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Climate & Energy

Guinea’s Solar Promise

Commentary13th May 2019

Chapter 1

Africas Energy Evolution

Across Africa, more than 600 million people lack access to electricity. As part of efforts to change this, many nations are making rapid transitions, which often include a greater use of renewables. Solar is at the forefront of this: many of the sunniest nations in the world are on the continent, and solar-power generation in West Africa as a share of all renewables has increased rapidly over the past decade (see figure 1).

Figure 1

Solar Power as a Percentage of Total Renewables in West Africa, 2007–2017

guineas-solar-promise - Solar Power as a Percentage of Total Renewables in West Africa, 2007–2017

Guinea is one of the countries undergoing a deep and quick energy evolution. In 2014 Électricité de Guinée (EDG), the national utility, could provide power to only a few districts of the capital, Conakry, and for just six hours a day. By 2022 the country is expected to become a net energy exporter thanks to its abundant hydro generation and four high-voltage interconnections currently under construction. These lines will not only put Guinea at the heart of the West African Power Pool, the regional market, but also accelerate the country’s domestic connection rate, providing reliable electricity for more homes and businesses.

Guinea is also a country blessed with enough sunshine to be a suitable place to build grid-connected solar power plants, and many developers have offered to be the first to do so. Unfortunately, the government was not ready to launch a structured competitive process to choose an independent power producer, so for many years the country’s ministers signed MoUs with almost anyone who was offering to build a power plant. This went on until it reached a slightly farcical situation: more than 2,000 megawatts (MW) of solar power were promised but no plants were under construction, in a country with a peak demand of only 330 MW in 2018.

But as a result of its government’s openness and willingness to reform, Guinea has secured its first bankable solar-power investment. This is a major energy milestone that is likely to lead to the construction of the country’s first solar-power plant. This achievement offers important lessons for energy sectors across West Africa.

Chapter 2

The Khoumagueli Project

About 500 kilometres northeast of Conakry, a planned power plant near the city of Linsan became emblematic of the situation. The 40 MW Khoumagueli power plant was initially developed by a small French company with no previous experience in West Africa. Discussions between the firm and the Guinean government began in 2012 with the aim of building the plant with what is known as a build-operate-transfer approach. Under this scheme, the private investor takes care of everything from financing to construction to operations. In exchange, the government commits to purchase the entire generation.

The first offer made by the company was about 25 US cents per kilowatt hour (kWh) for 76 gigawatt hours (GWh) of production a year. However, the negotiations stalled, and the government kept postponing a final decision, mainly due to differences of opinion between ministers and the utility and the diverging interests of the public institutions involved. Then the Ebola crisis struck in 2014, putting the project on standby.

A couple of years later, after the government had dealt with the tragedy of Ebola, two factors had changed the negotiation landscape. First, the Ministry of Energy had created a Public-Private Partnership (PPP) Unit. Second, a series of tenders organised by the International Finance Corporation (IFC) elsewhere in sub-Saharan Africa had shown that competition, planning and appropriate risk management could decrease the cost of solar power dramatically. Together, these developments paved the way for significant progress on the Khoumagueli plant.

Chapter 3

A One-Stop Shop for Investors

The establishment of the PPP Unit in 2016 was part of an ambition to speed up the engagement of private partners with government agencies. The Institute has supported the unit since the beginning, on both capacity-building and delivery. On the former, our embedded adviser organised training in financial analysis for energy projects, to make sure that the members of the unit could read and challenge the business plans submitted by developers. On the more immediate delivery needs, the Institute’s adviser was responsible for the financial aspects of the unit’s negotiations, leading the discussions and coaching the unit’s representative at the same time.

In the Khoumagueli project, an important factor was the government’s requirement for the private partner to pay for an international law firm to accompany the PPP Unit during the negotiations. This firm was chosen by the government, and in exchange, the private investor could recover the cost of this assistance in the project’s business plan. As the law firm worked from Europe, our Institute again assisted with communication, helping the PPP Unit translate economic and legal terminology into clear language that political decision-makers would understand.

Chapter 4

Why Competition Benefits Countries

At the same time, competitive procurement is hugely beneficial when it comes to choosing a power producer, especially in the solar sector, which uses mature and standardised technology. The political economy, driven by electoral deadlines and outside interests, often pushes governments to engage in bilateral negotiations with developers who promise a quick solution. But this is a false economy compared with the clear benefits of a competitive approach:

  • First, competition reduces of the cost of production, leading to savings for governments that typically have very limited budgets. When several companies are invited to bid on the cost per kWh that the national utility will have to pay, competition naturally minimises the price offered.

  • Second, competition reduces the perceived risk for the private sector, because procurement processes are typically more transparent than bilateral negotiations, and governments are often supported by international institutions. This again reduces the production cost, as risk is a cost factor.

  • Third, competition avoids the duplication of development costs, because only the most suitable sites are pre-selected and then tendered out. This is again reflected in a lower final cost of production.

  • Finally, because tenders have to be organised by governments and their development partners, the public authority remains in control of the planning. By contrast, with bilateral negotiations governments often simply react to inputs and interests from the private sector, and not necessarily in line with their own strategic plans.

For all these reasons, our Institute supports competition and globalisation in the energy sector. A competitive approach brings transparency, increases government accountability and results in more efficient use of public finances. The benefits are then felt by the wider population, rather than elites who can take advantage of the opacity of bilateral transactions.

In Guinea, when our Institute started to assist the Ministry of Energy, the negotiations on Khoumagueli had already been ongoing for four years, so there was no way to interrupt the talks and launch a competitive tender instead. However, the benefits of competition can spread indirectly too. Scaling Solar is a programme that brings together a range of World Bank Group services under a single umbrella to create viable markets for solar power in sub-Saharan Africa. The success of Scaling Solar reached the ears of Guinea’s top authorities, and our Institute supported the message that if other African countries could obtain a price of solar in the range of 5–8 US cents per kWh, then Guinea could too.

So, our Institute backed the IFC in its engagement with the Government of Guinea, alongside contributing to the negotiations on Khoumagueli. We could not secure the launch of Scaling Solar in Guinea from the beginning, but we did convince the country’s authorities that the cost of power in Guinea should not diverge too much from the benchmark now fixed by the IFC tenders.

Finally, to persuade the government to negotiate more aggressively, our Institute presented the results of its study on potential trade in the West Africa Power Pool. This study simulated and compared the cost of production in 14 West African countries to understand the export or import potential of each. This was a reality check for the Government of Guinea, as it could see where the country would be positioned vis-à-vis its neighbours. The government understood that if Guinea wanted to be competitive in the future regional market, it had to commit now to reduce the cost of its electricity production.

Chapter 5

A Successful Outcome

The negotiations took some time to conclude for two main reasons. First, the parties needed to find an adequate guarantee mechanism, as Guinea could not issue sovereign guarantees to keep its public debt under control. Second, the country’s political economy intervened: a government reshuffle took place just as the negotiation process was about to end.

Nevertheless, the project advanced and the tariff was reduced, first to 12.7 US cents per kWh, and eventually, when the agreement was signed in February 2019, to 8 US cents per kWh. Compared with the first estimated tariff of 25 US cents, this new price saved the state about $13 million a year, or more than $320 million over the 25 years of the contract.

Chapter 6

Lessons Learned

The negotiation process our Institute supported in Guinea offers the following lessons for the wider West African energy community:

  • It is important to take the time to negotiate a contract well. The government should have a clear negotiation strategy and should not give its counterparts the impression that a contract will be signed anyway at the end of the process.

  • Often political decision-makers remain stuck on the simple concept of a tariff, but many other factors affect the profitability and feasibility of a solar project. It is important to help decision-makers understand these factors and not to rush into a negotiation on a single figure.

  • It is not true that bilateral negotiations are always quicker than competitive tenders. The talks on the Khoumagueli project took seven years to reach a conclusion.

  • In the case of bilateral negotiations, it is very useful to have an international law firm supporting the government. This firm should be chosen by the government but paid for by the developer.

  • The collaboration with the IFC was of paramount importance to bring the tariff down: the simple fact that the corporation proposed introducing Scaling Solar in Guinea gave a huge push to reducing the price. This was a way to simulate the effects of competition, and the IFC’s presence and lobbying were extremely useful.

  • The forthcoming regional market is having a positive impact, as the region will converge towards a common wholesale price. The Government of Guinea has started to understand this and therefore tried to keep the negotiated price under the market threshold.

  • Finally, development partners must carefully consider the national political economy, including the relationships between decision-makers, because it always plays a key role in how and when decisions are made.

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