Ppp cook islands

How PPPs can deliver improved access to renewable, reliable and affordable electricity in the Cook Islands What is the infrastructure problem that the PPP is trying to solve?

The Cook Islands, in similarity with the majority of the Pacific Island Countries, rely heavily on imported non-renewable fuels such as petrol and diesel to meet their energy needs. In fact, recent data show that 28% of the country’s GDP is represented by fossil fuelsi. This in combination with i) complex fuel delivery logistics; ii) costly supply chains; and iii) limited capacity to store fuel; make the country one of the most vulnerable economies to price volatility in the regionii.

Moreover, the cost of supplying electricity is high. On average, households paid US$ 44 cents per kWh in 2014. This corresponds to two and a half times the average tariff rate in the neighbouring country Fiji during the same time periodiii. High electricity tariffs are a major obstacle for long-term growth and particularly challenging for poor households who are more hard-hit by price increases.

Accordingly, the country has strong incentives to transfer from conventional to new types of technologies with the potential to deliver clean, reliable and affordable electricity, whilst also minimising its carbon footprint.

To date, renewable energy contribution remains low in the Cook Islands. Despite the ambitious energy target of 100% renewable

energy generation by 2020iv, only 1% of total output came from renewables in 2014v. On the other side, access levels to electricity are high across the islands. Nearly all households in the Cook Islands are connected to grid electricity. In addition, the 15 islands have an abundance of renewable resources. Solar and wind power are currently the two most cost effective technologies in the region. These two aspects combined – high access to electricity and natural resources, are of great importance as it allows the government to emphasis on grid-based renewable investments that may help replace diesel generators.

What services are to be provided and are these services affordable?

Provision of electricity and services related to electricity has traditionally been carried out by the public sector in the Cook Islands.

Specific tasks such as maintenance have been contracted to the private sector but overall management services have remained within the public entity. When looking at renewable energy technologies, new infrastructure is needed to take advantage of site specific resources. For example, when looking at solar energy, solar panels must be produced, installed, operated and maintained to provide sufficient energy output. The same applies to wind turbines that need to be designed and installed to cope with seasonal wind speed variations, high humidity, salty air, and proneness to cyclones. The private sector is generally better at providing this type of services and have, in many cases, previous experience of delivering projects in similar environments.

However, small communities are normally not capable to afford the upfront cost for this type of infrastructure investment even though they would benefit from lower tariff rates and clean energy in the long run. Development

agencies have in many cases stepped in, which has crowded out pure private sector investments. Moreover, governments have in many cases set tariffs levels below the cost of supply, consequently undermining cash flows and so competition from the private sector. A PPP would allow the private sector construct, operate and maintain solar or wind farm, while in exchange of energy supply and quality guarantees.

What are the reasons that the private sector would want to participate?

The private sector incentives for getting involved in renewable energy in the region go beyond the socio-economic development benefits. To raise the attractiveness for private stakeholders to engage, viable business opportunities must underpin any type of collaboration or partnership between public and private stakeholders and development agencies. In addition, a range of factors needs to be considered for each opportunity. Examples include: resource availability; how appropriate the technology is for the site; initial and ongoing costs and maintenance; willingness to pay for the service; financial guarantees, etc.

How should risk be allocated to best provide the service which is subject to the PPP project?

First of all, under a Power Purchase Agreement (PPA), which is a common contract under a PPP in the energy sector, allows electricity to be sold under a long-term contract where quantities and power rates are set in advance. This protects the investor from high upfront costs and allows them to determine the commercial viability of the project based on a long, rather than short term perspective. Moreover, a PPA determines responsibilities and obligations for each actor. From a private sector point of

perspective, this means that the project is underpinned by a financial guarantee in the case of cost and energy demand changes.

Second, given that the project feasibility and economic viability analysis is the same for a PPP and a public investment projectvi, a request for bids from a public entity could improve the confidence in the resource capacity for the particular location. Wind data in the Cook Islands are for example very scares and it would take considerate time and investment for the private sector to collect and analyse necessary data. Availability and access to these feasibility studies are therefore an incentive for the private sector to get engage.

Third, a PPP in the renewable energy sector has the potential to protect private sector companies from competition from cheaper or subsidised options such as conventional power plants or more proven renewable technologies. This is particularly the case in the Cook Islands where wind power has been neglected in favour of solar energy, which is the source with the most reliable data. i

Dornan, M. (2014), Access to Electricity in Small Island Developing States of the Pacific: Issues and Challenges, Renewable and Sustainable Energy Reviews, 31, pp. 726735. ii ADB (Asian Development Bank) (2009), Taking Control of Oil: Managing Dependence on Petroleum Fuels in the Pacific iii

Dornan, M. (2014), Access to Electricity IRENA (International Renewable Energy Agency) (2013), Pacific lighthouse – Renewable Energy Roadmapping for Island. iv

v

IRENA (International Renewable Energy Agency) (2012), IRENA Policy Brief: Policy Challenges for Renewable Energy Deployment in Pacific Island Countries and Territories.I United Arab Emirates, pp. 24. vi

Worlkd Bank (2015), Public-Private Partnerships Reference Guide Version 2.0