Financing the energy transition in Tanzania

Barriers to the widespread scale-up of renewable energy systems can be solved if donor agencies, foundations and philanthropists fund the tariff gap, otherwise developing countries risk being locked in to fossil-fuel production systems

The World Bank and the African Development Bank have together committed more than $47 billion to help African countries combat the effects of climate change. This investment is intended to help developing countries significantly scale up renewable energy generation capacity at minimal cost, thereby meeting economic development objectives and the demands of a growing population. In Tanzania, installed capacity is 1500 megawatts (MW) — just 32.8% of the population had access to electricity in 2016. Projects in the development pipeline will increase capacity by over 3000 MW, but this figure would have to rise to 18,250 MW to meet projected consumption by 2040.

Existing energy sources are difficult to scale up in an affordable and sustainable manner. At present, most of Tanzania’s power is generated from oil (40% of installed capacity), gas (24%) or large hydroelectric sources (22%). Oil and gas have electricity costs of $0.18 and $0.08 a kilowatt hour (kWh) respectively, and carry indirect costs due to the effects of carbon dioxide emissions.

Tanzania has many alternative options to generate a low-cost and secure energy supply, while moving to a green and low-carbon future. Vast wind reserves have a total potential capacity of 450,000 MW, at an estimated cost of $0.07/kWh. Tanzania also has the third largest geothermal potential in Africa, albeit with a cost twice the African average, at around $0.13/kWh. The country likewise has significant potential to produce energy from biomass at an average cost of $0.09/kWh. The cost of solar energy at utility scale in Tanzania is well below the global average at $0.09/kWh.

Donors have focused on investment financing to provide the upfront capital costs of renewable technologies. Capital support is often preferred to operating cost financing as it promotes long-term sustainability and more closely reflects the cost structure of renewable projects, which are highly capital intensive. While this support can be critical, a gap still exists between the $/kWh for renewables and the government’s ability, or willingness, to pay.

Coal and natural gas have an estimated direct cost of $0.06 and $0.08/kWh respectively, and countries such as Tanzania are too cash-strapped to pay even a small premium price for renewable generation.

Releasing capital funds

Direct tariffs are a proven, efficient and effective method to promote renewable electricity generation. They guarantee payments to the producer to cover the difference between investment costs and revenue from energy sales. Payments can be feed-in-tariffs (FiT), where electricity is fed directly into the grid, or generation-based, where electricity is sold directly to consumers. Such subsidies enable the release of wider capital funds for renewables by ensuring a guaranteed market and price for the energy produced.

By 2012, 64% of global wind installations and 87% of solar PV installed capacity were driven by FiT systems. The majority in industrialised countries. Developing nations face greater financial constraints with the challenge of ensuring low electricity tariffs to facilitate access for the poorest while offering profitable rates of return to developers.

A targeted direct tariff subsidy for renewable technologies is only required if prices exceed fossil fuel alternatives. With the exception of large-scale hydro, the levelised cost of energy for renewables is projected to continue to fall. Cost curves for solar PV, biomass and geothermal technologies could reach parity with coal and gas by 2025. FiTs are commonly paired with auctions to encourage competitive price setting and reflect reductions in kWh prices. Agreeing a direct-tariff subsidy that reduces over time would ensure cost-effectiveness, ensure the policy is finite and avoid a continuous drain on public finances.

Direct-tariff subsidies are rarely promoted or financed by large-scale donors to accelerate the adoption of renewables in developing countries. Governments require donor support to bridge this price gap and mainstream renewable energy in the short-term. Despite a call from the Africa Group of countries to the UNFCC in 2014, highlighting that developing countries need support to implement feed-in tariffs, little progress has been made.

The Green Climate Fund (GCF) manages a global portfolio of 93 projects on climate mitigation and adaptation worth $16.3 billion. It has recently piloted two projects worth $215m that incorporate direct-tariff considerations for renewables. There is an opportunity to learn from these pilots and scale them across more projects.

Accelerating investments

In Tanzania, on-grid tariff support for solar and biomass would cost an estimated $53 million to 2025. This assumes capacity reaches 61 MW for biomass and 213 MW for solar PV by this date. Accelerating investments in 200 MW of geothermal could cost an additional $170 million in FiTs for the resulting energy generated. Such measures would incentivise and accelerate the renewable transition, while maintaining affordable rates and increasing access to electricity, until an optimal $/kWh rate is reached.

Success is dependent on utilities, in this case the Tanzanian utility TANESCO, paying for the energy purchased and the government maintaining constant tariff rates. These assurances will remove barriers to investment for private companies looking to expand capacity.

Mini-grids could also form part of the solution. A distributed and technologically diverse energy system will support load balancing of the overall grid, facilitate remote access for rural communities, encourage community access and environmental stewardship, and increase the robustness of the overall energy system against accidental damage or intentional attack.

Incorporating generation-based tariffs for remote mini-grids would, however, add significant cost and complexity to the scheme. The $/kWh for (solar PV) mini-grids is, higher and more variable, ranging from $0.30 to $0.65/kWh. Mini-grid tariffs would require regional flexibility to take account of this.

Barriers to the widespread scale-up of renewable energy systems can be solved if donor agencies, foundations and philanthropists fund the tariff gap. Without support, developing countries are at risk of becoming locked in to fossil-fuel production systems, and sustainable development goals for energy access will remain unmet. Organisations committed to limiting carbon emissions and preventing catastrophic climate change have an opportunity to take a leading role through this approach.

Supporting the scale-up of innovative funding mechanisms is a critical part of accelerating the clean energy transition, thereby enabling rural electrification and industrialisation in countries like Tanzania.

Devang Vussonji is Partner, Flavia Howard, Senior Consultant and Anokhi Parikh, Associate Partner with Dalberg Advisors

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