New analysis from Frost & Sullivan (energy.frost.com), Investment Opportunities for Independent Power Producers in West Africa, finds that perceptive independent power producers (IPPs) can identify countries with secure sources of fuel and lower political risks that offer lucrative opportunities. The next few years will see the emergence of a strong market for new turbines and opportunities for refurbishing old existing plants.
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"The ongoing power sector reform programmes in West Africa have opened up the power industry to private participation," notes Frost & Sullivan Research Analyst Moses Duma. "The reforms have created an environment conducive for power producers to compete in power generation and or distribution."
Sizeable generation capacity deficit and the rising demand for power have opened up a profitable market for IPPs in West Africa. The region is experiencing acute power shortages owing to inadequate power generation capacities.
Booming economic growth, driven by a growing oil industry, has resulted in power demand outstripping supply. State utilities lack the resources, both financial and human, to develop the required generation capacities to meet this demand. As a result, governments have turned to private power operators for additional capacities.
"The power sector in most West African countries is characterised by rolling black outs and high technical losses," says Duma. "Electricity access rates range between 10 per cent to 40 per cent of the population. However, governments lack the financial resources required to develop meaningful power projects."
As a result, power sector reforms have been instituted to reduce the monopolies of state utilities. By 2007, over 30 IPPs had been licensed to produce power in West Africa. The region requires an additional capacity of at least 10,000MW to meet the power demand by 2020.
Despite this potential for growth, the West African IPPs market is significantly hampered by the prevailing low tariffs and the high political risk attached to this market.
"The interference of a majority of governments in the tariff setting process has resulted in sub economical electricity tariffs, which significantly discourage private investors," explains Duma. "IPPs in West Africa demand a high return on investment to cushion themselves from the high level of political risk attached to this market. West Africa's political history has been characterised by a high incidence of politically motivated violence and civil wars."
Private project developers need to target specific countries, which have a secure source of fuel (or feedstock) and cost-reflective tariffs. Moreover, mutually agreed, long-term power purchase agreements in West Africa seem to bring an acceptable return on investment, ranging between 15 per cent to 20 per cent.
"Perceptive power sector investors need to ensure that they acquire a strong insurance against political risk," concludes Duma. "This could be through government guarantees, and/or multilateral political risk guarantees."
Investment Opportunities for Independent Power Producers in West Africa is part of the Energy & Power Growth Partnership Service programme, which also includes research in the following markets: Investment Opportunities for IPPs in East Africa, Southern Africa Markets for Independent Power Producers, Strategic Analysis of the Nigerian Electricity Industry, Strategic Analysis of the Kenyan Electricity Industry, South African Transformer Market, Country Industry Forecast, The German Energy Industry and Africa Steam and Gas Turbine Markets. All research services included in subscriptions provide detailed market opportunities and industry trends that have been evaluated following extensive interviews with market participants. Interviews with the press are available.
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Investment Opportunities for Independent Power Producers in West Africa / M303