Investing in Power in Ghana 100588

Investing in Power in Ghana 100588
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  Investing in the African electricity sectorGhana Ten things to know Attorney advertising Financial institutionsEnergyInfrastructure, mining and commoditiesTransportTechnology and innovationLife sciences and healthcare  01  |  Why consider Ghana? The power sector in Ghana has approximately 2,443MW of installed capacity, of which a proportion is already provided by independent power producers (IPPs). Demand is predicted to exceed 5,000MW by 2016, primarily as a result of the Ministry of Energy’s objective of becoming a major exporter of electricity into the West Africa Power Pool, coupled with an increase in demand domestically, as the government seeks to increase the electrication rate to 80 per cent by 2016. This is further fuelled by a high annual GDP growth rate (14.4 per cent in 2011). The Government recognises the importance of IPPs to the achievement of these international and domestic expansion objectives. In terms of renewable energy projects, Ghana has wind and solar energy resources, as well as biomass and hydropower. Around 65 per cent of Ghana’s installed capacity is currently provided by the large-scale Akosombo and Kpong hydropower projects. Biomass also makes a signicant contribution to the energy mix. The government is targeting to increase the contribution of wind and solar power to 10 per cent of the country’s capacity by 2020 and has recently enacted the Renewable Energy Law to support this objective. 02  |  What is the structure of Ghana’s power sector? The Ministry of Energy is responsible for setting energy policy, including in the power sector. Prior to 2008, the Volta River Authority (VRA) was the state utility responsible for electricity generation, transmission and distribution throughout Ghana. The VRA is wholly owned by the Government of Ghana and was established in 1961 under the Volta River Development Act. Through its subsidiary company, the Northern Electricity Department (NED), the VRA remains responsible for (and is the sole distributor of) electricity in the northern regions of Ghana (being the Brong-Ahafo, Northern, Upper East, Upper West, and parts of Ashanti and Volta Regions of Ghana). As a result of the unbundling process completed in 2008, another state utility, the Electricity Company of Ghana (ECG), was established for the purpose of purchasing electricity from the VRA at a bulk tari and distributing power in the southern regions. ECG is a private limited company that is wholly owned by the Government of Ghana.As part of power sector reforms implemented in 2005, the VRA’s mandate was restricted to electricity generation and the electricity transmission functions of VRA have been transferred to the Ghana Grid Company Limited (GridCo) (a process completed in 2008). GridCo is responsible for operation of the National Interconnected Transmission System (including dispatch), bulk power purchase of electricity from generators and sale to NED and ECG. It is also intended that the VRA’s distribution functions in the northern region of Ghana, currently vested in NED, will be transferred to the ECG, thereby creating a national distribution utility.Generators wishing to be connected to the transmission system must enter into an electrical connection agreement with GridCo.Ghana has two regulatory entities for the electricity sector. Generation licences are granted by the Energy Commission, which is also responsible for formulating electricity policy and rules governing the electricity sector, including a grid code. The Energy Commission is essentially a technical regulator. The Public Utilities Regulatory Commission (PURC) is responsible for the economic regulation of the electricity sector in Ghana (as well as gas and water), including the setting of taris. 03  |  Does the Government participate in IPPs? The government has interests in most of the four IPPs in Ghana, indirectly, as a result of the participation of VRA or the Social Security and National Insurance Trust in the equity of the project. However the government’s main role in IPPs is as the power purchaser. Whilst VRA, GridCo and ECG all have the ability to purchase power from IPPs, none of them has sucient covenant strength to facilitate the nancing of a project where they are the otaker without some form of government support. There is no consistent approach to providing government support for the IPPs that have been developed in Ghana to date. The issue has been approached in slightly dierent ways on two of the more recent IPPs for which power purchase agreements (PPAs) have been signed. In one case the Ministry of Energy entered into the PPA directly with the project company. In the other case the PPA was entered into by ECG and the Government of Ghana entered into a support agreement with the project company to augment the risk allocation and credit prole of the project. The Ministry of Energy has recently commented, in the context of renewable energy projects, that it is reluctant to provide government guarantees to support power projects. Instead it prefers developers to seek World Bank support Investing in the African electricity sector – Ghana 02 Norton Rose Fulbright Investing in the African electricity sector – Ghana – ten things to know  in the form of MIGA/partial risk guarantees. It remains to be seen whether this signals a shift in policy and, if so, whether it is conned to the renewable sector or will apply to thermal power projects as well. 04  |  How are tarifs established? Historically, one of the disincentives to private sector investment in power generation projects in Ghana was the prevailing level of taris, which were considered to be too low to be economic. This was partly due to the legacy by which the majority of Ghana’s power was generated by hydropower projects, as the costs per kilowatt hour are lower for hydropower than for a thermal power project. Taris have been increased on numerous occasions by PURC, with the aim of moving towards a more cost reective tari. However there is competing pressure to keep consumer taris as low as possible, which hampers the establishment of fully cost-reective taris that would support IPPs.IPP developers have preferred to enter into power purchase agreements directly with the Government of Ghana or with the ECG, in order to establish an economic tari. Notwithstanding this, the continued move towards cost- reective taris by PURC will be a key factor in the growth of the IPP sector in Ghana. 05  |  What are the fuel supply risks? Possibly the biggest constraint to the development of thermal IPPs in Ghana, as is the case in many emerging markets, is the availability of a reliable fuel supply. Take for example, the privately developed Sunon Asogli 560MW power plant at Tema. The project is a Ghanaian and Chinese joint venture which was not project nanced and therefore not subject to the usual bankability requirements of a project nanced IPP (such as a secure long-term fuel supply). Although construction of the rst phase of the project was completed in mid-2009 it is not currently generating electricity, as it is reliant upon gas supply from the West African Gas Pipeline (WAGP).It had been anticipated that WAGP would play a major role in delivering Ghana’s energy security and is encouraging the development of gas red IPPs. However, the supply of gas through WAGP has been repeatedly delayed or suspended through a combination of vandalism in Nigeria and other Nigerian supply constraints.It is unlikely that developers, lenders and indeed the Ghanaian government acting as otaker would be willing to assume the supply risk that would be inherent in relying on the delivery of gas from WAGP until a regular and reliable supply of gas through WAGP is established. The only alternative supply of gas, being associated gas from the Jubilee eld development in the West of Ghana, is unlikely to come on-stream for at least two years and is dependent upon the construction of suitable processing and pipeline infrastructure.The lack of a reliable gas supply has resulted in a number of existing power plants being congured to operate on both gas and liquid fuel, such as the 340MW Cenpower project in Tema and the nearby Kpone Project being developed by African Finance Corporation and Infraco. 06  |  What is the typical risk allocation for IPPs in Ghana? As discussed earlier there is no standard form of PPA in the Ghanaian market. Nevertheless, the power sector is relatively small and the negotiation of new PPAs tends to be supervised from the government’s perspective by sta who have been involved in earlier PPA development and negotiations. Some of the PPAs that have been entered into to date have provided developers with a robust risk allocation that is in line with project nance norms for emerging markets. Therefore developers should be able to achieve a bankable risk allocation. The tari structure under precedent PPAs in Ghana (which are for thermal plants) provides for the payment of capacity charges for dependable capacity and energy charges for electrical energy delivered. Fuel is sometimes tolled by the otaker, therefore the need for fuel costs to be passed through the project company is avoided. However, a fuel adjustment payment/deduction is included to ensure that the project company takes the energy conversion risk.It has been customary for the government to accept responsibility and to provide revenue protection to the project company for risks typically classied as “political risks” (ie, by paying capacity charges on the basis of a deemed available capacity during periods when the project company (or otaker, where applicable) is adversely aected by political risks). This includes risks such as war, civil commotion, expropriation, embargo, changes in law, etc. Whilst revenue protection is not provided for natural force majeure events (as is customary in project nanced transactions in emerging markets), some PPAs provide for an extension to the term of the PPA that is sucient to enable the project company to receive capacity charges that it was not able to earn as a result of a natural force majeure event together with any increased costs suered as a result of such natural force majeure event. Norton Rose Fulbright 03 Investing in the African electricity sector – Ghana – ten things to know  PPAs have also imposed a requirement on the otaker to provide a stand-by letter of credit in an amount equal to three months’ capacity and energy payments on a revolving basis. This provides increased credit enhancement for projects. 07  |  What governmental approval is required for PPAs? Article 181(5) of the Ghanaian Constitution provides that any international business or economic transaction to which the State is a party requires parliamentary approval before it can become eective. Prior to May 2012 it was generally considered by Ghanaian lawyers, in the absence of judicial interpretation, that Article 181(5) applied to transactions to which the State and international companies were parties. Therefore, where the Government of Ghana contracted with a Ghanaian project company, albeit one that was majority owned by international sponsors, the general view was that such contracts did not constitute international business transactions and therefore parliamentary approval was not required for them to become eective. However, in the case of Attorney General v Balkan Energy Co. LLC (a project company supplying power generated by a power barge to the Government under a PPA), the Supreme Court of Ghana found that the PPA constituted an international business transaction for which Parliamentary approval was required but had not been obtained. As a result of the decision in the Balkan case, developers and investors are advised to obtain either: (a) Parliamentary approval for the transaction; or (b) certication by the Attorney General in respect of the particular transaction, post structuring of the transaction, to conrm that the substance of the transaction is not international and the transaction is an ordinary commercial transaction rather than a major transaction that could fall within Article 181(5) of the Constitution. It is possible that future legislation will clarify the scope of Article 181(5) of the Constitution. However, in the interim, developers and investors should take a cautious approach to ensuring that any contract with the Government is binding on the Government. 08  |  What protections do foreign investors receive? Ghana’s exchange controls were relaxed substantially in 2006, so that now it is only necessary for the repatriation of funds to be done by authorised dealer banks. These banks report foreign exchange transactions to the Bank of Ghana, but no exchange controls are imposed.Businesses with foreign investment in Ghana are required to register with the Ghana Investment Promotion Centre, which guarantees that dividends, foreign debt service costs and distributions of equity following the winding up of the business are freely convertible without restriction. An authorised dealer bank must be used to execute the conversion. 09  |  What is the scope of a typical Ghanaian security package? In our experience the typical Ghanaian law security package on a project nanced power project in Ghana has included: ã legal mortgage over the land forming the site (which can also be granted over leasehold interests in land, including sub-leases which are commonly encountered, particularly on projects located in the Tema industrial area, as well as freehold interests);ã xed charges over movable assets, account balances, book debts, contractual rights, goodwill and intellectual property rights;ã oating charge over the entire undertaking of the project company; andã a pledge of shares in the project company (usually a Ghanaian limited liability company).A legal mortgage is a registrable security interest under the Land Titles Registration Law 1982 (in the case of land situated in a registration district) and under the Land Registry Act 1960 (in the case of other land). It creates a right for the mortgagee to take possession and to obtain an order for the sale of the mortgaged property in the event that the mortgagor defaults on the loan secured by the mortgage. If a legal mortgage is not registered it will be void. Certicates of registration take a signicant amount of time to be obtained, therefore the practice is for lenders to allow nancial close to occur in reliance on evidence that the document creating the mortgage has been lodged for registration with the relevant registry. Fixed and oating charges over assets of a company are subject to registration with the Registrar of Companies pursuant to the Companies Code 1963 and also with the Collateral Registry maintained by the Bank of Ghana under the Borrowers and Lenders Act 2008. Filing must be completed within 28 days of creation of the charge, failing which the charge will be void (and all monies secured by it become immediately due and payable). A share pledge is created by an agreement requiring the chargee to deposit share certicates and an executed share transfer form with the chargor to enable the chargor to 04 Norton Rose Fulbright Investing in the African electricity sector – Ghana – ten things to know
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