Energy transition in Tanzania constrained

To date, no wind, solar, or geothermal projects supply Tanzania’s national grid, its condition presenting an obstacle to significant renewables development.

Tanzania’s energy transition will be contingent on its own natural resource endowment, the state’s response to global market signals, and grid capacity, but analysts say that renewables other than hydropower will be at best a minor element in the country’s power mix.

While Tanzania has attempted to guide power sector development through a series of Power Sector Master Plans (PSMP), these have not framed actual public and private investment, which remain contingent on political responses to these three issues. Natural gas will dominate the future power mix, despite considerable investment in hydro, and ambitions for coal.

According to 2019 figures, contained in the most recent 2020 PSMP, 57% of generation capacity in Tanzania comes from natural gas, and 37% from hydro. These fire the national grid. Remaining capacity is off-grid, the bulk of which comes from liquid fuels, while less than 1% of generation capacity comes from scattered biomass plants.

By 2044, the PSMP aims to shift that to 28% from hydropower, 33% from natural gas, 26% from coal, and just over 12% from wind, solar, and geothermal, but that mix is unlikely to be achieved. Hydropower and natural gas will continue to dominate, coal is unlikely to take off, and renewables development other than hydropower will be limited, say analysts.

The continued importance of hydro, and the planned emergence of coal reflect the time in which the PSMP was drafted. Finalised in September 2020, it reflected what academic Dr Japhace Poncian describes as the “aggressive resource nationalism” of then-President John Magufuli’s administration.

Buttressing hydropower’s projected share is President Magufuli’s pet project, the Julius Nyerere Hydropower Project (JNHPP), which could more than triple hydropower generation if operating at its full 2115 megawatt (MW) capacity. It was President Magufuli’s flagship industrial development project, fast tracked in spite of concerns over its long term viability in light of climate change, and its environmental impact. Though still a priority, JNHPP is unlikely to be commissioned in 2022 as originally planned.

While JNHPP goes ahead, the current President Samia Suluhu Hasssan’s administration’s more friendly posture towards international capital, and understanding of global markets, has seen the revival of the long proposed Liquefied Natural Gas (LNG) project deep sea natural gas resources. Offshore blocks licenced to Equinor and Shell have current resources of 37 trillion cubic feet (tcf), giving Tanzania the potential to become a significant LNG exporter, greatly expand natural gas power generation, and underpin its role as a regional economic and political power.

President Magufuli’s attempts to revise upstream contracts, and a relatively high break-even price, estimated at between $9 and $11 by the Natural Resources Governance Institute, saw talks on a Host Government Agreement for a liquefaction plant stall. Europe’s demand for alternative natural gas sources may mark a structural change in the market that advantages the project. Minister for Energy, January Makamba, told a Host Government Agreement to be finalised by the end May, and a Final Investment Decision in two to three years. If so, this could see production by 2030.

Expansion of natural gas power generation will rest on agreeing terms for a Domestic Supply Obligation (DSO) with offshore operators. Equinor’s DSO is known to be 10%, while Shell’s is understood to be between 6 percent and 8 percent. While the proportion is set, gas purchase arrangements are not. Current proposals are ambitious, with 17 new gas power projects, green field and extensions, contained in the current PSMP.

Much rests on natural gas. Hydropower is now structurally constrained through reduced rainfall, while one quarter of projected power generation to 2044 depends on 14 coal projects that are unlikely to be developed. Dr. Poncian notes that proposals for coal investment date back as far as 1993 and the Africa Development Bank, and none have been developed. He dismisses investment in coal as “a day dream” based on this track record.

An analyst working with a renewables investor in East Africa – who asked not to be named – is more specific, pointing to the ending of financing of overseas coal projects by the Chinese state, as well as World Bank restrictions in place since 2013. The effects of this can be seen. Tenders for coal-fired power projects for a total of 600 MW issued in 2018 have yet to come to development. Coal is not being left in the ground though, thanks to import restrictions introduced in 2017, healthy domestic industrial demand, and the Indian export market.

Ambitions for renewables in the PMSP are conservative at best, and also reflect investor experience in recent years. The renewables investment analyst told Gas Outlook some are happy to let others be first movers in wind, citing concerns over the capacity of Tanesco, the state-owned integrated power utility, to appraise projects technically, as well as limitations brought by the state of the national grid, run by Tanesco, and a lack of predictability in power purchasing contracts in recent years.

To date, no wind, solar, or geothermal projects supply the national grid, its condition presenting an obstacle to significant renewables development. Minister for Energy January Makamba has made grid upgrading a priority, but the challenge is vast. Speaking in parliament in February he noted that for 132 distribution districts, the country has just 67 sub-stations, 39 of which are in Dar es Salaam. Consequently transmission lines are operating beyond capacity, and creating a delicate and unstable grid that is not fit to receive the unstable power loads that come from solar and wind projects. Makamba has promised €1.7 billion to upgrade the grid, though it is not clear where that will come from. A recent UK government funded study notes that Tanesco is carrying debts of almost €540 million.

A legacy of President Magufuli’s administration has been a worsening of the business environment, from the investors’ point of view. Regulations governing mini-grids – and the terms on which they can sell to the grid – introduced in 2016 were, according to the European renewables investor, regarded as “world class… copied and successfully implemented elsewhere on the continent”. While donor money was available to support development of projects most of it was not taken up due to capacity constraints on the government side. The statist leanings of President Magufuli’s administration also saw terms in the model Power Purchase Agreement changing unfavourably.

Francis Kibhisa, the CEO of Tanzanian solar energy firm Rex Investments, sees this as a short-term opportunity for investment in mini-grids. His own firm has developed such a project on islands in Lake Victoria, and is hoping to expand to 3.5 MW serving a mainly rural base. But it is not only the condition of the grid constraining more ambitious investments. The regulatory environment for renewables has deteriorated in the past five years.

Attracting greater investment in that sector will be critical to current and future administrations meeting high profile commitments to rural electrification. Most recently, in February of this year, Minister Makamba committed to financing the electrification of the remaining 37,000 settlements not reached by Tanesco. The original 2016 regulations provide a framework for this.

Nevertheless, Dr Poncian discounts the importance of last mile rural electrification through renewables based mini-grids. “In our hearts we are not for transition to renewables. Big projects get votes.”

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