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Generation

To meet the growing demand for electricity, additional capacity needs to be built and/or existing generation facilities must be updated. Public-private partnerships (PPPs) can be used to overhaul old facilities and construct new ones. The most frequently used forms of PPP transactions for power generation are Build-Operate-Transfer (BOT) agreements or on concession agreements. BOT agreements are often employed where the nature of the project causes the government to have a very long-term interest in the facilities, such as is commonly the case for hydroelectric and geothermal power plants.

PPP projects have been particularly successful in providing new generation capacity through independent power producers (IPPs). Some IPP plants, particularly large thermal or hydro stations, are very expensive facilities, and are well-suited to project finance arrangements, whereby security can be provided to the lenders though an identifiable revenue stream.  IPPs, which typically sell energy to utilities (government-owned or private) under a power purchase agreement (PPA), are increasingly playing a role in providing needed generation capacity, as many countries are liberalizing their power sectors by eliminating the monopolies previously held by state-owned companies and authorities. Between 2002-2012, there was a total of $350 billion invested in greenfield IPP assets in developing countries.

As of 2013, of the total PPP investment in electricity generation, fossil fuels account for the major share—roughly 75 percent. Coal accounts for 35 percent, natural gas 24 percent, and fuel oil 15 percent. Total investment in renewables represents only four percent (if hydropower is excluded) but investment in renewables is growing rapidly.

Generally, power generation projects fall into one of three categories:

  • Baseload: baseload generators operate on a continuous basis.
  • Peak: peak generators operate only where demand exceeds the output of the baseload generation facilities. Peak generators are commonly either hydropower, or either combined-cycle or open-cycle natural gas generators, due to the need for quick start-ups to meet intermittent peaks.
  • Mid-merit: mid-merit generators fill requirements somewhere between those of the baseload and peak generators. A mid-merit generator will be used as a base generator during the day, or during periods of high demand, and will then be used as peak generator at night or in times of lesser demand. Mid-merit generators are often older and more expensive than baseload plants.

Issues

  • Commercial viability of the PPA

    In countries with partially liberalized power markets, where IPPs sell to a single buyer (usually a state-owned utility), the contract between the IPP and the single buyer will take the form of a power purchase agreement (PPA). The PPA is a...

    In countries with partially liberalized power markets, where IPPs sell to a single buyer (usually a state-owned utility), the contract between the IPP and the single buyer will take the form of a power purchase agreement (PPA). The PPA is a long-term contract constructed to ensure the bankability of the project. In more liberalized markets, an IPP may have multiple PPAs, with a variety of buyers.

    In either case, the IPP needs to consider the financial and commercial viability of the power purchaser or purchasers. If the buyer is a utility company, the IPP must consider the impact that regulatory policies (in regard to matters such as tariffs and customer billing arrangements) will have on the buyer’s long-term viability.

    In cases when the power purchaser is not considered creditworthy, the IPP and its lenders may require a government or other third party guarantee of the power purchaser’s obligations. Alternatively, it may be necessary to put in place a security package, including access to financial instruments such as letters of credit or access to escrow accounts, to supplement the purchaser’s credit position.  

  • Interface with other energy infrastructure

    The ability to efficiently generate power is dependent on the reliability of the broader electricity infrastructure. The project company developing an IPP project will need to take into account, among other matters:

    • the condition of the grid;...

    The ability to efficiently generate power is dependent on the reliability of the broader electricity infrastructure. The project company developing an IPP project will need to take into account, among other matters:

    • the condition of the grid;  
    • the utility’s load balance;
    • the likelihood of grid failure;
    • the capacity of the transmission system; and
    • the ability of the power purchaser to make necessary investments in the reinforcement of the network.
  • Tolling agreements

    When the the supplier of fuel and the power purchaser for an IPP are state-owned companies, the risks in an IPP project can be substantially reduced by considering a tolling agreement (also referred to as an energy conversion contract). Under...

    When the the supplier of fuel and the power purchaser for an IPP are state-owned companies, the risks in an IPP project can be substantially reduced by considering a tolling agreement (also referred to as an energy conversion contract). Under a tolling agreement, the power purchaser delivers the fuel and buys all the energy, paying the IPP a fee for converting that fuel into electricity, assuming a certain level of efficiency.

  • Transmission and use of system agreements

    In a situation where an IPP is selling to more than one buyer, there will be a need for an agreement between the IPP and the owner of the transmission grid, allowing for access to, and use of, the grid facilities. This typically takes the form...

    In a situation where an IPP is selling to more than one buyer, there will be a need for an agreement between the IPP and the owner of the transmission grid, allowing for access to, and use of, the grid facilities. This typically takes the form of a transmission and use of system (TUOS) agreement.

    Usually, the TUOS agreement will be on terms fixed by a regulator, since transmission is a monopoly service. The TUOS agreement will normally place significant obligations on the generator to comply with the grid’s requirements, but usually gives little protection to the generator in the event of failure of the grid.  

    The TUOS agreement will establish a comprehensive mechanism for the following key components:

    • Defects or defaults: the agreement will specify the communication and identification of any defects or defaults in the grid or the transmission of electricity by the generator.
    • Grid requirements: the grid requirements will cover issues important to the proper management and operation of the grid, including the frequency and timing of electricity delivered into the grid, levels of reactive energy generated by the plant and emergency procedures. If a country has a grid code, the interconnection agreements refer to the grid code that covers in detail all design and operating aspects of the power system under normal and emergency conditions. If there is no grid code (which is the case in many emerging markets), the key provisions related to design are in the interconnection agreement and the operating aspects are in the PPA and may vary from project to project.
    • Interconnection assets: certain assets will be necessary in order to connect the generator to the grid, such as transmission cables and substations. These assets are generally provided by the generator. The TUOS agreement will set out the requirements for such interconnection assets and will give the grid company the right to oversee and approve any such interconnection with the grid to ensure that no damage is caused to the grid.
    • Metering: the agreement will address the metering of generated and delivered electricity.

Tools & Guidance

    • 2001
    • Asian Development Bank (ADB)

    Developing Best Practices for Promoting Private Sector Investment in Infrastructure: Power

    This five-volume set presents the findings of an ADB regional technical assistance study which developed sector-specific best practices for promoting private sector participation in key infrastructure sectors in ADB's developing member countries. The best practices cover the role of government, institutional reform, strategic planning, legal and regulatory frameworks, unbundling and competition, contractual arrangements, sources of financing, and the allocation of risk. This volume examines the optimum approaches for achieving benefits for consumers of electricity through power sector restructuring, unbundling, the introduction of competition, and privatization.  

    • 2012
    • Maria Vagliasindi
    • World Bank Group (WBG)

    Key Drivers of PPPs in Electricity Generation in Developing Countries

    Cross-Country Evidence of Switching between PPP Investment in Fossil Fuel and Renewable-Based Generation

    This paper presents new global evidence on the key determinants of public-private partnership investment in electricity generated by fossil fuels and renewable energy based on a panel data analysis for 105 developing countries over a period of 16 years from 1993 to 2008. It aims to identify the key factors affecting private investors' decision to enter electricity generation, through probit analysis, and the amount of investment sunk in this market segment, based on Heckman's sample selection analysis. The paper shows some evidence of switching from investment in fossil fuels to investment in hydro and renewables and within fossil fuels from oil to natural gas. An interesting result of the econometric analysis is that the likelihood...

Projects & Case Studies

    • 2011
    • Yijia Nan and Mark Moseley
    • PPIAF, World Bank Group (WBG), International Finance Corporation (IFC)

    The Expansion of China's Generation Capacity

    Power is a crucial factor in economic growth and quality of life, but building an adequate level of generation capacity has proven difficult for many developing countries. A number of jurisdictions have suffered from years of energy supply shortages, and this inadequacy continues to hinder their development.In the recent past, China’s generation capacity grew at an extraordinary rate, and this has drawn worldwide attention. For example, in 2009, China increased its generation capacity by almost 90 GW - more than the entire current total generation capacity of the United Kingdom. This note is intended to identify the key entities involved in the dramatic recent expansion of China’s generation capacity, and the legal relationships...

    • 2003
    • Asian Development Bank (ADB)

    Welfare Impacts of Electricity Generation Sector Reform in the Philippines

    This paper reports an empirical investigation into the welfare impacts of introduction of private sector participation into the Philippine electricity generation sector, through liberalization of the market for independent power producers (IPPs) during the power crisis of 1990-1993. This study uses a social cost and benefit analysis. The main benefits came from IPPs, which contributed to resolving the crisis and promoted economic and social development. Consumers and investors are net gainers, while the government lost and an air pollution cost was incurred. The paper concludes that reform with private sector participation increased social welfare.  

    • 2005
    • Julia M. Fraser
    • World Bank Group (WBG)

    Lessons from the Independent Private Power Experience in Pakistan

    The discussion paper reviews the IPP program and concludes with several lessons learned. Se tting a bulk tariff ceiling allowed Pakistan to alleviate its power shortage through private generation in record time; however, too much power was contracted with little regard for least cost expansion. Private investment in generation should be aligned with the country's sector reforms and also social, economic, political and institutional governance. In addition, solicitation of IPPs should be on a competitive basis and staggered over a few years so that changes in international investors' assessment of country and contract risks could lead to declining bid prices. Finally, while the risk of renegotiation can be minimized by competitive bidding...

    • 2010
    • PPIAF, World Bank Group (WBG)

    Public-Private Partnership Options for Future Power Generation in Montenegro

    Montenegro has a number of good opportunities for the development of domestic resources for electricity generation. In the Government’s Energy Strategy and Action Plan, it has set out a programme for development that encompasses a range of projects from large-scale hydro and thermal projects to smaller scale renewable energy projects. This programme calls for significant participation by the private sector in generation investment over the coming decade and beyond. The programme is intended to meet a number of objectives, important among which are included meeting international obligations regarding renewable energy utilisation and reducing the reliance of the country on relatively high cost imported power.

Lessons & Analysis

    • 2013
    • Maria Vagliasindi
    • World Bank Group (WBG)

    Revisiting Public-Private Partnerships in the Power Sector

    This report reviews the evidence to date with sectoral reforms and considers different approaches in varying circumstances to help outline the potential role of the private and public sector in strengthening the corporate governance of private and public utilities; helping governments to establish legal, regulatory, contractual, and fiscal frameworks; and improved market governance to attract private investment.   

    • 2012
    • Maria Vagliasindi
    • World Bank Group (WBG)

    Key Drivers of PPPs in Electricity Generation in Developing Countries

    Cross-Country Evidence of Switching between PPP Investment in Fossil Fuel and Renewable-Based Generation

    This paper presents new global evidence on the key determinants of public-private partnership investment in electricity generated by fossil fuels and renewable energy based on a panel data analysis for 105 developing countries over a period of 16 years from 1993 to 2008. It aims to identify the key factors affecting private investors' decision to enter electricity generation, through probit analysis, and the amount of investment sunk in this market segment, based on Heckman's sample selection analysis. The paper shows some evidence of switching from investment in fossil fuels to investment in hydro and renewables and within fossil fuels from oil to natural gas. An interesting result of the econometric analysis is that the likelihood...

    • 2007
    • Katharine Nawaal Gratwick and Anton Eberhard
    • University of Cape Town

    An Analysis of Independent Power Projects in Africa

    Understanding development and investment outcomes

    This study analyzes the outcomes of African independent power projects (IPPs). IPPs in Africa arose through the need to attract investment for new electricity generating capacity. They were also seen as a way to introduce the private sector into the electric generation sector and thereby improve technical and financial performance. Around two dozen such projects have taken root to date, concentrated in mainly eight countries. Outcomes have been varied with more balanced outcomes perceived in the North African region than across Sub-Saharan Africa. This study focuses on identifying the contributing elements to successful and more sustainable IPPs.

    • 2016
    • Anton Eberhard, Katharine Gratwick, Elvira Morella, and Pedro Antmann
    • World Bank Group (WBG)

    Independent Power Projects in Sub-Saharan Africa

    Lessons from Five Key Countries

    The track record of Sub-Saharan Africa’s power sector is dismal. Two out of three households in Sub-Saharan Africa, close to 600 million people, have no electricity connection. Most countries in the region have pitifully low access rates, including rural areas that are the world’s most underserved. In some countries, less than 5 percent of the rural population has access to electricity. This report highlights not only the challenges that policy makers are facing but also the underlying factors that contributed to healthy investment climates. Ultimately, the report is intended to offer references, options, and tools that may help African countries achieve scaled-up and sustainable power sector investment for the benefit of their people...

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