Competitive Procurement of Power Projects for Bankability of PPA’s A Case Study of Mozambique

1. Master of Business Administration-Finance-ZM
Competitive Procurement of Power Projects for
Bankability of PPA’s: A Case Study of Mozambique
Student ID: R2001D10309387
Name: Eucides Dgedge
Tutor: Dr. Spiros Chioteris
Date: December 2021

2. i
Abstract
With no doubt, electricity is one of the most essential services for modern societies, being
crucial for a wide range of activities and uses such as lighting, heating, cooling, computers,
electronics, communications, machinery, transportation and other public services (EIA, 2021).
Therefore, all the players of the energy markets globally are working to provide continuous
and stable electricity to the consumers. However, in alignment with the sustainable
development goals the world is seeing a transition from the traditional sources such as coal and
gas, into the renewable ones such as solar and wind technologies. In developing countries this
comes as a huge challenge to keep the power utilities financially healthy as most of the people
does not have access to electricity services and the development of decentralized grid, which
is driven by the development of renewable energy sources, brings obligations to pay electricity
to the Independent Power Producers (IPP’s) through the Power Purchase Agreements (PPA’s)
that are signed between the utility and the IPP’s (UNEP, 2012). The main scope of this
assignment is to explore to which extend the structuration of procurement processes for
renewable energy projects in developing countries enables the tariffs to be paid to the IPP’s to
reduce and be bankable to the power utilities. To meet this purposes, the national power utility
of Mozambique is used as the study object. Therefore, the literature review explores the current
situation of the Mozambican power sector with focus on EDM, as well as the different ways of
financing power projects. Therefore, the assignment explores the main advantage of structuring
procurement processes taking as example the ongoing processes in Mozambique, as well as the
its results. Finally, with resource to this analysis, a critical approach on the impact of this
processes on the bankability of the PPA’s for the power utilities of the developing countries is
performed.
Keywords: Power, Electricity, Procurement, Tariffs, Energy.

3. ii
Acknowledgements
First of all, I would like to thank God for the knowledge, and for providing me health and
strength to work. I would also like to acknowledge my tutor, Dr Spiros Chioteris, for the prompt
assistance provided during the module, as well as all the Unicaf University Team, for all the
assistance during the course. Finally, I would like to thank EDM, for all the support that has
been given to me during the course.

4. iii
Table of Contents
Abstract.......................................................................................................................................i
Acknowledgements....................................................................................................................ii
List of Tables ............................................................................................................................iv
List of Figures...........................................................................................................................iv
Abbreviations.............................................................................................................................v
1. Introduction ........................................................................................................................1
1.1. Background .................................................................................................................1
1.2. Research Question and Objectives..............................................................................2
1.3. Thesis Outline .............................................................................................................2
2. Mechanisms for Financing Power Projects ........................................................................4
2.1. Power Generation Markets..........................................................................................4
2.2. Power Market Players .................................................................................................6
2.3. Financing Models and Offtake Arrangements ............................................................7
2.3.1. Host Government Financing................................................................................7
2.3.2. Developer Financing............................................................................................8
2.3.3. Resource-Based Infrastructure Financing............................................................8
2.3.4. Project Financing .................................................................................................9
2.4. Sources of Financing.................................................................................................10
3. Power Project Procurement ..............................................................................................12
3.1. Direct Negotiations ...................................................................................................14
3.2. Competitive Tenders .................................................................................................14
3.3. Feed-in Tariffs...........................................................................................................16
4. Methodologic Approach and Ethical Issues .....................................................................17
4.1. Methodologic Approach............................................................................................17
4.2. Ethical Issues.............................................................................................................19

5. iv
5. Impact of the Development of Competitive Mechanisms for Procuring Power Projects in
Mozambique ............................................................................................................................20
5.1. The Mozambican Power Sector ................................................................................20
5.2. The National Public Utility and its Key Challenges .................................................21
5.4. Key Success Factors..................................................................................................23
6. Conclusions & Recommendations....................................................................................25
References................................................................................................................................27
APPENDICES ..........................................................................................................................A
List of Tables
Table 1: Power Market Players..................................................................................................6
Table 2: Sources of Finance.....................................................................................................10
List of Figures
Figure 1: Electricity Market Value Chain (Badissy, et al., 2014)..............................................4
Figure 2: Bundled vs Unbundled Systems (Badissy, et al., 2014).............................................5
Figure 3: Host Government Funding Structure (Badissy, et al., 2015) .....................................7
Figure 4: Developer Financing Structure (Badissy, et al., 2015)...............................................8
Figure 5: Resource-based Infrastructure Financing (Badissy, et al., 2015)...............................9
Figure 6: Project Financing Structure (Badissy, et al., 2015)....................................................9
Figure 7: Debt arrangements (Badissy, et al., 2014)................................................................10
Figure 8: Procurement Objectives (Abrams, et al., 2019) .......................................................12
Figure 9: Power Generation Market Development (Badissy, et al., 2014)..............................13
Figure 10: Structure of a Competitive Tender (Abrams, et al., 2019).....................................15
Figure 11: Open vs Restrictive Tenders (Abrams, et al., 2019) ..............................................15
Figure 12: Project Documents Included in the RFP Package (Abrams, et al., 2019)..............16
Figure 13: Mozambican Power Sector Structure (EDM, 2020) ..............................................20
Figure 14: Average Cost of Supply vs Average Selling Price (EDM, 2020) ..........................22

6. v
Abbreviations
ABBREVIATION MEANING
AfDB African Development Bank
ARENE Mozambique Energy Regulator
ATI African Trade Insurance
CDC UK Development Agency
DBSA Development Bank of South Africa
DEG Development Agency of Germany
ECA Export Credit Agencies
EDM Electricidade de Moçambique, E,P
EIB European Investment Bank
FMO Development Agency of Netherlands
FUNAE Energy Fund of Mozambique
IaDB Inter-American Development Bank
IFC International Finance Corporation
IPP's Independent Power Producers
IRENA International Renewable Energy Agency
MIGA Multilateral Investment Guarantee Agency
MIREME
Ministry of Mineral Resources and Energy Of
Mozambique
NORFUND Norwegian Development Fund
OPIC Overseas Private Investment Corporation
PROPARCO Commercial Fund of the French Development Agency
SDG's Sustainable Development Goals
SWEEDFUND Swedish Development Fund

7. 1
1. Introduction
1.1.Background
The modern world is characterized by connectivity and services that rely on modern
technologies that allows the whole world to be integrated in many aspects. However, although
the internet can be considered an essential service in today’s world, it still relying on electricity.
Not only the internet itself, but a wide range of activities and services such as lighting, heating,
cooling, computers, electronics, communications, machinery, transportation and other public
services rely on electricity services (EIA, 2021).
Due to the fact that electricity is an important good, being even considered as a public good,
or, in other words, it is a right of each and every person to have access to electricity, all the
players in energy sector globally are working to find the best strategies to provide reliable and
sustainable energy to its clients, by combining the best technical and financial solutions to
provide it at affordable prices (European Investment Bank, 2018).
In 2015, the United Nations Organization adopted the Sustainable Development Goals
(SDG’s), which even today represent a call to action with a number of measures to turn the
world into a better place, and these actions incorporate a huge call action to the power sector.
The SDG number 7 stands for “Affordable and Clean Energy” with the primary objective of
by 2030 ensuring affordable, reliable and modern energy services (UNDP, 2021).
This goal sets the world in a transition from the traditional sources such as coal and gas, into
the renewable ones such as solar and wind technologies. In developing countries this comes as
a huge challenge to keep the power utilities financially healthy as most of the people does not
have access to electricity services and the development of decentralized grid, which is driven
by the development of renewable energy sources, brings obligations to pay electricity to the
Independent Power Producers (IPP’s) through the Power Purchase Agreements (PPA’s) that
are signed between the utility and the IPP’s (UNEP, 2012).
Therefore, the main purpose of this assignment is to analyze how the structuration of
procurement processes for power generation projects can turn the power utilities bankable by
reducing the tariffs that these utilities has to pay to the IPP’s. It is also important to understand
that the power utilities in developing countries are struggling to be financially healthy, as their
purpose is not well defined if it is social, or commercial, therefore, developing mechanisms to
mitigate the risks and lower the tariffs paid to the IPP’s is critical.

8. 2
1.2. Research Question and Objectives
Research Question: To what extend the development of competitive procurement processes
for renewable energy projects increase the bankability and sustainability of the Power Purchase
Agreements signed between IPP’s and national power utility companies in developing
countries?
Objectives:
 To identify the different ways to develop renewable energy projects internationally;
 To identify the different factors that influence the tariffs from the Independent Power
Producers;
 To identify the different mechanisms for financing power projects, specifically
renewable energy projects;
 To identify the key challenges of the national power utility of Mozambique, in regards
to the bankability of the tariffs of the IPP’s;
 To identify and examine the key success factors, as well as key challenges of structuring
procurement processes for the development of renewable energy projects.
1.3.Thesis Outline
To address its objectives and answer the research questions, the current thesis is divided into
seven chapters in which these questions are developed and by which the research objectives
are met.
The literature review is divided into the next three chapters. The Chapter 2 explores the main
basic concepts around the power industry, and more specifically the fundamental concepts of
power project financing. Therefore, this Chapter allows the understanding of the different
mechanisms for funding a power project, as well as the role of each of the most important
stakeholders in the power sector. It is also important to highlight the fact that this chapter
focuses on the specificities of funding power projects in emerging countries.
The Chapter 3 basically aims to give substance to the main purpose of the current assignment,
as it explores the existing mechanisms for developing power projects, and develop the main
concepts around power project procurement, by providing an understandable comparative
analysis of the different methods for procuring power projects.

9. 3
The Chapters 4 provide a methodologic approach of the problem, explaining how the research
was conducted, allowing the reader to understand the process by which the research was
developed. This chapter also consider the discussion of ethical issues of the assignment.
Besides treating the secondary data collected to develop the assignment, the chapter 5 also
analyses the impact of the development of procurement processes for power projects in the
sustainability of Power Purchase Agreements. Finally, there is a conclusion on which the
research questions as well as the answers for the research questions are reflected.

10. 4
2. Mechanisms for Financing Power Projects
In this chapter, an explanation of the basic concepts regarding power markets and how power
projects can be financed will be given. The focus is on the understanding the financing
structures for large projects such as power generation projects, especially in emerging
countries.
2.1.Power Generation Markets
With no doubt, the development of energy markets is one of the most essential needs, especially
for emerging countries in order to meet the universal access to electricity by 2030 (SDG 7), as
well as to enhance the socio-economic development, as it is the essential commodity used in
several industrial activities (European Investment Bank, 2018).
Before diving deep into the main topic of the chapter, it is important to understand how a power
market is structured. Therefore, to understand how it is structured it is crucial to know its value
chain. In business terminology, electricity can be seen as a commodity that can be bought, sold
and traded (Ross & Khartit, 2021).
As shown in the figure 1, the electricity market has three main segments, which are
Generation, Transmission and Distribution (and Commercialization). In the power
generation segment the power is converted from the different sources, either renewables (wind,
solar, biomass, geothermal) or non-renewables (coal fired, oil, gas, nuclear), into electric
energy, which flows through the transmission system in high voltage to the load centres. The
end users, either domestic, industrial or commercial, are supplied with the electricity in the
distribution system, in medium and/or low voltage (Cramton, 2017).
Figure 1: Electricity Market Value Chain (Badissy, et al., 2014)

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Specially in emerging countries, the market is normally vertically integrated, with one power
utility owned by the government with the responsibility of covering all the segments in the
electricity value chain, in other words, the system is called bundled (Badissy, et al., 2014).
Given the growing increase of demand, as well as the need to rapidly spread the access to this
public good, the entrance of private actors in the marked is seen, especially in the generation,
as well as in the distribution systems, which is what is called power market reform, that makes
the system to become unbundled, as new actors enter in the generation and the distribution
system, and the transmission normally remains with the public utility (Butalid, 2005).
Indeed, for emerging markets with a vertically integrated power utility, as in Sub-Saharan
Africa countries, as the concern with the universal access in on hand, and in the other the
growing need to meet demand emerging from new industrial activities and infrastructure
development, as the public power utilities become unable to meet the demand, the private
sector normally participates in the power generation sector in order to add capacity to the
system, and therefore, the sector begins to be unbundled on the generation side (UNEP, 2012).
As the world is concerned with sustainability and encouraging environmental friendly
solutions, the cleaner sources like gas, as well as renewable energy sources play a critical role
in this transition, and the interest of the private sector is to explore this opportunity to add more
capacity to the system (IRENA & ADFD, 2020). The figure below shows a comparison
between bundled and unbundled systems, and it can be seen that in unbundled systems there is
a fair and transparent competition between the independent power producers, therefore,
theoretically, this kind of systems allows better tariffs for the buyers of electricity.
Figure 2: Bundled vs Unbundled Systems (Badissy, et al., 2014)

12. 6
2.2.Power Market Players
For a better understanding of the process of financing power projects, it is crucial to know what
are the main players of the market as well as their responsibility in the market. It has to be
highlighted that as the current assignment will focus on power generation projects, as it
analyses the development of projects in emerging countries, where the unbundling is more on
the generation side, and not in the distribution space.
According to Badissy et al (2014) in power markets there are primary actors and secondary
actors. The primary actors are the ones who are directly tied by a contract which is called Power
Purchase Agreement (PPA). The PPA is the central contract that determine the bankability of
any power project, as it is signed between a government agency (power utility) and the private
energy producer (IPP), in which the seller agrees to sell power to the government agency on a
long term (15 to 25 years), and the buyer agrees to buy this power (Ross & Khartit, 2021). The
main players in the power markets can be seen on the table below:
Table 1: Power Market Players
Primary Actors Secondary Actors
 Offtaker (Buyer)
 IPP (Seller)
 Government
 Regulator
 Customers/End User
 Transmission Company
 Distribution Company
 Lenders
 Construction Company
 Plant Operator
 Fuel Supplier
 System Operator
Although the PPA is only signed with the primary actors, the secondary actors its terms are
highly influenced by the secondary actors, as they are the key players for the project as well.
The Government for example is responsible for the legal and regulatory frameworks, that can
rather attract or retract fund to the project. The power regulator is the one approving the project
PPA. The PPA shall also be acceptable to the lenders, as they will be the ones investing the
larger amount in the project (Badissy, et al., 2014). The responsibilities of each of these players
can be seen in Appendix 1.

13. 7
2.3.Financing Models and Offtake Arrangements
Mainly in developing countries, bankable transactions are crucial for the development of the
market. This is really dependent on the risks that each of the parties involved in the project
accept to take, as well as what can be done by each party to make the transaction more attractive
such as the sovereign guarantees that can be issued by the government (Morris & Price, 1998).
There are four main financing structures by which power projects are financed, and what
distinguish one from another are the responsibilities each party have on funding the upfront
costs of the projects, with its own pros and cons case by case. These financing structures are
described as follows: Host Government Financing, Developer Financing, Resource-Based
Infrastructure Financing, and Project Financing (Badissy, et al., 2015).
2.3.1. Host Government Financing
This financing model is based in the idea of having the Government from the country in which
the project will be implemented financing the project using funds from its own balance sheet,
lending funds to the offtake in order for him to develop the project (Morris & Price, 1998).
This financing structure can be seen in the figure below:
Figure 3: Host Government Funding Structure (Badissy, et al., 2015)
These kind of arrangements are also called concessional funding or soft loan, that have more
generous terms than other sources of financing in the market. In one hand, having a project

14. 8
financed by the host government is good as it assures lower financing costs, as well as fewer
coordination challenges. In the other hand, the problem of opportunity cost of capital rises, as
large amounts of capital are required from the Host Government (Badissy, et al., 2015).
2.3.2. Developer Financing
Although rarely applied due to the risks that are involved in huge transactions to fund a utility
scale project, some large international corporations, mainly in oil & gas and mining industries,
are capable of funding large projects from their retained earnings or other internal sources of
finance. This arrangement really comes with fewer coordination work, as well as no funds are
required from the Government, however, as previously stated, due to the risks involved few
developers have appetite for this arrangement (Badissy, et al., 2014)
Figure 4: Developer Financing Structure (Badissy, et al., 2015)
2.3.3. Resource-Based Infrastructure Financing
This is a structure which comes with the advantage of having few players in the deal, and it is
based on the idea of having the project completely financed and built by a third party
developer/contractor (normally a foreign state-owned enterprise), in exchange for natural
resources of the host country. The main advantages of this structure is that no cash is required
from the host government, it comes with fewer coordination challenges, as well as a shorter
time frame to implement the project. However, the disadvantage is that it comes with an
unknown cost for the host country for several years, as mortgages natural resources for future
generations have to be considered (Sachs, 2013)

15. 9
Figure 5: Resource-based Infrastructure Financing (Badissy, et al., 2015)
2.3.4. Project Financing
This is the most commonly used financing structure for power projects, and the main principle
is to finance long-term infrastructure project through a non-resource, in which the funds
provided to finance the project, and the project repays the debt with the cash that is generated
by the project (Hayes & Costagliola, 2021). This type of structure is quite complex, as a
separate entity owned by the sponsors is created, and known as Special Purpose Vehicle, or
project company, which is a completely new, legally distinct and ring-fenced entity that will
own, build and operate the project (DENTONS, 2013).
Although this arrangement comes with more complexity in terms of coordination between the
various entities involved, that makes the developer to spend more time to reach operations, as
well as to incur to higher up-front costs, the mechanisms does not require cash from the Host
Government, and the risks of the project are equitably allocated to each party, as well as
performance guarantees are required from the project company (Badissy, et al., 2015).
Figure 6: Project Financing Structure (Badissy, et al., 2015)

16. 10
2.4. Sources of Financing
As seen in the previous subsection, power generation projects are normally developed using
the project financing structure, and all the parties involved need to raise funds in order to
develop and mobilize the required debt to build the project (Morris & Price, 1998).
As the main objective of any project is to produce the most reliable power possible at lowest
possible cost, and with the higher return possible, developers rarely accept to take all the risk
to finance the projects, as they will need a higher rate of return on their money, thus turning
the tariff higher than expected. Therefore, they normally agree to finance only their equity that
is normally 25 to 30 % of the total amount of the project (DENTONS, 2013).
Figure 7: Debt arrangements (Badissy, et al., 2014)
In this type of projects, what is called senior debt is normally financed by Development Finance
Institutions (DFI’s), and the equity can be financed in various manners (DENTONS, 2013).
The summarization of the sources of finance adapted from Badissy, et al (2015) can be een in
the table below:
Table 2: Sources of Finance
Senior Debt Equity
 DFI’s (OPIC, Proparco, FMO, DEG,
CDC, Norfund, Swedfund, DBSA
and others)
 Multilaterals (World Bank, MIGA,
IFC, AfDB, ADB, IaDB and others)
 Sponsor/Developer
 Private Equity Funds
 Venture Capital (Community
Funding)
 Impact Investors

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 Political Risk Providers (PRI, MIGA,
OPIC, ATI, EIB)
 Commercial Banks
 Export Credit Agencies (ECA’s)
 Syndication
 Capital Markets (Project Bonds,
Sovereign and Sub-Sovereign Bonds,
Refinancing, Yield Companies,
Public Offerings)

18. 12
3. Power Project Procurement
Having understood how a power project can be financed in the previous chapter, this chapter
provide a comprehensive analysis of the different aspects behind the procurement of power
projects, as well as the different roles of the stakeholders of the electric sector in this process.
As stated previously, mainly in Sub-Saharan Africa the lack of electricity access is a major
hindrance for the development, and as per the Sustainable Development Goals set by the United
Nations, there is a need to ensure universal access to electricity by 2030 (UNEP, 2012).
However, this comes with major challenges in regards to the development of new generation
capacity, at more affordable prices, therefore, the study of the different procurement methods
is really important. This can be highlighted by the fact that many power utilities in Africa have
been led to enter into non bankable transactions due to inexistence of proper frameworks for
procuring power projects (Muzenda, 2009).
Basically, power projects can be developed using the following procurement methods: Direct
Negotiations, Competitive Tenders (or Procurement), and Feed-in Tariffs (Abrams, et al.,
2019). The main players of the power markets were described in the previous section, however,
it is important to understand what are the main objectives of power procurement that attract the
private investment. It can be seen in the figure below.
Figure 8: Procurement Objectives (Abrams, et al., 2019)
Additionally, another topic to pay attention when it comes to development of power projects is
the overall environment in which these projects will be developed. Therefore, for the
development of this kind of projects, in the following four areas, the government of the Host
Country needs to take positive actions in order to create the enabling environment: Political
Will for Power Sector Development, Energy Access and Market Policy, Legal/Regulatory
Framework, and Institutional Capacity (Correia, Tolmasquim, & Hallack, 2020).

19. 13
For any of the above mentioned procurement types, the process flow of the development of a
power project, right from the conceptual phase all the way to the end, is the one that can be
seen in the figure below:
Figure 9: Power Generation Market Development (Badissy, et al., 2014)

20. 14
Having discussed the basic insights about power project procurement, now it is time to
understand the more about the different types of procurement for power projects.
3.1.Direct Negotiations
Known as unsolicited bids as well, projects developed under this framework normally emerge
as a private initiative by the project sponsor (also known as project developer), that invests in
all the development works for the project (technical, financial, environmental studies, land
acquisition framework and others) and then start contractual negotiations with the offtaker
(public utility) until reach the financial close and star construction (John, O'Boyle, Lher, &
Detsky, 2020).
As can be foreseen, this type of procurement strategy comes with a lot of work load for the
developer, and support from the Host Government is not always guaranteed. Therefore,
although project developers often prefer to use this framework, it can be very risky, and most
of the time this risk is transferred to the tariff (Badissy, et al., 2015).
3.2.Competitive Tenders
Also known as reverse auctions, and as the name suggest, this is a competitive process by
which a procuring entity select the project sponsor, in a stage in which the project is almost
developed and the tender comes with the package of the feasibility studies and some financial
instruments to mitigate risks. Although it requires some time to structure this kind of processes,
this is a very effective way to bring the energy tariffs down, as most of the development works
are coming in the tender documents (Abrams, et al., 2019).
These kind of processes normally have the following three stages, and have the structure that
can be seen in the figure below:
i. Expression of Interest (EOI);
ii. Request for Qualification (RfQ); and
iii. Request for Proposal (RFP).

21. 15
Figure 10: Structure of a Competitive Tender (Abrams, et al., 2019)
Yet within this framework, two types of tenders can be considered, as the procurement process
can be done through an open or restricted tender. An open tender is assessable to anyone
interested in the power sector, being also known as international tender. In the other hand,
restricted tenders , as the name suggests, are restricted to pre-identified candidates, and can be
conducted through a competitive dialogue or by shortlisting potential bidders based on their
reputation and previous experience that is publicly known (Abrams, et al., 2019).
Figure 11: Open vs Restrictive Tenders (Abrams, et al., 2019)

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Last but not least, it is important to highlight that in this framework developers have access to
a wide range of data and pre-feasibility studies, which makes it much more easy and affordable
to mobilize finance to build the project, as it comes with a full package of legal, technical,
financial and regulatory documents (Badissy, et al., 2014).
Figure 12: Project Documents Included in the RFP Package (Abrams, et al., 2019)
3.3. Feed-in Tariffs
Finally, another important procurement mechanism, which is similar to competitive tenders are
the Feed-in Tariffs, which is applied whenever the intention is to encourage the development
of projects of a specific technology, being largely used to boost the development of small to
medium size renewable energy project, bringing a mechanism to subsidise the tariff and lower
the development risks in order to assure a competitive tariff for the offtaker (Abrams, et al.,
2019).

23. 17
4. Methodologic Approach and Ethical Issues
The present chapter aims to develop and discuss the methodologic approach of the project, by
presenting the main methods used to collect the relevant data that has been used to produce the
report, as well as the research methods used.
The main objective of the current assignment is to analyse how the development competitive
procurement processes for power projects, specifically renewable energy projects, increase the
bankability of the Power Purchase Agreements that Independent Power Producers sign with
the power utilities in developing countries, taking the particular case of Mozambique as an
example.
It seems to be a simple question, however, as discussed in previous sections, although Power
Purchase Agreements are simple contracts that link an electricity buyer with the seller, the
particularities behind the overall project development process can make it non bankable
(Springer, 2013). Therefore, in order to proper explore the question, the current assignment has
defined targets that are reflected in the following objectives:
 To identify the different ways to develop renewable energy projects internationally;
 To identify the different factors that influence the tariffs from the Independent Power
Producers;
 To identify the different mechanisms for financing power projects, specifically
renewable energy projects;
 To identify the key challenges of the national power utility of Mozambique, in regards
to the bankability of the tariffs of the IPP’s;
 To identify and examine the key success factors, as well as key challenges of structuring
procurement processes for the development of renewable energy projects.
4.1.Methodologic Approach
The current assignment is totally based on secondary research, having been written with data
already available in different existing sources, such us publications, strategies, annual reports,
institutional documents, sectorial documents, Government publications, books and other
existing sources. In other words, it is a desktop research conducted with already existing data
(Fowler, 2018).

24. 18
Knowing that the collection of data can be done through different methods, qualitative and
quantitative, it is although is often difficult to distinguish with precision which type of methods
is used in the research, as most of times researches use a combination of the two methods
(Sileyew, 2019).
The current assignment will not be an exception and uses a combination of both methods to
reach to the pre-established objectives. The work is developed around the objective of
optimization of electricity tariffs through the development of competitive procurement
processes. However, it is all around this number that is called tariffs, the research uses more
qualitative methods than quantitative, as the intention is to explore what is behind the reduction
of tariffs, and therefore, it is more oriented to discovery, exploration and observation which are
characteristics of qualitative research.
The first and third objectives, are fulfilled in the chapters 2 and 3, and the second one is partially
meet in these two chapters. The different manuals used to develop the literature review result
from the merging of knowledge of different specialists of the power sector, with experience of
development of power projects both in emerging markets as well as in developing markets.
Being so, the literature review in the current assignment is not merely theoretical, and is based
on previous experience from real projects.
In addition to this, to develop the theoretical framework, the research also uses previous
researches on similar issues, that have been conducted by other researches, however, the report
only considers the use of credible and certified sources, in order to assure the quality of the
research.
At the same time, the research conducted is not subjective, as it results from the review of
consolidated work, and its results does not result or rely on beliefs of the researcher, but relies
on consolidated knowledge and standardized procedures and protocols.
To write the next chapter, which aims to present and critically evaluate of the data that were
gathered in during the research, the researcher uses a combination of various sets of data, both
qualitative and quantitative about the Mozambican Power Sector, its players, as well as the
National Power Utility of Mozambique, that is called Electricidade de Moçambique, E.P (or
EDM).

25. 19
Therefore, the research present and discuss data from various sectorial sources, as well as from
EDM, sectorial organograms, data from annual reports, as well as the competitive procurement
processes that are being developed in the country, discussing the main expected outputs form
these programs, in order to examine the factors that are behind the tariffs that are currently
being negotiated in Mozambique.
Last, but not least, the report does not consider collection of primary data, therefore, no one
have been interviewed to produce the data that is used, and no data have been collected through
direct observation of processes and procedures, as well as pictures taken by the researcher. This
is to assure that all the report only considers secondary data.
4.2.Ethical Issues
Having deeply explained the research methodology, this sub-chapter aims to explore about
ethical issues of the current assignment. As per the Gatekeeper letter submitted under the
framework of the current module, the report only use public domain information contained in
the various sectorial and organizational sources, with no prejudice to any of the interested
parties, nor to the Mozambican Power Sector itself.
In the current work, Governmental entities, the National Power Utility of Mozambique, the
Power Regulator are cited, however, not in a way that is harmful for their integrity.
Furthermore, all the information form other sources are cited, and the report has got clearance
from the National Power Utility, so the information can be presented.

26. 20
5. Impact of the Development of Competitive Mechanisms for Procuring Power
Projects in Mozambique
This chapter aims to bring the critical evaluation of the impact of the development of
competitive procurement mechanisms for procuring power projects in Mozambique. The
present and critically evaluate all the secondary data that was previously retrieved.
5.1.The Mozambican Power Sector
The Mozambican Power Sector is characterized by a huge presence of a vertical integrated
structure dominated by the National Public Utility, EDM, which operates at a national level,
and the sector itself, involves a group of entities responsible for the following sub-sectors:
guardianship & regulation, energy promotion, power production, power transmission &
distribution and commercialization (MIREME, 2018). The sectorial structure can be seen in
the image below, in which the different players are represented.
Figure 13: Mozambican Power Sector Structure (EDM, 2020)

27. 21
As it can be seen, in the generation side there are several players, however, the overall sector
is dominated by EDM, as the orange parts are scope of the national public utility. At the top of
the structure, there is the Ministry of Mineral Resources and Energy (MIREME), which
represents the Government of Mozambique, followed by ARENE, which is the power sector
regulator.
5.2.The National Public Utility and its Key Challenges
As already introduced previously, the National Power Utility of Mozambique is called
Electricidade de Moçambique, E.P (or EDM), which is a state owned company responsible for
all the value chain of electricity sector (power generation, transmission, distribution and
commercialization), operating at a national level, being founded in 1977 with this mandate
(EDM, 2018). The current organizational structure can be seen in appendix 2.
Going straight to the main problem of the current assignment, aligned with the sustainable
development goals, EDM has set three strategic objectives, which are to become a regional
pole of electricity, to ensure universal access to electricity by 2030, as well as to ensure gender
equity (EDM, 2017).
Given the fact that the current electricity access is around 35%, and the current financial
situation of the company, derived from the gap between the average cost of supply and the
average selling price, these objectives can be considered quite ambitious, as one of the major
contributors to this gap is the entrance of new players in the generation side, making EDM to
be subjected to higher tariffs than expected, in addition to commercial losses derivate from
various factors in the internal management (EDM, 2019).
The image below shows the evolution of the above mentioned gap, and in 2015, with the
entrance of new players in the power generation market the situation got worse, as the average
cost of supply was about 12.4 c$/kWh, and the average selling price was about 9.0 c$/kWh.
Although not shown in the graph, in 2019 the first utility scale solar power plant was
commissioned and connected to the grid in Mocuba Town, central region of Mozambique, and
as seen in the graph the cost of supply went even higher.

28. 22
Figure 14: Average Cost of Supply vs Average Selling Price (EDM, 2020)
Although the gap has become accentuated with the entrance of new generation unit, it is
important to understand the country context. The hidden debts discovered in 2015 have driven
the inflation rates higher than expected, and the national currency (Mozambican Metical –
MZM) lost its value against the American Dollar (Orre & Rønning, 2017).
Additionally, due to the fact that EDM collect a large amount of its revenues in Meticals, while
pays in American Dollars to IPP’s is one of the factors behind this gap, and this is what brings
the need for optimising the electricity tariffs, by promoting competitive processes, in
opposition to the existing power plants that were developed under direct negotiations.
5.3.The Undergoing Procurement Mechanism for Renewable Energy Projects
One of the actions taken by the Government of Mozambique to promote projects that comes
with lower tariffs was the development of a Program called PROLER. This program emerges
from a donation from the European Union through the French Development Agency (AFD) of
37 700 000 EUR, for the preparation of tenders for 4 renewable energy projects, being 3 solar
projects of 40 MW (Dondo, Lichinga and Manje) and one wind of 50 MW (Jangamo), with the

29. 23
main objective of increasing power availability, thus contributing to the universal access to
electricity by 2030, as well as for reduction of emissions (AFD, 2018).
This program comes in a form of open competitive tenders, and delivers a complete package
to the bidders in the RFP, as there are 4 MUSD allocated for the preparation of this tenders, by
the development of complete feasibility studies, land acquisition framework, and an attractive
financial package that comes with some guarantees that the Government is not issuing due to
the country’s situation (MIREME, 2020).
The feasibility studies for this program are prepared by EDM, and the tender processes are
conducted by the regulator (ARENE). It is important to state that the program develops
standard contractual documents, such as PPA, COA (Connection and Operation Agreement),
SHA (Shareholders Agreement) and Concession Agreement, thus reducing the need of
specialized law firms by the bidders, driving the tariffs even lower (ALER & AMER, 2021).
To compensate the gap between the average cost of supply and the average selling price, EDM
has set the objective of negotiating tariffs below 7 c$/kWh, and for this programs, the expected
tariffs are even below this level, first because of the instruments that the program is bringing,
second because of its competitive nature, as in the second stage of the tender, who wins is the
bidder that offers the lowest tariffs among others (MIREME, 2020).
5.4.Key Success Factors
As seen, ensuring bankable PPA’s is not just a matter of structuring competitive processes for
the development of new power generation projects. There are several drivers contributing for
the attractiveness of investments in power projects, mainly in developing countries such as
Mozambique.
The country is not issuing any kind of sovereign support, and allied with weak structural
business environment and infrastructure, makes the country to be considered as a place of
higher risk for investors, being what retract new investments, as well as brings higher costs due
to the risks (Ozyurt, 2021).
As previously discussed in chapter 3, the following four drivers are crucial for attracting new
investments in the power sector: Political Will for Power Sector Development, Energy

30. 24
Access and Market Policy, Legal/Regulatory Framework, and Institutional Capacity
(Abrams, et al., 2019).
For the case of the PROLER Program, all these factors are assured, as the program is led by
the Ministry of Mineral Resources and Energy, that is closely working with EDM and ARENE
to create this enabling environment. In the other hand, to change the legal and regulatory
framework is not that simple, as the current electricity law was approved in 1997 (EDM, 2019).
To mitigate this barrier, the program comes with key incentives that attract the private sector,
and is also building some capacity in the institutions that are involved in the power sector, in
technical, financial, environmental and procurement areas (AFD, 2018). In addition to this, the
program recognises the importance of reducing the development works by the project sponsors
in order to optimise the PPA’s that are signed between them and the National Utility Company.

31. 25
6. Conclusions & Recommendations
As seen, the research covered all relevant aspects that have been pre-established, and it was
possible to understand the business side of almost all the value chain of the electricity market,
and then understand in details how a power project is developed and the effect of competitions
in the tariff that have to be paid to the Government Entity, which is the Power Utility company.
Another important topic that have been discussed is the difference between the development
of power projects in emerging and developed markets. As seen, while in emerging markets the
sector is organized and the enabling environment is already there, and highly regulated, in
emerging markets this enabling environment usually have to be created to allow the power
utility companies to sign bankable PPA’s.
As discussed, the tariff is just a number, but a very important one, and is highly dependent on
the way the project is developed, on the incentives that the project manage to get from the
Government and from the Multilateral Development Institutions, in order to optimise the tariff.
Although for the utilities the competitive bids are safer, if not well structured these competitive
bids can become very expensive, with no difference from direct negotiations in terms of tariffs.
If the example of a company called Globeleq, which is developing several companies in
Mozambique is taken, it can be seen that they have abilities to optimise tariffs, by establishing
partnerships that bring securities and added value to their projects, as in the case of a gas power
plant of 400 MW in Temane, Southern Region of Mozambique (Globeleq, 2021).
The National Power Utility Company of Mozambique, EDM, have major challenges to fulfil
the strategic objectives for assure universal access to electricity by 2030, due to the lack of a
proper legal and regulatory framework, the country risk and the overall business environment
of the country, and as many African Utilities, EDM is struggling due to signature of PPA’s that
were not really bankable, and from now one, the company have to look for ways to arrange
competitive processes.
The case of Temane for example, although it has been done in a form of direct negotiation, the
project managed to get good incentives, as well as developed internal competitive procurement
in order to assure that the power plant equipment’s are supplied with the best price possible,
thus driving the tariffs down.

32. 26
The key success factors will be to assess the needs of the sector, and give incentives for the
preparation of competitive bids for the development of power projects, especially renewable
energy projects, due to its specificities.
Other important aspect, is that all the organizations of the power sector shall seat together and
try to develop legal, regulatory, and financial instruments for power projects, specifically for
renewable energy projects. It is said that a power sector of any country can only develop with
a robust electric public utility, therefore, it is really crucial that MIREME and ARENE, with
the support of EDM and other stakeholders of the power sector start taking serious actions in
order to avoid bankruptcy, as EDM is the single buyer, in other words, is the only entity in the
country that buys power directly from the IPP’s (EDM, 2019).
One recommendation for future research works, as the bidding processes of PROLER are
ongoing, would be to see the output of the tender results, and deeply analyse the strengths and
weaknesses of the overall process, in order to avoid the same kind of mistakes in the future.
However, it is also important to consider the evolution of the market structure, as the
circumstances of each power sector varies from time to time.
The last aspect to take into consideration when it come to the evolution of the power market is
the technologic evolution, specifically in the renewable energy arena, which is very fast
compared with other sources. For example, the current Master Plan for the Power Sector
Development didn’t took into account this fact, and there are currently many more renewable
energy projects than expected. However, the evolution of the technology, as well as various
factors that contribute to the falling prices of renewable energy projects, so it can be expected
that in the near future this technology shows up with competitive prices, allowing the power
utilities to sign bankable PPA’s (IRENA & ADFD, 2020).

33. 27
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36. A
APPENDICES
APPENDIX 1 – RESPONSIBILITIES OF THE KEY STAKEHOLDERS OF POWER
MARKETS

37. B

38. C
APPENDIX 2 – EDM’S ORGANIZATIONAL STRUCTURE

39. D
APPENDIX 3 – EXISTING GENERATION PROJECTS

40. E
APPENDIX 4 – PLANNED RENEWABLE ENERGY DEVELOPMENT