Academic Corner

For most countries in Sub-Saharan Africa (SSA) unreliable and insufficient power-supply poses a substantial challenge to poverty alleviation and economic development. In the region almost half of the population does not have access to electricity and continuous power outages hamper the economic performance of those already connected to the grid.

For instance, Ugandan firms reported in the last World Bank Enterprise Survey (2013) that they lose on average 11.2% p.a. of sales due to outages and identified these to be their main obstacle in their business environment (see Figure 15). At the same time, only 22% of Ugandans have access to on-grid electricity at all and until recently there was a shortage of electricity generation.

 

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Figure 15 - Population Access to Electricity (including off-grid) and Firms' Main Obstacle in Uganda 2013

 

Enabling improved quality and security of grid electricity supply in Uganda requires significant investments in renewable power generation. Uganda and other East African countries are currently experiencing a reduced ability to obtain concessional finance due to overall high levels of public debt. Hence, the funding gap in the electricity supply industry, including power generation, cannot be filled by the public sector alone but requires increasing participation of the private sector (e.g., through independent power producers). However, private investments in electricity generation will not materialise without a suitable investment environment.

Such an environment is characterised by a clear, credible and tested regulatory framework for private sector participation, including standardised Power Purchase Agreements (PPA) that mitigate off-taker risks. It also requires high level political backing through sufficiently credible and transparent long-term policy and investment plans for power sector development.

Political commitment towards cost-reflective electricity tariffs is also required. In the early stages of private sector participation, where the regulatory framework has not yet been sufficiently tested, a case can be made for financial incentives to mobilise the first private investment and kick-start participation in a new segment. In order to get developers and sponsors off the fence, GET FiT Uganda introduced a top-up tariff to provide keen developers with a more attractive return on renewable IPP investments.

Hence, the question is to what extent the GET FiT Programme incentivised private investments that would not have happened otherwise. Given that Randomised Controlled Trials (RCTs) are normally not possible for infrastructure projects, such as GET FiT, we use a threshold approach to evaluate the additionality of the GET FiT Programme.

We also model the profitability of projects, namely the Internal Rate of Return (IRR). Firms that applied to build GET FiT plants needed to provide extensive financial documentation, which was checked by the Programme Management. The quality of this documentation is above that of most other comparable programmes. In addition, instead of using the same metric of financial viability across different rounds (e.g. 11% IRR), we use the lowest IRR in each round of projects that were rejected, but then went ahead with construction despite not receiving funding by the GET FiT Programme. This IRR is referred to as the counterfactual IRR, and provides an indicative level for the actual (non-subsidised) market IRR. Out of the 17 projects, 14 were small hydropower plants, so we focus only on this subset of plants.

Our preliminary findings, as illustrated in Figure 16, suggest that most small hydropower plant projects were additional i.e., would not have been built without the GET FiT project support, particularly in funding rounds 1 and 2. It is evident from the data, that the profitability of projects required to go ahead with construction (counterfactual IRR) declined substantially in round 3, indicating lower investment risks. This suggests that the cost of capital – particularly equity – went down over time and across the different rounds.

The GET FiT Programme rightfully decreased the top-up over the rounds to account for lower investment risks in Uganda. Nonetheless, our research indicates, that in retrospect, the phase out could have been faster.
 

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Figure 16 - The required profitability of the projects dropped across the three rounds, due to lower investment risk

 

While these findings may provide a basis for further discussion on determination and adjustment of topup levels in future GET FiT schemes, it should be noted that the counterfactual IRR only provides an indicative level of market IRR – different hydropower projects and different investors have different return requirements. Moreover, additionality is difficult to determine due to significant uncertainty with respect to actual construction costs and the exact level of returns required by individual investors.

The GET FiT Programme in Uganda demonstrates that substantial declines in power cost are possible even for mature technologies, such as small hydropower technologies, through lowering the cost of capital and risk perception of investors. For that a sound regulatory environment is critical, which includes a clear procedure for obtaining generation and environmental permits, interconnection and a solvent off-taker.

This is particularly important for renewable energy technologies, where generally a greater proportion of the cost needs to be paid up front compared to conventional technologies, such as gas plants. Hence, financing cost – cost of debt and equity – and risk perception are central cost drivers of these projects and maintaining a predictable investment environment is key to minimising project costs and ultimately electricity tariffs.


About the Study
This section provided an overview of the ongoing research of KfW, German Development Bank, and the Centre of the Environment, Energy and Natural Resource Governance (C-EENRG) of the University of Cambridge on the impacts of the GET FiT Programme.

With our research, we hope to contribute to the academic literature and policymaking in two ways:

  • First, many developing countries face the dual challenge of greening their energy mix – to emit less greenhouse gases and other pollutants – while achieving economic development to alleviate poverty and improve living standards. Hence, understanding how to best support developing countries, such as Uganda, in meeting these challenges is crucial for international climate and development policy.
     
  • Second, we also intend to contribute to the debate on how to evaluate policies when true randomisation is not possible or the sample size is too small to perform more sophisticated statistical analysis.


In additional ongoing research, we attempt to understand whether the GET FiT plants, which are distributed geographically throughout Uganda, have led to lower power outages, using satellite data to capture variations in night lighting to proxy changes in outages related to the GET FiT plants.

The study on GET FiT is a joint work between Benedict Probst, Prof. Laura Diaz Anadon, Prof. Andreas Kontoleon at the University of Cambridge and Lotte Westermann (KfW). The study is envisaged to be published in the World Development special issue ‘Latecomer Development in a Greening World’.