How Power Contract Transparency Can Help Fight Poverty and Climate Change
The world must solve two global crises – energy poverty and climate change – at the same time. Energy poverty impacts 3 billion people worldwide, which hurts living standards and livelihoods. And to meet global climate goals, the International Energy Agency estimates that the world needs to build more than 1,000 GW of new clean power every year through 2050. Solving both of these crises depends on massively accelerating clean energy investment. But we can’t possibly succeed if every power plant contract is custom-negotiated behind closed doors, kept secret, and prices are shielded from the public.
The World Needs More Energy
Markets scale quickly when they are open, transparent and harness competition. In most mature energy markets, data on pricing and procurement are widely available. This allows competition to drive down prices, investors to understand the market and consumers to know what contracts are being signed on their behalf.
Yet the status quo across emerging markets is the opposite. In many countries (ironically, especially those with the greatest energy needs) the norm is unsolicited procurement of new power generation and electricity contracts that are never disclosed. Specifically, the standard contract for financing electricity infrastructure – the power purchase agreement (PPA) – is often negotiated, signed and implemented without any public knowledge.
Secret electricity contracts are costly. First, they often lead to poor pricing. The lack of clear price disclosure reduces the pressures for least-cost procurement and creates moral hazard for negotiators.While the costs of solar and wind are rapidly declining, many countries such as Kenya are not seeing electricity tariff declines as they bring on more renewable power; rather underlying prices have been rising.
Undisclosed contracts often also lead to overcapacity, which can undermine the financial viability of the entire system. Many power projects are financed based on long-term take-or-pay contracts, which means that the offtaker (or government guarantor) must pay for generation capacity even if no electricity is used. Between 2011-16, opaque electricity procurement in Ghana resulted in parallel negotiations by government agencies leading to 43 different PPAs and excess generation capacity, for which the government was contractually obligated to pay. As a result, the government paid over $600 million in 2019 for power it could not use. Bangladesh also paid over $1.1 billion in excess capacity charges in 2019 for idle plants.
Third, the public guarantees required to finance power projects in most frontier markets create substantial risk of ‘hidden debt.’ PPAs often contain huge contingent liabilities buried inside the contracts that only come to light upon default. Without far greater transparency, the extent of such risks are unknown despite posing real financial risks. Zambia’s recent review of its debt stock found $1.2 billion in unpaid arrears from PPAs. Similarly, Ghana’s energy sector debt reached $2.8 billion in 2018, with 30% payable to the private sector. The government’s own estimates suggested this burden could potentially balloon to over $12.5 billion without corrective action.
Fourth, opaque contracting allows actors with privileged access undue advantage in getting contracts signed while raising risks to investors of future contract disputes or renegotiation. These governance risks are worsened because secrecy encourages subsequent corruption claims. Mexico recently announced plans to renegotiate PPAs amidst Presidential claims of paying ‘too much for those contracts.’ Kenya, Ghana, Nigeria, and other countries are all currently seeking to renegotiate previously-agreed power contracts. While PPA disclosure wouldn’t remove contract risk, it would substantially reduce it.
Finally, the lack of contract transparency slows deployment of new clean energy projects. Attracting the necessary volume of private capital for renewable energy projects depends on markets that can accelerate procurement, drive prices down, and provide clarity. With clear information about how electricity is produced and purchased, officials can make sound long-term decisions required to accelerate clean energy – and investors can react to market signals. Without that information, problem projects deter investors and clog the pipeline.
Transparency Can Help
Contract disclosure has proven hugely beneficial in the extractives sector and in public procurement. Power contracts are just another form of procurement, so why not expect the same level of transparency and accountability in the electricity sector?
Publication of electricity contracts would enable civil society and the media to monitor whether the government and companies are negotiating good deals for the public and then adhering to the agreements. Ultimately, better incentives for all parties to act in good faith would lead to cheaper prices for consumers, which would bring all of the economic and social benefits of affordable electricity. And for the climate, transparency is especially needed now to make smart choices about energy deployment across emerging economies.
A Call to Action
Affordable, abundant electricity matters to everyone. Creating a global norm for PPA transparency is a zero-cost step to help provide energy for everyone and deliver on the low carbon future we all need.
- Governments can support these goals by disclosing basic information on PPAs for all power projects and, where necessary, enshrining transparency in law and policy.
- Journalists, civil society and ordinary citizens should demand access to information about power contracts and press for greater transparency in order to hold public officials accountable.
- Investors and project developers should be open to contract disclosure as a way of leveling the playing field. They could even encourage partner governments or utilities to publish power contracts (redacted where absolutely necessary) within one year of reaching financial close.
- Development partners should signal their support for transparency by supporting the establishment of a new global norm of contract disclosure, as happened with the Extractive Industries Transparency Initiative.
- Climate and clean energy advocates should make the case that reaching ambitious low carbon goals in emerging economies will require competitive markets that can scale quickly. Demanding open contract information is a good start.
The Promised Land
The world needs a future of abundant, affordable, and reliable clean energy for everyone. We cannot possibly rally to make that happen without open competitive electricity markets. Making the core contract at the heart of power projects publicly available is a zero cost way to help reach that future.
Rushaiya Ibrahim-Tanko and Todd Moss recently launched PPA Watch.
This article originally appeared in the Forbes blog on June 1, 2022.