Take or pay solar power purchase agreement

Context

Since 2010, Senegal had pursued reform policies within the energy sector, and aimed to increase installed renewable energy to 20% of total installed capacity by 2017. In Senegal, energy is produced by private operators and sold to the Senelec government energy corporation. The Santhiou Mekhe Solar Power Plant (Senergy) is a 30MW installation in the Thies region to the northeast of Dakar, installed by Senergy PV with a 25-year power purchase agreement (PPA).

Problem

• There was insufficient depth in domestic capital markets to fund the project, particularly in debt markets.
• The private sector was hesitant to finance renewable energy projects without sovereign guarantees to mitigate off-take PPA risk.

Innovation

• The project was developed by Senergy Suarl (the original developer of the project with 15% equity ownership), FONSIS (32% equity ownership) and Meridiam (53% equity ownership) under a partnership model similar to a ‘production sharing agreement, -- with Meridiam leading the project.
• Proparco provided a loan to help fund the project.
• Revenues for the solar PV power plant are generated by a 25-year PPA with the national utility Senelec, backed by the Government of Senegal on a take-or-pay basis.

Stakeholders involved

• Senergy Suarl: Privately owned Senegalese energy corporation, and the original developer of the project
• FONSIS: Senegalese sovereign fund
• Meridiam: French sustainable infrastructure investor, with USD8 billion assets under management across 25 countries
• Proparco: Subsidiary of the French Development Agency, focused on private sector development

Timeline

Results and impact

• Reduction in greenhouse gas emissions: The newly constructed solar plant provides electricity for up to 226,500 citizens at a lower price than the country’s thermal power plants, which still account for 90% of power supply. This will lead to an overall reduction in greenhouse gas emissions of 34,000 tonnes of C02 per year. Senegal now has the most non-hydro renewable electricity connected to the grid in West Africa.
• Reduction in requirements for fuel imports: Fixed-price power supply contracts through solar installations have reduced energy price fluctuations due to oil price changes and stabilised Senegal’s forex reserves.
• Domestic equity in the project (47%) was mirrored with local integration into solar installation through hiring local labour, supporting local farmers, and establishing microcredit lines for women in the project area.

Key lessons learnt

• Take-or-pay structure for PPAs encourage private sector investment by guaranteeing the government agency will pay for a certain amount of power, even if it does not off-take it (for example, due to grid issues).
• Higher levels of domestic financing – such as from sovereign funds and domestic investors – can help increase community support and involvement in the project.