This article is collaboration between Ms. Lamis Aljounaidi, Ms, Wang Nin, Dr. Cheick Taliby Sylla, M. Mamadi Condé, M. Mory Kaba, M. Henry Chevet and Ms. Flora Dordé. It was presented at the Gdansk Hydropower Conference in 2018
Setting the stage
The potential of the Konkouré River has been identified over 70 years ago with a potential total capacity of hundreds of megawatts. Located upstream of Kaléta, Garafiri HPP is the first to be built and has been commissioning in 2000 with an installed capacity of 75 MW.
In their final layout, Kaléta is a 240 MW hydropower scheme with a 23 million cubic meter reservoir while Souapiti, currently under construction, is a 450 MW hydropower scheme with a 6 300 million cubic meter reservoir located five kilometers upstream. Together, they are expected to produce over three Tera-watt-hours of electric energy. The two hydropower schemes are connected to the Guinean Network through the Kaléta substation. High voltage lines connect the Kaléta substation to Conakry, and will connect it to the mining region of Boké, to Sénégal, Guinea Bissau and the Gambia through the OMVG line and to Côte d’Ivoire, Liberia and Sierra Leone through the CLSG line.
Kaléta, A Success Story
Before Kaléta and Souapiti projects, the electrical mix in Guinea was roughly 200 MW with 75% of hydro and 25% of thermal assets.
In 2011, the Government of Guinea concluded an EPC contract with China International Water and Electric Company (CWE) for the construction of Kaléta Hydropower scheme. The Exim Bank of China provided a sovereign credit for 85% of the EPC contract value, while the Government of Guinea provided 15% of the EPC contract value and covered the costs of the supervision contract, the environmental and social management measures and the interest during construction: overall 25% of the total costs of the project.
Kaléta hydropower plant (HPP) was successfully commissioned in August 2015. It doubled the available capacity on the Guinean network and increased the average daily hours of service from 12 to 18 with assessed annual generation of 1000 GWh. The additional energy was absorbed by the Guinean network, partly for the supply of the capital Conakry. It is safe to say that it changed the lives of many in the country.
Souapiti, A new frontier to overtake
After this first success, the Guinean government initiated the second step: construction of the Souapiti scheme. With 450 MW of installed capacity and an annual generation of 2000 GWh of electricity, Souapiti HPP is a major hydropower asset. Its development is a strategic step for Guinea. Indeed, Souapiti will allow the country to export energy and attract investment, while doubling the electric capacity installed in the Guinean network. Although highly valuable to the Guinean economy, Souapiti HPP is nevertheless not affordable for Guinea: its cost is of around 20% of country’s GDP.
A typical financing scenario would consist in the provision of 85% of the EPC contract cost by an export-import financing agency. This financing would only be triggered by the provision by the GoG of 15% of the EPC cost, the funds necessary to implement the social and environmental management plan, and those necessary to pay-up interest during construction. The State of Guinea did not have the public funding (25% of the total costs) necessary to ensure financial closure and the realization of the Souapiti project.
A public private partnership solution was sought to finance the project. It consists in i) the concession of Kaleta HPP to Kaleta project company “SOGEKA”; ii) the valuation of SOGEKA then the sale of part of SOGEKA shares to CWE; the funds thus leveraged would be used to finance GoG’s equity shares in Souapiti project company “SOGES”; iii) the setting of SOGES with all the contracts needed to guarantee future cashflow; thus triggering the complement of needed equity from CWE; iv) the grant of debt financing through an export credit agency.
Financial and contractual arrangements, A brief history
The Concession to SOGEKA
The natural fall at Kaléta (~ 40 m) allows it to generate a significant amount of energy at a low average cost. The State of Guinea decided to harness this national advantage for the financing of the Souapiti project. The sale by the Guinean State to CWE of shares in Kaléta project company then called ‘SOGEKA’was the solution identified to fund the equity needed for the construction of Souapiti.
The first step was then to create the project company SOGEKA and concede the Kaleta assets to it. The perimeter of the SOGEKA covers the Kaléta HPP and the transmission assets linking the hydropower plant to Conakry, the capital city. These assets are transferred to SOGEKA through a Concession Agreement between the GoG and the SOGEKA. SOGEKA is then in charge of the operation and maintenance of the assets. An Operation & Maintenance (O&M) contract was prepared between CWE and SOGEKA, which delegates the O&M to the company CWE. Finally, a Power Purchase Agreement (PPA) was elaborated between SOGEKA and the electricity off-taker (EDG - Electricité De Guinée, the national power utility) for the sales of electricity. Its billing mechanism was thoroughly analysed and discussed between the stakeholders.
To summarize, at its creation, the GoG is the owner of the SOGEKA company, created to ensure the operation of the generation and transmission assets of Kaleta and the commercialization of the public services associated to them. The SOGEKA operates the infrastructure through an O&M contract with CWE and sells the generated electricity to EDG under the PPA contractual conditions as summarized below.
The SOGEKA valuation exercise The contractual arrangement described enabled the creation of SOGEKA and gave it a legal existence and stable cashflows. A valuation exercise was then conducted to assess the value of SOGEKA and the value of shares GoG intends to sell to CWE. The valuation exercise considered:
The configuration of the Concession Agreement, including: the perimeter of the SOGEKA concession, the ownership of assets, the duration of the concession, and the recovery value of the assets at the end of the concession contract;
EDG's future obligations to the concessionaire through the PPA contract, which deals with purchase conditions (cost of electricity, amount, guarantee); the energy price and guaranteed energy quantity;
Other future cash obligations: O&M payments through the O&M contract as well as rehabilitation costs;
The macroeconomic assumptions, especially the discount rate assessment, critical for the assessment of future cashflow.
The aforementioned contractual arrangement provides the company SOGEKA with stable and predictable cashflow; i) the revenues from the PPA, ii) the costs for operation and maintenance, iii) and the financial costs and taxes. The financial value of SOGEKA was assessed through the evaluation and discounting of the future cashflow generated by the activity of the company.
The valuation of SOGEKA, performed by a third-party advisor mandated jointly by CWE and GoG allowed CWE to acquire shares in SOGEKA company.
Like the SOGEKA, the project company SOGES has been created for Souapiti HPP. Souapiti HPP shall be conceded to SOGES through a Concession Agreement between GoG and SOGES. SOGES shall then be in charge of the operation and maintenance of Souapiti HPP. A PPA contract was elaborated between SOGES and the electricity off- taker (EDG – Electricité De Guinée) for the sale of electricity, as well as an Operation and Maintenance (O&M) contract between CWE and SOGES, which delegates the O&M to CWE.
The sale of the SOGEKA shares to CWE allows GoG to inject equity into SOGES. Besides, CWE also invests its share of equity in Souapiti project. Together, the GoG and CWE equity represents 25% of the projected amount for the Souapiti project, and allow the partnership CWE-GoG, the SOGES, to contract a loan with Exim Bank of China for the remaining 75% of the project.
Furthermore, additional contracts involving the two companies SOGES and SOGEKA complete the contractual arrangement:
The Transmission Agreement: further described in section 3.3, this essential contract between EDG and SOGEKA ensures the proper management and operation of the Kaleta transmission assets included in the Kaleta Concession Agreement (this network being an essential part of the Guinean network, on which Souapiti is connected and other users are expected to connect).
The Coordinated management contract: tripartite contract between SOGES – SOGEKA and EDG (Garafiri HPP operator) for the optimization of the cascade production.
The Souapiti Connection Contract is the contract between the SOGES and the SOGEKA that drives the connection of the Souapiti HPP electricity to the Kaléta substation and transmission network
The whole contractual arrangement is summarized below.
CWE and GoG's equity contributions in SOGES company reach 25% of total project costs required to access export import credit. To grant the credit, the EximBank of China conducted a thorough due diligence of the project with the aim of i) identifying and hedging against non-financial risks, such as reputation risks; and ii) assessing the capacity of the SOGES to repay the loan.
Environmental and Social risks ranked high on the bank’s list of non-financial risks. In this regard, the due diligence covered the Environmental and Social impact study that has been carried out as part of the feasibility study. The costs of social and environmental mitigation measures were reviewed and the bank requested SOGES to set aside funding for these measures.
The capacity of SOGES to repay the loan was assessed through the thorough review of the SOGES financial cashflow. The review covered:
Review of the project’s financial model
Review of all contracts backing this model, including: EPC contract (construction costs), O&M contract (O&M costs), Concession agreement (concession fees and concession duration), PPA (revenues)
Due diligence of all counterparties to the contract: including CWE as EPC, CWE as O&M, EDG as off-taker, and the Owner’s engineer.
Considering the expected dramatic change in EDG’s size after commissioning of Souapiti, the bank requested a thorough review the off-take perspectives of Souapiti’s energy. This included an assessment of the demand and evacuation capacity. In this framework, a supply-demand analysis on domestic consumers, mining demand and demand from neighbouring countries and a study of the transmission network were carried out.
Focus on main features of the arrangements
PPA: Risk allocation and billing methodology
The aim of the PPA between the SOGEKA and EDG is to distribute risks between the electricity off-taker (the ‘Buyer’ - EDG) and the electricity producer (the ‘Seller’ – SOGEKA). Allocation of the hydrological risk is a critical point: because hydrology is by essence unpredictable and dependant on the rainfall, the generation of electricity may significantly vary from expectations. The aim of these discussions was to reach an agreement of the billing methodology and define the obligations of each stakeholder to purchase or sale. In general, a billing mechanism is considered acceptable when it meets the following characteristics:
The average income expected is equal to the value retained in the valuation of the asset,
The risk sharing between parties provides a good balance between risks supported by each stakeholder and their reward.
In addition, in the project context, the billing mechanism to be agreed between the parties needed to satisfy the following conditions:
Ease of implementation in the Guinean administrative and operational context,
Provision of incentives to optimize the use of the assets in the best interest of the Guinean economy,
Efficiency in the finalization of PPPs and their implementation.
Several energy billing mechanisms were discussed and analysed. These do not consider availability problems related to operation / maintenance or off-take which are considered under other sections of the PPA contract. The three typical billing mechanisms are:
The Energy tariff mechanism, the billing is based on the energy effectively generated which is multiplied by the energy tariff. In this particular hydropower context, a floor was set at the level of firm energy multiplied by the energy tariff.
The Capacity tariff mechanism, the billing is based on the average energy used in the valuation exercise, regardless of the energy actually produced.
The Capacity + Energy tariff mechanism, billing of a fixed price (corresponding to firm energy), as well as the energy produced, billed at a marginal rate. In this case, the tariff therefore includes a flat-rate component and a lower energy tariff.
Eight hybrid tariff mechanisms, with various parameters have been studied and evaluated through a Monte-Carlo statistical analysis. The statistical analysis method has been developed to quantify the effects of the different energy billing systems. A total of 16,000 sets of 40 random production runs were computed from the actual standardized hydrological data encompassing 50 years. For each simulation and billing system, the average billed energy and discounted revenues for the period were calculated.
This method makes it possible to assess the impact of each billing system on the income and risks considered in the valuation of the assets. The average income gap and the deviation from the values used in the valuation was assessed through the computation of average revenues compared to the target revenues. The risks considered were assessed through the measure of the standard deviation of income.
The final billing mechanism selected consists in an energy based mechanism with a cap and floor for extreme hydrological events and an additional mechanism levelling revenues and payments. It ensures:
The stability of the revenues needed to secure debt financing of the project,
The fair distribution of risks between the seller and the buyer,
Coordinated management contract for the cascade
The three HPP in cascade over the Konkoure river (Garafiri, Souapiti, Kaleta) will be managed by three different operators while they are influencing and constraining each other’s operation. The aim of the coordinated management contract between EDG - SOGES - SOGEKA is to ensure the optimization of the cascade operation as a collective national resource.
The constraints and objectives of this contract elaboration were:
Defining operating rules of the cascade considering the objectives and interests of each stakeholders, and maximizing the potential of the cascade as a whole,
Defining communication rules among the cascade operators to ensure efficient transmission of information
Defining obligations and responsibilities of each party,
Translate technical elements into contractual clauses and define means of implementation and control for these clauses,
The coordinated management contract governs among other things the principles of a tandem operation program for Souapiti HPP and Kaleta HPP. The issue is that Kaleta HPP, located directly downstream of Souapiti HPP and with a small reservoir, is directly dependant of the generation of Souapiti HPP. Indeed, with only five kilometres between Souapiti and Kaleta, water turbined at Souapiti reaches Kaleta roughly two hours later and needs to be turbined or stored up to the relatively reduced storage capacity of Kaléta, or spilled. Besides, the SOGES and the SOGEKA will separately receive their order for generation from their respective off-taker (which is EDG for both at this stage).
For instance, in a configuration where SOGES is asked to generate electricity while SOGEKA is not asked to generated electricity, water turbined at Souapiti would be spilled at Kaleta thus generating a waste of water and potential electricity. To avoid such spill and ensure optimization of the potential of the cascade, the two concessionaires should synchronize their operation to generate together, at any time, the sum of the generation order for the two plants. In that respect, for any hour:
𝑬𝑹S(𝒉) + 𝑬𝑹K (𝒉) = 𝑬𝑨S(𝒉) + 𝑬𝑨K (𝒉)
𝑬𝑹S (𝒉): Energy requested from the SOGES for the hour,
𝑬𝑹K (𝒉): Energy requested from the SOGEKA for the hour,
𝑬𝑨S (𝒉): Energy actually produced at Souapiti HPP during the hour,
𝑬𝑨K (𝒉): Energy actually produced at Kaleta HPP during the hour,
Concretely, in operation phase, SOGEKA conveys its generation program to SOGES which propose the tandem operation program respecting the synchronization of the generation and the generation commitment of both concessionaires.
Transmission assets The Kaléta transmission assets between Kaléta substation and Conakry are included in the perimeter of the SOGEKA concession. These transmission assets are central to the Guinean transmission system. The Kaléta substation will connect, among others, to the Souapiti HPP and to the regional OMVG transmission line. Hence, the management of this public service is critical and the Transmission Agreement between SOGEKA and EDG regulates contractual rights, public service obligations and the related technical requirements. The contract is meant to protect the interests of the concessionaire while ensuring that it guarantees quality public services.
To ensure that, the Transmission Agreement includes incentive measures on quality of supply, availability of the transmission infrastructure and limitation of electrical losses, as well as detailed procedures to ensure the proper evaluation of these criteria.
The contract is thus associated to the ‘operating procedures’ underlining every contract of the contractual architecture. This documentation describes operationally how the contractual clauses will be implemented, controlled and updated during the operating period.