Compact Development Guidance

As of March 2013

Chapter 19: Guidelines for Countries Proposing Power Projects

MCC will use the feasibility study of the proposed power project as the basis to examine the following and to make a determination on what supplemental studies, if any, are required to develop the project sufficiently so that appraisal could commence:

Sector Background

  • Legal, regulatory, organizational and ownership structure of the power sector and the project; list of key decision makers and stakeholders/ consumers in the power sector.
  • Prior feasibility or pre-feasibility studies conducted on the project or alternative projects.  Previous economic, environmental and financial analyses of the project that quantify estimated costs and benefits and identifies potential beneficiaries (rural/urban, marginalized groups, household and livelihood use of power by gender, age, and ethnicity).
  • Prior studies on rural electrification projects, rules of electrical interconnection with the national grid and power wheeling rules, if any.
  • Interconnection rules for on-site and inside-the-fence generators (e.g., for the sale of power back to the utility from roof-top solar PV operators, or on-site power generators, etc.), if any.
  • National utility law and laws governing private ownership, operation, or management in the power sector, if any; analysis of private sector involvement in the sector; copies of Power Purchase Agreements with IPPs; copies of management/operating agreements between utility/government and private operator, if any.
  • List of donor activities with respect to the proposed project, overall power sector, and rural electrification strategy.
  • Stakeholder analysis at the intra-household level to identify power use disaggregated by gender and demographics to establish that the project has been identified as a priority.
  • Meaningful public consultations (including gender, age, and income-based focus groups in rural and/or urban areas where relevant) among project affected persons and key stakeholders, including women’s civil society organizations.

Demand Drivers

  • Number of customers by category (residential, industrial/commercial, residential/ small business, commercial agriculture/ household garden plots, other) and voltage class (low, medium, high, etc.).
  • Historical power consumption (kWh) and growth rates by customer category in the project area, regionally and nationally.
  • Historical annual peak demand (MW) of the system/region/project area.
  • Long term forecast of power demand (kWh) and system peak load (MW).
  • Seasonal variations in power demand. System load duration curve and load factor.
  • % population disaggregated by gender with access to power; share of that served by interconnected grid and share served by isolated systems.
  • Studies or analyses of suppressed demand, if available.
  • Value of unserved energy.

Supply

  • Portfolio of existing power generators by resource type (hydro, diesel, coal, natural gas, wind, solar, other) at project, regional and national level.
  • Current list of power generation projects that are proposed or in development (both by private sector and public sector).
  • Vintage and condition of individual plants, historical availability factors, O&M costs, annual fuel consumed (coal, diesel, gas, etc.); annual capital expenditures for upgrade and upkeep of generators; forced outage rates of individual generating plants and the system as a whole.
  • Analysis and assessment of resource potential by category (total MW of hydro, tons of coal, tcf of natural gas, solar insolation, wind potential, etc).
  • Resource analysis, particularly if based on hydro; flood/drought probability; historical water flow information.  For other fuel types, provide summary of fuel supply sources and contractual arrangements.
  • Power supply expansion plan studies (resource planning) or identification of least cost options.  Power supply curve that shows the merit order dispatching of each plant.
  • Level of import and export of electricity with neighboring utilities/countries and maximum transmission interface capacity (MW) at power exchange hubs.
  • Estimation or analysis of backup power and inside-the-fence power generation by size of gensets, fuel used, ownership (residential, businesses, public sector, and other) and genset heat rates in different regions of the country.

Transmission & Distribution

  • State of the transmission and distribution infrastructure including length of lines and number of substations/transformers by voltage class, and vintage.
  • Regional interconnections and arrangements, including power pool participation.
  • Annual investments in T&D infrastructure; analysis of the need for new capacity including T&D capacity expansion plans, if any.
  • T&D losses including technical and non-technical (e.g., theft) as a % of power generated.
  • Statistics and analysis of number and causes of catastrophic T&D failures in the past five years.
  • Collection and integration of satellite imagery and topographical maps at the appropriate scale (typically 1:25,000 for urban planning) identifying key elements of existing and proposed infrastructure, rights-of-way, and service areas.  In addition, it may be appropriate for the appraisal process to identify other geo-spatial data – including but not limited to census data, water resources, and geological data – and combine them into a single GIS database.

Pricing

  • Cost of service study.
  • Studies conducted on pricing methodology used by the electric utility - marginal cost vs. average cost.
  • Tariff structure used by the utility - energy (currency/kWh), capacity (currency/kW-yr or kW-month), and ancillary services by voltage class and customer type.
  • Fossil fuel prices (diesel, kerosene, natural gas, heavy fuel oil, coal).
  • Electricity prices and explanation of price changes over time.
  • Estimates of income elasticity and price elasticity of electricity demand from previous studies.
  • Surveys or analyses of ability/willingness to pay for power (at the intra-household level surveying both male and female household heads for residences).  A proxy might include estimation of cost of electricity from backup generators, or expenditure on total energy services by households and businesses converted to electricity equivalent.
  • Analyses, if any, of subsidies and cross subsidies.

Institutional

  • Determine sector providers or utilities and their role in the market, and examine the corporate/institutional structure and governance of each entity; management background, expertise and experience of the above.
  • Determine whether corporate and financial reporting and record-keeping is up-to date; review most recent audited financial statements, examining historical financial performance of each provider/utility, debt burden, sources of financing, and key obligations. 
  • Determine revenue by customer category, corporate overhead, fuel costs, etc.  Number of employees and analysis of performance metrics such as number of employees/MW installed or kWh generated; number of employees/number of customers, etc.
  • Metering, billing and customer information systems; frequency and method of meter reading/billing/collection.

Once MCC has made the determination to commence project appraisal, the infrastructure group will conduct the following assessments, and identify any key constraints.

Market Assessment

A market assessment will be undertaken, including an analysis of supply, demand, pricing and competition for products/services provided by the project.  This assessment should provide baseline information to calculate a provisional financial IRR (FIRR) for the project.

  • Review and validate power demand statistics on which sizing of the project is based, to ensure economic viability of the investment.  Particular attention should be given to demand growth, reserve margin, frequency and duration of outages, loss of load probability in the absence of the project, and the target population’s ability to pay for power (disaggregated by gender, income, age, ethnicity, rural/urban, etc.).
  • Review projections for increased energy consumption and the underlying basis for the projections, including market surveys. 
  • Analyze the power pricing methodology - average cost versus marginal cost; energy only (¢/kWh) vs. energy and capacity charges ($/kW-month); all-in cost of delivered power vs. disaggregated cost including generation, transmission, distribution and customer service charges.
  • Analyze the cost and availability of fuel for electricity generation.  If hydro based, analyze probability of drought; if fossil fuel based, analyze international prices and cost to imported fuel.
  • Assess the current competitive situation with respect to price sensitivity, service sensitivity, competitor’s resources, if any, and lack of power sector investment.
  • Assess the threat of future competitors with respect to price, service, on-site generation, technology such as photovoltaics, small wind turbines, etc.
  • Analyze backup generators used in the country, their installed cost ($/kW), heat rate, and O&M costs.
  • Assess the impact of any cross-subsidy (e.g., higher industrial/commercial rates to subsidize residential customers) on the financial viability of the project.
  • Calculate provisional FIRR based on projected revenues and operating costs of the project.  Confirm that appropriate level of capital expenditures (e.g., land acquisition, replacement parts and long term maintenance) is included in O&M costs to sustain the project.

Technical Assessment: Engineering

Engineering analysis of the project should follow international industry best practices, with consideration given to specific country situations.  This analysis should establish the technical soundness of the project with regard to civil, mechanical and electrical engineering work.

  • Assess whether the proposed project is part of the country’s expansion planning model (resource optimization model).  Identify and compare alternatives that are outlined in the government’s long range resource plan.
  • Review all aspects of preliminary technical designs and proposed standards and confirm appropriateness of design criteria, demand requirements and social environmental factors, including resettlement.
  • Confirm details of design and construction standards applicable in the location, where these exist.
  • Compare the proposed design criteria to international industry standards and best practices.  Assess capital cost of new projects (e.g., in $/kW installed for generation or demand management projects, $/kVA for substations and $/mile for T&D line) and compare these costs to industry/regional standards.  Analyze bill of materials and capital cost.
  • Analyze fuel and operating costs and the resulting life cycle costs (e.g., in $/kWh).
  • Confirm availability of, and identify sources of energy technology supply chain (e.g., is technology market ready, availability of parts, after sales service and logistics, warranties), systems maintenance, anti-theft mechanisms, revenue collection, billing and customer service.  Technologies and standards adopted in the power system should not be unique or proprietary.
  • For supply side projects such as hydro power, confirm that the project can be completed within the compact term, including contingency, construction management, and construction of access roads, if any.  Confirm that the project includes appropriate analysis of transformers and ancillary equipment required, and transmission capacity to bring power to distribution hubs. 
  • For T&D projects, confirm type (aluminum vs. copper) of wires/cables, capacity rating of transformers, insulators, transfer switches and circuit breakers, include type of breakers to be used (e.g., SF6 is a highly potent greenhouse gas).
  • For demand side management projects, confirm that appropriate institutional and regulatory mechanisms for implementation (measurement and verification is an important component of such projects) are in place or can be created early in the compact term.
  • For rural electrification projects, confirm that the institutional capacity and regulatory arrangements are or will be in place to operate such projects.  Assess the level of interconnection from large inside-the-fence generation that might be desirable to improve stability of the system.  Analyze appropriate rules and regulations that might be required for such interconnection.
  • For performance based regulation, analyze list of metrics to be used to measure performance.  Analyze interconnection standards for distributed generation, feed-in tariff rates, wheeling charges interconnected with the national grid and other technical requirements of operating a network that is separate from the national utility/grid.
  • Identify major project risks and quantify, as much as possible, the impact of these risks on project cost, timeline and quality.  Develop mitigation measures and estimate the cost of mitigation.
  • Develop project cost estimates of +/-35%, including all associated costs, such as costs relating to environmental mitigation, resettlement compensation, social safeguard measures, construction supervision, project management and technical audits.
  • Develop provisions to be included in project cost estimate, such as physical contingency, allowances for specific risks that were identified in Appraisal, price contingencies, and allowance for the effects of foreign exchange rate fluctuations, and determine meaningful rates of inflation – local and foreign – to apply to base costs.

Technical Assessment: Economic and Financial

The MCC economist responsible for the assessment will work to ensure that proposed power project complies with MCC Guidelines for Economic and Beneficiary Analysis.  The economic rate of return for each project should be sufficiently high to warrant investment and eligible countries should have reviewed relevant governance practices, including laws and regulations, and have undertaken reforms, as possible, to enhance the anticipated economic benefits generated by the power project.  Infrastructure input to this analysis may include the following:

  • Estimate the project’s revenue and cost stream for FIRR analysis.  Financial modeling should broadly follow International Financial Report Standards, if possible.
  • In consultation with the MCC economist, assess the current economy of the region(s) to benefit from the investment.  Quantify economic activity for the region based on best available data and consultation with local organizations (including civil society organizations and women’s NGOs).
  • Confirm the number of customers (by gender, income, age, ethnicity, etc.), energy consumption and energy expenditures by different customer classes.  Estimate the level of suppressed demand in the region.  Estimate the level of inside-the-fence power generation by customer class and estimate ability to pay.
  • Identify the beneficiaries (by gender, income, age, ethnicity, etc.).  Estimate number of households and enterprises (including small enterprises from households) affected by the investment and increased economic activity (by sector), including small-scale household run income-generating activities expected to flow from the new investment.  In close consultation with the MCC economist, compare the expected increase in economic activity with current levels, and assess the capacity of the local and wider region to absorb the increased level of service.
  • Benefits should include an estimate of reduction in the number and duration of power outages and the economic value of reduced outages.  Analyze positive impacts on women and children. Benefits to households include reduced expenditure on electricity (for those relying in backup power), improved indoor air quality (for those switching from firewood to electricity), etc.
  • If diesel power generation is displaced, economic analysis should include reduction of oil imports and balance of payment improvement.
  • Confirm design standards, life and cost estimates (opex, capex) are consistent with the assumed benefits and duration of the benefit stream.  Note that the duration of the benefit stream is typically assumed to be twenty years.  Assumptions that the duration is longer or shorter than this should be clearly justified.

Technical Assessment: Environment, Social and Gender

MCC environment and social assessment experts will review projects for their compliance with MCC Environmental Guidelines, Gender Policy, and resettlement guidance (www.mcc.gov), which include an expectation of compliance with host-country laws, regulations and standards, as well as requirements by which the host country is bound under international agreements.  Particular attention should be given to the assessment of project alternatives - including the no-project alternative - and their respective environmental and social costs and benefits, any temporary and/or permanent land acquisition (e.g. for new construction or transmission rights-of-way), and relevant environmental laws and regulations and regulatory capacity for enforcement.  Assessment will also inform design by including gender analysis of use, control of resources, design appropriateness, and how well gender is integrated into project design, participatory planning processes, and implementation.

  • Identify country-, region- or sector-level assessments, strategies and commitments with respect to climate change and their relevance to proposed compact activities.
  • Identify climate change impacts (from the project) and risks (to the project), and corresponding mitigation and/or adaptation opportunities, as relevant.

Legal and Regulatory Assessment

In consultation with MCC legal staff, the infrastructure group will assess the proposed power project to ensure that the proposed project does not violate any existing laws of the country or that MCC’s assistance of such projects would violate any law or U.S. policy applicable to MCC.  The infrastructure group will also review relevant governance practices in the sector, including laws and regulations, and any reforms the country has or proposes to undertake.  Finally, the infrastructure group will, in consultation with MCC legal staff, review and comment on any contracts related to the implementation of the proposed infrastructure projects.  This assessment may include the following:

  • Identify applicable laws, regulations and government policies specifically related to power sector.  Identify any international agreements specifically related to the power sector.  Identify any issues arising from such laws, regulations, policies, and agreements.
  • Identify and analyze the role of each entity that possesses regulatory authority over the power sector, including applicable laws, regulations and policy.
  • Identify and analyze the role of the relevant government ministries, agencies, or departments that possess policy making oversight or direction for the power sector, including applicable laws, regulations, and policies.
  • Identify and analyze under local law, what power-related and non-power related approvals would be required, and what would the approval process for the construction or refurbishment, operation and maintenance of a power plant entail (including timing) for the type of power project investment under the proposed compact.
  • Identify any governmental agencies or other entities whose cooperation and assistance are necessary to the power sector. 
  • Identify the proposed chain of ownership of that portion of the power sector receiving assistance under the proposed compact, how MCC’s grant investment in that entity will be reflected post-compact, and whether any changes in ownership will be needed upon the end of the proposed compact.
  • Identify any special arrangements that need to be made with any contractors performing work in the power sector.
  • Identify any military, police, militia, national guard or other quasi-military organization or unit that would benefit from the power sector construction or improvements.
  • Confirm that the technologies that are proposed in the project do not require any exemptions from local import regulations.

Sustainability Assessment

  • Institutional – Assess the extent to which there is the existing or potential institutional and human capacity (within governments, NGOs, organizations, the private sector, possibly based on inclusion of training and support for capacity building in or prior to the compact) to carry forward the project’s work.  Provide a detailed description of current arrangements for ownership, management, maintenance and expansion of the power system or project.  Include details of legislative framework, administrative framework, funding arrangements and maintenance responsibilities.  Identify issues related to quality of service oversight and organizations’ capability to meet existing and new customer needs.
  • Financial – Assess the extent to which funding to cover the costs of building/creating and maintaining the project and related network components at a meaningful level is available.  In particular, revenues (or transparent subsidies as needed) should cover at least the on-going O&M and periodic capital expenditures for financial sustainability of the project.  Assess the coordination with central and regional energy authorities for regulatory, tariff, environmental or operational policies and plans including feed-in tariffs, wheeling charges, interconnection standards, tariff structures, performance based regulation standards, etc.  Assess the extent to which a grant funded project could provide the wrong price signals and should be accompanied by a proxy capital recovery charge in the ratemaking processes.
  • Political – Assess the extent to which a project which depends on continued political support and commitment in order to fulfill its objectives can expect to attract an appropriate level of support across potential changes of government/party or in the face of local/regional/national tensions.  Specifically, projects that have outside sponsors or have unpopular conditions (e.g., tiered tariff structures) need political support to be successful.

Risk Management Assessment

  • Identify significant risks to the project, in particular construction cost increases, delays, sustainability of the rural electrification systems, local acceptance and take up of benefits, and other factors affecting economic performance and distribution of benefits by disaggregated homogenous groups (gender, income, age, and ethnicity, etc.).
  • Identify and assess significant risks relating to durability, and confirm that design criteria adopted shall mitigate these risks within acceptable tolerance levels.
  • Assess the ability of the operator to manage the project in its development stage (project management skills) and on an on-going basis.  Provide evidence the operator has prior successful experience executing the development and construction of the proposed investments and operating and maintaining the proposed assets (e.g., rural electrification project, a power plant(s) or a T&D network).
  • Assess the risk of an independent operator functioning in an existing or new institutional set up; consider strategies to minimize risks of institutional paralysis/vacuum.
  • Assess fuel supply or hydrological risk, risk of physical damage to power plants, T&D network, market risk, and credit risk of consumers.
  • Prepare a risk management plan to minimize the negative impact of these risks including program management and/or long term management technical assistance.

 
Implementation Assessment

  • Provide a summary of the technical and construction resources available in country (including the resources and specific staff within the proposed implementing entity), and the relevant parties’ experience with projects of similar size, nature and type.
  • Provide details of implementation options available (include opportunities for collaboration with other donors).  Where implementation requires the creation of new institutions or organizations, identify an appropriate model (e.g., operation of a power system might be better through a cooperative model or a public-private operating agreement or a municipal ownership rather than a typical state-owned enterprise utility ownership model).
  • Identify local factors that may affect the timely completion of the works, including availability of skilled labor (disaggregated by gender, age, and ethnicity), transport to/from the location for the contractor’s equipment or project materials, specialized manufacturing, fuel and other materials, seasonal weather patterns, such as avoiding the wet season.
  • Prepare an implementation program (work plan) including contract awards, any approvals and permits needed, construction times, cash flow, government commitments and other hold points as appropriate.
  • Recommend the most appropriate procurement procedure and packaging.
  • Recommend the most appropriate supervision and management arrangements.