The little document that makes a big difference in project finance: Why a Bankable PPA helps private investment in African power
One of the ways OPIC supports President Obama’s Power Africa initiative – in addition to providing loans and insurance to help build new power plants – is by sharing its extensive experience doing business in emerging markets. The Agency has supported multiple large-scale power projects in Africa and understands the hurdles to successful development.
One document OPIC helped develop to encourage more power projects is 10 Elements of a Bankable Power Purchase Agreement (PPA), a collaboration of OPIC, the U.S. Trade and Development Agency, U.S. Agency for International Development, and the U.S. Department of Commerce, along with several international development finance institutions. During the U.S.-Africa Energy Ministerial in Addis Ababa, Ethiopia earlier this month, amid much inspiring talk of illuminated schools, charged-up personal computers and newly-electrified health clinics, OPIC President Elizabeth Littlefield shared this framework document that is a key component to unlocking all of the positive development possible from new African power projects.
A PPA is a long-term agreement between a power producer – such as a privately-funded power plant – and an offtaker – such as a country’s government – that distributes electricity to the population. In any market, but especially emerging ones, these agreements are needed to ensure fair and viable pricing for these large-scale projects.
Without a PPA, spikes in demand, dips in production, or other sudden swings in pricing could lead to imbalance in the relationship between power producer and the end-users who pay for the utilities. If electricity costs soar too high, average people are unable to afford electricity. If electricity costs sink too low, private capital won’t view investment in large-scale power projects as an opportunity worth pursuing. Either way, the end result is a lack of power access for the end-users, and lack of investor interest in building power plants.
The “10 Elements” document produced by OPIC and its partners is a baseline list of what every bankable PPA must have to satisfy both producer and offtaker. It includes agreements about pricing, guidelines for dispute resolution, protection against outside events like foreign currency devaluation or political shifts, and contingencies for new laws or tax policies that may impact electricity production or consumption in a country.
“Sometimes simple is better and less is more,” Littlefield said of the document. “This framework outlines, on one page, the key elements for attracting financing to energy projects. An agreed-upon list like this benefits government, producer, and consumer. Developers, lenders, and local governments can devote time and resources towards projects with shared expectations and clear paths for progress.”
In a country with a developing economy and power sector, like many of the countries in Sub-Saharan Africa, this document is not a formality, but a necessity. A bankable PPA offers private investors the confidence to commit large amount of funding to power projects. In addition, African governments need equitable PPAs to ensure that public utilities bring value to the African people.