PART II Case study: KIVUWATT $($RWANDA$)(50$ marks$)$

Introduction

A small power station stands on the shore of Lake Kivu, near Kibuye, in the west of Rwanda. It is producing $25$ MW from three W$$rtsil$$ gas$-$fired generators. There is nothing unusual about this$$except that a line of floating buoys, carrying a submerged pipeline, runs from the edge of the lake to a floating barge in the distance. This is what makes this project unique. It is using methane gas from the depths of Lake Kivu as fuel for its generators. The barge draws methane mixed with water and other gases from the bottom of the lake some $350$ m below the surface, then separates the gases from the water, removes carbon dioxide and other unwanted gases, and pumps methane onshore to be used to fuel the generators.

It has long been known that there are large quantities of methane in the lower depths of Lake Kivu. Decaying vegetation falls to the bottom of the lake, where bacteria create methane. The water is warmer near the bottom and because of the high saturation most of the methane is dissolved in the water. Higher up in the lake the water is cooler, so the saturation of gas dissolved in the water decreases and forms a layer that does not let any gas pass upwards.

However, this methane resource also poses a potential danger. If it continues to build up and is then disturbed, perhaps by volcanic activity, a large bubble could shoot to the surface of the lake, which would be dangerous to the lives of those on its shores. Thus, using methane for power generation not only provides electricity at a competitive price but also reduces the danger of a gas eruption.

Project Development

The potential of the methane in Lake Kivu as an environmentally friendly and sustainable fuel for power generation has long been recognised. Indeed, a brewery beside the lake began extracting small quantities of methane for its boilers in the $1960$s and only ceased doing so in $2004.$ Until the $2000$s there was no real need for the Government of Rwanda $($GoR$)$ to pursue this possibility as its electricity needs were met by hydropower generation, but low rainfall and declining river levels combined with rising demand meant that power shortages developed, and the gap had to be filled by using expensive diesel generators.

In $2002$ GoR signed a memorandum of understanding with a small Denmark$-$based developer, Dane Associates, followed by a Power$-$Purchase Agreement $($PPA$)$ and Gas Supply Agreement $($GSA$)$ in $2005,$ to build a pilot $5$ MW power plant $($Kibuye Power $1)$ beside Lake Kivu, to be followed, if successful, by a $35$ MW plant. $30\%$ of the cost was to be covered by GoR. This partnership broke up acrimoniously, partly because of the failure to meet the deadline of $2006$ for completion of the plant, and partly because of a dispute about $$3$m of development costs that Dane Associates claimed from the project. Thereafter GoR asked the Emerging Africa Infrastructure Fund $($EAIF$),$ and the World Bank$$s commercial lending arm, International Finance Corporation $($IFC$)$ to help develop a $25$ MW plant on the site originally designated for Dane Associates, to be expanded in due course to $100$ MW$.$

The first stage was to procure a sponsor$/$equity investor for the project. Major oil and gas companies had little interest in being involved, as the project was small, technically complex and in a difficult location with limited local services. However, W$$rtsil$,$ a major Finnish company specialising in power for the marine and energy market, introduced the project to ContourGlobal, a successful US$-$based developer, and a proposal from ContourGlobal was accepted.

Power$-$Purchase Agreement

In $2009$ a PPA was signed between Contour Global$$s subsidiary project company, KivuWatt Ltd $($KivuWatt$),$ and the Energy, Water and Sanitation Authority $($EWSA$)$ of Rwanda. No specific Public Private Partnership$($PPP$)$ law was in place at the time, and the contract was covered by public procurement legislation.

GoR was very committed to the project, with the then Minister for Infrastructure taking an active part in the negotiations, as it was badly needed as a long$-$term solution to Rwanda$$s power shortages and had a good negotiating team. However, GoR had no experience in negotiating a major PPP contract and relied heavily on its advisers in this respect. The result, however, seems to be a fairly market$-$standard PPA.

The key terms of the PPA are as follows:

$$ As is normal in any PPP$,$ KivuWatt is responsible for designing, building financing and operating the project for the $25-$year term of the PPA.

$$ The long$-$term tariff is $14/$kWh$.$ This is a fixed price, other than the portion covering O&M costs, which is indexed against US CPI.

$$ There is an option to develop a Phase II that would take output up to $100$ MW and reduce the cost of the power to $11/$kWh$.$

$$ EWSA took no risks on whether the project could be completed on$-$time, on budget, or to the required specificati