Author: Babu Ram

Sub-Saharan Africa (SSA)’s natural gas resources are estimated at 359 trillion cubic feet. The countries that hold major natural gas resources are Nigeria, Angola, Equatorial, Guinea, Mozambique, and Tanzania. The unproven (contingent) resources correspond to 190 trillion cubic feet, a lot of which are located in Mozambique and Tanzania and remain to be commercialized. Equatorial Guinea, Nigeria, and Angola are LNG exporters.

Eight other countries having about 1 trillion cubic feet of natural gas reserves are Cameroon, Ghana, the Republic of Congo, South Africa, Namibia, Côte d’Ivoire, Mauritania, and Gabon. Creative thinking to address economy-of-scale issues will pay high dividends. 

Besides being an LNG exporter, Nigeria also supplies gas to Ghana, Togo, and Benin through the West Africa gas pipeline project (WAGP). The unreliable gas supply issue needs to be addressed, which entails investments in new pipelines within Nigeria. However, if reliability is improved, WAGP extension to Cote D’Ivoire will enable the country to ramp up electricity production and exports to neighbors i.e., Burkina Faso, Mali, Ghana, etc.

Nigeria intends to increasingly use natural gas in gas-to-power projects. Nigeria’s energy sector roadmap envisages adding 20,000 MW gas-to-power projects by 2022. Achieving these targets is contingent upon doubling current natural gas production and building the natural gas pipelines and expanding and reinforcing the electricity transmission system wheeling capacity to 20,000 MW in the realm of the country and the West Africa Power Pool (WAPP) in the same time frame.

The government’s energy sector reforms’ success is notable with private investment in Azura (450MW) with smart debt financing by having local currency devaluation risk mitigated. Azura is viewed as a model for unleashing further private investment in the sector. Following Azura.  Oma Power Generation (1080MW) is expected to commission in 2022.

Angola is also an LNG exporter; is developing a combined cycle gas-to-power project (400MW), expected to enter into commercial operation in 2024. Natural gas could be supplemental to its hydropower resources under development. Presently a non-operating member, Angola’s integration with the Southern Africa Power Pool (SAPP) will be facilitated if shared water resources (Baynes Dam-600 MW) are jointly developed with Namibia for power production.

The investment decision in Namibia exploiting Kudu gas resources for power production (885MW), is expected to be finally taken in 2022. The project will contribute to increasing the intra-regional electricity trade in the Southern Africa Power Pool.

Mozambique’s potential to export LNG is about 10 trains, or even more to happen in twenty years. The national economy is expected to receive over US$100 billion.  Plus, with uncommitted gas, 20 GW gas—to—power projects, could be built, which, however, face competition with Cahora Bassa North Bank and Mpanda Nkuwa and coal projects in Tete.  If built pipelines connecting Mozambique with neighboring countries will increase intra-regional natural gas trade in Southern Africa. Mozambique presently exports natural gas to only South Africa.

South Africa’s Ministerial determinations require “that 3126MW of baseload and/or mid-merit energy generation capacity is needed from gas-fired power generation to contribute towards energy security. The gas required for such power generation will be from both domestic gas and imported gas resources”.

This scenario enhances the economics of a second pipeline between Mozambique and South Africa for natural gas supply to the  South African market.   Moreover, South Africa’s shale gas resources, estimated at 390 trillion cubic feet, could be counted for use in the long term.

Tanzania is using natural gas in gas-to-power projects with the operationalization of the 546 km Mtwara-Dar Es Salaam natural gas pipeline and Kenyerezi I 150MW-open cycle gas turbines, all funded by the government. So, Kudos to the government. The piped natural gas would be used further to produce an extra 400-500 MW in plants owned by TANESCO and IPPs in Dar Es Salaam, replacing jet fuel and HFO. Future plans to produce about 3000 MW of gas-to-power projects are confirmed.

The natural gas resources are enough to double the current electricity generation capacity in Sub-Saharan Africa. Natural gas–to–power production will supplement hydropower and smoothen fluctuations in the outputs of renewables like wind and solar, supported by the strengthened electricity grids. The pivotal role the natural gas and renewable energy mix play in the carbon-constrained world is an important virtue.

Natural gas resources located close to low-demand centers in far-flung areas offer entrepreneurial challenges and opportunities to venture capitalists. Private investments are needed to build to transport gas to run power projects, in particular pipelines and compressing stations. Plus, natural gas production needs to be stepped up to achieve gas-to-power production targets within the time frame in SSA in particular in Nigeria and Tanzania.

The scale economy issues deprive small reserve-holding countries of the benefits of natural gas exports. If not gas, such countries can export power to neighbors. The solution lies in integrated funding of gas field development, gas transportation, and gas-to-power production facilities with public-private partnerships. In this context, Banda gas field development (Mauritania) is a great example of replication in several situations in Sub-Saharan Africa. The reforms in natural gas upstream and midstream sectors are on equal footing with electricity sector reforms to attract investment in the natural gas value chain and gas-to-power projects.  These reforms will divert investment from elsewhere to Sub-Saharan Africa as at the present time European economies are scrambling for alternative and reliable natural gas resources to lessen their dependence on Russian gas.

The energy industry is witnessing a revolution that has never been seen before. You can compare it to the green revolution or the IT revolution. It has the power to change how we produce and consume energy. Renewable energy sources such as wind have seen tremendous growth. Solar is not far behind and is catching up at an unprecedented speed. This speed brings with it its own challenges in how quickly the industry, consumers, governments, and communities can seamlessly embrace new energy sources in this ever-changing industry.

This blog will attempt to unravel the market and the industry development and view it from the lenses of energy security, climate change, consumer choice, and economic growth.

As you read the blog, provide comments and pose questions but more than that, engage your friends and family members on the changing energy industry. The energy consumer of the future will be far from passive. Rather, the future energy consumer will actively make choices on what and how they consume energy.

Dr. Babu Ram presented his perspectives on Sub-Sharan Africa energy access to Global Superior Energy Performance Partnership power working group in Ankara, Turkey.

Dr. Babu Ram, as part of the African Development Bank, supervised the new construction and rehabilitation/expansion of two substations at Dar Es Salaam, and one at Arusha, and construction of distributions networks in Mwanza and Shinyanga to connect additional 32,000 customers to grid.

I was delighted to participate in the Ukrainian Energy Forum 2020. Based on the interactions with policy makers, marketers, academics, investors, and high officials of key energy sector institutions, I noted a lot of opportunities that are coming up in the renewable energy business for investors, bilateral aids, and consultants in that country. There are certain risks, but manageable.

Author: Dr. Babu Ram

Solar photovoltaic power plants are increasingly being installed due to reduction of cost of photovoltaic technology, guaranteed off-taking of power produced, feed-in-tariffs plus production tax benefits. Feed-in-Tariffs are giving way to renewable energy auctions.  It is estimated that the demand for O&M services will significantly rise in near future.

The O&M practices comprise of preventive and reactive maintenance. The preventive maintenance is essential as it improves the plant output by 1-5%; it is planned in advance to upkeep the system. Key activities are washing panels and vegetation management, etc. The reactive maintenance arises due to unplanned outages caused by failure of power plant components such as inverters, AC subsystem, DC subsystem, etc. Of these, inverter breakdown tops the list of component failures. 60-65% of plant down time is ascribed to inverter breakdown, which is major cause of loss of electricity production.

O&M services can be outsourced from a third party. O&M contract’s cost and performance are significantly influenced by the warranty clause of the conditions of contract. The warranty clause phrasing should be precise to convey expectations to contractor; it should capture major equipment that are likely to fail. The O&M contractor generally provides 10 year warranty period. However, some service providers even quoted 15-20 year warranty period. That seems unrealistic as the plant may require major renovation & modernization of equipment after the 15^th year of the plant life. The EPRI White Paper (Assessing Solar Photovoltaic Operations and Maintenance Challenges) raises doubts about the realism of warranty period above 10 year in terms of whether the system integrator understands the warranty concepts; and it makes adequate provision for warranty liability in the balance sheet.

From the accounting perspective, manufacturer/supplier records the expected cost of warranty liability in the balance sheet, as per GAAP requirement. At the same time, it records the estimated warranty expense in the income statement in the same period in which sales revenue is recorded. Liability amount is reduced with defective equipment/component replaced. The cost of inventory is also reduced in the same amount.

GAAP requires manufacturer/supplier to estimate the warranty claim as accurately as possible. However, it is not easy to predict rate of failure of equipment accurately. While estimating warranty liability, company is tempted to understate liability to report higher income in the current year. On the other hand, the company might overstate warranty liability to report lower earnings; in this way it creates additional liability -“cookie jar reserve” to use it to reduce future warranty expenses.

The Photovoltaic Plant owners should carefully state the warranty clause in the O&M contract as well as assess the earnings management practices of service provider in the financial statements versus competitors in negotiating an O&M contract.

The cyber-attacks are likely to increase in the electricity grid in the next ten years in the world due to:  (1) the internet-connected systems are increasing targets (2) security is not the first concern in the design of internet applications (3) major cyber-attacks have already happened, i.e. Stuxnet worm, Havex, and BlackEnergy 3 and (4) electricity sector is one among most vulnerable sectors. Therefore, the cyber security of electricity grid is of paramount importance and a global issue.

In view of the above, the questions lurking in minds of company executives are:  what are best practices and what we can we learn from best-practices in cyber resilience, and what types of changes are required for the energy industry to be prepared for today’s critical inter-connectivity?; How do we translate cyber risks from an operational risk to a business concern?; What do leaders need to know; and what can they do in the future to better prepare our systems in the instance of sheer sabotage?

This paper is about addressing these questions. The underlying themes are: the cyber resilience of smart electricity grid could be enhanced: firstly by preventing and destroying a cyber-attack where it happens and at the same time by blocking the spread of attack to other networks and systems in the interconnected power systems; and secondly by restoring the power supplies to customers quickly if the electricity grid fails due to a cyber-attack.

Besides introduction, the paper is divided into five parts: part 2 is about review of cyber security threats and attacks in the literature. Part-3 presents best practices to learn lessons from and to enhance cyber resilience of electricity grid. The best practices subsume a comprehensive cyber security framework with application to advance metering and electricity distribution infrastructure. Part 4 addresses some critical questions: What types of changes are required for the energy industry to be prepared for today’s critical interconnectivity; How do we translate cyber risks from an operational risk to a business concern?; and How do we finance cyber resilience electricity infrastructure. Part 5 of the paper, given the limited experience with cyber- attacks, which triggered power outages in the interconnected system, presents an evolving set of best practices to restore power supplies to customers if the grid fails due to these types of attacks. Finally, conclusions, recommendations and future research areas have been presented.

To continue reading,

Best Practices to Enhance Cyber Resilience of Smart Electricity Grid with Focus on Advance Metering and Distribution Infrastructure

By Dr. Babu Ram

To read the full paper, click here

Abstract—The objective of this paper is to present new rate design innovations toward improving or replacing the net energy metering and billing associated with the rooftop solar PV systems. New rate design innovations are helpful in enhancing the sustainability of renewable energy based micro grids and utility’s network. The paper is presented in five parts.

Part I being introductory in nature, summarizes the rate design innovations by utilities in the US with regard to net energy metering. Part-II presents analyses about the applicability of Time of Use (TOU) tariff to net energy metered solar and nonsolar
customers in the residential sector. In part III, Welfare Economics of the proposed TOU tariff is presented. Part IV discusses results. Finally, conclusions and recommendations
have been presented in part V of the paper.

It may be noted that the paper is prepared in the context of the US utilities, but the rate design innovations, conclusions and recommendations that have been discussed in the paper are equally applicable to such utilities in Africa and other parts of the world, that are building renewable energy based micro grids.

Index Terms- Net Energy Metering, New Rate Design, Sustainable Micro grids, and Time of Use Pricing

To read the full paper, click here

Prospects of Investing in the Long-Term Debt Securities for Funding Renewable Energy Projects in Emerging Economies

By Dr. Babu Ram

The emerging economies are adopting new and innovative approaches to expand their renewable energy portfolio with the assistance of private sector participation in their projects. The innovations happen in both demand and supply side. The approaches on the supply side are renewable energy portfolio standards (e.g. green certificates), net metering, renewable energy feed-in tariffs, and auctions for procurement of MW / MWh.  Renewable Portfolio Standards and net metering are in use in the US and Europe. Renewable Energy Feed in Tariffs are widely used in developing countries. According to IRENA report, 30 developing countries out of 44 countries used auctions as of early 2013.

The experience of emerging economies such as South Africa in the use of procurement auctions is worth the discussion with the objective to understand challenges and opportunities in terms of exploring alternative sources of financing of renewable projects utilizing solar and wind. Finding the alternative funding instruments is imperative because the supply of funds from conventional debt channels namely, commercial banks, is reaching limits or even expected to decline, toward funding renewable energy projects.

The electricity supply in South Africa is dependent on coal and the country is committed to progressively displace the use of coal for power generation. It is investing in clean coal technologies. It has prepared an atlas of carbon storage sites.  Its potential for solar energy and wind energy is well documented. Its electricity transmission grid is healthy and is capable of absorbing 5000 MW renewable energy projects without any additional investment.

The renewable energy development began with the announcement of feed in tariff in 2009 but it was abandoned in favor of procurement auctions because the procurement based on the feed in tariff was not in conformity with the national procurement laws. The country launched procurement auctions in favor of feed in tariff in 2011. It has successfully conducted three rounds of auctions to source renewable energy projects under the South African Renewable Energy Independent Power Producer procurement program (REIPPP). In round 1, 28 bidders were qualified to produce 1416 MW of renewable energy. The round 2 generated 19 preferred bidders to supply 1045MW and round 3 the 17 preferred bidders to produce 1470 MW. The three rounds of auctions together contributed to 55% of the targeted RE capacity addition by 2020.  The fourth round auction, furthermore, yielded 1121 MW new renewable energy projects capacity additions.

The key outcomes are: the offered unit electricity price has progressively declined from the round 1 to round 3 in regard to wind energy, solar photovoltaic and solar CSP. The round 3 also picked new renewable energy projects, namely a landfill gas-to-power project and a biomass project. Local content in the renewable energy projects has increased; South Africa invested US $10 million to prepare bidding documents, conditions of contract and evaluation of bid which is a big amount for a small Sub-Saharan economy.

The implementation modalities for developing the selected projects are: the renewable energy  projects developers sign a PPA with the state utility ESKOM, which  guarantees a payment for power generated at an agreed tariff, based on a “take or pay” for at least twenty years. The Department of Energy provides investors a second line of defense and offers recourse to government if ESKOM fails to honor its commitments subscribed in the PPA. These dispensations make the PPA a credible instrument enabling developers to raise funds for project development purposes.

On the basis of these PPAs, selected bidders raise equity (30%) and debt (70%) to implement renewable projects.  The resultant preferred bidders of the three rounds have already secured the financial closure status. The debt has been financed from major local commercial banks and equity by institutional and domestic investors. However, Soittec Solar, a company selected for a solar PV project, secured $111 million of debt finance through issuance of a rated bond in 2013. The project was expected to be completed in 2014/15. The bonds have been purchased by South African institutional investors such as insurance companies and pension funds. This shows that the debt financing is possible through renewable energy bonds.

There are two pertinent questions in regard to raising debt in emerging markets: (1) what should we do so that the experience of Soittec is emulated by other companies in emerging economies? (2) What should be done to attract the international institutional investors to purchase long-term debt securities in the emerging economies?

To investors, a bond is a fixed income security. A bond is characterized by an annual interest rate, called coupon and bond duration. For example, coupon rate could be 5% per annum on the par value of a band. The bond issuer pays to investor an yield based on the coupon and face value of the bond. The bonds after issued are listed on the stock market, can be bought and sold by investors. The real bond value fluctuates with macro-economic variables such as rate of inflation and interest rate of economy. If the market interest rate is higher than the coupon, the present value of the bond reduces and investors loose. On the other hand, stable macro-economic conditions such as low interest rate, low inflation and well developed stock markets offer investors a higher yield than assured by   coupon interest rate.

The project developers need to study the macro-economic parameters of a country and credibility of the stock markets. It should take the help of noted transaction advisers to develop a bond prospectus for investors. The prospectus defines, among others, coupon, maturity and rating of the bond. The bond needs to be rated by an international rating agency. The bond rating should be an investment grade in order to inspire investors to invest in the bonds. The investors avoid the junk rated bonds. The bond prospectus needs to be approved by the stock market regulator. The project developers need to appoint smart investment banks to market these bonds to institutions investor such as insurance companies and pension funds. The institutional investors try to match duration of their assets and liabilities.

There is no doubt that opportunities are big for investors in renewable energy bonds to be issued by private project developers in emerging economies.  However, the international investors view emerging markets purely from the risk perspectives. Such risks as political upheavals, labor strikes, large unemployment level, policy reversal risks, policy paralysis risks and two digit fiscal deficits make the international rating agencies weary and they down grade sovereign bond rating. Downgrade of sovereign bond rating might have impacts on current and future projects due to rising debt service cost. It might lead to increase in the infrastructure service supply cost.  Therefore, infrastructure projects must be implemented within the time schedule and budget.

Moreover, there is need to improve the macro-economic policies (a) accelerated economic growth with jobs, (b) stable interest rate, (c) stable exchange rate of national currency with US$ / Euro in view of  the expected US Treasury’s tapering of the quantitative easing, (d) prudent fiscal management   and (e) monetary policies to control inflation.  In the current situation, the international investment in renewable energy bonds is likely to lag behind other sectors, in emerging economies. However, renewable energy bonds could be given some sops such as a tax free status to attract international investment in the long-term debt securities.

 

 

 

The full paper is available on :

Proceedings of the 23^rd World Energy Congress 2016, Istanbul, Volume 1,  PP 985-1008

By Dr. Babu Ram (Unfolding Energy Board Member)

The cyber-attacks are likely to increase in the electricity grid in the next ten years in the world due to:  (1) the internet-connected systems are increasing targets (2) security is not the first concern in the design of internet applications (3) major cyber-attacks have already happened, i.e. Stuxnet worm, Havex, and BlackEnergy 3 and (4) electricity sector is one among most vulnerable sectors. Therefore, the cyber security of electricity grid is of paramount importance and a global issue.

In view of the above, the questions lurking in minds of company executives are:  what are best practices and what we can we learn from best-practices in cyber resilience, and what types of changes are required for the energy industry to be prepared for today’s critical inter-connectivity?; How do we translate cyber risks from an operational risk to a business concern?; What do leaders need to know; and what can they do in the future to better prepare our systems in the instance of sheer sabotage?

This paper is about addressing these questions. The underlying themes are: the cyber resilience of smart electricity grid could be enhanced: firstly by preventing and destroying a cyber-attack where it happens and at the same time by blocking the spread of attack to other networks and systems in the interconnected power systems; and secondly by restoring the power supplies to customers quickly if the electricity grid fails due to a cyber-attack.

Besides introduction, the paper is divided into five parts: part 2 is about review of cyber security threats and attacks in the literature. Part-3 presents best practices to learn lessons from and to enhance cyber resilience of electricity grid. The best practices subsume a comprehensive cyber security framework with application to advance metering and electricity distribution infrastructure. Part 4 addresses some critical questions: What types of changes are required for the energy industry to be prepared for today’s critical interconnectivity?; How do we translate cyber risks from an operational risk to a business concern?; and How do we finance cyber resilience electricity infrastructure. Part 5 of the paper, given the limited experience with cyber- attacks, which triggered power outages in the interconnected system, presents an evolving set of best practices to restore power supplies to customers if the grid fails due to these types of attacks. Finally, conclusions, recommendations and future research areas have been presented.