtake, financing and preparing for construction. For a developer with extensive experience and expertise in multiple markets, these challenges can be navigated, but there is a potential for significant delays in project development timelines. Especially the regulatory challenges that are not within the control of development team pose a risk for significant delays.     

One of the EEP project developers, Windlab Developments South Africa (Pty) Ltd (Windlab), which is developing the Miombo Hewani wind energy project in the Wanging’ombe district, Njombe Region of the Tanzanian Southern Highlands has encountered some of these challenges. The first phase of this Windlab’s Miombo Hewani project that is being supported by EEP is intended to be a 100MW grid-connected wind energy project and thus has the potential to be a flagship utility-scale project for Tanzania in the renewable energy sector. However, the project has been significantly delayed due to changes in government regulations that are largely effecting all players in the market.

Offtake Process

Since early 2015, Windlab has been in discussions with TANESCO (the national utility), the Ministry of Minerals and Energy (MEM) and EWURA (Energy and Water Utilities Regulatory Authority, the national energy regulator) with regards to securing an offtake for the Miombo Hewani project.  In early 2016 an instruction was given by MEM to TANESCO, indicating that TANESCO should proceed to enter into a Memorandum of Understanding (MoU) with Windlab and continue to negotiate a PPA under an unsolicited tender and PPA negotiation process. At this time it was understood that the project would receive priority attention as one of the few advanced utility-scale renewable energy projects in Tanzania. 

Nearly two years later, by late 2016 Windlab was informed that the approach to securing an offtake via an unsolicited tender and direct PPA negotiation was no longer available as an avenue for securing an offtake for the project. A long-mooted competitive tender process for large (more than 10MW) renewable energy projects was said to be commencing soon. This was followed by the release of a subsidiary legislation, The Electricity (Market Re-Organization and Promotion of Competition) Regulations (Government Notice 292) in October 2016, which further defines the competitive procurement framework.

The procurement rules and draft PPA for a small project’s (less than 10MW) procurement process have been released for public comment in December 2016 and March 2017 respectively.  The comment periods for both these documents were no longer than five working days each, and engagement with industry was limited to these opportunities only. 

To date, May 2017, there has been no engagement with industry on the procurement rules and other key documents for the large (more than 10MW) project’s procurement process, and no indication as to when this process will commence or what the timelines are from commencement to finalisation of a PPA. Until the documentation is released for review it is unclear how the process will be structured and designed. Until a suitable procurement process commences in Tanzania the uncertainty affects all project developers.

Project Finance Process and Ability to Secure a Bankable PPA

Windlab is in ongoing discussions with commercial lenders, Development Finance Institutes (DFIs), equity partners and other parties that offer project finance assistance, risk insurance and guarantees. Due to a lack of well-developed utility scale wind projects in East Africa, there is significant interest from numerous parties in partaking in a project finance deal for Miombo Hewani, but there is a general reluctance to enter detailed discussions regarding the finance terms until there is clear sight of an offtake for the project. 

One of the key concerns that financial partners have regarding the PPA process (aside from the lack of clarity on the form and timing of a tender and PPA negotiations) is the bankability of a PPA with TANESCO, given their strained financial position. Regardless of the state of TANESCO’s financial position there will undoubtedly be a requirement for significant involvement of the DFIs, appropriate credit support and risk guarantees in order to bank a large renewable energy facility in Tanzania. 

Windlab is currently working on a financial model for the Miombo Hewani project, with a view to providing evidence that this project is capable of delivering a highly competitive electricity tariff, despite the additional finance premium that will be levied as a result of banking a project in a relatively risky and challenging environment.

Environmental Impact Assessment Application Fee

Windlab has experienced challenges related to the Environmental Impact Assessment (EIA) process and a new requirement imposed by NEMC (the National Environment Management Council) which requires the project to pay a significant application fee before any application for environmental authorisation can be reviewed.  Unfortunately this issue is still pending.

EIA fees of similar magnitudes were enforced in Kenya after a very similar amendment to the EIA regulations under the Kenyan legislation. Following significant push-back from industry this fee amendment was repealed due to its potential to result in a significant depression of infrastructure development and other economic activity due to its anti-development stance.

As environmental studies have a limited validity in terms of the time between baseline data collection and the finalisation of an impact assessment, it is likely that Miombo Hewani will have to complete the impact assessment before the legislation can be amended, or potentially face having to repeat the baseline data collection aspect of the study.

Impact on Project Development Timelines

The above-mentioned challenges and the uncertainty caused by the changes in the industry cause significant delays to project timelines and to the estimated Financial Close schedules. More efficient legislative and regulatory frameworks and clear procedures for the development and offtake of energy projects in Tanzania, and elsewhere in East and Southern Africa, would clearly have a substantial impact on the development of a competitive and healthy energy sector that would provide the backbone for economic growth in the region. A structured framework would potentially accelerate the development process and provide the much needed private sector investment. Projects like the Miombo Hewani project in their scale have the potential to create a significant impact in Tanzania but are in need for a more structured, stable and investment conducive operating environment to be successful.