Africa is about to experience a wave of investment in its hydropower sector. But will it be able to avoid some of the problems that have bubbled up with other natural resource concessions?

Private investment in African hydropower has lagged behind the rest of the world, despite the continent having the largest untapped potential combined with chronic power deficits. This unsatisfactory situation is changing fast as governments struggle to meet rapidly growing demand from an increasingly prosperous middle class and a burgeoning, power-hungry mining industry.

Finding the finance

A major challenge has been the capital-intensive nature of hydro projects. Faced with the need to invest in new capacity, most countries have only a limited range of options. The very poorest may still have access to concessionary financing, but the majority have to rely on commercial financing through private developers, or on sovereign loans from emerging economies such a China, through its EXIM bank. The latter are often linked to a trade agreement and the money is usually tied to Chinese construction companies.

To attract more varied sources of capital, many African governments are liberalizing the power sector. This is a challenging process for a continent that has traditionally been accustomed to a high degree of state ownership in all aspects of electricity supply. The process is more advanced in some countries than others, but the concept of privately financed generating stations is now well established. However, nearly all of these independent power producers (IPPs) have been thermal, wind, or geothermal projects; hydro has proved to be a more difficult nut to crack. This follows similar experiences in Asia and South America, where private hydro was initially slow to take off. Once established, however, it rapidly gathered momentum.

Crafting the concession

Another significant challenge is negotiating concession agreements where there is little experience to draw upon. A recent review of 35 Sub-Saharan countries reveals that 14 are already engaging with private hydro developers, while 11 are moving in the same direction. This suggests that up to 25 African states may soon be negotiating hydropower concessions, most for the first time.

These highly consequential contracts not only determine the nature of the project to be developed, but also define what the host nation will receive for the use of its resources, and the impact on any existing or planned developments in the river basin. They reach far into the future and involve many stakeholders. Governments need help.

Turning point

There are reasons for believing that African hydro is now at a turning point. The recent commissioning of the 250 megawatt (MW) Bujugali project on the River Nile in Uganda marks the successful completion of the first sizeable hydro IPP on the continent. There have been smaller schemes, but Bujugali has demonstrated that with the right combination of private investment and public support, much of the continent’s vast hydro potential could be developed by the private sector. It has boosted confidence among investors and developers alike, to the extent that there are now a number of international companies focusing exclusively on the African hydropower sector with a raft of projects under negotiation or development.

These include projects like Bumbuna (250 MW) in Sierra Leone and Ruzizi 3 (145 MW) in Burundi, both nearing construction, and several large projects like Mphanda Nkuwa (1,500 MW) and Cahora Bassa North (1,000 MW) in Mozambique, which are in the planning stage. In the Democratic Republic of Congo, which holds 65 percent of Africa’s hydro resources, plans are now in hand to develop the 4,800 MW Inga 3 scheme as the first stage of Grand Inga, which will eventually have a capacity of 40 gigawatts. For all of these, securing financing will be the overriding challenge on a continent where credit ratings are weak. In most cases it will involve a complicated blend of private and public money and guarantees, as funding such projects is usually beyond the reach of the private sector alone.

From generation to generation

The new wave of private hydro in Africa offers great opportunities for nations to strengthen their power sectors and build their economies in the way that is happening elsewhere in the world.

First generation hydro concessions are relatively straightforward because they are structured around the IPP acting as a captive supplier to the state-owned grid company; the host government is therefore focused on achieving least-cost power. However, in a few parts of the world, such arrangements are giving way to open market concessions where the developer is free to sell power wherever he can find a buyer.

Under these second generation arrangements, the power produced moves from being a public service to a tradable commodity, and the focus of the host government changes to maximizing its share of the economic rent from the site. This is more difficult to address—and will remain an obstacle—in a situation where concessions can stretch 30 years into the future, and energy prices continue to escalate at an unpredictable rate.

Hydropower development in Africa faces many challenges, but perhaps the greatest is to achieve equitable and sustainable concession agreements that stand the test of time.