African solar construction issues

Potential issues arising in the construction of solar projects in Africa
June 22, 2016

Norton Rose Fulbright has advised sponsors, funders, contractors and governments on the construction and operation aspects of solar photovoltaic (PV) and concentrated solar power (CSP) projects across Africa. We have advised on dozens of PV and CSP projects under the South African Renewable Energy IPP Procurement Programme (REIPPPP) as well as first in country projects such as an 8.5MW ground mounted solar PV project in Rwanda and Masen’s Ouarzazate 125MW CSP project in Morocco. We are currently advising on solar projects in over ten different countries, including innovative projects where solar PV is integrated into traditional thermal projects.

This briefing is not intended to repeat general construction risks found in solar projects across the globe, but rather to share some specific construction-related issues we have encountered in relation to solar projects being developed in Africa.

Ground and site risk

Although a concern for construction projects in any jurisdiction, the challenging and remote environment and the unusual or uncharted geological conditions at many African project sites means that ground risk is of particular relevance for African projects. Across Africa, ecosystems, weather conditions, and sub-surface geology and hydrology change dramatically. In addition, many countries in Africa have suffered from, and continue to suffer from, war and terrorism, and consequently some areas are plagued with subsurface munitions and land mines. Fossils and archaeological sites are also prevalent. But to keep this in context, on the upside, the foundations and other civil works required for solar are generally much simpler and less intrusive than other renewables projects, such as wind.

Grid infrastructure issues

In respect of grid, Africa is no different to many parts of the world. There is often ageing, inadequate or non-existent grid infrastructure and this can impact the design and structure of a project. Some countries, such as Sierra Leone, have development programmes in place and it is recognised that increasing the funding available for grid infrastructure is required in order to achieve the integration of renewable energy and access to electricity. One issue which is frequently encountered is who takes the risks of delays when the government/ offtaker is responsible for upgrading or completing of the connection works or substation for the plant. It is very difficult to pass this risk on to a contractor as they have no control over the actions of the government/offtaker.

In some projects, contractors have stipulated that if testing and commissioning is delayed beyond a certain time period they look for this to be treated as ‘deemed’ taking over even if the power purchase agreement (PPA) does not give the same level of protection to the project developer. Many sponsors and lenders prefer that the required interconnection works, including new lines and sub-stations, are undertaken by the project company rather than the government/offtaker. This is possible in some countries across Africa, often when the government/offtaker does not have adequate resources to commit to the interconnection works programme and capex required.

In this scenario, these works may be included in the scope of the contractor’s work or as part of a separate contract with a specialised contractor. One issue we have encountered is whether such infrastructure when complete will be transferred to/adopted by the government/offtaker or will remain the property of the IPP. This varies country to country. The ability of the government/offtaker to pay for such infrastructure – by way of a capital contribution or an adjustment to the tariff – is a key issue.

Electrical losses

Conversion of electricity from direct current to alternating current results in power losses, as does transmitting power from remote project locations to the point of use. These losses, combined with the potential inadequate grid infrastructure issues referred to above can lead to large electrical losses, in some cases more than 20 per cent.

Logistics/transportation

As one can imagine, getting the plant and equipment to site can be challenging given the varied and sometimes remote locations of Africa solar projects. Overland transportation can be particularly difficult due to poor road infrastructure. If equipment is shipped (most likely), clearing African ports and customs is not always a simple or quick process. In some jurisdictions sponsors have encountered issues due to solar equipment not being clearly identified on lists of customs duty exempt items. This has led to considerable delays. Contingencies can cover the costs of such duties but the usual position under the PPA is that the project company is responsible for importing equipment required for the project and accordingly any delay may not always be treated as force majeure.

Piracy can be a risk depending upon the route taken and it is therefore important to ensure that equipment being shipped is routed accordingly to avoid high risk areas. In this context the insurance package will also need to take account of specific risks such as piracy.

Desert conditions – cleaning, water and consumables

African solar plants can be located in deserts or other such isolated areas. The build-up of sand or dust on solar panels and mirrors can reduce the efficiency of the plant. Additionally, the supply of water and consumables for the construction and operation phases of a project is key. Absolute clarity is required in the relevant contract(s) to allocate responsibility for the cleaning of solar panels and mirrors in accordance with OCM manuals (in order to meet guaranteed performance levels) and for the provision of water and consumables.

Security, vandalism and theft

Security, vandalism and theft are unfortunately a real risk for any solar project anywhere in the world. Transporting and storing plant and equipment to and within Africa is no different and can be risky. Theft (including armed theft) of plant and equipment from project sites is an issue that we have had to deal with on a number of projects. The risks can be mitigated through the enhancement of security measures, including the erection of barbed-wire fences and implementation of guarded access gates and closed circuit television. Responsibility for the cost and performance of such security measures (which are often a requirement of insurers) must be clearly stated, in both the construction and operation contracts.

Dual fuel

We are beginning to see a move towards dual fuel solutions. Power can be supplied from a combination of sources such as solar and diesel gensets. These technologies can complement each other, with solar PV providing power during daylight hours and diesel gensets meeting the balance of the load requirements. The responsibility for the interface between the solar PV project and the diesel gensets usually lies with the contractor rather than the project company. There is a limited track record for such integrated/hybrid projects and in most cases to date the lead contractor has been the diesel genset supplier/contractor rather than a solar PV specialist.

Labour difficulties and socio-economic support

Many African countries have “localisation” legislation aimed at promoting local ownership, creating jobs for and empowering the local workforce and/or encouraging local procurement. Such legislation can require that a minimum level of ownership or preferential procurement, amongst other criteria, is given to local people and businesses. The localisation agenda is becoming more and more prevalent across Africa, with policies and legislation varying between simply a minimum level of local ownership in the project company to far more sophisticated arrangements allocating scores and weightings based on the level of commitment to various localisation criteria, and applying rewards or penalties for failure to achieve such levels of localisation. The South African REIPPPP process has shown that it is possible to achieve an increasing level of localisation while maintaining a real decline in the tariffs bid by the project promoters.

Tax

Many African jurisdictions have taxation regimes which are difficult to access, and the application of taxation laws and double taxation treaties can be inconsistent. The project company and the contractor need to fully understand the applicable tax regime. Although there may be a level of protection under a PPA, implementation agreement or investment protection legislation, this usually only applies to taxes imposed after the date of the agreement or investment.

Examples of tax issues we have encountered in Africa during the construction phase of projects include

  • VAT applicability and recovery
  • Reverse VAT – which can be charged if the revenue authority deems that a particular service or good is available locally and should not have been imported
  • Withholding taxes on payments to contractors and sub-contractors
  • Stamp and registration duties being applied to the value of the contracts

Onshore/offshore contracts

A common issue globally with construction contracts is whether the construction arrangements need to be split into onshore and offshore elements. In simple terms, this issue arises because of the risk that, if there is one contract between the contractor and the project company which combines the elements to be performed in the country where the project is located and the other elements not performed in-country (such as design, equipment manufacture and transportation), the tax authorities in the project’s jurisdiction may tax the contractor on its entire income derived from the contract rather than just from the services and works performed in that country.

The usual way to address this issue is to split the contracts into the two portions and then to have a separate agreement with the project company to ensure there is no interface or other risks introduced by splitting the construction contract, usually termed a bridging or umbrella agreement.

One point to watch is whether the local content contract needs to be in local currency due to any restrictions on two local companies entering into contracts in a foreign currency.

Currency risk

Outside South Africa, the majority of construction contracts for solar PV projects in Africa have been denominated in US dollars or in some cases Euros. Sponsors will need to ensure that the project company is entitled to pay the contractor in the relevant foreign currency and understand if any taxes, withholdings or charges apply to such payments or transfers. The contractor should usually take the risk of repatriation of any amounts from the relevant country, however, we have seen contractors try to pass this risk on to the project company.

Operation and maintenance

Many contractors have been keen to enter the growing African PV market and we have found that many of them have been offering competitive combined packages with an EPC for construction and a long term O&M arrangement. The warranties offered by the O&M provider have generally been in line with global norms for solar PV projects.

One area where challenges may arise in the future is the move for governments and utilities to ask for output guarantees – these can be expressed as a guarantee that a certain number of kWh are produced each year regardless of irradiation levels. The solar PV industry is not used to output guarantees and we have encountered problems getting suppliers and O&M contractors to provide them, as they are used to provide performance ratio guarantees only.

African market perceptions

Given the issues raised in this briefing you may think that solar PV projects in Africa will be prohibitively expensive. This is not necessarily the case and as more and more PV is installed in different markets the construction costs will come down. We have already witnessed this in South Africa with the tariffs for some PV projects in R3 of the REIPPPP falling below the equivalent of US$10c/kWh. Outside South Africa we have seen the construction costs start to fall as an increasing number of experienced contractors chase new PV projects.

Construction programmes can be challenging in Africa. However, solar PV is generally much faster to install than everything other than temporary thermal gensets – which are significantly more expensive on a per kWh basis. The build times for solar PV plants can be very quick (three to six months for up to 20MW) meaning that solar can provide an almost immediate solution to power shortfalls. Clearly this needs to be considered in the context of grid and wider infrastructure planning but the signs are certainly encouraging with a huge amount of potential on the African continent.

Other solar technology

This briefing has focussed on solar PV technology which is generally seen to be a proven technology. Other solar technologies such as CSP and concentrated photovoltaic technology carry with them some of their own issues. For example, the track record of large scale CSP projects is relatively limited and their supply chain is dominated by a small group of core technology providers and contractors. Furthermore, the capital cost of CSP projects can be substantially higher than for solar PV projects. However, the CSP market in Africa is exciting – Morocco has taken the lead on CSP power and has made significant progress towards reforming the policy and regulatory framework, boasting one of the most de-regulated electricity sectors in the MENA region, and South Africa has made some exciting progress having achieved financial close in respect of a number of CSP projects.

Conclusions

There has been a real upturn in interest in solar projects in the African market over the last twelve months with some innovative and first in region projects. This has been driven to some extent by the success of the South African REIPPPP process and by ever falling costs of solar technology across the world. Solar PV is a tried and tested technology, and very attractive to lenders and investors.

Our extensive experience in advising sponsors, funders, contractors and governments on the construction and operation aspects of solar PV and CSP projects across Africa makes us well placed to share our experience and assist in the further development of the African solar market as the upturn in interest continues.