Vestas Joins Power Africa as a Private Sector Partner

Speeches Shim

Vestas, the world´s leading wind turbine manufacturer, recently became one of Power Africa’s private sector partners.
Vestas

Vestas, the world´s leading wind turbine manufacturer, recently became one of Power Africa’s private sector partners. A Danish multinational with US headquarters located in Portland, Oregon, Vestas embodies Power Africa’s mission to promote the private sector driven development to increase access to electricity in sub-Saharan Africa.

In this interview, Vestas discusses its plans to promote wind power development in sub-Saharan Africa and detail how the company’s efforts relate to Power Africa’s drive to expand access to electricity to millions of people.

Q: What attracted you to join Power Africa?

A: As the market leader and the only global energy company exclusively dedicated to wind, we had to take part in this initiative. As you know, in sub-Saharan Africa, over 600 million people lack access to electricity. Vestas can offer the technological capabilities and the expertise to change this situation and provide clean and sustainable energy to people in need. Our company is working on a number of projects in Africa and history has proven that partnership and association can achieve much more than working alone. As one African proverb says, “If you want to go quickly, go alone; if you want to go far, go together.”

Q: What role do you think Power Africa can help Vestas with?

A: For Vestas it is a priority to focus on winning the race against energy poverty in sub-Saharan Africa and elsewhere. The race against energy poverty is not one that Vestas or for that matter, wind power can win alone. Wind and Vestas are part of the solution, and it is imperative that we work creatively through financial and technical partnerships to help address this global challenge. When assessing sub-Saharan wind power potential, we see a significant potential in nearly all regions.

Already today, Vestas operates in a number of African countries, with wind farms installed in Cape Verde 28 Megawatts (MW), Egypt (79 MW), Kenya (12 MW), Morocco (50 MW) and South Africa (295 MW) for a total of 398 MW installed. Furthermore, Vestas is constructing new wind projects in a number of other sub-Saharan countries, including the Power Africa supported 310 MW Lake Turkana Wind Power project in Kenya, which will be the largest wind power plant in sub-Saharan Africa upon completion. All in all, we expect to reach 1 GW of wind power installed by Vestas in Africa, by 2016

Vestas can greatly benefit from the Power Africa partnership, in particular from a business development point of view, by sharing experiences with other partners in the region and having a fluent working relationship with OPIC, EX-IM, USAID and other USG agencies, as well as the World Bank, African Development Bank and other donors, to attract investment,lending and technical assistance to new project developments. But also from the policy side, Power Africa will allow us to further reach out to sub-Saharan African governments in order to provide our expertise and policy advice based upon more than 35 years working with policy makers to foster the development of wind power in their countries. Finally, but also relevant, we see the benefits from positive public relations and an enhanced profile that come with connection to the Power Africa brand recognition.

Besides its large scale wind power projects, Vestas, through its Wind for Prosperity initiative (WFP) is working with the private and public sectors to deliver off-grid wind-diesel hybrid power stations across several sub-Saharan African countries. The long-term goal for WFP is to reach parts of the world facing energy poverty, through leveraging reduced costs from technology and service providers. A considerable share of these people living in rural areas far from grid-infrastructure still have abundant wind resources, which need to be utilized. WFP has clear synergies with Power Africa’s “Beyond the Grid” sub-initiative; raising the possibility of possible tie-ups in the future.

Q: What do you see as the major challenges in terms of investing in sub-Saharan Africa on the energy side?

A: Grid access and instability are, of course, one of the major bottlenecks in sub-Saharan Africa. So governments need to invest in transmission capacity if they want to increase the uptake of renewable energy. Moreover, national grid companies typically do not have enough knowledge of wind energy and how the newly installed capacity will impact the stability of the grid. For this, Vestas provides training, grid impact studies and grid modelling assistance, in order for local transmission system operators to learn how to meet these new challenges.

Political and regulatory risk can also be challenging, especially in countries where the government changes often. Political risk insurance (such as those offered by the Multilateral Investment Guarantee Agency and OPIC) and in depth country and off-taker due diligence are key to mitigating these types of risks. Key to making these risk mitigation instruments work at a project level is to be able to link the project to the government, so that the providers of Political Risk Guarantees and Political Risk Insurance can effectively bank the political risk. In this sense, some form of political support for the project(s), or more directly, a sovereign guarantee from the host government is desirable to make this link, especially when the project is first of its kind in the country.

Additionally, the enabling legislative or regulatory environments such as support schemes for renewable energy -- as Feed-in-Tariff or quotas/green certificates -- are often not yet developed. Policy guidance provided by Power Africa can be valuable to jump-start wind power development in some countries.

Further, transportation and the lack of adequate ports, roads, and other infrastructure are also a challenge. To understand these potential hurdles, Vestas always undertakes transportation studies as well as geological studies to find the best route to wind sites and to assess the investments needed to address transportation-related challenges.

In the end, all these potential bottlenecks create prolonged transaction timelines that can discourage investors from entering these markets. Power Africa can help to work with African governments and other key stakeholders to reduce transaction timelines and identify bottlenecks, therefore facilitating greater local and international participation in their electricity sectors.

Q: What is your vision for addressing electricity access issues in sub-Saharan Africa?

A: Upwards of 1.3 billion people across the globe currently lack access to affordable and reliable electricity – with dramatic consequences for human health, education, and economic well-being. Vestas has made it a priority to focus on winning the race against energy poverty in sub-Saharan Africa and elsewhere and we are doing this both through large-scale grid-connected wind farms, which is at the core of our business, and through off-grid wind hybrid projects under the WFP program. Our analysis suggests that a considerable share of the more than one billion people who do not have access to electricity live in rural areas far from transmission and interconnection infrastructure, but at least 50 million live in areas with abundant wind resources. This is where Vestas adds value beyond the grid.

As mentioned, the race against energy poverty is not one that Vestas or wind power can win alone. At Vestas, we have partnered with key players in the energy space ranging from technology providers and OEMs to project developers, law firms, investors, NGOs and governments in order to tackle these challenging projects. We welcome the opportunity to continue this journey as a private sector partner of Power Africa, which we hope can help us gain further traction and expand our partnership network.

Q: What experience have you gained from working elsewhere that you think will help in terms of you being a Power Africa partner?

A: Vestas is the only global energy company dedicated 100 percent to wind energy. Together with our customers, we have installed more than 53,700 turbines in 73 countries, and we remain committed to increasing that number via our superior, cost-effective wind technologies, products and services. Since Vestas began producing wind turbines in 1979, our company has achieved a market-leading position with more than 66 GW of installed wind turbines, around 19 percent of total global wind capacity.

Vestas pioneered projects in 35 of the 73 countries where we have installed capacity. This means we have been the first company to install a commercial wind turbine in almost half of the countries where we operate, including countries like Mexico (in 1994) and Jordan (the 117 MW Tafila project now under construction).

As all partners of Power Africa know, successfully developing the first project is always the most difficult, but also the one that provides the most learning. As sub-Saharan Africa is mostly a green field for wind power projects, our experience as pioneers can lead the way for others to follow suit, for the benefit of those most in need of energy access.

Q: What are the financial challenges?Other roadblocks?

A: The financial challenges to developing large-scale, grid connected projects are quite different than those facing smaller, off-grid projects. For the large-scale projects, the focus should be on building local capabilities and robust capital markets for long-term investment into energy infrastructure. Large-scale infrastructure projects are not being implemented in Africa at the rate that is needed which in turn is further impeding development on the continent. There are multiple reasons for this, but a leading contributor is the lack of local capital markets.

In some cases, African banks and other local financial institutions lack the experience or information to assess these types of projects, since constraints on long-term lending mean they have been involved in only a few transactions of a similar nature. This is also the case for pension funds or insurance companies with limited private finance experience. Local branches of international banks often draw on the experience of international teams, but independent local banks and institutional investors cannot do so. These problems are inter-related, and entrenched. Long term saving deposits are not being invested into infrastructure, so the local financial institutions do not invest in the skills needed to serve infrastructure sectors. Given these constraints, infrastructure projects are tailored to the perceived reality that infrastructure must be donor funded and hard-currency financed, and designed to produce hard currency revenue streams where possible, further excluding the development of local currency capital markets. Hence, a vicious cycle is currently at play. The structural deficiency therefore is that local capital markets are too immature to support infrastructure investments.

When looking at the smaller scale, off-grid projects, financing tends to revert to the status quo. Project finance is usually too complex, time consuming and costly for small scale distributed power. Legal and due diligence costs alone for a project less than $10 million are prohibitive and we see that there is little appetite for institutions to offer non-recourse financing for these smaller-scale projects. Hence, the funding instruments available are not fit for these types of projects, rendering them less financially viable from day one, or on the flip side, less economically sustainable for rural populations, which are the ones that would benefit the most from these investments. From Vestas’ perspective, we are approaching the issue of scale by creating platforms of small size projects in different locations and across countries and continents as well by investing in R&D initiatives that will render wind technology more suitable for small off-grid projects. Being able to bring scale in this form will to a great extent ensure a certain size and risk diversification across a portfolio of projects.

Q: What kinds of Power Africa projects are you working on?

A: Vestas is working on large-scale grid connected projects as well as smaller-scale distributed generation projects addressing both rural electrification and captive power off-takers. For example, Vestas is the turbine supplier and service provider for the Power Africa-supported Lake Turkana Wind Power project in Kenya. With average wind speeds in excess of 11 meters per second, the Lake Turkana project will add 310 MW of clean, reliable electricity capacity to the Kenyan national grid. The project will generate more than 1,400 GWh of power per year, equivalent to approximately 15 per cent of the country’s current electricity consumption. The project is located approximately 1,200 km from the Kenyan port of Mombasa and requires the construction of more than 420 km of transmission lines to reach the Kenyan national electricity grid. Hence, Lake Turkana will expand installed capacity greatly, helping reduce the levelized cost of electricity in the system, and achieve a more reliable electricity system. And better electricity also means less sub-Saharan Africans experiencing energy poverty.

On the distributed power generation side, Vestas is engaged in small- to medium-scale captive power projects for industry as well as smaller rural electrification through WFP. Both the captive power and WFP projects fit perfectly with Power Africa’s Beyond the Grid sub-initiative as both entities target off-grid and isolated networks. WFP projects are hybrid power systems using Vestas’ smaller range of wind turbines, including factory refurbished turbines and technology upgrades. Currently, Vestas is working in several sites in Kenya which are part of Kenya’s Rural Electrification Agency based on an off-grid IPP model with Kenya Power & Lighting Co. as the off-taker and private sector investment.

Today, in total, Vestas has installed 400 MW across Africa. In close collaboration with our partners in the region – such as Power Africa –we expect to reach 1 GW of installed capacity in Africa by 2016.