Of the 18 IPPs that were licensed, only five are operational, and government has resorted to withdrawing licences for those that have failed to take off.
KM: As an independent power producer operating in the country, what drove you to invest in this sector?
IM: The deregulation of the Electricity Act, which began in 2002 and resulted in the Electricity Act of 2005 and the recent adoption of the energy policy, opened up the electricity sector to independent power producers, and this in effect was the inspiration to build and operate the first mini hydroelectric power station, Nyamingura.
KM: When did you start the first IPP?
IM: In 2007, construction commenced of Nyamingura Power Station, which is a 1.1MW run-of-river hydroelectric power station supplying electricity into the national grid. This was commissioned in 2010.
KM: How much money have you used for the three IPP’s that you are currently operating: Duru, Nyamingura and Pungwe?
IM: Typically these stations cost $2.5m per MW to build. The investment into the three operating power stations, which have a combined installed capacity of 6.05MW, is in the region of $15m.
KM: What is the source of funding for IPPs?
IM: IPPs are either local or foreign companies and their funding is a combination of equity and borrowings, which of necessity is offshore whilst capital remains scarce within Zimbabwe due to the high amount and the loan duration of capital required.
KM: What is the capacity utilisation level for mini-hydros and do you think it’s the best that you can achieve in this environment?
IM: It has been established that for the hydrological conditions pertaining to Zimbabwe, for run-of-river schemes a capacity factor of between 35 per cent and 40 per cent optimises the trade-off between the natural resource potential and the capital investment required to develop the resource.
Much higher capacity factors are possible if smaller capital investments are made, but this is at the expense of the total annual electricity generated and this is clearly not in the national interest. You will no doubt find higher capacity factors in other parts of the world, including Africa, but these plants are situated in regions that have more consistent rainfall throughout the year when compared to us. For example, Kenya’s rainfall is spread over two seasons.
Zimbabwe has a finite number of sites for mini-hydro development and it is in the national interest that each site is developed to maximise annual energy output without overcapitalising development. It is worth pointing out that these power stations are ‘run-of-river’ and can only operate when the rivers are flowing, so the output is seasonal. Also, by happy coincidence, most of the mini-hydro sites are located on the eastern side of Zimbabwe whilst Kariba and Hwange are on the western side of the country.
This means that the mini-hydros can reduce the amount of power that has to normally come all the way across the country, reducing transmission line losses which are considerable. Some estimate that due to their location, the mini-hydros replace as much as twice the amount that would have to be despatched from the existing power stations if they did not exist and, if correct, this means that they are twice as valuable to the system than their capacity suggests.
KM: What are your major challenges as an IPP operating in Zimbabwe and do you think there is room for small IPPs to thrive in this market?
IM: As the nation develops, its energy needs increase and therefore the generating capacity should be increased at the same rate. As new generation plants are built, because of inflation, they naturally cost more and the cost of this new electricity is invariably a quantum amount greater than the cost of the electricity coming from older plants.
The blended cost of electricity from all sources therefore increases and the users of electricity pay more. However, if new plants are brought on every five or 10 years, say, the increase is not too great and the users can bear the increase without too much discomfort.
Unfortunately, as the nation has grown and developed we have not increased the generation capacity of the country and we now require a quantum increase in our generation capacity to satisfy the national demands that have outstripped supply.
Consumers have had inflationary increases to the cost of their electricity but have not had to face the cost of increased generation capacity for many years. The development of new sources of supply comes with a cost and consumers are naturally hostile to such increases in cost. Electricity users obtain their supply from ZETDC and diesel generators (or other auxiliary sources) when this is not available, but only a few realise that the cost of their back-up supply is at least four times the cost of electricity obtained from ZETDC, and baulk at the thought of new generating sources costing twice their current cost.
However if the new and old are blended together, the resulting cost is more palatable and, in addition, if new sources are brought in regularly, the cost increase is less noticeable.
As a nation we can satisfy the demand by building large power stations, similar to or much larger than Kariba and Hwange, or by building a large number of smaller units as well as medium-sized units. The large and medium power stations are ideal for base load supply whilst the smaller IPP sized units are usually renewable based and not suited to base load supply because of their seasonal or diurnal nature. A combination of both is probably the best solution.
Also, the lead time for building power stations is very long – much longer for large projects than small projects and therefore a combination is best in terms of delivery.
So, yes, there is room for IPPs in the country. However, whether they thrive or not, depends on conducive national policies and, most importantly, long-term continuity in the application of these policies, as these projects are all long-term and require the long-term confidence of potential investors.
KM: What do you think about the regulatory framework and the tariff structure in Zimbabwe? Is it favourable?
IM: The national policy and the regulatory structure are conducive to IPPs, but the application of these in a clear, coherent, consistent and objective manner is required to attract IPP investment. In our view, there is a lot of interest by potential investors in the IPP sector, but they are watching to see the application of the policy in practice.
KM: You mention that you are working on a new project. Can you shed more light on the project?
IM: We are building the second stage of the Pungwe project and this will be a 15MW run-of-river power station that, if all the deadlines are met, should be generating by the end of 2014.
KM: What needs to be changed or be considered by government to encourage more players in this market?
IM: Government has set the scene for a vibrant IPP sector by the implementation of the Electricity Act of 2005 and the adoption of the energy policy. As producers of clean electricity, we’d like to see a renewable energy policy developed by government that backs up its commitment to this form of energy and to underwrite its viability.
With this framework in place, it is then up to both existing IPPs and government to demonstrate to other potential investors that this sector offers good business opportunities in step with the global interest in reducing carbon emissions and sustainable development.
Post published in: Analysis