Rural Electrification Model for ERP

Proposed Structure of this Public Private Partnership (PPP) Model

The project will be leveraging a New-User-Tariff model. Given the higher risk of installing new transmission infrastructure in a region with lower average electrification rates, which is also an effect of lower household incomes, allocating the fund-raising obligation to the private sector participant may result to limited or expensive financing options. Hence, in this case the government entity designs, finances, and leads project development. The private sector company can be contracted via concession agreement to carry out operations and maintenance of project under a long-term lease from the government. Once the long-term lease ends, the private-sector partner transfers management of project back to the government entity. Financing can be provided by 3rd party financiers in exchange for a portion of the ERCs generated from the project.

Table 1: Model Attributes

Proposed risk allocation of the Public Private Partnership Model

Key features of PPP structure

• Government or state-owned entity works on the design, build and financing of the electricity distribution project
• Government or state-owned entity offers long term concession agreement with a private sector entity company to carry out operations and maintenance of project
• Financing is to be undertaken by the government or state-owned entity, with additional climate financing from third party financiers in exchange for a portion of the ERC revenues
• The private sector entity is provided the concession to operate the infrastructure, which will include the license to contract to purchase electricity and distribute the same to the retail electricity consumer base at rates agreed with the power regulator

Key considerations/risks for proposed project

• ​​​​​​Partnering with a service provider for the project’s marketing, sales and pricing is needed to identify potential offset buyers, negotiate contracts, and secure good target price per tonne to enable the financial viability of ERC generation
• Contracting a monitoring, verification and reporting (MRV) service provider with experience in conducting MRV and preparing the necessary documents for generating ERCs in a voluntary carbon market standard will reduce risk of registration and issuance delays or bottlenecks, and strengthen credibility of project’s carbon integrity quality

Figure 1: Financing and Activity Flows for the Model

Case Study: Electric Frontier Expansion Program Phase III in Peru

Project description

The implementation of the Electric Frontier Extension Program Phase III (PAFE III) in 2013 was planned to increase electric coverage in Cajamarca, the least electrified region in Peru. The aim of the project activity was to supply electric energy for 24 hours a day, continuously, permanently, and reliably, to localities included in the 19 rural electric systems (SERs). The project included the construction of primary lines from the national grid, allowing power to be supplied to 65 districts, in the following provinces: Cajabamba, San Marcos, Cajamarca, Celendin, Contumaza, San Miguel, San Pablo, Chota, Cutervo, Santa Cruz, Jaen and San Ignacio.

Impact

The project was estimated to result to annual emissions reductions of 12,113 tonnes over the 10 year crediting period as the electricity supplied replaced emissions from fossil fuel combustion. The project also enabled 43,508 new households to be connected to the grid as of 2018, contributing 6% to the electrification ratio in the area. The ERC component of the project enabled the electrification project to become financially feasible given that there will additional revenues from the carbon market, as assessed by Spanish Association for Standardisation and Certification (AENOR) in the 2015 Validation Report.

Figure 2: Structure of Case Study PPP

JICA provides a loan to Cajamarca regional government to partially finance the project. FONAM PERU, a non-profit organization promoting investment in environmental projects, is developing requirements for registering PAFE III in the VCS Standard. FONAM works with the government to create the Project Description. The regional government of Cajamarca will develop and promote all 19 electrification components, while three concessionaries, Hidrandina S.A., Electronorte S.A, and Electroriente S.A, will handle operation and maintenance of the project.

Summary of the Model Financials

Assuming similar scale, context, and project arrangements as in the case study of electrifying an additional 40,000 households, the model’s Net Present Value (NPV) without ERC in- and outflows – only considering non-ERC inflows through other revenue streams or cost savings enabled by the project – is positive at $222.5 million (M)¹. With ERC cashflows, the total project will have a positive NPV of $222.9M, which provides added value to make these types of projects more financially attractive, given the large capital outlay to finance the installation of the mini-grid.

Table 2: Summary of sources of inflows and outflows and key assumptions

Table 3: Net cashflows summary (in USD)

Footnote 1: All prices are expressed in United States Dollars (USD)