Rift Valley Energy
22 March 2021
In this latest instalment in the Talking Points interview series with REPP investees, we talk to Mike Gratwicke, Managing Director of Rift Valley Energy, about grid 2.0, tariffs, regulation, productive use of energy (PUE) and a much more besides.
Rift Valley Energy established one of the first private large-scale rural distribution networks in Tanzania, which currently supports more than 5,100 connections across 37 villages, of which around 500 are SMEs. What inspired Rift Valley to set up a privately owned network and what were some of the major challenges you confronted in turning your vision into reality?
Tanzania’s first distribution network of this sort was set up about 12 years ago, primarily as a means to profitably dispose of surplus energy from a gas-to-energy project in the Mtwara area, and unfortunately only operated for less than 2 years. The network used an operating concession and expansion model, and grew very quickly. However, it was reliant on a retail tariff structure that was well above the national average, and ultimately ended up surviving on subsidy differences being paid by donors to meet the difference between the national tariff and the desired tariff. When these subsidies ceased, the entity closed (and was subsequently taken over by TANESCO), which served to tarnish the future reputation of operating concessions in the eyes of the Government ever since.
Overcoming this very significant precedent was probably our single largest challenge, and taught us the importance of transparent and professional regulation, as well as the very real dangers of operating subsidies (here today, gone tomorrow). Adopting tariffs that are similar to the national tariff for main grid-supplied electricity was fundamental to our acceptance by Government.
We originally set out to build the hydro power plant to supply our tea factory with more reliable power and sell the balance of power to TANESCO. Our major driver for establishing the rural network component of the project was the significant risk of non-payment by TANESCO – which was a key sector-wide problem at that time. We recognised that the area where we planned to construct our rural network has immense long-term growth potential, and that if we were to take the long-term view, adopting the national tariffs in such a distribution network would certainly yield a better final price than the TANESCO PPA prices that we could obtain. Our ambition remains to grow the network to achieve and maintain a 50-50 split of revenue between main grid and retail sales.
The advent of mobile phone-based pre-paid meters was a key means of tackling this market, which would otherwise have been virtually impossible to manage properly. We were the first to set this up in Tanzania, which of course came with its own set of challenges.
The rural distribution network was ultimately key to cutting through the licensing and permitting barriers for the project (and sector), as all of our prospective customers (including public and government stakeholders) also wanted the project to happen.
Within the sector, we often talk about utility 2.0 or grid 2.0, can you explain to us what it is and whether your network fits this term?
I fully agree that our business could be coined a grid 2.0, as we are positioned at the crossroad between off-grid and on-grid. Our model is able to bring together all of the best aspects that a main grid can provide (reliable, affordable, unconstrained industrial quality power), whilst also avoiding the potential problems that a large traditional grid often inherently has (large transmission and distribution losses, variable power quality at the end of grid).
In the event that the main grid is down for any reason, we can run as an isolated mini-grid until it returns. And when we are grid connected, we bring significant benefits to the national grid by reducing the level of main grid transmission losses, whilst providing much needed ‘end of grid’ voltage support. Thanks to the addition of the wind generation, we are now also much more climate resilient.
We are understandably proud that we are able to sustainably offer lower tariffs than the national grid, at better reliability levels – and are obviously very well positioned to grow as and when our customer base requires it.
A company of firsts, Rift Valley Energy also established Tanzania’s first operational wind farm in June 2020 to complement the existing 4MW hydropower plant that has been powering the network since 2012 and to enable its planned expansion. Why did you decide to add a wind farm to your network? What has been the impact of the wind farm so far, and how are you planning to develop the network over the next few years?
At the peak of the dry season our hydro output typically drops below 1MW, whilst our peak demand from the rural network currently exceeds 1MW. It was obvious that we needed more generation capacity during the dry season to ensure system stability (and avoid any risk of load shedding). As the wind blows strongest in our area at this same time, the construction of wind generation capacity was deemed to be the most appropriate solution.
The installation of 2.4MW of wind generation capacity (with three wind turbines of 800kW each) has enabled us to maintain a suitable energy capacity balance, and we expect it will continue to do so for the next three or four years, during which time we expect the demand of rural network to continue to grow.
Network densification will continue going forward, and we are actively planning to add another 2,500 connections over the next two years. We also expect significant parallel growth in demand from our rapidly evolving semi-industrial customer base.
How do your wind and hydro projects work concurrently?
We operate the wind farm such that its weekly energy output approximately balances the weekly energy demand of our rural network. During the windier months, this is done by adjusting the pre-set ‘allowable maximum output’ of each turbine as and when required (typically weekly) to achieve this energy balance (and thus avoid exporting excess wind generation to the main grid under a ‘hydro only’ PPA).
During months with less wind availability, we have found that it is not necessary to limit the maximum generation set points, and we instead have to utilise some energy from the hydro plant to meet the rural network energy balance requirements. The network consumption continues to grow, and we believe that within 18 months, this will become the normal operating methodology across the entire operational year.
In recent years, developers working in the energy access space have been increasingly engaging in supporting the uptake of productive uses of electricity (“PUE”), which requires them to step outside of their main area of expertise. What has been your experience in this regard?
We fully recognise the importance of PUE as a driver for long-term economic growth of the surrounding communities, as well as the positive long-term impact that this has on our own electricity sales (where 80% of our electricity sales are currently made). To help stimulate further growth within this space, we launched a revolving fund back in 2018, which we still use to provide financing to prospective customers for both PUE equipment, as well as larger household appliances.
Demand for this financing tool is such that it could be significantly scaled up simply by increasing the size of the revolving fund and its associated support services, but we have not yet done so due to existing and ongoing regulation uncertainty within the wider microfinance sector.
You have previously said that REPP loan was critical to concluding the financial structure for the wind farm. What were some of the challenges you faced raising funds for the project, and why was REPP so important in helping to bring the project to fruition?
Unfortunately, small wind farms are inherently expensive due to their lack of economies of scale, especially so if the wind farm that you are constructing is the first one in the country. This seriously impacts economic returns. Since the initial outset of the project, we have always recognised that a portion of concessional financing would be needed in order to balance the project’s financial returns. We had originally planned for a portion of grant financing, but after several attempts to secure something appropriate, were ultimately unsuccessful, and the project remained stalled at the foundations stage.
We were very fortunate to secure a mezzanine loan from REPP. Thanks to the team at Camco (REPP’s investment manager), the loan has been structured in a very innovative manner, that allows for long-term flexibility in interest rate. This provides a win-win solution to all parties concerned over the life of the project, and enabled the final financing hurdle to be crossed, and the delivery of the turbines to commence.
The COVID-19 crisis continues to affect all reaches of the planet. How has the pandemic affected Rift Valley Energy’s operations and business plans, specifically? What kind of measures have you put in place to protect your employees and the communities you serve?
We have seen a marked slowdown in demand growth within in the industrial and semi-industrial sectors. The most notable example is an almost 75% drop in our tea irrigation customer sales, which have been a direct result of cost-cutting measures within the tea industry due to a weakened global tea market. Decision making in most sectors has also been slower than expected due to travel restrictions and remote working tendencies.
International technical support has also been significantly constrained by travel restrictions. The best example of this is that we were forced to complete the installation and commissioning of our wind project without the normal technical site supervision, using online support tools instead.
Obviously, we also adopted the recommended COVID transmission prevention protocols across our workplaces and reduced both local and regional travel to only what was absolutely required. From a community perspective, we ensured continued provision of reliable power services to all of our customers, including all healthcare facilities, as well as community service providers.
Beyond the effects of COVID-19, what other challenges are currently affecting the scaling up of renewables and progress towards achieving SDG7 (ensuring access to affordable, reliable, sustainable and modern energy for all) in Tanzania?
The development of small-scale renewables in Tanzania is primarily driven by a framework of legislation, that is underpinned by a standardised power purchase agreement (SPPA) with the national utility (TANESCO). Unfortunately, the SPPA process became stalled in Tanzania a little more than three years ago, primarily as a result of TANESCO not being willing to accept the price and some of the commercial terms contained within the SPPA legislation that was gazetted at that time. This impasse was recently broken when six new SPPAs were signed by TANESCO in December 2020 – an exciting development for the sector. Unsurprisingly, these SPPAs have all been signed at very low prices, and developers and their financiers have had to accept some commercial terms that are not generally considered to be ‘bankable’.
Private mini-grids provide an alternative market for small-scale renewable energy project developers, but this sector is also not without its challenges. Recent tariff regulatory developments have presented significant challenges to developers trying to serve such markets. The very rapid expansion of the main grid over the last four years, deep into previously unserved rural areas, has been a welcome change for the development of the country as a whole, but has also significantly reduced the size of the potential marketplace available for private developers to target.
These two concurrent developments have negatively impacted on the availability of private investment, commercial financing and donor-backed concessional funding streams, and will undoubtedly slow the pace of small-scale renewable energy project development in Tanzania going forward.
On the positive side, The drop in price of the standard rural connection fee to an almost negligible amount has been very beneficial across both the public and private rural electrification sector, in that it has significantly speeded up the pace of customer connectivity across rural Tanzania. It is not the only component to the connectivity puzzle however, and more work still needs to be done on network densification, coupled with exploring ways to assist rural customers to finance both their household wiring, as well as their aspirational electrical appliance lists, if connectivity is to be significantly increased.
Rift Valley Energy is very fortunate in that our (EWURA-approved) tariffs are already a little lower than those of the national grid, and still yield a more attractive final blend price than selling our power to TANESCO under a SPPA. The directive is actually a potential upside for us, as we can now apply to increase our tariffs to better match the national ones, in line with the Government directive.
What three pieces of advice would you give to other clean energy developers starting out in Tanzania or other parts of the region, particularly those aiming to address the energy access challenge in remote areas?
It’s not easy, and requires full and long-term buy-in across all stakeholders.
Real development takes time.
Ensure you have an underlying competitive edge, and stay focused on maintaining it.
This article first appeared on ESI Africa.
Read other interviews in the Talking Points series: