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AFRICA ELECRIFICATION INITIATIVE PRACTIONERS WORKSHOP 14th-16th November 2011

Dakar, SENEGAL

FINANCING WINDOWS FOR RURAL/RENEWABLE ENERGY DEVELOPMENT IN TANZANIA

(Matching Grants, Performance Grants, Technical Assistance, Credit Line and Renewable Energy

Programme of Activities) Presented by: George M.J. Nchwali

Rural Energy Agency (REA) Sam Nujoma Road, P. O. BOX 7990, Telephone: +255 22 2412006 Facsimile: +255 22 2412007 Email: info@rea.go.tz TANZANIA

1) General Information 2) Energy Situation in Tanzania 3) Challenges 4) Tanzania Energy Development and Access Expansion Project

(TEDAP ) 5) Typical Energy Projects Financing Structure and Innovations 6) Performance and Matching Grants 7) World Bank Supported Credit Line 8) Tanzania Renewable Energy Programme Of Activities (PoA) &

the Carbon Leveraged Equity Advance Scheme 9) Conclusion

Outline

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1. General Information

Total Area: 945,234 km2, 886,040 km2 is land and 62,050 km2 is water.

Population: About 42 Million people (2010 est.) Growth in Power demand is 10 -15% per annum About14.5% of the Population has access to electricity Total grid installed capacity is 1,006 MW (2010 data) Hydropower: Potential 4,780 MW

Firm Capacity 3,200 MW Developed 561MW (12%)

Hydro contributes (53%) Others (47%)

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General Information…cont

2. Energy Situation in Tanzania Recurrent power shortages, which cost the Tanzanian economy 2

percent of GDP annually Tanzania has one of the lowest electricity access rates even in comparison with other Sub Saharan Africa countries (20 % of SSA

average) Electricity access rate in rural areas (where majority of populatio

n lives) is about 2 percent. Tanzania has abundant local renewable energy resources that can be harnessed for power generation to the grid as well as rural electrification; increasing power security and reliability . Tanzania has enabling policy and regulatory environment for rural and renewable energy projects and willing private investors Lack of long-term funding is a major constraint to the development of renewable energy projects The inability of the project developers to match the high equity requirement (30% of total investment) of the local banks.

3. Challenges: Alleviation of recurrent power shortages Building capacity of rural and renewable energy project developers (private sector, cooperatives…) Build capacity of Tanzanian banking sector to identify and appraise rural and renewable

energy projects Development of long term market financing instruments Promote economic development in rural

areas Increase energy security Improve access to electricity in rural areas

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The objective of TEDAP is to improve the quality and efficiency of the electricity service provision and to establish a sustainable basis for energy access expansion and renewable energy development in Tanzania. Funded by World Bank and GEF and running from April 2008 to June 2012

(DNO - Distribution Network Operator) (SPP = small power projects)

On -grid component Off -grid component

Improving service quality and efficiency of the DNO (TANESCO)

Facilitating framework, grants and TA for new connections by third parties(private sector, communities, NGOs) + Additional financing to establish a credit line

- SPPs selling power to DNO's main grid (+ retail) - SPPs selling power to DNO's isolated mini-grids (+ retail) - SPPs – Greenfield mini-grids - Solar PV institutional and household systems

4. Tanzania Energy Development and Access Project (TEDAP)

Grid Connected Projects

Small Power renewable projects connected to the National Grid.

Full private funded investment. Projects are facilitated through SSPA/T to be

signed with DNO (TANESCO) Licensed by Regulator (EWURA)

Grid-connected mini-grids

These are demand driven proposals by registered private operators.

Finances only a portion of mini-grid investments SSPA/T applies for power sales to DNO only

Isolated (Greenfield) mini-grids

Finance a portion of total system costs (including generation and distribution)

Sole purpose to sell power to local communities and productive establishments

Funding Source Percentage Comments

Debt Financing 70% Long term debt from local banks enabled by Credit Line (enabled by the World Bank)

Equity Requirement 30% To be arranged by Project Developers

In kind Equity (5%) Valuation of Promoters' efforts in getting water right, land, preparatory works etc.

Cash Equity (10 - 15%) Typical availability (based on data from several projects)

Performance Grants(5%) Based on number of connections provided(banks accept this as promoter's equity)

Equity Gap (5 - 10%) To be addressed through market based solutions (Carbon Equity Advance Scheme)

Typical Energy Projects Financing Structure and Innovations:

5. Performance and Matching Grants Rural Energy Agency provides Performance grants – US$ 500 for

each new connection in rural areas using renewable energy sources

Matching Grants for pre-investment support and market development

Technical assistance for project developers and local commercial banks

6. Credit Line (US$23 million) to provide long-term lending (10-15 years) to participating financial institutions to lend to eligible renewable/rural energy projects

Implemented through participating financial intermediaries (PFIs) = commercial banks

GOT through REA on-lends to eligible PFIs

PFIs on-lend to eligible Small Power Projects (SPP)

REA overall coordination and facilitation

Tanzania Investment Bank (TIB) administers credit line transactions on behalf of REA

Bank of Tanzania (BOT) assists REA in PFI eligibility assessment (BOT prudential regulations) and on-lending terms setting

Confirm Project & Developers eligibility Compliance with safeguards

Long Term Refinancing

Loan

Commercial Loan Agreement

Project Service Agreement

Financing Agreement

Participation Agreement

Long Term Commercial Loan

Credit

Request

PFI eligibility

IDA

REA

Participating Financial

Institutions

Developers

BOT TIB

MOF

Disbursement & Collection Repayment

Credit Line (Terms and Risk Sharing)

On-lending terms From PFIs to SPPs: Market From GOT (via TIB) to PFIs: Market rate, in TZSh Variable rate = Weighted Average Deposit Rate Current rate about 6%, revised every six months

Risk-sharing Sub-loans from PFIs to SPPs: PFIs takes the SPP credit risk Sub-loans from GOT to PFIs: GOT takes the PFI credit risk Exchange rate risk: GOT

There is an opportunity to access carbon finance to meet part

of the equity requirements of projects and enable the project developers to achieve financial closure and implement the projects.

Already 4-5 projects with capacity 15-20 MW are in advanced stages of CDM cycle on their own, with help from international donors and commercial agencies.

To tap the opportunity, REA has signed a CDM PoA Renewable Energy Project Contract with the World Bank to become a Seller Participant in the WB CPF program. One of the important elements of the program design is to seek part of the carbon revenues upfront from CPF that will h

elp bridge the equity gap of the project developers.

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7. Renewable Energy Programme Of Activities (PoA) & Carbon Leveraged Equity Advance Scheme:

Carbon Equity-Advance Scheme

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Operations Construction & Commissioning

Financial Closure Commercial

Banks

Promoters

CPF Donors

(through REA)

Equity 20%

Connection Grants (5%)

Commercial Debt (70%)

REA (CME)

Carbon Advance (5%)

CERs CER Guarantee

Account (20% of total)

Emission Reduction Purchase Agreement

Carbon Advance Revolving Account

Renewable Energy Project

Carbon Purchase and

Equity Advance Agreement

Framework of the Carbon Equity Advance Scheme:

The Tanzania Renewable Energy Program Carbon Equity Scheme involves:

Small scale (<15MW), technology neutral (predominantly small hydro, biomass and some wind) RE projects, totaling about 100 MW.

Cash advance against future carbon credits to help bridge equity gap faced by the developers/Promoters of renewable energy projects

REA plays the role of Coordinating and Managing Entity for the PoA, joins the CPF as Seller Participant and commits to sell the carbon credits to CPF.

REA signs back to back emission reduction transfer and equity advance agreements with individual CPA implementers (project developers)

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9. CONCLUSION

Favorable institutional and regulatory framework

Local capacity development

Access to finance Carbon finance

Pipeline of projects (150 MW)

Through these windows renewable energy projects financing challenges are addressed. Tanzania is assured of an improved and sustainable basis for establishment of renewable energy development and energy access expansion.

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THANKS FOR YOUR ATTENTION

Important Links And Further Information Please Visit: Rural Energy Agency (REA): www.rea.go.tz Ministry Of Energy and Minerals: www.mem.go.tz Tanzanian government Website: www.tanzania.go.tz

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