What is the problem or issue that you are trying to solve?
The island state of Mauritius – for the purposes of this exercise, I have assumed that Mauritius is an IDA-only country – does not produce enough electricity to satisfy its needs, which results in frequent blackouts. Investments are needed to boost electricity production. At the same time, it is acknowledged that Mauritius “sorely needs to diversify energy sources to avoid excessive dependence on coal. According to the present outlook, the country will be dependent on coal to produce electricity for the next 50 years.” (Source: Blackouts bye-bye: Mauritius’ CT Power project to start in 2016, in Africa Money, web article). The other source of power is imported heavy oil and obviously, it too is not particularly environmentally friendly.
At the same time, the country must remain mindful of finding outputs for its sugar production since this industry is a large contributor to the country’s overall economy. Indeed, sugarcane is grown on about 90% of the cultivated land area and accounts for 15% of exports (source: https://www.cia.gov/library/publications/the-world-factbook/geos/mp.html). Yet, under WTO rules, preferential subsidies to sugar exports to Europe were phased out starting in or around 2007. The government and local industry had no choice but to reorganize this sector by finding other ways to capitalize on this important resource. The adaptation strategy called for optimizing sugar production (resulting in the closure of some of the country’s sugar factories) and pushing for the use of bagasse for energy generation (source: Integrated Safeguards Data Sheet Concept Stage available at http://documents.worldbank.org/curated/en/519071468051286827/Mauritius-Compagnie-Savannah-Thermique-Bagasse-Fuelled-Cogeneration-Project).
One solution that addresses both the energy and the economic issues is to use sugar cane or by-products from its exploitation to generate or co-generate electricity. In fact, “bagasse”, the fibrous matter that remains after sugarcane stalks are crushed to extract their juice, can be used to generate electricity. Dry bagasse is burnt to produce steam, which is in turn used to rotate turbines to produce power. In addition, bagasse can be used as a biofuel (source: Wikipedia, under the rubric “bagasse”). At the same time, one must be mindful of the fact that during off-crop periods, when no bagasse is available, overall electricity production is reduced. Therefore, an alternative source of energy must always be available lest the country is to continue to experience power black-outs or accept lower output from its sugar factories. However, the government and industry have agreed that the output of the remaining sugar factories will need to be increased significantly if the industry is to remain on track with its export targets.
What are the reasons that the government, official aid provider or private sector would want to participate?
As in many cases, the reasons are two-fold: Maintaining or increasing the country’s economic output, whilst at the same time protecting the environment though the reduction of carbon emissions. An additional reason is to reduce the island’s dependency on imported oil, which is not only a pollutant, but an expensive one at that, which is an objective actively pursued by the Minister of Energy since at least 2012 (see http://www.lemauricien.com/article/%C3%A9nergie-r%C3%A9duire-notre-d%C3%A9pendance-au-%E2%80%9Cfossil-fuel%E2%80%9D-d%C3%A9clar%C3%A9-rashid-beebeejaun). Both reasons are worthwhile for any, even mildly, benevolent and responsible government and private sector actors paying attention to the Sustainable Development Goals. Because of the limit on available bagasse, there is an opportunity to both introduce an alternate, clean source of power, such as a wind farm, and at the same time increase the output of the remaining sugar refineries.
What are the main obstacles currently standing in the way of unlocking financial opportunities? How would your solution overcome them?
The main obstacles are as follows:
1) The local commercial banks do not have the ability to finance such a large project alone.
Solution: Blended finance with the backing of the African Development Bank (both of which have previously financed projects in Mauritius) or the World Bank. The latter could look to its Risk Mitigation Facility to de-risk the deal, for example by offering breach of contract coverage in relation to the off-taking agreement mentioned below if the Mauritius government is not in a position to provide a sovereign guarantee to the investor or if the investor will not take it (see (http://documents.worldbank.org/curated/en/251611468198009717/pdf/106374-BR-Box396267B-OUO-9-IDA-SecM2016-0120.pdf). Furthermore, as part of the project is to transform one more coal-based generation station into a bagasse-coal co-generation station, there will be a resulting displacement of fossil fuels. For the right investor, the resulting substantial greenhouse gas emission reductions could be monetized through an Emissions Reduction Purchase Agreement (ERPA), with the WB’s carbon finance unit assisting in finding a buyer for the carbon credits.
2) A private investor will want to maximize its investment in the new sugar factory by securing a steady flow of revenues for a period of time. As such, the prospect of having downtime because of the limited availability of bagasse at certain times of the year could be a deal-breaker.
Solution: A private-public partnership to build a wind farm that will both provide electricity to the new sugar plant and will connect to the national grid so that excess electricity production benefits at least part of the population. The private party would build and operate the wind farm with a guaranteed feed-in tariff, as well as an off-take agreement, de-risked as set out above, for a minimum period of seven years so as to guarantee a minimum return on investment.