Posts by tmourgues

This article summarizes the conclusions of a scouting mission to Bucharest in July 2023, where I met with key industry stakeholders to understand Romania's potential as a renewable energy investment destination.

MARKET OVERVIEW

Market dynamics

The first wave of renewable energy projects in Romania (2007-2013) was fuelled by generous government support through the green certificates scheme. However, the market entered a period of hibernation after the prohibition of power purchase agreements (PPAs) in 2012. This was due to public uproar over the huge profits made by traders who had concluded advantageous long-term contracts with Hidroelectrica. These traders simply pocketed the difference between the PPA and market prices. As a result of these contracts, Hidroelectrica was forced to file for bankruptcy in 2012.

The introduction of the Government Emergency Ordinance GEO143/2021 on 31 December 2021 under the pressure of EU Commission was quite successful in that it sparked a new wave of projects. Main features of the law included:

•  changes to the rules on granting licenses and permits
• repeal of restrictions on PPAs
• repeal of legislative provisions that deal with the regulated electricity market
• other amendments facilitating investment in the sector and clarifying certain rules

Project pipeline and prices

According to some estimates, there are currently 9 GW of renewable energy projects at the ready-to-build stage in Romania, and 30 GW more are registered. However, it is likely that only a fraction of these projects will be implemented, as some insiders estimate that the success rate is as low as 15%.

Prices for renewable energy projects have fallen since the 2022 speculative frenzy. Solar PV projects are often traded for under 100,000 EUR/MW, while wind projects remain higher at 160-180,000 EUR/MW. The prices of course depend on many project-specific factors, such as project economics, stage of development, and developer experience.

Some market players expect prices to recover in 2024, driven by the phasing out of grid connection authorizations (ATRs) that are only valid for 18 months under the new law.

Technology trends

In terms of technology, most current renewable energy projects in Romania are solar PV, in contrast to the first wave, which was dominated by wind park projects.

A growing share of the energy mix but still below expectations

Despite the current "boom" in renewable energy projects, it is unlikely that the EU's 2030 target of a 34% renewable energy share will be met on time. Other considerations include the potential development of nuclear energy (2,700 MW split under 2 plants as well as small modular reactors with a total capacity of 500 MW) and the need to build combined cycle gas turbine (CCGT) plants (mostly gas-fired) to balance the grid in light of the deployment of intermittent generation sources such as solar and wind (storage is unlikely to solve this issue on its own). Accelerated deployment of green energy facilities should remain a top priority for policymakers if Romania is to achieve carbon neutrality by 2050.

Financing

Banks are reasonably active in supporting the renewable energy sector in Romania. Some banks are willing to finance projects on a merchant finance basis (without power purchase agreements), although some may soon change their policy on this. As international players enter the market, their parent companies are often able to provide guarantees to special purpose vehicles (SPVs). Loan maturities typically extend up to 10 years.

International investors are quite active in Romania, with the majority coming from Western and Central Europe.

Public support

Romania is the largest recipient of the EU Modernization Fund, with a total budget of 1.4 billion euros to help it reach its 2030 targets. The EU-funded National Recovery and Resilience Plan also includes a significant share of investment in renewable energy.

So far, projects that have received support have been funded up to 80% of their capital expenditure (capex), which seems excessive. In practice, the government has tried to channel these funds to public companies, which has distorted competition with the private sector. It is expected that a more competition-friendly approach will be adopted in the near future.

LEGAL AND REGULATORY

PPAs

The 2021 Ordinance lifted the ban on power purchase agreements (PPAs), but very few PPAs have been concluded so far (probably not more than two or three). Market participants are hesitant to commit to long-term contracts in a context of high volatility (high MW prices in 2022, followed by a gradual return to more usual levels).

Land issues

The 2021 Ordinance attempted to simplify the process of obtaining land for solar and wind projects, but this has been turned into a blocking factor by the interpretation of the Ministry of Agriculture. The Ordinace states that land authorized for solar or wind projects must be classified as Intramuros land (as opposed to Extramuros) under the General Urbanism Plan or Zoning Urbanism plan. Romanian law classifies agricultural land in five categories, with category one being the best land. The 2021 Ordinance stipulated that land plots from categories 3, 4, and 5 up to 50 hectares could be reclassified as Intramuros land by the Ministry of Agriculture. However, the Ministry has so far interpreted this to mean that plots above 50 hectares cannot be reclassified. This restrictive interpretation, which effectively blocks projects of more than about 40 MW, was pushed by lobbies who fear that the best land will be taken over by industrialists and lead to a food crisis. However, these fears are greatly exaggerated, as low-category land is not highly productive and there is more than enough land available to meet the country's agricultural needs. In practice, developers have circumvented this limitation by splitting their projects into units smaller than 50 hectares, but the legality of this practice has been questioned by some lawyers and creates legal uncertainty.

The problems with land use for renewable energy projects should be resolved with the entry into force of the 2023/166 law in June, which clarifies the original spirit of the facilitating steps described in the 2021 Ordinance.

Additional land issues relate to the need to trace the ownership of land dating back to the end of the communist regime, as some ownership conflicts have not yet been resolved.

NEW SUPPORT SCHEMES

Contracts for Difference

The Government is working on setting up the regulatory framework for Contracts for Difference (CfDs). These are hedging contracts that last for 6-10 years, in which the producer agrees to a strike price with OPCOM (with state guarantee). If the market price is higher than the strike price, the producer must repay the difference to the counterparty. Alternatively when the market price is lower than the strike price, the producer receives a premium equal to the difference.

EU funds

Romania is a major recipient of EU funds, including the Modernization fund and the Recovery and Resilience facility. These funds will support investment in renewable energy.

REMAINING BOTTLENECKS

The renewable energy market in Romania is becoming more attractive for investment, but there are still some bottlenecks.

Developers lack of experience

One of the main challenges is the lack of qualified developers. Many players have entered the market without the necessary experience, such as realtors who are able to secure land but lack financial resources or technical capacity. This has led investors to be more careful when vetting projects. However, qualified developers can build mutually beneficial long-term relationships with investors.

Grid capacity

Another bottleneck is the limited grid capacity. The government acknowledges that the grid needs to be upgraded, but investment in this area is constrained by a lack of fiscal space. The situation varies by region, with the eastern part of the country being more heavily loaded than the western and southeastern parts.

Grid capacity is one of the key factors that determines whether the transmission operator will grant grid connection authorizations (ATRs). In the past, ATRs have been granted on a first-come, first-served basis, without taking into account the developers' capacity or the technical quality of the projects. This has led to an enormous pipeline of projects, most of which are unlikely to be implemented. The 2021 Ordinance has introduced an 18-month validity period for ATRs. As older ATRs expire, new serious projects should be able to obtain grid capacity more easily, which will help to address the grid capacity bottleneck.

FUTURE DEVELOPMENTS

There are three promising areas for future development in the Romanian renewable energy market: storage, green hydrogen, and offshore wind farms.

Storage

Technical regulations for energy storage were published in January 2023. These regulations facilitate investment in the sector, as storage can be added to a project after an ATR has been obtained. Large battery factory projects are being considered and are seeking financing often with public support (at the end of last year, the government opened a call to award over EUR 100 million for BESS -Battery Energy Storage System- projects).

Green hydrogen

The government's hydrogen strategy has been recently published for public consultation. It includes ambitious plans to build electrolyzer facilities in Dobrogea. However, questions remain about grid capacity and transportation costs, as the industrial consumers are not located in this region. The precise use of green hydrogen also needs to be clarified. Transportation use seems implausible, but the gas industry could be interested, although favorable economics are not guaranteed.

Offshore wind farms

While several studies have been undertaken, the regulatory framework is not yet in place. A draft of the expected law has been submitted to public consultation in July 2023, and the law is expected to be passed by the end of this year or in 2024. Some observers note that the context of the Russian-Ukrainian conflict is not conducive to investments in offshore wind farms. For example, mines could potentially threaten the facilities. Nevertheless, major international players are closely following these developments due to the excellent wind conditions in the Black Sea. Furthermore, offshore projects could be linked to gas projects, driven by the favorable results of initial explorations. The first projects are expected within five years.

CONCLUSION

In spite of the question marks and limitations mentioned, Romania remains one of the most promising markets for renewable energy in the region. As the market become more mature, it is expected that competition will become stiffer and that investment terms become less favourable for rent-seeking investors, while long term players will gain the upper hand. However, opportunities for pioneering projects should remain available for the less risk averse investors in specific areas.  

The benefits for developing countries to prioritize Renewable energy sources are cleaner, more sustainable energy mix and a favourable impact on jobs creation and economic growth. A cleaner energy mix, as renewable energy sources produce fewer emissions than thermal energy sources, which helps to reduce air pollution and greenhouse gas emissions; improved sustainability as renewable energy sources are not limited by fossil fuel reserves, which means that they are not in danger to run out. In addition, the development and deployment of renewable energy technologies creates jobs in the manufacturing, installation, and operation of renewable energy systems. Finally, the development of renewable energy can boost economic growth by creating jobs, attracting investment, and reducing energy costs.

For these reasons many developing countries have developed ambitious targets:

• India has set a target of generating 500 gigawatts of renewable energy by 2030.
•  Brazil has set a target of generating 80% of its electricity from renewable energy sources by 2030.
• Kenya has set a target of generating 100% of its electricity from renewable energy sources by 2025.

In terms of programs, successful examples include:

• The Gujarat Solar Challenge in India: This program has helped to install over 2 million solar rooftop systems in Gujarat, India, providing financial incentives to homeowners and businesses to install solar panels.
• The Moroccan Solar Plan: This program aimed to install 2,000 megawatts of solar power by 2020 and succeeded in attracting large investment from both domestic and international sources.
• The Kenyan Off-Grid Solar Market: This market has grown rapidly in recent years, with over 1 million solar home systems installed, providing affordable and reliable solar power to rural households.
• The Brazilian Proinfa program: This program has helped to finance over 10,000 megawatts of renewable energy projects in Brazil, providing long-term loans at favorable interest rates.

This clearly shows that transition to renewable energy is not exclusively a developed countries endeavour. However, even if the political will is there, some developing countries experience difficulties in prioritizing renewable energy that may be due to :  

• High upfront costs (depending of the capital investment targets), in a context of a capital scarcity
• Lack of infrastructure: Developing countries often lack the infrastructure, such as transmission lines and distribution networks, to support renewable energy projects.
• Unstable political and regulatory environments: Developing countries often have unstable political and regulatory environments, which can make it difficult to develop and deploy renewable energy projects. Lack of clear and consistent regulations governing the development and deployment of renewable energy projects can make it difficult for investors to assess the risks and costs of renewable energy projects, and can discourage investment in this sector.
• Lack of access to finance, as banks and other financial institutions tend to limit the lending of capital to renewable energy projects, due to the perceived risks involved.
• Lack of skilled workers needed to install and maintain renewable energy projects. Renewable energy technologies are often new and complex, and developing countries may not have the educational institutions or training programs needed to produce the skilled workers required to install and maintain these technologies.
• Public opposition, particularly in rural areas where people may be concerned about the impact of these projects on their livelihoods or on the environment.

To overcome these challenges, Governments should work in the following directions:

• Developing clear and consistent regulations, providing  investors with certainty and predictability, and encouraging investment in this sector.
• Stabilizing the political and regulatory environment. This will make it easier for investors to assess the risks and costs of renewable energy projects, and will also encourage investment in this sector.
• Providing access to finance: Governments can work with banks and other financial institutions to develop more favorable lending terms for renewable energy projects and ease regulatory restrictions.
• Reducing the upfront costs of renewable energy projects, by providing subsidies, tax breaks, and other incentives for renewable energy projects.
• Building the capacity of skilled workers: Governments can invest in education and training programs to help produce the skilled workers needed to install and maintain renewable energy projects.

The development of renewable energy is not necessarily exclusive of investment in fossile fuel projects, especially gas, as developing countries may feel the need to take advantage of the natural resources that are available to them and that developed countries for their part have exploited for decades. However the benefits of the exploitation of fossile fuel ressources should be invested in a sustainable development model aligned with the efforts of the international community and that will offer a better life to the future generations. 

SEMINAIRE GESTION DE PROJET EXPORT

Paris-Gennevilliers, 17-21 avril 2023

PUBLIC

Chefs de département, managers et membres de Direction, mandants et membres de comité de pilotage, spécialistes au sein des projets, assistance de projet, chefs de projets.

OBJECTIFS

Cette formation est basée sur les référentiels ISO 21500 :2015, PMI et IPMA. Elle comprend des exemples pratiques de projet.
Elle permettra aux responsables et aux chefs de projets d’envisager la conduite des projets sous divers angles afin d’en assurer la maîtrise et la prise en compte de son environnement..

CONTENU

• Comprendre le contexte et l'environnement du projet, définir les objectifs et le mandat de projet

• Le cycle de vie du projet

• La définition des résultats à produire

• La gestion du changement

• La gestion des modifications

• Les tâches de conduite

• Les tâches de pilotage

• L'aspect humain de la gestion de projet.

MÉTHODE

Approche pédagogique basée sur la pratique appuyée par des explications théoriques. La priorité est donnée aux échanges et l’interactivité entre les membres du groupe par des tâches à réaliser en commun.

INTERVENANTS

Enseignant diplômé ou professionnel de la branche.

CONTACT ET RENSEIGNEMENT

Brochure et renseignements sur demande à :

Email : info@camdenadvisory.com

Tél :     + 39 339 163 84 52

The Green agenda for the Western Balkans adopted in Sofia in November 2020 targeted full decarbonisation by 2050. Behind this apparent potential bonanza for renewable energy investors, the real situation is much less rosy, as Governments have been slow to take the necessary steps. However, things are moving in the right direction, although at different speed throughout the region. In this article, we aim to provide an overview of the situation in 3 Western-Balkan countries and analyse the opportunities opened to investors over the next 5-10 years. 

Bulgaria

Overview

In 2020, installed renewable energy capacity amounted to 5 233 MW (40.3 % of the total), including hydro for 3 207 MW (24.7%), photovoltaic for 1 246 MW (9.6%), wind for 701 MW (5.4%) and biomass for 78 MW (0.6%), out of a total of 12 986 MW all sources included. In 2021, wind generated 1 434 190 MWh (3% of total generation) and photovoltaic 1 487 946 MWh (3.1%).

The Bulgarian Energy strategy 2020-2030 defines the main objectives of the country for the energy sector, in alignment with the integrated plan on energy and climate for 2021-2030 which envisages Renewable Energy to provide for 27% of the gross end consumption. Between 2020 and 2030, the net installed capacity of renewable energy sources is expected to increase by 2,645 MW, from which photovoltaic plants will contribute 2,174 MWp, wind capacities 249 MW and biomass 222 MW. 

Support schemes  

Government Support to renewable energy projects have encountered different phases. The 2007 Renewable and Alternative Energy Sources and Biofuels Act established a feed-in tariff (FiT) scheme. The eligible producers could enter into PPAs with the public utility EAD or other end-suppliers which guaranteed to producers the sale of all their generated output. The FiTs were to be reviewed by the Bulgarian Energy and Water Regulatory Commission (EWRC) according to a formula defined by law and which limited the any decrease in FiTs by 5% per year. This was not an extremely advantageous scheme as per international practice PPAs usually guarantee a certain level of price stability throughout the contract duration.

In 2011, given the new EU obligation to reach 16% of energy consumption generated by RES by 2020, a new law- Energy from Renewable Sources Act (ERSA)- improved the investment climate through the obligation to maintain the FiT specified in the PPA for its whole duration (20 years for solar, geothermal and biomass, 15 years for hydro up to 1MW and 12 years for wind).  These amendments had such a major positive impact that Bulgaria rapidly reached its targets, followed by a pause decided by the Government in 2013.

From 2012, regulatory instability slowed down investors’ appetite: retroactive temporary grid access fee (2012); 20% fee on FiT (2014), which was later declared unconstitutional; reduction of output that can be sold with the benefits of FiT to the average production of plants of the same category (under deduction of auto consumption); compulsory monthly Fit revenues payment of 5% to the ESSF (2015, lifted in 2021). These measures resulted in many legal proceedings and disarray on the market.  The situation progressively stabilized after 2015.

In 2018, producers with installed capacity above 4 MW were allowed to terminate PPAs and enter into feed-in premium agreements to be paid under the Bulgarian Energy Security System Fund (ESSF), with the ESSF compensating the difference between the FiT and the market price as determined by the Regulator and depending on the energy source.  Since 2019, FiT applies only to small producers (installed capacity under 1 MW).

Romania

Overview

Total electricity generation installed capacity amounted in 2020 to 20,696 MW, of which 31.4% in hydropower (6,703 MW), 14,6% in wind power (3,023 MW), 6,7% in solar power (1,391 MW) for a total of 21,3% of renewable installed capacity out of the total capacity.  However, a significant part of this capacity is theoretical as it corresponds to aged facilities that are no longer in position to function effectively and should be decommissioned. More accurate is the energy output breakdown: it climbed by 5.3% in 2021 to 59 TWh, with 38% thermal, 29% hydro, 19% nuclear, 11% wind, and 3% solar.

Romania set the 2030 renewable energy end consumption target at 30.7% (excluding hydro), despite the European Commission recommending 34%, as Romania has a great unused renewable potential (wind potential is estimated the highest in Europe with 14 GW). To reach this target, Romania intends to install around 7 GW of new capacity, of which around 3.7 GW of solar projects. The phasing out of coal mines by 2030 should also provide the opportunity to install 735 MW of solar PV plant on depleted mines and disposal sites as per Just Transition plans.

Support schemes

Wind farms developed rapidly between 2008 and 2013, through an advantageous subsidy scheme based on green certificates issued according to yearly quotas and that green electricity producers could sell to electricity providers through market mechanisms. The system was changed in 2013, as Romania seemed on track to reach its 2020 targets and also to prevent fraud and increase predictability. These changes ended the attractiveness of renewable energy investment in the country and new capacities were no longer installed after 2015. The poor state of the transmission network is also a limiting factor for the development of renewables, especially in the western part of the country.

Politically the Government put the emphasis on the development of gas and nuclear energy rather than of renewable. As heating, which is currently 40% derived from wood, should be replaced with gas (large gas fields are to be developed in the Black Sea), gas receives far more political attention than renewables.

The situation may evolve in the right direction with the EU 2021–2027 Multiannual Financial Framework and the Recovery and Resilience Mechanism, possibly triggering access to EUR 80 bn for Romania and linked to the Green Deal and the concrete steps to reach full decarbonisation by 2050.

Concretely new schemes have been introduced in 2021 to replace the green certificates mechanism, notably authorization of long term PPAs and introduction of Contracts for Difference (CfD). CfD could mobilize before 2024 3.5 GW of solar PV and onshore wind with auctions to be held by end 2023. Offshore wind projects should also receive some kind of support.

SERBIA

Overview

Total installed capacity amounts to 8,500 MW.  Electricity generation of 34 028 GWh in 2020 is mainly sourced with coal (70% of the total), followed by hydro (25,3%) and wind (2.3%). Other sources are negligible.

Serbia currently has more than 550 MW of newly-built renewable capacity on the grid, all in wind farms.

Although Serbia is not a member of EU, it has to apply EU rules in the energy sector as a necessary step on the road to EU accession. The 2016 Energy sector development strategy which did not put much emphasis on renewable has been updated in February 2022 with the Energy Security of Serbia Plan aiming to reach full decarbonisation by 2050, with a share of renewable of about 50% compared to 26% in 2020. The national Energy and Climate Plan (NECP) is still at draft stage, but it contains the preliminary target of 40% emission cut by 2030.

Support schemes

The State utilities Elektromreža Srbije (EMS) and Elektroprivreda Srbije (EPS) have so far played a dominant role in electricity generation. No support has been available to solar IPPs after 2016, although the capacity has remained to a paltry 10 MW.

In general, reforms have been slow due to the reluctance of EPS to move toward renewable and the lack of interest of the general public in renewable energy. Limited implementation of EU regulation, artificially low energy prices for end consumer and lack of transparency also tend to deter investors.

However, the Government intends to develop renewable IPPs. A March 2021 renewable energy law should help to unlock some barriers. According to this law, small scale facilities (power plants below 500 kW and wind power plants below 3 MW) can benefit from feed-in tariffs. For larger projects, auctions based on feed-in premiums will be held according to quotas. 

A first auction is scheduled in 2023 for 400 MW and over 1,000 MW in the next 3 years, with a goal to reach 2 GW capacity in 5 years. Government would provide the land to the investors. 650 MW of floating solar power plants are also planned.

In parallel to IPPs and possibly in cooperation with strategic investors, the government plans to create a State-owned company called Green Energy of Serbia in charge of generating renewable energy.

CONCLUSION

The rapid survey shows that after several years of stagnation, a momentum is starting to take place although at different pace in all 3 countries. Ambitious capacity development programs have been announced and should be implemented from 2023. For sure, obstacle and barrier remain as Governments have to establish their credibility beyond the financial opportunity to access EU subsidies, and the investment climate require improvements. But these are overall good news for investors.   

What are smart infrastructure and smart cities?

Smart infrastructure is no longer just a buzzword but an operational reality. This has been made possible by technological advances in recent years in areas such as data collection processes, data treatment (artificial intelligence) and communication networks which are all part of the internet of things (IoT). 

According to the Royal Academy of Engineering of the United Kingdom, “A smart infrastructure is a smart system that uses a data feedback loop to improve decision-making regarding a matter. A system that can monitor, measure, analyze, communicate and act based on data collected by sensors.”

Based on the definition, the Royal Academy makes a distinction between semi-intelligent infrastructure (data is collected but the system does not make any decision ; typical example would be city traffic map); intelligent infrastructure (data is collected and supports human decision process; for example, traffic information is provided to the drivers to help them adapt their itineraries); and smart infrastructure (data is collected based on which the system takes decision autonomously). Typical examples of smart infrastructures are smart networks (for example an energy transmission network) or smart buildings (when operations such as heating, lighting or security are handled by automated systems).

Why the global surge of interest in smart infrastructure?

According to Nexus, the benefits are:

• Self control
• Cost efficiency
• Reliability
• Safety and resilience
• User interaction and empowerment
• Sustainability

Compared to traditional infrastructure, smart infrastructure is able to adapt to changing needs and environment, to communicate individual knowledge to the network and to optimize the decision-making process in a way the human mind alone would not be able to achieve.

To succeed, smart infrastructure should not be exclusively designed by engineers for technological benefits; on the contrary, it should be a tool to support cities master plans and long-term objectives for the benefits of all stakeholders (such as users, citizens, NGOs, service providers, City governments and others).

More comprehensively, smart infrastructure is part of a global move toward a more interconnected society. This includes trends such as e-government, e-governance, social inclusion, distance services and smart economies. In this sense, smart infrastructure is related to smart mobility (transportation networks with real time monitoring and control systems), smart environment (pollution control), smart services, smart governance (use of technology for design and delivery of services), smart people (creativity and innovation), smart living (improved quality of life), and smart economy (economic growth through technology).

The Smart Cities Council considers that smart infrastructure shall help cities to embody three core values: livability, workability, sustainability. This council led by private firms such as IBM or Huewei is a good example of the commitment of the private sector to support the move toward smart cities by providing technical advisory services and spreading best practices to the cities governing bodies.

According to a report of economic consultants, the global smart cities market size was valued at USD 98.15 billion in 2020 and is expected to expand at a compound annual growth rate (CAGR) of 29.3% from 2021 to 2028.

What PPPs for smart infrastructure?

PPPs being a method for delivery of infrastructure, they can be implemented with any type of infrastructure. The smart factor from the strict PPP point of view does not require any revolution in the concept of PPPs. In On the other hand, it is important to determine in which context and under which conditions PPPs are best suited to deliver smart infrastructure.

The traditional arguments in favour of PPPs remain true with regards to smart infrastructure: when adequately designed and implemented, PPPs allow to alleviate financing constraints, transfer risks to the parties best suited to bear them, take advantage of private sector know-how and skills to reduce cost and delays and improve quality.

However, a particular emphasis should be paid to certain areas when talking of smart infrastructure. The specificity of the ICT is the extremely quick pace of technological change. When a road or a power plant can operate over decades with minimal requirement in maintenance, an ICT system is due to become outdated in a short timeframe.  Obviously, technology firms are in a better position than the public sector to mobilize, fine tune and implement technology.

 Cities need to understand the drivers of technological change as well as the gains and limitations of an intensive use of technology.

Contracts should focus on the results that are targeted rather than on a precise description of the means and the equipment to be implemented. Although the result-oriented mindset is a tendency of recent PPPs, this approach is vital in smart infrastructure projects. For one, because cities may not have the expertise to assess by themselves the best technical solutions, and for two, because the pace of change will render obsolete in the future the technical solutions that may appear best at one point of time.

For this reason, PPP contracts should emphasis emphasize flexibility and make sure that the private partner will be able to adapt the technical solutions with time. Contractual incentives, particularly in terms of remuneration, should guarantee that the private partner will constantly monitor market developments and envisage the deployment of innovation when it makes sense under all dimensions (users point of view, commercially, financially, etc.).  In this context of constant change and adaptation, a cooperative approach based on mutual trust between the city (including other stakeholders such as NGOs and users’ representatives) and the private partner becomes crucial to success. 

Different types of PPPs may be structured in relation with to smart cities. The traditional model based on project finance, with the creation of a Special Purpose Vehicle that receives either payments from users or from the public partner are to be considered when the project involves investment into assets that are clearly identified as well as the cash-flows associated with them. It allows for the mobilization of private funding and a strong transfer of risk. Besides this traditional model, the revenue sharing model is growing in popularity. Under this scheme, an ICT vendor implements a technological solution for a City and is repaid through the cost savings generated by the solution until the vendor has achieved pay-back, including a profit rate agreed in advance.

According to Paul Jacobson, PPPs should be examined under 2 axes: the revenue earning capacity, and the capex. The sweet spot for PPPs is formed by projects with high revenue potential and high capex. On the opposite, projects with low revenue generation and low or medium capex should rather be procured by means of EPC contract followed by a service contract if necessary.

In practice, as analyzed by McKinsey, a considerable number of smart cities projects have already benefited from PPP contracts, especially in fields such as energy management (distribution and grid, metering, street lighting, energy efficient buildings), network infrastructure, transport (car and bikes pooling, integrated multi-modal transport, etc.), traffic management systems, utilities management, CCTV and surveillance, as well as e-governance. This list will no doubt grow in the coming years.

Smart infrastructure has become a key component of the future of large and small cities at the global scale. PPPs are one of the best available instruments to design, finance, build and operate it to the benefits of all citizens as the expertise and creativity of private sector in this specific area under the right framework are largely unrivaled.

wappp-quarterly-7-q1-2022.pdf (1.91 Mo)

WAPPP Quarterly magazine new issue is available. It includes PPP units presentations and a series of articles about the latest trends in PPPs.

Thibaut Mourgues, Chief Editor