Historically, independent power producers (IPPs) have not been major players in the sector in sub-Saharan Africa. But with more supportive policies and innovative financing, that looks set to change. We talked to Katai Kachasa, CEO of Lufubu Power Company, to learn more about his experience in Zambia.
What has been your experience setting up hydropower IPPs in Zambia? What has gone well and what have been the challenges?
I was involved in the first IPP in Zambia as the founder and CEO of Lunsemfwa Hydro Power Company from 2002 until June last year. Over those 13 years, I witnessed the whole liberalisation process in the Zambian electricity sector, from inception to what it is today.
Although there were laws to encourage IPPs back then, it took a while for us to have a supportive framework, particularly in terms of enabling the financial performance of IPPs. Since then, a lot of work has gone into improving the policy environment for IPPs. Alongside our own liberalisation initiatives, we have also been members of the Southern African Power Pool (SAPP), which gives some comfort to investors.
There are still challenges around the pricing of tariffs for hydropower, and there are also challenges in terms of the structuring of power purchase agreements (PPAs). Nonetheless, government agencies have been able to develop a considerable knowledge base.
In the second IPP that I’m heading, Lufubu Power Company, we have been able to move much faster than we could have first imagined because of the knowledge base now existing in government agencies.
Why are hydropower IPPs important for development in Zambia?
For a country like Zambia, hydropower will continue to be the anchor technology in securing energy for development for the foreseeable future. Zambia’s development will be dependent on harnessing our extractive industry. We have abundant mineral resources, but the industry requires sustainable and reliable sources of energy, such as hydropower.
As hydropower projects have very long implementation periods, the tenders around hydropower investment can put tremendous demands on financing, so I think we need a full recognition of that by stakeholders, the developers, and the lenders.
But once hydropower development has been procured, it is a game changer in the economic circumstances, not only of the country in which it is developed, but also the communities around the construction site itself. Hydropower development, done well, creates a lot of jobs and provides ongoing benefits in and around the construction site.
I haven’t seen one megawatt deployed in Africa which has remained stranded without a customer."
The work to be done in hydropower development in Zambia is huge in ensuring universal access to electricity and the government cannot accomplish that alone. The role of IPPs will be crucial in an accelerated development effort, as our experience has shown.
What are some of the challenges in securing financial close for IPPs?
The issues around financing I think are more from perception. When you speak to lenders, they may see the Zambian market as weaker, requiring more government support. They might also assign risks to the Zambian market which locals would not. If you hear some of the discussions, they will centre on what sort of government support you might receive and whether there will be a sovereign guarantee.
We would like to see hydropower development as self-financing. There’s certainly a business case. In sub-Saharan Africa, more than two-thirds of the population do not have access to reliable energy, so there must be a business case to deploy more capacity.
There are concerns around the ability of customers to pay, but that is a transition which can be managed. I haven’t seen one megawatt deployed in Africa which has remained stranded without a customer. The benefits are obvious. Energy is a catalyst for economic development and creates new business and opportunities for employment. That’s why it’s so important that we can facilitate investment.
My wish would be to see more support for hydropower development in Zambia from government and cooperating partners as we are beginning to see on solar power development.
If support for hydropower can be scaled up and Zambian hydropower projects are evaluated on a case-by-case basis regarding dam reservoir capacities and resettlement issues, we will see a very successful integration of hydropower with solar power and other renewables. From this effort, we would ensure a successful intervention in combating poverty.