Solar energy in Africa

Construction issues
August 13, 2015

In 2014, there was a marked upturn in interest in solar projects in the African market. This note outlines construction issues encountered in solar PV projects developed in Africa. 


 

Ground and site risk

The challenging and remote environment and the unusual or uncharted geological conditions at many project sites in Africa 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 sub-surface munitions and land mines. Fossils and archaeological sites are also prevalent. The foundations and other civil works required for solar are, however, generally much simpler and less intrusive than other renewables projects, such as wind.

Grid infrastructure 

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 affect the design and structure of a project. Some countries, such as Sierra Leone, have development programmes in place and recognise that increasing the funding for grid infrastructure has to happen in order to  integrate renewable energy and access to electricity.

The question of who takes the risk of delays when the government/offtaker is responsible for upgrading or completing the connection works or substation for the plant is a frequent issue. It is 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 the required interconnection works, including new lines and sub-stations, to be undertaken by the project company rather than the government/offtaker. This is possible in some countries, 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 that can then arise is whether the infrastructure, when complete, will be transferred to or adopted by the government/offtaker or will remain the property of the IPP. This varies from country to country. The ability of the government/offtaker to pay for the infrastructure –  by way of a capital contribution or an adjustment to the tariff – is a key element.

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 when combined with poor grid infrastructure can lead to large electrical losses, in some cases more than 20 per cent.

Logistics and transportation

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 (the common solution), 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 duties but the usual position under the PPA is that the project company is responsible for importing equipment required for the project so any delay may not always be treated as force majeure.

Piracy can be a risk depending upon the route taken, so care must be taken to ship equipment avoiding high risk areas. The insurance package will also need to take account of specific risks such as piracy.

Desert conditions 

Solar plant may 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. The supply of water and consumables for the construction and operation phases of a project is key.

Absolute clarity is required in the contract 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 a risk for any solar project anywhere in the world. Transporting and storing plant and equipment to and within Africa is no different. Theft (including armed theft) of plant and equipment from project sites is a real issue. 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 security measures (which are often a requirement of insurers) must be clearly stated in the construction and the operation contracts.

Dual fuel

There is 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; in most cases the lead contractor is the diesel genset supplier/contractor rather than a solar PV specialist.

The workforce and 'localisation' 

Many jurisdictions in Africa have ‘localisation’ legislation aimed at promoting local ownership, creating jobs for and empowering the local workforce and/or encouraging local procurement. This legislation may require that a minimum level of ownership or preferential procurement, among other criteria, is given to local people and businesses.

The localisation agenda is becoming more and more pronounced across Africa, with policies and legislation varying from a simple 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 this level of localisation.

The South African REIPPPP process the Renewable Energy Independent Power Producer Procurement Programme – indicates that it is feasible to achieve an increasing level of localisation while maintaining a real decline in the tariffs bid by the project promoters.

Tax

Many jurisdictions in Africa have taxation regimes which are difficult to access. The application of taxation laws and double taxation treaties can also be inconsistent. The project company and the contractor need to have a good understanding of the tax regime.

There may be a level of protection under a PPA, implementation agreement or investment protection legislation. This usually only applies, however, to taxes imposed after the date of the agreement or investment. A number of tax issues may arise during the construction phase.

Tax issues in Africa

  • VAT applicability and recovery
  • reverse VAT
    (this may be charged if the revenue authority deems that a 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 contract.

On-shore/offshore contracts

Should the construction arrangements be split into on-shore and offshore elements? This is a typical issue with all construction contracts. There is a 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.

Bridging or umbrella agreement
The usual way to address this is to split the contracts into the two portions and then conclude a separate agreement with the project company. This will ensure that there is no interface or other risks introduced by splitting the construction contract and is usually termed a bridging (or umbrella) agreement.

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

Currency risk

Outside South Africa, most construction contracts for solar PV projects in Africa have been denominated in US dollars or Euros. Sponsors will need to check that the project company is entitled to pay the contractor in the 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; some contractors will try to pass this risk on to the project company.

Operation and maintenance

Many contractors are keen to enter the African PV market and many offer competitive combined packages with an EPC for construction and a long term O&M arrangement. The warranties offered by the O&M provider are generally in line with global norms for solar PV projects.

In the future, governments and utilities may 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 used to providing performance ratio guarantees but not 'output' guarantees, and suppliers and O&M contractors may experience difficulties in providing them.

Market perceptions around cost and time

Despite the issues raised here, solar PV projects in Africa are not generally prohibitively expensive. As more PV is installed across different markets, construction costs will come down. This has already happened in South Africa, with the tariffs for some PV projects in R3 of the REIPPPP falling below the equivalent of US$10c/kWh. Elsewhere in the continent, an increasing number of experienced contractors are chasing new PV projects and construction costs are starting to fall.

Construction programmes can be challenging in Africa. However, solar PV is generally much faster to install than any of the alternatives other than temporary thermal gensets – which are significantly more expensive on a per kWh basis. The build times for solar PV plants can be 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 viewed in the context of grid and wider infrastructure planning but the signs are encouraging.

CSP technology

Solar technologies such as CSP and concentrated photovoltaic technology carry with them 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, achieving one of the most de-regulated electricity sectors in the MENA region, and South Africa has achieved financial close on a number of CSP projects.