KivuWatt – Financing Rwanda’s first IPP
ContourGlobal’s KivuWatt project, Rwanda’s first independent power project, has reached financial close. As well as being Rwanda’s first project financing and largest single private investment, it is also the first commercial-scale power project in the world to utilise methane gas produced from Lake Kivu. Madhavi Gosavi and Laurie Pearson of Norton Rose examine the unique features of this project.
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The US$142m KivuWatt methane to power project is located at Kibuye, on the shore of Lake Kivu in Rwanda. Lake Kivu, which is located on the border of the Democratic Republic of Congo (DRC) and Rwanda, has the unique feature of containing high concentrations of methane gas and carbon dioxide held in solution at great depth in the lake. Lake Kivu is the world’s 18th deepest lake at about 300m–400m.
Lake Kivu is arguably Rwanda’s greatest natural resource but also its greatest liability, given the potential for spontaneous gas release of carbon dioxide and methane (known as a limnic eruption or lake overturn) with a resulting impact on 2m local people, wildlife and the environment. In 1986, Lake Nyos, one of the two other gas-producing lakes in Africa, both located in Cameroon, released a large cloud of carbon dioxide that suffocated 1,700 people and 3,500 livestock in nearby towns and villages.
Helping to dissipate the deadly build-up of gas and averting a natural disaster, ContourGlobal’s project will also deliver reasonably priced power to Rwanda, which suffers gross under-capacity and dependence on expensive imported oil. Rwanda’s grid currently has a generating capacity of about 75MW–80MW.
The project consists of barge-mounted gas extraction equipment that will bring carbon dioxide and methane in solution to the surface of the lake; scrubbers will then separate the methane gas from the carbon dioxide, pump it ashore and then use it for power generation. The project is being developed in two stages, the first of 25MW, with a subsequent 75MW phase (split into three 25MW parts). The first phase is scheduled to enter into commercial operations in 2012.
The project carries a number of novel risks, including technology risk on unique gas extraction technology. The project has been described by Tony Lea of the Emerging Africa Infrastructure Fund as “one of the most innovative in the history of electricity generation“ and has led the way for the development of further energy projects in Rwanda.
ContourGlobal signed the power purchase agreement and concession agreement with the Government of Rwanda and the state electricity utility, the Energy, Water and Sanitation Authority (EWSA), in March 2009. EWSA agreed to purchase power from the project on a take-or-pay basis for the 25-year concession period, backed by a full sovereign guarantee of the offtake and the termination payments. The tariff is denominated in US dollars but payable in Rwandan francs due to the lack of foreign exchange reserves.
Given the novel technology and the fuel source, the parties were forced to come up with unique risk allocations. EWSA and the government recognised the first of its kind nature of the project and the difficulties associated with imposing strict performance standards on the generator. Accordingly, the PPA takes a more relaxed approach to liquidated damages than many other PPAs that employ conventional fuels and technologies.
The project is exposed to the usual force majeure risks, which are compounded to some extent by its location near the politically turbulent border of the DRC, Uganda and Rwanda. The area also contains active volcanoes. The parties agreed to extend the concept of force majeure to address the risk of gas eruptions from the lake and the risk that insufficient quantities of gas would be available for extraction in commercially reasonable quantities. ContourGlobal agreed to bear the first portion of such natural force majeure risks, with the Government of Rwanda and EWSA taking the remainder of this risk.
The concession agreement and the PPA benefit from a Government of Rwanda guarantee. Unusually, there is no liquidity support of any kind for EWSA’s obligations under the PPA, either by way of a letter of credit, cash collateral or a collection account mechanism, which is a standard feature in power projects in Sub-Saharan Africa.
With the concession agreement and PPA agreed, ContourGlobal worked with its suppliers to finalise the design and procurement for the gas extraction system and the power plant itself. The methane extraction equipment will be mounted by Kenya’s Civicon on a barge, with each phase of the project requiring a separate barge. The technology is unique, but draws on experience from gas scrubbing technology used in gas field developments.
Construction of the barge and installation of equipment are to be undertaken by Civicon with the supply of equipment being procured under a number of supply contracts. The risks that lenders were asked to take on were compounded by the lack of wrap on the construction package. However, this risk was mitigated through intensive due diligence on all equipment supply agreements and a partial sponsor support for cost overruns. The project company itself is to manage the procurement of the construction for the barge and the power station.
The procurement of the power plant, utilising Wartsila turbines, was more conventional in nature using an EPC contract. The key issues in respect of the power generation aspect of the project were (i) whether gas could be extracted in the necessary concentrations required for the tolerances of the turbines; and (ii) the ability to transport equipment to the greenfield project site. The size of the Wartsila units was carefully selected for the ease of air transport to Rwanda and the long road trip from Kigali to the project site. The weight-bearing characteristics of roads and bridges in Rwanda were addressed through appropriate warranties in the concession agreement.
The debt funding of US$91.5m was arranged by the Emerging Africa Infrastructure Fund and FMO (the Netherlands Development Finance Company), which respectively provided US$25m and US$31.5m. The remaining funding was provided by the African Development Bank (US$25m) and BIO, the Belgian Development Bank (US$10m). Debt tenor is 15 years with a combination of fixed and floating interest rates.
The project was supported by a large upfront equity contribution from ContourGlobal, based on an expected debt to equity ratio on completion of nearly 65:35. In addition to partial sponsor support, lenders were prepared to accept uncertainties regarding the potential capacity achievable owing to the novel nature of the technology being employed and gas source on the basis of an undertaking from ContourGlobal to buy-down part of the debt. The project was banked without a full ContourGlobal completion guarantee.
ContourGlobal entered into a political risk insurance policy provided by the Multilateral Investment Guarantee Agency (MIGA). However, there is no MIGA cover for the lenders.
Another key issue for the project was its potential environmental and social impact. As well as the requirements imposed by the Government of Rwanda, each lender and MIGA had its own set of rigorous environmental and social requirements that needed to be met and balanced. Of particular concern was the impact on the ecology and stability of the lake and the risk that, given the novel nature of the technology being deployed, the gas extraction operations could potentially upset the balance and result in a limnic eruption.
SKMEnviros was brought in to advise ContourGlobal and these issues were managed through in-depth modelling, studies and impact assessments and plans for their ongoing monitoring and management. Royal Haskoning was appointed as technical and E&S adviser to the lenders. The first 25MW phase of the project is being operated as a pilot project, which will inform and shape the design for the following phases.
Lake Kivu contains considerable reserves of methane gas, raising the possibility of future projects of a similar nature. However, given the novel nature of the geology in the Lake Kivu area, these projects are unlikely to be replicated elsewhere in the world. ContourGlobal’s KivuWatt project, however, establishes a useful precedent for future power projects in Rwanda. Rwanda is considering further IPPs, including additional methane extraction projects, as well as peat, geothermal and run-of-the-river hydro. These plans are positive for Rwanda on many levels, including the monetising of domestic resources, reducing dependence on imported oil and, most importantly, reducing energy poverty.