What we do
At the Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance, we support a variety of initiatives, which strive toward the same goal: to engage a wide variety of actors to advance the transformation to resilient low-carbon and resource-efficient economies by attracting new types of investors, in particular catalyzing the private sector. While some of the Center’s work is abstract, we also seek out opportunities to highlight concrete cases where innovative financing is able to promote our shared vision.
The Lubilia small hydropower (SHP) project is a nice example of how different instruments have addressed barriers at distinct stages of the project cycle and enabled it to reach construction. Lubilia, a 5.4 megawatt run-of-river power plant, will be located in Western Uganda (see map).
It has the potential to offset approximately 13,000 tons of carbon dioxide annually while contributing a significant and stable power supply to an economically vibrant area of a fast-growing country facing an electricity shortfall.
While the project is economically viable, a number of gaps and barriers inhibit private sector financing of renewable energy projects in developing countries, like Uganda, including regulatory uncertainties, lack of creditworthy off-takers, difficult logistics, volatile political environments and scarcity of skilled personnel. These factors increase both the cost and the perceived and actual risk of developing these projects. As a consequence, financing is often scarce and the pipeline of bankable projects often short.
In its early stages, prior to Lubilia’s legal, operational and financial viability being demonstrated, the developers partnered with the Seed Capital Assistance Facility (SCAF), administered by Martin Cremer, Senior Project Manager at the Centre, in collaboration with UNEP. SCAF supports early stage project development by partnering with fund managers and project developers to 1) set up new investment vehicles, 2) co-finance origination, development, and seed financing activities, and 3) co-finance activities that help projects with demonstrated feasibility get off the ground (e.g. technical studies or environmental assessments). In the case of Lubilia, SCAF provided critical co-financing for the development budget, which supported technical, hydrological, and financial feasibility studies, as well as legal and tax structuring activities. Following the successful implementation of the first round of SCAF support since 2007 (SCAF I), the Centre will also act as the SCAF Agent for phase II, which kicked-off in November 2014 with the first meeting of representatives of the different governance bodies.
While SCAF provides incentives to early-stage project development to bolster a healthy pipeline, the projects themselves are still perceived as risky and many are not able to move forward on account of lenders’ and investors’ prohibitive risk-adjusted return expectations. Here, different kinds of support instruments, targeted to the later stages of the lifecycle, are required for projects to reach financial close.
GET FiT Uganda
One such initiative is the Global Energy Transfer Feed-in Tariffs (GET FiT), currently being piloted in Uganda, and anticipated to be launched in other African markets in the coming years. GET FiT provides support to projects, including Lubilia, through a few different channels, including a renewable energy feed-in tariff premium “top-up” to support its revenues, the possibility of acquiring political risk insurance through the World Bank’s Partial Risk Guarantee scheme, and additional technical assistance. Lubilia’s top-up of USD 3.2 million (complementing investment costs of USD 18.7 million) played a central role in ultimately making this project bankable.
Silvia Kreibiehl, the Head of the FS-UNEP Center has led the conceptual work to establish the GET FiT program and sits on the GET FiT Uganda Investment Committee. Additionally, a team of the FS-UNEP Centre is currently working on the revision of feed-in tariffs in Uganda, together with Uganda’s Electricity Regulatory Authority (ERA).
In February 2015, Silvia and I, visited the Lubilia site, where we met with the project’s community manager to discuss the importance of engagement and outreach with local community members, as well as specific activities that have been and will be undertaken throughout the planning, construction, and operations of the project. The project developers have also used the International Finance Corporation’s (IFC) Environmental and Social Performance Standards – considered international best practice for managing environmental and social risks in the private sector – to inform their stakeholder engagement strategy, environmental due diligence, and resettlement and compensation plan. This approach provides a strong framework for ensuring that the community’s needs and impacts are fully taken into consideration throughout the project’s development.
With these targeted support mechanisms, Lubilia was able to sign a Power Purchase Agreement with ERA in January 2015, and is expected to begin operations in early 2017. The Centre will follow up this post as updates become available and will also publish a case study.
Have we interested you in our projects? Come and visit us on our Centre website for more information.