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Wednesday, February 1, 2012

Bujagali Hydropower project to earn Carbon Credit Income


By Esther Nakkazi

Uganda’s Bujagali Hydropower Project has been approved as a Clean Development Mechanism (CDM) and sustainable development project by the Netherlands, the designated Authority for this activity.

As a CDM it could earn about $17 million per year from selling certified emission reduction (CER) credits to industrialized countries, as part of their emission reduction targets, under the Kyoto Protocol of the UN framework Convention for climate change.

“It is like a thank you on a project that will save the environment not only on site but on electricity usage as pressure on the environment will be reduced. It will also earn us some revenue,” said Mr. Bukenya Matovu the head of communications in the Ministry of Energy and Mineral Development.

Under the deal, the Uganda Government will receive 60 percent of the carbon credit income and 40 percent will go to Bujagali Energy Limited (BEL) the project sponsor which will also control the revenue.

The 250-megawatt project is the largest private investment ever in East Africa, and now becomes the only capital-intensive project in Africa to be financed through carbon credit income, a key decision that equity financiers of the project considered before financing the project.

Investment experts say it is now common international practice that hydropower projects apply for CDM validation as it presents investors especially in poor investment climates like Uganda with additional financial incentive and security through the carbon credit revenue stream.

In the Bujagali case it was a key factor in the decision to invest made by Sithe Global, the main shareholder in BEL and equity investor in the project.

BEL is a project- specific company owned by Industrial Promotion Services
Kenya Limited (IPS Kenya) and SG Bujagali Holdings Ltd, an affiliate of Sithe Global, an American power company majority owned by private equity giant, The Blackstone Group based in the USA.

According to the ERM Group, the world’s largest provider of environment, health and safety certification, Bujagali qualifies to be a CDM because of the technology applied- hydropower replacing fossil fuel electricity generation.

The technology will result in reductions of greenhouse gas emissions in Uganda particularly targeting CO2 emissions that in the absence of the project activity would have been generated by diesel and heavy fuel oil generators. It will also avoid the need for future oil fired generation, says the ERM Group validation report released this month.

The project will also not create emissions as it is a renewable energy (hydropower) project, and has no fossil-fuelled power to supply to the grid. If at all, from the two emergency stand-by diesel generators on site, the annual diesel would be less than 1 percent of emissions reduction, a reasonable amount, according to ERM certification and verification services (ERM CVS).

Bujagali hydropower project has a total installed capacity of 250 MW and is estimated to be fully operational by June 2012 to generate 1,305 GWh (net) per year to the electricity grid.

According to ERM CVS, the Bujagali CER revenue presents to the Uganda government a secure stream of revenue that will provide a buffer from the foreign exchange rate risk and from the default on its commitments to purchase electricity from BEL.

The carbon credit revenue for Bujagali will be in foreign currencies either US $ or Euros which will help the government offset the foreign currency exchange risks associated with meeting the electricity payments that it faces.

The Power Purchase Agreement spells out that Uganda Electricity Transmission Company (UETCL), purchases from BEL all power produced by the Bujagali Project, under a sovereign guarantee by the government of Uganda.

But, Ugandan consumers pay for electricity in Uganda shillings while BEL to be paid $116 million per year after the project starts running- is paid in US Dollars, which creates an exchange rate risk for the government as the Uganda shilling fluctuates significantly against the US dollar. For instance the shilling declined in value against the US $ by about 50 percent since 2000.

CDM is the main source of income for the UNFCCC Adaptation Fund. The project was validated on its project design documents, site assessments and resolution of outstanding issues.

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