Why Songas is keen on expansion
PROFILE. Songas has been a key provider of electricity to the Tanzanian grid since July 2004. The company plans to ensure that it generates 25 per cent of electricity in Tanzania by 2020, up from 21 per cent currently. BusinessWeek’s Mnaku Mbani interviewed Songas managing director Nigel Whittaker on the firm’s plans.
QUESTION: How did Songas find Tanzania good for business?
ANSWER. As you are aware, in late 1990s, a very few Tanzanians have had access to electricity. So, a competitive tender was floated, seeking independent producers to supply power to the Tanzania Electric Supply Company [Tanesco], of which the company won the tender. The intention of the project was to use the existing Tanesco units. I would say it was a second-hand unit and was not very efficient or effective and Tanesco thought that they were not of good value. So there were plans to convert the unit to run by gas, so that is where Songas started.
So, after winning the tender, a gas processing plant was set up in Songosongo Island, then the underwater pipeline from the island to the mainland at Somanga; and another pipeline from Somanga all the way to Dar es Salaam was constructed. There were three units: the gas-processing plant, under-water pipeline and the mainland pipeline to Dar es Salaam. So, Songas reached a financial clause in 2001.
Financial clause means the contract was signed, construction was executed and instituted and the plant started commercial operations following completion in 2004. We had a 20-year PPA [power purchase agreement] with Tanesco. All the electricity we produce, we sell it to Tanesco and Tanesco takes all the power and sells it to consumers and the contract will expire in 2024. Songas started by producing 178 megawatt of electricity to Tanesco. The total cost of the project was $320 million. So, Songas is not a gas company.
In fact, it is an electricity company using gas from the Songosongo Island gasfield, off the coast of southern Tanzania. The investment in the operation of the Songosongo Island upstream and midstream gas infrastructure to enable gas shippers [PanAfrican Energy and TPDC -- Tanzania Petroleum Development Corporation] to sell gas to their customers in Dar es Salaam and supply gas to the Ubungo Power Plant.
Who are Songas shareholders?
Songas is a Tanzanian company established in Tanzania and it has Tanzanian shareholders. The first shareholder is Globelec, which owns the majority 54.1 per cent. Globelec is the development fund which is owned by Commonwealth Fund for Development Corporation of the British government with 70 per cent and the Norwegian government development institution (Norfund) with 30 per cent share. The mission of Globelec is to develop power projects in Africa.
The second shareholder is Tanesco, which owns 9.56 per cent of the stake, TPDC owns 28.69 per cent and Tanzania Finance Development Limited [TDFL] which owns 7.69 per cent. Thirty-two per cent of TFDL shares are owned by the government and the remaining 68 per cent by BancABC.
So, in each $100 we get from business, 60 per cent is taken by the Tanzania government.
How has Songas been operating?
Songas is a reliable supplier of electricity. Our guarantee is to meet target of 91.3 per cent, but last year we managed to reach 96 per cent.
We also produce very cheap electricity and the cost of our electricity we sell to Tanesco is being $6 cents per unit because our earlier intention was to sell electricity at a very low cost as possible. This includes $2 cents for electricity and $4 cents for capacity charges.
This is against other independent power producers which were charging between $40 cents and $60 cents per unit. Tanesco sells it to customers at $12 cents. This is the cheapest power tariff in East African Community. These tariffs depend on the costs and costs of gas we purchase from TPDC and PanAfrican Energy Limited.
We produce 21 per cent of all electricity generated in Tanzania and we have been using only 13 per cent of installed capacity.
We are heading towards the middle-income economic status, what will be the role of Songas towards this journey?
Songas endeavours to make long-lasting contribution to the socioeconomic development of Tanzania.
We would like to support the drive towards industrialisation. We recognise that we have an obligation of providing reliable electricity at a low cost.
We are already a local reliable and we are willing to expand our operations.
The next benefits we are creating now, and it is probably contributing towards middle income is to create jobs. We have 72 full-time employees whom are locals and experts are just three.
We have also an internship programme, where we receive students from various universities, ranging from different disciplines including finance, business, engineering of which we started six years ago and nearly 100 interns have benefited from field attachment placement.
We are also implementing the corporate social responsibility [CSR] programmes, targeting health, education and environment.
Through the CSR, the company vision on socioeconomic development is to make an impactful contribution to develop sustainable communities in the area of our operations.
One education, we are working with various partners to improve education deliveries through training teachers, sponsoring young scientists, offering scholarships for students along the gas pipeline.
The company considers education fundamental for the sustainable development and growth of the community.
To ensure the maximisation of the impact to communities, the company implements projects, which are aimed at improving access to quality education for children between three and 18 years of age.
The company also supports health services aimed at improving access to quality basic health services. It works with the government and reputable and non-governmental organisations in training and empowerment projects in rural areas along the way leave.
Each year we provide $360,000 for CSR programmes.
In each $100 we generate, 60 per cent of it goes to the government in terms of taxes and dividends.
The government is changing its energy policy including venturing into cheaper hydroelectric power as well as getting out of independent power producers. Does Songas feel threatened?
As you are aware Songas is one of the best models of public-private partnerships. So I do not think that the changing of energy policy is a threat to us.
We know the government is implementing the largest MW2,100 hydropower project, but experience shows that larger power projects tend to take longer and when they are completed the demand has also risen.
Remember the Akosombo Dam in Ghana, when it was being constructed in the 1960s its capacity of 600MW was four times the country demand but after the time it was completed, the demand for electricity had risen.
As the country embarks on industrialisation, more power will be needed.
Other mega projects like the standard-gauge railway will increase consumption. So more sources must be identified and developed to cater for the anticipated increasing demand.
The sustainability of hydropower is also something you need to plan well by considering whether changes. At any time when drought will persist, alternative sources will be required to supplement power generation.
Songas is interested in developing other energy projects in Tanzania. Under Globelec it has solar and wind projects in other countries it will be glad to have the same in the country too to complement the availability of energy, which will also be affordable.
You are planning to increase capacity and extension of the project. What are you looking to achieve?
Songas, through the proposed expansion and extension, is ready to support the government drive to industrialisation. Songas is a world-class example of public-private partnership and is immensely beneficial to Tanzania.
As we go forward, Songas will replace the smaller, old units 1 and 2, with larger units, concluding an expansion of capacity from the previous committed 178.114 MW to approximately 245 MW, depending on the selected turbine manufacturer technology.
If the Songas expansion/extension project negotiations are concluded by June, this year, the project construction will be completed by September 2020.
The existing contracts could be amended to accommodate the upgraded deal structure. Subject to the costs of gas, Songas proposes that the tariff per kWh remains the same.
The PPA with Tanesco and other key agreements, as necessary, will be extended from 2024 to 2034.
The PPA will be converted to build-operate-own to a build-own-operate and transfer model. Tanzania will immediately own 100 per cent of the plant by 2034 following normal transfer fees of $1.
