Risk Management of Investments in the Electricity Sector

Despite the major efforts by local governments and international organizations over the past two decades, most countries in Sub-Saharan Africa are still suffering from poor access to electricity. This thesis explores the investment environment in these countries with particular attention to independent power producers (IPPs). Private participation has been prescribed for decades as the solution for improving the situation; the results however are not satisfactory. Evidence presented in this thesis suggests that in such circumstances, the independent power producers (IPPs) have an incentive to overstate the investment cost as an instrument to mitigate the country risk. This technique is an effective risk mitigation strategy under the conventional financing and contractual arrangements in such markets. It, however, promotes the use of less efficient power plants. The distortion in the choice of technology results in economic losses over the life of the plants. Furthermore, this thesis provides an empirical framework for deterministic and probabilistic cost-benefit analysis (CBA) of investment in fuel-flexibility in the thermal generation of electricity. Natural gas has become the fuel of choice for new thermal electricity generation plants across the globe. While many countries have access to imported or domestic sources of natural gas, instabilities in the price, availability and quality of natural gas have resulted in suboptimal operation of many thermal power plants. This has created an increased interest in investments in fuelflexible power plants. When needed, such plants can operate on alternative fuels such iv as the abundantly available, but more expensive, light crude oil. Countries can also benefit from such operational flexibility when faced with volatile fuel prices, or when there is a prospect of cheap domestic supply of natural gas in the future. While many countries can greatly benefit from fuel-flexibility of their thermal power plants, the political and the regulatory environment in these countries provide a disincentive for public utilities and IPPs to invest in this feature. The findings of this research have important policy implications that can assist regulatory bodies, governments, and international financing agencies to adopt a more informed approach to the integration of private investment into the electricity generation capacity of developing countries. Keywords: IPP, Electricity, Africa, Risk, PPA