Why not an Independent Power Producer (IPP) Model for the AFHP?

IN Part 4, we looked at how to utilise the USD 80m earned payments. We suggested that,

given the fact that we believe the USD 80m is money owed to the Government of Guyana (GoG), projects utilizing the USD 80m would include: transferring the USD80m into the Trustee’s Account; Comprehensive Hydropower Update Studies; Making GPL More Efficient and; Solar Farms Investment.

In this final part of the Amaila Falls Hydro Project (AFHP) series, our focus is about situating the AFHP within the broader context of its uncertainties and make an argument that Guyana, as a small developing state, should not be burdened with such costs and that the AFHP, if it is such a doable project, should be recast as a project using the Independent Power Producer (IPP) model. For ease of clarity, an IPP is a private utility, which owns its own facilities that generates and sells electric power to other utilities. Let us zero in on some key uncertainties.
Uncertainty Surrounding the Investor of the USD80m

The AFHP report states thusly, “If admissible, [and] according to guidelines for payments from NICFI, we may suggest some of the USD 80 million presently deposited at IDB being used for project preparation”. Secondly, the Terms of Reference (ToR) for the AFHP Report stated, “As Norway has committed funds to the Project and the assessment, the assessment outcome will also inform the Government of Norway as well as any potential sponsors.” Let us now contrast this statement with what the GoG specified in its LCDS 2013, which reads as follows, “The Government is investing US$80 million as equity in the project – sourced from payments accumulated since 2009 under the Guyana-Norway partnership.”

As we pointed out in Part 3, the USD80m represents earned payments for ecosystem services under the Guyana-Norway Agreement (GNA) and ought not to be sitting in an IDB account. Those funds should have been paid into the Trustee’s (World Bank) account. In that context, it is puzzling, to say the least, that the KoN would lay claims that same USD 80m as funds committed by it, the KoN, and not by the GoG. Further, what specific guidelines would Norway’s International Climate and Forest Initiative (NICFI) refer to that would allow them to determine that some or all of the USD 80m could be spent on addressing some of the problems with the AFHP?

As pointed out in Part 3, such claims and possible actions conflict with the Administration and Financial Agreement between the KoN and the World Bank (The Agreement) that governs the GNA. Suggestions within the AFHP report concerning whether the statutes of the KoN would permit use of the USD 80m deposited in an IDB account is really of no moment, since the USD 80m represents earned payments by the GoG whom, together with the KoN, through the Guyana REDD+ Investment Fund (GRIF), determine what projects are prepared and submitted for approval.

Uncertainty Surrounding the role of IDB in the Financial Structure
We suggest at the outset that there is significant concern about the role of IDB in any future configuration regarding the AFHP in its current structure and any realignment to meet the requirements under the GRIF and The Agreement since the IDB became a party outside the provisions under which it could have become a party to a project. Of course, we do believe that the IDB is quite favourable an entity under a different financial structure, one where the possibility of an IPP model is not overlooked. Consider also that “…the Project Company’s debt structure includes lead financing by the Inter-American Development Bank (IADB) and the China Development Bank (CDB)” and that China Rail First Group, the contractor and later replaced sponsor was not recommended by the Consultant’s Report based on serious conflict of interest and corruption issues. In this context, we opine that a raft of other uncertainties would undoubtedly ensue.

Uncertainty Surrounding the Costs of the AFHP
The high cost of AFHP, which stood at USD 858.1m and now modified to USD 800.7m is still considered very high, given that the cost per mega watt (Mw) for hydropower varies significantly. According to IRENA, costs can vary from USD 450,000 to USD 6,000,000 p/Mw. In the case of the AFHP, we are looking at a range of USD 74m to USD 990m, and this is without unknown costs relating to technical upgrades to bring the project up to acceptable standards. It could well run into over USD1.0 billion. Secondly, GoG is also putting equity in the form of the provision of the actual site (Amaila Falls, the Kuribrong River etc,) and this equity should have been quantified and added to the project cost as GoG’s input. In other words, our natural capital contribution was not included.

Thirdly, The China Export & Credit Insurance Corporation (Sinosure) insurance for the AFHP stands at USD 34 m, because political risk is deemed to be high in Guyana. Why not wait until this risk is reduced? Why let that GoG pay for an identified international measured deficiency. The extra cost is not given in the report. It may well be in the hundred of millions of U.S. dollars. Who knows at this point?
Why should a small nation like Guyana be so burdened? Why not let private capital be invested? These are the obvious questions that one is likely to ask and to which one is entitled to answers.

Uncertainty Surrounding Potential Energy of the AFHP
The AFHP report speaks about uncertainties surrounding future sedimentation and lifespan of the reservoir; size of the reservoir; annual water flows; technical flaws; stability issues; alternative powerhouse siting and geological instability. We believe that these types of uncertainties are likely to lead to doubts surrounding the potential energy that the AFHP can deliver, unless they are all addressed, which will incur unknown financial costs. Once again, who will pay for these technical upgrades?

Why not an IPP Model?
We believe that, in the end, more than any thing else, the true economics of a given hydropower scheme will be driven by factors, such as costs, local market, structure of the power-generation pool, grid capacity, grid constraints, the value of providing grid services, and not simply the promised amount of kWh’s generated relative to the investment. In that context, recommendations by the Norconsult Report for reducing the political risk of the AFHP by requiring the GoG and Opposition Party to jointly agree to the AFHP in its current configuration is a virtual dictate to GoG, which serves to increases the political risk to the GoG. We submit that reducing political risk via joint agreement between GoG and the Opposition Party is very unlikely and too unacceptable, given the GoG’s fiscal and political space. Not to mention, there is no such requirement under the Guyana Constitution.

Given these uncertainties, we hold the view that an IPP model is best suited for an AFHP and other types of hydropower project in the future. An IPP, well regulated, could provide cheap power to the Guyanese citizenry over decades to come. In addition, the political and social risk to the GoG would be minimal, the GoG’s equity is still calculable under the natural capital heading, a competitive energy provision environment is a real possibility and the GPL would be able to rent its infrastructure at a profit. I believe we can all agree that one of the energy objectives of the GoG is the provision of cheap and reliable electric power to its citizens. Therefore, who provides this energy should not really rank as a top priority, provided the IPP meets the objective.

Having regard to the above and the instant pressure on Guyana to pursue the AFHP because it is doable, why is it then that the IDB, the KoN or any other government or international firm has not come forward with a proposal to fully fund the AFHP under an IPP model? The GoG should not bear such a large risk for equity of USD 80m in a USD 800m project.
Next week, I shall begin a series that will look at the entire Guyana-Norway Climate Agreement, which includes the GoG-KoN MOU; The Financial and Administration Agreement governing the partnership, the Joint Concept Note and the LCDS. We will begin with the GoG-KoN MOU.

Mr Gary A R Best is a retired Rear Admiral and former Chief of Staff of the Guyana Defence Force. He is an Attorney at Law and the Presidential Advisor on the Environment. He is a PhD candidate at the University of the West Indies. He holds a BSc in Nautical Science (Brazil) and Masters Degrees from the University of the West Indies and the University of London. He is also an alumnus of the National Defence University and Harvard Kennedy School. His research areas include, climate change governance, climate change finance, international relations and environmental law.

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