US$2,5m AfDB loan shot in the arm for struggling IPPs

AfDB has availed a US$2,5 million loan to Zimbabwe to bolster energy sector reforms.

THE African Development Bank (AfDB)has availed a US$2,5 million loan to Zimbabwe to bolster energy sector reforms, which revolve around building a viable network of independent power producers (IPPs).

For years, Zimbabwe’s IPPs have struggled to implement projects, which are critical as demand for alternative energy rises.

Traditional sources of power — the 1 050 megawatt (MW) Kariba South Hydro Power Station and Hwange Thermal Power Station — have struggled to serve the market.

Kariba has been affected by declining water levels due to prolonged droughts and climate change.

Antiquated equipment continues to affect most of Hwange’s 12 units, although two of these were recently given a new lease of life through US$1,5 billion deal involving Chinese funding.

Existing facilities are currently generating between 1000MW and 1 500MW, against a national demand estimated at 2 000MW.

If hurdles to implementation are ironed out, renewable energy projects – solar, wind, geothermal, small hydropower stations, biomass and biofuels - can give the country an estimated 1 900MW in additional capacity.

This will be enough to power the country.

AfDB support comes when Zimbabwe is already behind its target to achieve 1 100MW in alternative energy generation by 2025.

The target was announced four years ago, when the country launch the Renewable Energy Policy.

“The project implementation is still at the procurement stage and the outcomes are likely to be achieved by the project closing date. Project implementation was initially delayed by having to relaunch the procurement process for the project coordinator due to non-responsive bids,” AfDB said.

“Project implementation is now on track for completion by the revised project closing date of May 31, 2025.”

As of last week, approximately US$100 587,63 had been disbursed under the AfDB window titled ‘Zimbabwe Energy Sector Reform Support’.

Explaining the purpose of the funding, AfDB said it will “facilitate the creation of an enabling environment for promoting IPPs, thereby improving the availability of electricity supply to support economic growth.”

A study conducted last month by the Zimbabwe National Chamber of Commerce (ZNCC) revealed major challenges in getting IPP projects off the ground.

The challenges included the bankability of projects, lack of feasibility studies, lack of funding, foreign currency distortions, and delays in compensating IPPs.

On delays, the ZNCC said: “The process from the idea (solar or gas, or mini-hydro or a combination of the two) to the stage of being licensed by the Zimbabwe Energy Regulatory Authority (Zera) takes 2,25 years to three years to complete, depending on the project size. This long and costly process discourages some potential IPPs”.

“The current (IPPs) licenses have a lifespan of 25 years and about two to four  years of that is being lost in the project preparation phase.Expertise to verify and assess most individual projects (before a license is issued) costs around US$200000 when a foreign firm is engaged and is paid upfront. This amount is high for some potential IPPs,” reads the ZNCC report.

It said sometimes officials from Zera only recognise certification/verification from specific experts or companies who should carry out the verification and assessment process.

“It is not always a guarantee that the certification from such will be the final. This uncertainty discourages some potential IPPs to dare start the process.”

With regards to the offtake arrangement, the ZNCC said the Zimbabwe Electricity Transmission and Distribution Company (ZETDC), which buys electricity produced by IPPs, takes about 30 days to pay.

IPP projects also face currency volatility problems, whereby payments are done in local currency, which is fast depreciating at an “unprecedented rate”.

To address these bottlenecks, ZNCC said direct offtake arrangements enabled by ZETDC in which the producer could have a direct supply and payment arrangement with the end user would be a welcome policy initiative.

“The guarantees to pay foreign currency obligations by the Reserve Bank of Zimbabwe (RBZ) are also crucial in enhancing private investment into the energy sector amid foreign currency challenges,” ZNCC said.

“The cost-reflectivity of tariffs should also be the energy sector's end goal by 2030.”

Renewable Energy Association of Zimbabwe chairman Isaiah Nyakusendwa said IPPs needed appropriate financing to get projects off the ground.

“We need appropriate financing structures which are long-term in nature for IPPs to access. Project development needs patient capital. It is encouraging that Old Mutual and the National Social Security Authority are now funding renewable energy projects.

“More alternative investments in renewable energy need to be accorded prescribed asset status for more insurance and pension fund investments,” he said.

“Foreign currency must be accessible for procurement of equipment, payment of interest/dividends, and repayment of loans. ZETDC must be capacitated to offtake power generated by IPPs,”Nyakusendwa said.

He added that ZETDC must give a cost-reflective tariff while also generating foreign currency to fulfill obligations.

“Intermediation between ZETDC and the IPPs is also another option and we are looking forward to the coming on board of Africa Greenco on the Zimbabwean energymarket,” Nyakusendwa said.

“Energy is key to the economic transformation of our country and renewable energy can provide quick solutions in solar, wind, and bioenergy whilst also decarbonising our energy generation mix if we all put our heads together,” he added.

Until IPPs receive that support, the National Renewable Energy Policy will not be implemented.

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