Transcript Slide 1

Lights out: investment conundrums
and solution
A survey of independent power
projects in Africa
Katharine Nawaal Gratwick
& Anton Eberhard
Management Program in Infrastructure Reform and Regulation
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Lights out
Source: Horvei (2005), IPP Development in Southern and South Africa: Current experience and future
challenges, for “IPPs and PPAs: Frontiers in International Experience” Graduate School of Business, UCT,
www.gsb.uct.ac.za/mir
What is RSA/Eskom doing?
DSM
2 OCGT IPPs: Eastern
Cape, Kwazulu Natal
(1000 MW)
Import projects:
Kudu, Botswana
coal plant
2 new OCGTs: Atlantis &
Mossel Bay (1000 MW)
3 mothballed plants:
Camden, Komati &
Grootvlei (3,800 MW)
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Status of RSA’s IPP program
2Q
3Q
1Q
4Q
2005 2005 2006 2008
Plans
•Request
qualification
•Deadline
application
•Notification
qualification
•Request
Proposals
•Deadline
proposals
•Financial
close
Commercial
operations
X
X
X
X
Reality
•Request
Proposals
(7 months
late)
With RfP 7
months late:
now expected:
Bids: 3Q2006
Preferred
bidder:
1Q2007
Financial
close: 2Q2007
COD: 1Q2009
“We will not compromise on these deadlines” (Sept 2005, Nelisiwe
Magubane, Deputy Director General)
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Distinguishing features of RSA IPP projects
• A changing reform environment: no longer plans for
competition in the mkt, only for the mkt, at the margins
• 2 plants
• BEE
• IPPs have access to local capital markets
• Cost Recovery Mechanism & contract nullification
• Changing timelines
• Offtaker (Eskom) may access local & int’l capital,
i.e. presently no capital scarcity
(but to track/determine efficiency we need a private sector
comparison)
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International investment experience: early promise and then
collapse
$60,000
$5,000
$50,000
$4,000
$40,000
$3,000
$30,000
$20,000
$10,000
$2,000
all regions
SSA
across all developing
regions
Power projects with private sector participation 1990-2001
(million US$, real)
$1,000
SSA
$0
$0
199019911992199319941995199619971998199920002001
SSA 6% of total funds, at
height in 1997
World Bank PPI database
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At the end of the 1990s…
• Mutual renegotiation
– Philippines (29 of 35 contracts renegotiated)
– Thailand (most contracts renegotiated)
• Unilateral renegotiation
– Malaysia (most contracts renegotiated)
– China (most contracts renegotiated)
• Refusal to honour contract
– Argentina (refusal to raise tariffs)
– India (refusal to honour state guarantees for Dabhol)
• Creeping expropriation
– Mexico (stalling extension of natural gas pipeline)
• Cancellation
– Indonesia (27 contracts cancelled)
– India (Dabhol)
What is the experience in Africa?
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IPPS in Africa
Tunisia
Morocco
Egypt
Burkina
Faso
Senegal
Congo, B
Cote
D’Ivoire Ghana
Ethiopia
Kenya
Nigeria
Tanzania
Developing world: 456
IPPs
Africa: 27 IPPs (6% of
total) in 14 countries
Angola
Mauritius
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Scope of our discussion & research methodology
– greenfield investments in generation by the private sector, in
the form of Independent Power Projects (IPPs)
– cases from Africa (Egypt, Kenya, Morocco, Nigeria, Tanzania,
Tunisia), part of a global developing country study*
– identifying factors that impact development & investment
outcomes, recognizing that a sustainable investment is one
where outcomes are in balance
Sustainable outcome
Development outcome
Investment outcome
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Background to deals: mind games & the obsolescing bargain
What’s in the mind of the investor and the public utility before they
commit to a project? Are they at odds? And what’s the consequence?
Obsolescing Bargain Theory predicts that: bargaining position of
foreign investor changes once heavy infrastructure built. Original deal
becomes obsolete and host country can potentially expropriate the
benefits.
Investors try via risk engineering to lock up all risk in the contracts.
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Evaluating IPPs: emerging country factors (1 of 2)
3 country level factors
COUNTRY-LEVEL FACTORS
Components
Exogenous shocks


macroeconomic shock (especially currency devaluation)
drought
Investment climate

investor perception based partly on history as well as:
-state of the economy
-political stability and independent and established legal system
-level of corruption
-sovereign credit rating
-multilateral and bilateral donor commitments
-security guarantees (including availability of sovereign
guarantees)
Electricity market

market structure (e.g. single buyer model), including role of state
utility
role and strength of regulator
wholesale and retail price cost/coverage
electricity supply/demand balance
incumbent fuel
sector procurement policy
prevalence of back-up generators and degree to which
industrial/commercial base rely on grid
extent of interconnections with other countries







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Evaluating IPPs: emerging project factors (2 of 2)
6 project level factors
PROJECT-LEVEL FACTORS
Components
Project partners




local/international investors
multilateral agencies
firms’ commitment to sector/country
equity turnover
Project finance



debt vs. equity
sources
seniority of debt
PPA




off-take agreement (including ownership/transfer and risk allocation)
degree of sovereign or other guarantees for agreement
provisions for dispute settlement
impact on off-taker
Fuel type and agreements



imported or locally available fuel
exposure to FX risk
government or other supplier
Project management


O&M
Budgeting
Political & public perception


what did the general public and politicians think (and why)?
to what extent did the general public or political process influence the
project and future projects?
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Inventory of projects (1 of 2)
Countries evaluated: 3 (+3 ongoing)
Projects evaluated: 9 (+7 ongoing)
Technology/fuel: diesel generators (East Africa),
OCGT (Egypt, Nigeria), CCGT (Tunisia/Morocco,
Nigeria), Coal (Morocco), Geothermal (Kenya), Wind
(Morocco)
Investors (debt/equity): local, multilateral,
development-minded firms (Globeleq, IPS)
US/European multinationals (AES)
PPAs terms: generally 20 years, main exception is
Kenya, and BOO agreements
Government guarantees: Egypt, Tanzania
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Inventory of Projects (2 of 2)
Country/project
Size
(MW)
Cost
(US$
million)
Fuel
Egypt (10% of total installed capacity)
Sidi Krir
683
417.8
natural gas
Port Said
683
340
natural gas
Suez
683
338
natural gas
Kenya (15% of total installed capacity)
Westmont
46
20
kerosene
Iberafrica
56
65
diesel
OrPower4
13
54
geothermal
Tsavo
75
85
diesel
3 emergency
105
80
diesel
power
plants
Tanzania (30% of totaled installed capacity)
Tanwat
2.5
6
waste/woodfired
IPTL
100
120
diesel
Songas
180
310
natural gas
Total
2626.5
1835.8
-
Contract
type
Contract
Yrs
Project
tenderProject
operation
BOOT
BOOT
BOOT
20
20
20
1996-2002
1998-2002
1998-2003
BOO
BOO
BOO
BOO
BOO
7
7, 15
20
20
1.5
1996-1997
1996-1997
1996-2000
1995-2001
1999-2000
BOO
6
NA (fin closure
‘94)
BOO
BOO
-
20
20
-
1997-1998
2001-2004
-
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20
04
20
02
20
00
19
98
19
94
19
92
19
96
geothermal
thermal
hydro
6000
5000
4000
3000
2000
1000
0
19
90
GWh
Spotlight on Kenya:
Electricity production by resource (1990-2004)
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Take 4: Kenya’s IPPs
1st-Stop gap IPPs (2 projects)
-no independent regulator
-projects built in 11 months
-no project finance
-7 year contracts
-selective international tender
2nd -Normal IPPs (2 projects)
-ERB involved in PPAs
-project finance for one of the two
-20 year contracts
-general international competitive tender
3rd-Emergency IPPs (3 projects)
-majority World Bank funding
-MoE arranged
-capacity charge borne by government
-1 year contracts for duration of drought
4th-under development (0)
-government to undertake geothermal resource assessments; change in tax structure;
special provisions for off grid and renewables; bilateral agreements between producers
and consumers; possible BOOT arrangements; lower tariffs.
An 80 MW diesel generator was expected to be procured under this new framework,
but the plant is now being fast-tracked, which may mean that it has its own quasiframework
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Plant Availability: IPP vs. KenGen thermal (2004-2006)
IPPs: 95% vs. KenGen thermal: 60%
80.00
IPPs
60.00
40.00 KenGen thermal
20.00
0.00
Ju
l-0
Se 4
p04
N
ov
-0
4
Ja
n05
M
ar
-0
M 5
ay
-0
5
Ju
l-0
Se 5
p05
N
ov
-0
5
Ja
n06
% Available
100.00
Operating
history (19962006):
Westmont:
77%.
Iberafrica:
89%
Tsavo: 92%
OrPower: 98%
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Capacity Utilization of IPPs vs. KenGen
ay
-0
5
M
ay
-0
4
M
ay
-0
3
M
ay
-0
2
M
ay
-0
1
M
ay
-0
0
M
ay
-9
9
M
M
M
ay
-9
8
100
90 IPPs
KenGen
80
70
60
50
40
30
20
KenGen
10
hydro
0
ay
-9
7
% Capacity Utilization
IPPs: 65% vs. KenGen thermal: 42%
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Comparison of all plants (Ksh/Kwh, nominal)
Supplier
1999/200
0
Iberafrica
8.7
10.2
10.2
10.9
10.4
6.4
Westmont
10.4
11.1
13.5
33.8*
59.7*
54.8*
OrPower4
-
6.1
6.6
6.4
7.1
6.1
Tsavo
-
4.2
5.6
6.8
11.1*
7.5
UETCL (imports)
5.3
5.5
4.8
4.4
4.4
4.4
KenGen Thermal
8.3
9.4
7.0
7.3
5.2
7.1
KenGen NonThermal
2.4
2.5
2.5
2.4
2.2
1.8
KenGen Overall
4.0
4.9
3.1
2.8
2.2
2.4
Mumias (bagasse)
-
6.6
6.7
-
-
-
EPPS (leased
plant)
-
7.2
-
-
-
-
4.6
6.1
4.4
4.0
3.3
3.6
Annual weighted
average cost per
unit from all
sources
2000/01
20001/02
2002/03
2003/04
July-Dec
2004/
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Kenya: results & determining factors
4 IPPs on the ground (190 MW,15% of total),
but development and investment outcomes
mixed
Westmont* sits idle off Mombassa;
OrPower4** developed only 1/3 of its capacity
Project management: Iberafrica*** reduced
capacity $ voluntarily then negotiated 2nd PPA
with charges ½ of original (challenging
obsolescing bargain theory)
ERB
Regulator playing significant role in tariff
reductions for all IPPs
…publicly funded plants and one IPP in pipeline
*Westmont generally refers to 1st IPP; **OrPower4 generally refers to 3rd IPP;
Iberafrica generally refers to 2nd IPP (4th IPP was/is Tsavo).
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Our findings: what factors made a difference in outcomes?
(1 of 2)
•Macroeconomic shock: currency devaluation and dollardenominated PPAs (Egypt, less impact for RSA, with
(some) local currency financing)
•Coordination among stakeholders, i.e. donors, gvt
ministries and Power Master Plan (TZ, evidence in RSA)
•International competitive bidding practices (All, evidence
in RSA)
•Selecting bidders with ‘staying power’ (All & RSA)
-a new type of developer, IPS,
Globeleq, (Tata, YTL)
Sustainable outcome
Development outcome
Investment outcom
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Our findings: what made a difference in outcomes? (2 of 2)
•Locally available fuel supplies (Egypt, imported in RSA)
•Incumbent fuel, comparison exacerbated during drought
(TZ & Kenya, coal comparison in RSA)
•Availability of Government guarantees (RSA, no
guarantee and CRM failure risk)
•Presence of an independent regulator
(RSA’s NERSA may play this role)
Sustainable outcome
Development outcome
Investment outcome
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The way forward
CONTRACT
• Global developing country study (PESD) indicated that IPP
success was a function of risk engineering but esp strategic
management, challenging Obsolescing Bargain
• Strategic management features prominently in African case
studies to date with:
– Tsavo standing out for its community fund
– Iberafrica’s voluntary reduction in tariff (in contrast to
Westmont)
– Egyptian IPPs negotiating local currency payments
– Tanesco availing non-payment of debt option
Our next goal is to test the role of informal and
formal contracts in the sustainability
of projects
Sustainable outcome
Development outcome
Investment outcome
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APPENDICES
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Spotlight on Kenya: Project Specs
Projects
Size
(MW)
Invest
ment
Cost
(US$
million)
Fuel
Contra
ct type
Contr
act
Yrs
Project
tenderProject
operation
Iberafrica
56
65
Medium speed
diesel, burns
HFO
BOO
7, 15
1996-1997
Westmont
46
20
Gas turbine,
burns
kerosene/gas
condensate
(bargemounted)
BOO
7
1996-1997
OrPower4
13
54
Geothermal
BOO
20
1996-2000
Tsavo
75
85
Medium speed
diesel, burns
HFO
BOO
20
1995-2001
Total
190
224
-
-
-
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100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
KenGen total
KenGen
thermal
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
IPPs
Jul-99
% of generation
KenGen & IPP contribution to generation 1999-2006
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Appendix B: typical IPP contracts & stakeholders
Providers
of debt
Lenders
EPC Contractor
Shareholders
Loan Agreement
Shareholders
agreement
EPC Contract
Power Purchase
Agreement
IPP Project
Company
Fuel suppliers
Power
Off-taker
FSA
O&M Contract
O&M Contractor
Permit
Environmental
Authorities
License
Regulator
Government Concession
Government
Source: Clive Ferreira - Fieldstone
Modified from Clive Ferreira, Fieldstone
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Appendix C: Project Risks & Mitigation
Risk
Constructio
n
Operational
Fuel Supply
Mitigation
•
•
•
•
Late completion
Reduced output
Inefficient (high heat rate)
Environmental compliance
•
•
•
Low availability
High operating cost
•
•
Reliable fuel supply to
specification
Adequate resources for
life of project (PPA)
•
•
•
•
•
•
Turnkey, lump sum, date
certain contract
Liquidated damages for
performance failure
Fixed fee contract with
performance bonuses
Operational guidelines and
penalties/termination for
performance failure
Proven reserves - fixed price
Alternative supply obligation
Liquidated damages for
delivery failure
Source: Clive Ferreira - Fieldstone
Source: Clive Ferreira, Fieldstone
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Project Risks & Mitigation (Cont.)
Risk
•
Revenue
•
Mitigation
Creditworthiness of Power
Purchaser
– Utility
– Industrial User
– Municipality
Demand for electricity
•
•
Long term power
purchase agreements
(fixed)
Escrow accounts
Force Majeure
•
•
•
•
Force Majeure for unforeseen circumstances
Usually insurable
Strikes and labour disputes usually contentious issue
Parties to receive payments from power purchaser under Force Majeure
Source: Clive Ferreira - Fieldstone
Source: Clive Ferreira, Fieldstone
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Sustainable IPPs and PPAs?
•
Conceptually simple (apparently)
– but complex in detail because of difficulties in managing risk
– political, legal, regulatory, commercial and social
•
Changing incentives for politicians, regulators, developers and
financiers under conditions of asymmetric and imperfect information
can lead to project conflicts and risks that are difficult to manage
•
Interaction with ongoing reform process?
•
Emergence of new kind of IPP firm:
they combine modern management (market)
with political connections (state);
they are nimble, efficient, and can mobilise
local and international capital and hedge
and manage risk politically
•
Managing dynamic instability!
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IPPs in Africa: Project Specifics, 2006 (27)
Financial
Closure
Year
Project
Nam e
Project
Status
Subtype of Investm en Total * US
PPI
t Years
m illions
2003 Chicapa Hydroelectric
Construction
PlantBuild, ow n, and
2003-2003
transf er
1998 Hydro-Af rique
Operational
Hydroelectric
Build,
Plant
ow n, and
1998-1998
transf er
5.6
Sponsor
16 Alrosa
12 Hydro-Afrique & Sonabel
1996 Sounda S.A. Operational
Build, ow n, and
1996-1996
operate
325
240 Interpro
1999 Azito Pow er Project
Operational
Build, ow n, and
1999-1999
transf er
223
420 ABB, EdF, IPS
1994 Compagnie Ivoirienne
Operational
de Production
Build, ow n,
d'Electricite
and
1994-1994
transf(CIPREL)
er
70
99 Bouygues & EdF
2001 Port Said powOperational
er plant
Build, ow n, and
2001-2001
transf er
340
683 EdF
1999 Sidi Krir 3 & 4Operational
Project
Build, ow n, and
1999-1999
transf er
480
685 Globeleq
2001 Suez Gulf pow
Operational
er plant
Build, ow n, and
2001-2001
transf er
338
683 EdF
300
150 Mohammed International Development, Research Organ
2003 Gojeb Hydropower
Construction
Plant
1999 SIIF Accra
Concluded
Merchant
1999 Takoradi 2
Operational
Build, ow n, and
1999-1999
operate
60
1996 Iberaf rica Pow
Operational
er Ltd.
Build, ow n, and
1996-1996
transf er
50
1999 Kipevu II
Build, ow n, and
1999-1999
operate
84
1996 Mombasa Barge-Mounted
Concluded Pow
Build,
erow
Project
n, and
1996-1996
operate
20
Operational
1999-1999
1999 Ormat OlkariaOperational
III GeothermalBuild,
Pow er
owPlant
n, and
1999-1999
(phase
operate
1)
1998 Belle Vue Pow
Operational
er Plant
..
39 EdF
17.5
Build, ow n, and
1998-1998
operate
109.3
2003 Tahaddart Pow
Construction
er Station Build, ow n, and
2003-2003
operate
360
1997 Tetouan WindOperational
Pow er Project
Build, ow n, and
1997-1997
transf er
60
1996 Jorf Lasf ar Units
Operational
3&4
30
2001 AES Nigeria Barge
Operational
Limited Merchant
Okpai
Independen
t Power
2002 Project
Operational
1997 GTi Dakar Ltd.Operational
200?
Capacity
45
2001-2001
1500
225
462
Build, ow n, and
1997-1997
transf er
59
1997 Independent Pow
Operational
er Tanzania
Build,
Ltdow n, and
1997-1997
transf er
150
2001 Songo SongoOperational
Build, ow n, and
2001-2001
transf er
340
1994 Tanw at Wood-Fired
Concluded
Pow erBuild,
Plantlease, and
1994-1994
ow n
6
1999 Rades II
Operational
El Biban
Operational
Build, ow n, and
1999-1999
operate
235
30
330 CMS
56 Union Fenosa
74 Cinergy Corp, IPS, Globeleq, Wartsila
43.5 Westmont
12 Ormat
100 Harel Freres & Societe Industrielle de Developpement de
384 Endesa & Siemens
50 EdF, Germa Energie Environnement, Vestas Wind System
700 Coal
290 AES Corporation
480
Nigerian Agip Oil Company Limited, Nigerian Natio
56 Falck & Greenwich Air Service
97.4 MechMar Energy Sdn Bhd & VIP
190 Globeleq
2.5 Globeleq & TDFC
471 BTU Pow er Company, Marubeni
30 CME
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IPP Project Specs for Africa, 2005 (26)
Country
Angola
Burkina Faso
Project Name
Chicapa Hydroelectric
Hydro-Afrique
Congo, Rep.
Sounda S.A.
Côte d'Ivoire
Vridi-CIPREL
Côte d'Ivoire
Azito Power Project
Egypt
Suez Gulf power plant
Egypt
Port Said power plant
Egypt
Sidi Krir 3 & 4 Project
Ethiopia
Gojeb Hydropower
Ghana
SIIF Accra
Ghana
Takoradi 2
Kenya
OrPower4
Kenya
Westmont
Kenya
Iberafrica
Kenya
Kipevu II
Mauritius
Belle Vue Power Plant
Morocco
Tahaddart Power Station
Morocco
Tetouan Wind Power
Morocco
Jorf Lasfar Units 3 & 4
Nigeria
AES Nigeria Barge
Senegal
GTi Dakar Ltd.
Tanzania
Tanwat
Tanzania
IPTL
Tanzania
Songo Songo
Tunisia
El Biban
Tunisia
Rades II
Total
% of our pool
% of 2 project/countries
Yr
Capacity
fin
(MW )
clos/
S ponsor1
16 2003 Alrosa
12 1998 Hydro-Afrique
240
210
330
683
683
683
150
39
220
13
46
56
74
70
384
50
700
270
50
2.5
97.4
180
27
471
5756.9
44%
91%
1996
1994
1999
2001
2001
1999
2003
1999
1999
1999
1996
1996
1999
1998
2003
1997
1996
2001
1997
1994
1997
2001
Contr
act (US $mil
yrs
l)
40
45
14
5.6
Interpro
..
325
CIPREL
19
70
Cynergy(IPS, ABB, EdF)
23
225
EdF
20
338
EdF
20
340
InterGen
20
480
Mohammed Int'l Dvlpmt
300
EdF
2
CMS Energy Corp
25
60
Ormat Turbines Ltd
20
54
Westmont Ltd.
7
20
Union Fenosa
7
65
Tsavo Power
20
85
Harel Freres
20
109.3
Endesa (Spain), Siemens AG ..
360
EdF
20
60
ABB/CME
30
1500
AES Corporation
13
225
Falck
15
59
Commonwealth Development Corporation
6
6
Mechmar, VIP
20
130
CDC Globeleq
20
310
Societe d'Electricite d'El Bibane
30
1999 Marubeni Corp.
20
235
5436.9
last updated on October 10, 2005 with
Dev Bank
support
Agency
Technology/e
nergy source
Hydro
Hydro
Geothermal
IFC
Diesel, Hydro
AFDB;IBRD;IFC
Natural gas
IFC; IFC
Steam
IFC
Steam
Natural gas
Hydropower
Steam
Natural gas
Geothermal
Kerosene
Diesel
IFC
Diesel
EIB
Coal
Natural gas
EIB
Wind
Coal
Natural gas
IFC
Diesel, Natgas
Waste
Diesel
EIB; IBRD Natural gas
Natural gas
Natural gas
input from PPI
Correction made to MW (from PPI database figures): Egypt: Sidi Krir (683, not 685); Kenya: Iberafrica (56 MW, not 46), OrPower4
(13, not 12); Morocco: Jorf Lasfer (700 not 1356 and categorized as greenfield, not concession); Tanzania: Songas (180, not 115
Correction made to project costs US$ million, (from PPI database figures): Kenya: Iberafrica (65, not 50), Tsavo (85, not 84), Ormat
(54 not 17); Tanzania: Songas 310, not 270, but includes all pipeline construction as well.
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