The improvement of access to energy is crucial for socio-economic development in Africa. Of the available sources of power generation, hydropower is cost-effective, sustainable, and flexible in contributing to a robust system. In order to analyse Africa’s abundant, untapped hydropower potential, as well as the key trends, challenges and opportunities in the industry, PowerLine magazine (in association with Global Transmission Report and REGlobal) organised a two-day virtual conference on ‘Hydro Power in Africa’ on 24 and 25 November 2021.

Singularity was Knowledge Partner at the event that witnessed participation from the who’s who of the global hydropower industry. The conference was attended by over 270 participants from amongst leading international infrastructure companies, energy companies, high-ranking officials of African governments, representatives from energy regulators in Africa, international financing institutions and lenders, non-profit organisations, and consulting firms.

I. Overview

Ms. Carole Rosenlund (Regional Director & Head of Africa Section, International Center of Hydropower) opened the conference with an overview of the key trends in the hydropower segment in Africa, major issues and challenges faced by hydro projects, and the region’s hydropower outlook.

Mr. Prateek Bagaria (Partner, Singularity Legal) also presented opening remarks on “Hydro - Power Development – Risks and Financing Opportunities”. He underpinned the centre stage that would be assumed by renewable energy in this decade. Africa has an abundant hydropower potential of which only 11% is presently being utilised. While many African countries like Morocco, South Africa, Ethiopia, and Congo are receiving global commendation on their transition to renewable energy, there is a lot more to be done to meet the continent’s power requirements and global decarbonisation goals.

Mr. Bagaria highlighted a number of issues and challenges that have been affecting Africa’s hydropower segment resulting in sub-optimal performance. Despite all the positives, the primary deterrent for investors appears to be the uncontrolled exposure to climatic uncertainty, resulting in disruptive surprises and costly penalties. Additionally, political risks, socio-economic risks, environmental risks, and technical risks form another cause for apprehension amongst investors. Mr. Bagaria also expanded on the disputes that arose in relation to the largest Nile dam projects – the Grand Ethiopian Renaissance Dam and the Nigerian Mambilla project - to demonstrate the risks associated with hydropower development.

 

 

This set the ball rolling for the two-day summit.

The conference saw a series of presentations on the plans and perspectives of specific countries in Africa. Mr. William Willoughby Liabunya, (CEO, Electricity Generation Company, Malawi) gave an overview of the energy sector in Malawi, explaining how Malawi is uniquely well-suited for hydro energy production. While 90% of Malawi’s existing energy needs are met by hydropower, and in light of increasing energy demand, numerous further sites are being identified for new hydropower development.

Mr. Edward Iruura (Director-Financial Services, Electricity Regulatory Authority of Uganda) similarly explained how Uganda satisfies 79.8% of its energy needs by large hydropower plants, and another 12.2% by small hydropower projects. Uganda is pushing hydro development further with feasibility studies being conducted for 27 new projects, and 26 projects under development. Uganda is also taking initiatives to address major concerns of hydro developers, such as providing sovereign guarantees, standardizing PPAs, guaranteeing uptake, etc.

Mr. Taurayi Maurikira (CEO, Zimbabwe National Water Authority) spoke on the country perspective of Zimbabwe. He pointed out that Zimbabwe has some small hydro projects and a number of relatively small dams that the government was looking to convert into hydro energy projects.

A number of the presentations were also dedicated to discussing key hydropower technologies. Mr. Paul Hinks (CEO, MyHydro) gave a presentation on the company’s innovative Restoration Hydro Turbine, that allowed electricity generation with a water drop height of as low as 2 metres, compared to 40 metres for conventional mini-hydro projects. Mr. Aurelien Maurice (Leader, GE Hydro Solutions Digital) spoke about their flexible operation and management (O&M) solutions, that incorporated digital monitoring and information technology to lower maintenance costs and maximize production. Mr. Taurayi Maurikira (CEO, Zimbabwe National Water Authority) spoke on the potential of pumped hydro storage technology, which allows hydro energy to be used as a repository for energy generated by other sources. Mr. Paul Rollins (Director-International Business Development, Worthington Products Inc.) spoke about solving floating debris problems in hydropower with innovative technology such as weed booms.

On the second day, a number of presentations were focused on best practices and case studies. Mr. Stephen Dihwa (Executive Director, South African Power Pool Coordination Centre) spoke about hydro energy in the context of regional power trading. He explained that hydro energy had played a key role in driving power trading in southern Africa since hydro energy projects were naturally connected across borders. In fact, the bulk of the traded power in the South African Power Pool is from hydro plants. A number of large hydropower projects are expected to be developed in the region in the future as well.

Ms. Kellie Murungi (Chief Investment Officer, East African Power Corporation) spoke about the opportunity presented by small hydro. Small hydro has several advantages over large hydro, such as low environmental and social impact, ability to service remote areas, increased water efficiency, and scalability. At the same time, there are policy, development, and financial risks that hamper small hydro development. Better sovereign support for small hydro developers and aggressive early-stage financing were some solutions to mitigate these risks.

Ms. Eva Kremere (International Consultant, UNIDO) also spoke about UNIDO’s role in small hydro. She explained how Africa is uniquely suited for small hydro, as 70% of the new rural electricity supply was expected to be from off-grid or mini-grids. She explained through case studies how small hydro can fulfill this energy need, especially given its ability to stabilize the grid over other renewables.

Mr. Kassim Abubakar (Senior Electrical Engineer, Ghana Grid Company) & Ms. Afua Adwubi Thompson (Civil Engineer, Volta River Authority) spoke about transmission infrastructure requirements for upcoming projects in Ghana, while also giving an overview of the energy ecosystem and production capabilities of Ghana. Similarly, Ms. Ghada Osama (Head of Network Studies, Egyptian Electricity Transmission Company) spoke about the development and challenges to transmission in Egypt.

Mr. Moises Machava (Executive Director, Hidroeléctrica de Cahora Bassa) presented a showcase on the International Hydropower Association, Hidroeléctrica de Cahora Bassa, and the Mphanda Nkwua power project along with an overview of the Costa Rican energy ecosystem.

II. Panel discussion on Investment Trends & Challenges in hydro power

The conference witnessed an engaging panel discussion to provide insights into the perspective of investors and lenders, challenges and issues, key opportunities, and investors’ future outlook. The panel comprised of:

1. Moderator: Prateek Bagaria, Partner, Singularity Legal
2. Olivier Tricca, Power Engineer, European Investment Bank (EIB)
3. Sylvie Mahieu – Principal Investment Officer, African Development Bank 
4. Richard (Chris) Troy, Transaction Liaison, Power Africa US Agency for International Development (USAID)

Mr. Bagaria opened the discussion with a clarion call to the need for investment to meet Africa’s burgeoning requirement for power. He suggested that investments made to address the COVID-19 crisis must spur the continent’s transition towards a sustainable energy future, particularly to the potential behemoth in the hydropower sector. A relapse into unsustainable economic patterns, as took place globally with the 2008 financial crisis is undesirable.

He categorized financial risks into three perspectives – lenders, investors, and the State, and went about how these may be minimized.

1. Lenders: Financing contracts that ensure security, create trust and retention mechanisms, and tiered dispute resolution mechanisms may provide relief to lenders. International accepted templates like FIDIC contracts throw light on the global best practices.


2. Investors: Investors can work closely with contractors, and if the situation permits, with employers who are usually state-owned, to address bureaucratic bottlenecks and enable an optimistic environment for PPP development and financial sustainability. Investors too must ensure their contracts address situations when the employer fails to adhere to its commitments and obligations, including dispute resolution mechanism in the contract as well as investment protection under the relevant bilateral or multilateral investment treaty.


3. State: The State can avail and adopt multiple mechanisms to avoid disputes and see through the smooth completion of the project, ensuring the financing needs are met and the project is completed in time.

Mr. Bagaria then introduced the other speakers from the EIB, AfDB, and USAID and invited them to make their presentations. Development finance institutions (DFIs) like these have played a major role in meeting the financing needs of energy projects in Africa, including hydropower.

Mr. Tricca informed that the EIB’s total hydropower investment between 2012-20 in Africa stood at €320 million in around 13 projects. The EIB’s project portfolio includes large hydroelectric schemes sponsored by public utilities, small and medium schemes by private investors, one under-construction pumped hydro plant in Morocco, amongst others. As with any major investment, Mr. Tricca shared that the EIB has faced multiple challenges in their hydropower investment in Africa, including site-specific risks, community engagement, biodiversity impact, resettlement actions, balancing the rightful beneficiaries of the profits of the projects, local government requirements that are sometimes unacceptable to the EIB, system losses, etc. He emphasised the importance of a comprehensive plan to account for all these risks and their mitigation at the very outset, before proceeding with acquiring finance. Mr. Tricca concluded that the EIB seeks to expand its portfolio in Africa, with renewed vigour in light of the global decarbonisation goals.

Ms. Mahieu shared that the AfDB aims to promote the development of hydropower projects in the region with adequate environmental and social safeguards while taking into account climate change implications. Some key hydropower projects funded by the AfDB include 420 MW Nachtigal Hydro IPP (Cameroon), 250 MW Bujagali Hydro (Uganda), and 120 MW Itezhi Tezhi (Uganda), amongst others. She noted that investment in the private sector has been inadequately allocated – with maximum investments being received in Europe and North America where the best and most efficient hydropower resources have already been developed. It is Africa that needs the investment with its ample, but undeveloped hydropower capacity. Governments have taken notice of this and have begun to include hydropower in their ambitious energy plans and create regional power-sharing mechanisms. She agreed that appropriate contract mechanisms, PRG, PRI, and insurance cover were necessary to mitigate risks to hydropower development. Another suggestion was introducing smaller-scale hydropower projects (mini-hydro/off-grid schemes) that are less capital intensive, and minimize certain risks like those associated with resettlement.

Mr. Troy began by highlighting that the USAID is leading the ‘Power Africa’ initiative which brings together over 160 private sector partners to increase investment in the African energy sector in order to improve electricity access. He emphasized that hydropower is not only important for power generation itself, but it is also essential to provide complimentary access to other forms of renewable energy like solar and wind power. He stressed the need to mitigate losses and increase collection by modernizing the grids with technologies like digital meters. Certain countries report up to 80% losses, making investment financially unsound and also lowering investor trust. Financial instruments like sovereign guarantees have to be efficient and then layered onto the complex transaction to ensure a balanced risk allocation amongst all participants.

The panelists reached a collective consensus that developers must take into consideration the environmental and social impact of large hydro projects, adhere to established protocols and standards to ensure credibility of data, and focus on climate-resilient designs, given the clear emphasis laid on these by the DFIs. They also suggested the need for government policy accounting for medium-to-long-term investment needs, and regulatory reforms such as power sector unbundling.

 

 

III. Presentation on Claims Management

The first day of the conference noted the opportunities and perspectives for hydropower across Africa. As claims are an inherent part of hydropower construction projects, Mr. Bagaria opened the second day with a session on claims management.

Mr. Bagaria began the session by noting the peculiarities involved in the hydropower sector. Hydroelectric power plants have complex structures and involve large amounts of capital with a long-running construction period. Unlike many other projects, hydropower requires more parts to be built simultaneously including the dam, power station, supply lines, etc. This situation imposes uncertainty factors with considerably high risks. Mr. Bagaria walked the viewers through the six categories of risks faced by hydropower projects.

For instance, in the case of political risks, Mr. Bagaria explained the instance of debate relating to harnessing rivers- who has a right to harness and how much water can be utilized from that river. Disputes between two states in a federal structure or between two countries in an international structure can lead to delay and dispute with respect to the project, including halting the project.

Mr. Bagaria further supplemented these risks with anecdotes from his experience. One such instance was an act of violence (or terrorism) which was used to convey a political point: in an African region, warnings were issued by the local community against awarding the contract to contractors of a specific nationality. Despite these warnings, when the award was contracted to an experienced contractor of that nationality, the construction site was bombed leading to loss of life and limb, delays in completion, increased costs, and compensation for the losses. The incident brought the project to a grinding halt over a dispute as to who would absorb the loss as the contract did not address the risk allocation. Another instance of technical and operational issues involved a project in the Philippines involving land silting issues which caused delays. Further, instances of management risks include frauds, diversion of monies, and over invoicing.

Therefore, hydropower projects require synchronization to handle risks and claims and to ensure that profits remain unaffected.

Mr. Bagaria explained that the construction contract should operate as a valuable project management tool, as failures to manage project risks, as well as disputes, can be time-consuming and lead to high costs. He emphasized on having a detailed and clear contract in place, preferably meeting international standards such as the FIDIC contracts, that has unambiguous risk allocation terms. This is an essential element and key to achieving estimated profits and achieve completion in the anticipated timeline. In the absence of a risk allocation mechanism, the parties would have recourse to law in accordance with bilateral or multilateral treaties or in accordance with the governing law. However, the same would be a recourse only at the dispute resolution stage. The risk allocation mechanism also helps avoid recourse to risk transfer at the dispute management stage (contractors’ all liability insurance, risk share with construction partners or sub-contractors, etc.).

Therefore, in addition to being aware of all legal remedies, parties must be aware of certain best practices that can be adopted for managing project risks and managing disputes.

A. Pre-Dispute: Dispute Avoidance

1. Preliminary assessment into local policies, culture, environment, and political environment.
    
2. Diligence: Obtaining required authorizations and licenses; balancing international standards with municipal legislation.
    
3. Pragmatism: All factors should be considered, including price risks. It is imprudent to accept exposure only to win the bid.
    
4. Contract Negotiation: Having clear outlined scope and obligations, unambiguous terms, balanced risk allocation, right of access to information, identification of reporting lines, force majeure clauses, and damages clauses.
    
5. Mitigation: Parties should work together to mitigate losses on account of anticipated obstacles during the performance of the contract like delay in handover of possession of land, instead of causing disruption to the project. For instance, the contractor might be able to continue engineering work while the employer continues to obtain possession over land;
    
6. Deployment of new technologies: Technologies can assist in risk mitigation- e.g., drone monitoring, automatic reporting on power transmission using the blockchain, US Dept. of Energy is sponsoring R&D of turbines which could reduce fish deaths to lower than 2% from the existing 5-10%.
    
7. Preservation of evidence: Proper, written documentation helps trace and predict disputes, leads to better communication and negotiations. It would be helpful to involve consultants early on to have precise correspondence in terms of the contract.
    

B. Post-Dispute: Preparing for Dispute Resolution

1. Conduct a thorough risk assessment: Review the claim, grounds, evidence, and chances of success with lawyers
    
2. Documentation:
   1. Collate all internal documents and records supporting relevant evidence
   2. Actively communicate with counter-party using written means, and suggest reasonable alternative means of performance.


3. Review your dispute resolution options: Investment arbitration, commercial arbitration, litigation, insolvency, or amicable settlement, as provided in the contract, local laws, or before specialized bodies such as the Dispute Adjudication Board.
    
4. Review financial capacity: Disputes are significant cost centres. Parties can consider litigation finance as well.


5. Ensure procedural compliance in order to exercise remedies such as notice requirements, and approaching appropriate forums for each remedy.
    
6. Avoid pigeonholing: If your claim can be made on several grounds, prepare to plead all grounds in alternative to each other.
    
7. Consider interim reliefs: Since disputes can be protracted, interim remedies like partial payments, possession over assets, and freezing orders may be helpful.

 

 

 

IV. Conclusion

There is a clear consensus that global decarbonization goals cannot be achieved without a large element of hydropower. Although the conference discussed the risks associated with hydropower projects, it refreshingly discussed more of the solutions to these risks as well as opportunities.

The conference proved to be a professional venue for business and government representatives to exchange experiences and consolidate efforts for the successful development of investment projects on construction and reconstruction/ modernization of hydropower plants in the region. It discussed investment trends and various financing models, risks and claims’ management strategies, and innovation and advance sustainable hydropower outcomes for communities and the environment, further to urgent demands across the sector to increase installed capacity and meet global net zero emissions.