While standardizing power purchase agreements (PPAs) will help accelerate negotiations for independent power projects, it’s up to all stakeholders involved to create an environment that ultimately facilitate greater access to power.
Last year 1.2 billion people in the world lived without electricity, half of them in Sub-Saharan Africa. A lack of reliable and accessible power has debilitating social and economic impacts. Businesses cannot expand while hospitals and schools cannot function at full capacity. The lack of electricity access is exacerbated by the long process of negotiating and implementing investments in independent power projects. Power purchase agreements (PPAs) are contracts that are need to facilitate these agreements. Yet, in many African countries, PPA negotiations can take 5-10 years – more than two to three times longer than in other parts of the world. The result? Fewer projects are successful and ones that are completed can be more expensive due to these costly delays.
The new PPA handbook, “Understanding Power Purchasing Agreements”, was an IGD collaboration with the US Department of Commerce, OPIC, USAID and the African Development Bank through the African Legal Support Facility. The handbook translates knowledge and best practices on PPAs into an accessible primer on this often complicated and misunderstood legal instrument. Ultimately, it provides the foundation for any conversation about power projects by framing each of the key issues for the investor, the off-taker, the financing parties and the consumer.
FOSTERING POLITICAL WILL
Standardized PPAs can certainly simplify the development and negotiation process, thereby facilitating private investment in the power sector. However, while a standardized PPA is useful for consolidating interest and creating political momentum, it is only one piece of the investment puzzle. Due to the significant legal, economic, and policy matters at stake, governments – both in Africa and elsewhere – must also have the political will to pursue broader, more difficult reforms to increase sustainable investment in the sector.
These reforms include transparent procurement processes, cost-reflective tariffs, accountability for official corruption, fiscal transparency and long-term sector planning – all of which are necessary for long-term economic growth. Many of these reforms will undoubtedly be unpopular in the short-term; however, experience shows that when such reforms are undertaken, private investment has increased. Where they continue to languish, investment has stalled along with development.
CREATING ECONOMIC GOWTH
The development and dissemination of the new PPA handbook will go a long way toward increasing general understanding of the PPA, as will IGD’s ongoing efforts to encourage the development and adoption of standardized PPAs in Africa. By eliminating one bottleneck to investment, we hope also to contribute to a larger conversation about other measures necessary for accelerating the development of independent power projects. And, at the same time, we would like to stimulate a discussion over how document standardization can be adapted to various other key sectors on the continent, a topic that at IGD’s Frontier 100 Forum from May 31- June 2. Frontier Leaders will explore how standardized procedures can play a role in fostering inclusive economic growth in Africa.