Leslie Nelson, managing director of GE Sub-Saharan Africa, discusses extending power capacity in West Africa.
What is the current trading environment like for gas to power projects?
We recently started a gas to power centre of excellence within GE, resourcing it with very senior people, to solve the gas conundrum, that is how to get gas molecules from where they are to where they need to be. It’s an indication of the gas challenges within the region. We’re well endowed with gas, we’ve got gas in Nigeria, Mozambique. New findings arguably in Tanzania and Ghana but it’s not flowing at the quantities that it needs to, to the places where it needs to get to. As a result, we started working on what I call synthetic gas to power solutions.
Gas is effectively the principal feed stock of our turbines here, in some cases as you know, we’ve got multi-fuel turbines that can burn light crude oil, heavy crude oil and other sources but all of this isn’t as cost effective as it needs to be and we challenge ourselves to deliver the lowest cost of power to our customers. We do so knowing that in order to do that, we need to be able to deliver gas to the source at the lowest dollar per MMBtu possible. That gives you some context to the trading environment in which we’re working in.
I was just wondering whether the price of gas had any bearing on the business?
No, the price of gas has gone down because as you know, it’s pegged with the price of oil in some cases. So that helped some utilities in some countries but for the most part, remember, gas in most countries is a pass through. The cost is passed through the end customer, from our standpoint we’re relatively neutral, we like to have efficient technology that burns less gas obviously for obvious reasons.
Can you give me a figure on the installed capacity?
Sure. I think if you factor in what we’ve done in Ghana, in Angola, soon to be in Nigeria, we’re probably looking at north of five hundred megawatts installed this year with at least another five hundred to a thousand megawatts under construction due to come online in early to mid-2017.
What has been your biggest obstacle?
I think the first one really is financing, in order to get these transactions done, most of them have to be done on a project finance non-recourse basis. The lenders are the usual suspects, the IFC as well as commercial banks and these processes take time. You add that with the fact that they require some onerous security instruments from governments in order to make sure that they get paid, the equity is not so much the problem, it’s the debt and that’s one challenge. So, I would say it’s not so much an obstacle or challenge, it’s just something that has to be done and takes time.
When you talk about real obstacles, in my mind it remains the first subject we talked about which is gas availability, then the infrastructure required, transmission and distribution. The whole bag then has to work and currently you can produce a lot of power but you need the appropriate grid and the ability to evacuate that power and distribute it to the end user. That remains a challenge and I think the final thing is I think the framework in a number of the countries is really in its infant years and is going through growing pains. So you look at a market like Côte d’Ivoire probably a best practice because its very well developed, the value chain works all the way from generation to the metering and to the end customer site. You’ve got probably in the middle, somewhere like Ghana, where they’ve tried [putting the system in place] over a decade ago, whilst Côte d’Ivoire did it two decades ago so they’re closer to perfecting.
So in Ghana the IBP system is now working. The government is figuring out what the appropriate security instruments are then they are moving away from sovereign guarantees and putting other instruments in place, like the put call option and government support and consent agreements that are not as onerous on the state.
You have other countries where we face challenges because the system doesn’t work. There are transmission losses or challenges with the bulk trader.
So, you have an entire spectrum of challenges that we’re working through, that we are partnering with governments to help resolve through advocacy channels, using Power Africa where necessary to provide advice on what some of those sector interventions may be because you need an industry that works in order to install the power and ensure that everybody gets paid.
That helps me a lot. I always associate GE with turbines but you are involved with other parts of the value chain, as you put it?
Absolutely. One of the things we’re looking at, we’re really transforming the industry with, what we call, a digital power plant. We’re using the largest, most efficient turbines. What we can also do now, as a result of acquiring Alstom is we can provide extended scope and provide more full balance of plant. So, we can assist with the electrical balance of plant, we can do extended scope that includes the boilers in combined cycle projects and things of that nature. If you see a picture of the power island before we acquired Alstom, we were probably contributing twenty five to thirty percent of the scope. Now that can be north of sixty percent. We can do a lot more from a technology standpoint.
That’s within the power plant itself? That sixty percent?
Within the power plant itself. Now, in addition to that, a model that is relatively unique to Sub-Saharan Africa, we’ve begun to develop projects as well. So, we partner with local developers and that’s one of the things that I think we’ve done really well in Ghana, in Angola, in Côte d’Ivoire, in particular. So, local sponsors who have a project and need capacity, need investment, need expertise to help them put the project together and make it bankable, so we are a co-developer and we’ve been putting in development equity into a number of projects. So we invest equity into specific projects if that’s needed and if that happens to be a constraint to a deal closing, it’s something that we’ve been doing; we have done and will continue to do.
In some cases, for one project in particular, we are going to be a lender in the short term and this is because the issue I mentioned before about project finance, taking a long time. We have an energy financial services division that can provide loans to projects in the short run. When the project gets to COD and they’re actually generating power, they’re effectively brown field projects and no longer green field projects and have been significantly de-risked and this is an area where we are leading the industry in certain cases.
Then, of course, we are an original equipment manufacturer; we provide long-term service agreements. What we’re doing in Africa is more of a value added developer, investor, lender in some cases, original equipment provider and long-term service provider to the power plant.
Can you put a value as to your portfolio of investments in Africa?
We are developing four or five projects at the moment, concurrently. There are two in Ghana, one in Nigeria – soon to be two in Nigeria, one in Côte d’Ivoire, in particular, one in Cameroon. That means we will probably commit probably as much as fifty million dollars on development funding which is, as you know, the highest risk type of financing. Early stage capital, the dollars are relatively precious but that’s really where the project needs the most help. Then, I would say, well over probably one to two hundred million dollars in equity commitments once these transactions reach financial close. So we are a relatively significant player within the value chain here and we’re doing it because these are gaps in the marketplace that need to be filled and it’s a capability that we have so to the extent that our technology is part of the solution. We believe in the region and in order to capitalise it the right way and speed up some of these transactions, we just have to do more. We’ve been given that mandate to do that from our headquarters and support from our CEO in Africa, Jay Ireland and all the way up to the CEO of global GE Power Steve Bobbs and then the Chairman himself.
I think I can take from that, that you are more involved in kick-starting projects than anything else. Have I got that right? Do you take a lot of knowledge from existing projects and transfer it to future projects?
The knowledge transfer is natural. It happens over time but in a perfect world, we would just sell equipment, that’s what our reasons for being here is and we would service it. What we are doing in this development role that we began participating in is, we’re doing it to capitalise certain marketplaces, to build the capacity of local developers, to share some of the skills that we have globally and bring them into the region, which I think is the type of thing we should be doing, in the hope that if you build enough of those developers and help them develop a track record, then they will be able to develop more projects with or without you and that’s really the vision here.
We are a catalyst, we’re doing it principally because we believe it helps the marketplace, it gives a lot of the projects more credibility when they have big players involved as part of the capital structure. In the near term I think it’s something that we’ll continue to do.
Having GE involved with any project would obviously add a certain cache to it, wouldn’t it? Tell me, do you have any competitors? I’m thinking probably about the Chinese, are the Chinese coming in with their own turbine offerings?
Great question. Alstom was a competitor that is now, as you know, part of GE. I would say we compete with Siemens in the same space in Africa. We have better market share, we localise a lot quicker and invested a lot more as a result and I think that’s part of the reason why we tend to be winning more in this region. A competitor of ours, quite frankly, is a company like Wärtsilä who operates in the smaller reciprocal engine space so you see those more in smaller countries that have smaller grids. Then, of course, we don’t so much compete but you have companies that focus and specialise in rentals, like APR in providing rental solutions. There is an interesting cocktail of solution providers for power, that we run into but from a pure play perspective, I would probably say Siemens and the hybrid competitors, people like APR and Wärtsilä. I look at competition as people who are doing what you could be doing. I would argue, in our case, that putting power on the grid and those are the players that do in addition to us. With respect to the Chinese, I think we have been partnering with the Chinese very effectively. They seem to be interested more in winning the construction contracts and being the engineering procurement and construction companies for projects.
African governments and lending institutions want really reliable and well known technology so if you think about to get a very, very cost-effective project done, one way is to find the most cost-effective construction company with the most cost-effective financing and then the most cost-effective and efficient technology and you add those three up and partnering with a Chinese EPC in some cases, provides that solution to the end user. So it’s a model that we’ve used in Ghana, one that we’ll probably soon use in Côte d’Ivoire, one we’re implementing with a project we’re developing in Nigeria and kind of using the best of both worlds so we found a way to complement one another and do so in a way that benefits the end customer.
What about your geographical focus. You seem to be almost exclusively focused on West Coast Africa, Atlantic Coast Africa, what about Indian Ocean Africa? What about those huge gas finds in Mozambique, Tanzania, I think also Kenya? Are you eying up the prospects on that side of the Continent?
Historically, most of our business has been on the West Coast and in Angola. If you walk around the region, we partner with Tanesco and Jacobsen in Tanzania. So there’s over one hundred and fifty megawatts of a natural gas power facility in the Kenyan region. We’ve recently signed an agreement with Jacobsen to implement phase two of that which will be another one hundred and fifty megawatts, I believe that should come online next year.
Mozambique, it’s all about the gas and when that gas situation gets resolved, we have a pipeline of projects, we’ve invested in local resources in Mozambique that are working with the government and the regulators so that we can be ready to provide solutions there.
In Namibia, we have a project that we are hoping will come online next year that we’ve been working with a South African and an Australian developer for a few years now. Our hope is that some of the approvals that are needed will be coming through and we can get started on that project.
Then of course, one big one for us, probably in the next eighteen to twenty four months will the South African gas to power initiative. Where, as you know, government is looking for at least two to three gigawatts of incremental power to be fuelled by NSSIU and LNG and this is where our centre of excellence around gas to power is really going to help us be the most competitive. In South Africa, there are really three criteria for winning there and I think we’re well positioned to do it.
The first is around technology and we will probably be deploying our new HA turbine which is the largest and most efficient turbine in the world. It is providing over fifty percent efficiency because cost is a big criteria in South Africa. The second big piece of that transaction will be around the fuel and here we will be partnering with a number of fuel providers, as I mentioned before, the criteria will be to deliver the lowest cost of fuel on a per LMBTU basis and then the final piece will be around localisation and making sure that what we do is in accordance with the BEEE regulations and the laws and that we are involving local partners and doing things locally within South Africa, as opposed to importing capabilities. We probably have the best track record of doing that. You may be familiar with what we do on the rail side and our partnership with Transnet, we now develop and build a locomotive in Africa, in partnership with Transnet where over fifty percent of the content is made and manufactured in Africa. We have a proven track record unlike any of the other Equipment Manufacturers that we actually can do it, we have done it and we will do it. So when you put those three pieces together, efficient and low cost technology, partnering with the right gas supplier and localising our value proposition is going to be the most attractive.
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