1. Did Uganda Pay Too Much?
I will like to revisit this project to reevaluate an often cited criticism, its price tag. You can read my previous post on this project at http://soleremit.com/project-finance-of-power-projects-in-africa-case-study-6-bujagali-falls-dam/. This 250MW “run of the river” rock-filled hydroelectric dam is the first largest project financed hydroelectric dam in Sub-Sahara Africa.
A brewing controversy that has festered in the wake of its construction has been its seemingly hefty price tag of $905M. None other than President of Uganda, Yoweri Museveni have repeatedly raised the issue. It appears efforts are underway to work with the project lenders to refinance the project debt. See http://www.reuters.com/article/uganda-electricity-idUSL5N0YQ3I820150604.
To put things in perspective, I will briefly encapsulate the core project financials. The project was financed on a limited recourse basis through a mixture of debt (78%), equity (22%). Partial risks guarantees from IDA ($115M in PRGs from IDA to the commercial lenders and Bujagali Energy Ltd-BEL, a special purpose vehicle); MIGA ($115M Multilateral Investment Guarantee (MIGA) and backstop guarantees and indemnity from the Government of Uganda.
The bilateral power purchase agreement (PPA) is between BEL and Uganda Electricity Transmission Company Limited (UETCL), whereby UETCL will buy the power for 30 years.
2. A Justifying Theory Behind the Numbers?
In their publication, “Risk Mitigation Instruments for Renewable Energy in Developing Countries: A Case Study on Hydropower in Africa," Gianleo Frisari and Valero Micale, use an Avoided Cost theory to assert that the Bujagali project still holds a better value for Uganda when compared to a thermal generation source. This Avoided Cost is the cost the offtaker, UETCL would have incurred had it obtained the power from comparative thermal generation (diesel), together with the avoided costs of the Lost Load of the Additional Capacity the dam will contribute to the grid.
Thus, the central theory of Frisari and Micale’s hypothesis is that building the Bujagali dam avoided the construction of a more expensive thermal alternative.
3. How Did They Reach Their Conclusion?
To support their assertion, Frisari and Micale compared the projected capacity payments for the term of the PPA with the avoided cost of generation from a thermal generation source. By quantifying the Avoided Cost and adding to that value tax and renewable energy credits revenue from the project, they posit that from that perspective, the Bujagali project provides a better value proposition and "more than compensates the annual capacity payments needed to cover the cost of the project.”
The breakdown of their analysis, at least the way I understand it, is as follows:
i. They calculated that the expected estimated payments by UTCL to the ProjectCo throughout the 30-year term of the PPA would be $175M until project debt is fully repaid and $90M after repayment of the project, till the PPA, expires in 30 years.
ii. They then established the Avoided Cost UETCL would have paid for an interim thermal generation using the estimated cost of supply of diesel generators (US cents 22/kWh of 2005 (PPA, 2007) based on a thermal displaced -738 GWh). Thus, the estimated Avoided Cost for interim thermal generation is $127M per year.
iii. They further considered the Capacity added to the grid, net of 34% technical and non-technical losses estimated by the retail offtaker and the value of Unserved Power would be US cents 38.9/kWh.
iv. Thus, a, and b established the estimated annual Avoided cost of the Lost Load to be approximate, $161M.
v. Lastly, they added to the Avoided Costs, the projected tax revenue of $38M on average for the first 12 years, and $16.4, after that as well, revenue from carbon credits which they expected to be $2.4m per year.
vi. They argue that avoiding the costs of evidently, the more comparatively, expensive thermal generation and of failing to meet electricity demand more than compensates the annual capacity payments for the cost of the hydro dam.
4. “Take Aways”
i. Indeed, this analysis and conclusions predicated on certain variable assumptions which I have not independently verified. Also, the Avoided Costs of thermal generation based on fuel prices and other factors such as the macroeconomic environment in Uganda.
ii. Further, the comparative proposition of this Avoided Cost theory does not address the supposedly, exorbitant 10.1 cents per K/h retail price of power from the Bujagali dam.
iii. Admittedly, I am only scathing the surface of smoothing I do not fully understand. I decided to write about this because of Frisare and Micale's analysis plausibly, offered a different take on what is increasingly becoming an explosive issue in Uganda. I will leave the experts to agonize over this further.