LIBERIA: BUCHANAN RENEWABLES DEAL STALLS OVER PRICE DISPUTE

UNCLAS SECTION 01 OF 03 MONROVIA 000725

SENSITIVE
SIPDIS

E.O.12958: N/A
TAGS: ECON EINV ENRG EAGR LI
SUBJECT: LIBERIA: BUCHANAN RENEWABLES DEAL STALLS OVER PRICE DISPUTE

REF: MONROVIA 82


1. (SBU) SUMMARY: The Government of Liberia may back out of a power
purchase agreement with Buchanan Renewables (BR),after a consortium
of donors warned the President that unduly high tariffs could
threaten the financial solvency of the Liberian Electricity
Corporation (LEC) and deter small businesses and residential
consumers from connecting to the power grid. BR defends its pricing
model based on large up-front investments, the high cost of doing
business in Liberia, and the demonstration effect of a "green" power
project in a low-income country. To break the impasse, President
Sirleaf agreed to accept a professional energy negotiator, but
warned she needs a firm recommendation by October 21, because
Liberia needs power immediately, and political pressures make
further delays untenable. If BR refuses to renegotiate, Liberia
will pursue conventional heavy-fuel oil generation. END SUMMARY.


2. (SBU) BR signed January 21 a concession agreement with the GOL
and a power purchase agreement with LEC for the construction of a
35-megawatt power plant to provide energy to greater Monrovia (ref
A). According to the contract, BR will invest $150 million to
construct a power plant fueled with woodchips from unproductive
rubber trees, and will build a transmission line to Monrovia. The
Overseas Private Investment Corporation (OPIC) approved a $112
million loan for the project, and BR would fund the remainder with
private equity. BR is seeking final agreement with the GOL on the
tariff in order to achieve financial closure and commence
construction of the power plant.


3. (SBU) Separately, Buchanan Renewables Fuel (BRF),an independent
subsidiary of parent company Buchanan Renewables B.V., will sell the
woodchips to its sister company, and pledged to plant at least one
rubber sapling for each felled tree, offsetting the carbon released
by the power plant. The BRF project promises additional benefits to
small-scale rubber growers without the means to replant their farms.
To date, OPIC has disbursed $15 million to BRF, which has begun
exporting rubber wood chips to Europe from the port of Buchanan. Two
shiploads have already been exported and BRF has contracts with
utilities in Norway and Sweden to supply more.


4. (SBU) BR estimates power generation will cost 23 cents per
kilowatt hour, roughly half the cost of diesel-fueled generators or
the donor-funded fuel-oil powered 10 MW Emergency Power Program, but
well above international norms for hydroelectric energy (5-8 cents)
and heavy-fuel oil (12-14 cents). BR's pricing structure seemed a
palatable interim measure in mid-2008, when oil prices were at
record highs. Hydroelectric also remains a distant and
capital-intensive solution, as rehabilitation of the Mt. Coffee
Hydroelectric Dam will require $500 million in investment.


5. (SBU) However, as donors began planning a management contract for
LEC, it became apparent that BR's tariffs might imperil the
off-taker's long-term self-sufficiency and compel the GOL to furnish
a subsidy its budget could not bear. The International Financial
Corporation (IFC) and the Government of Norway commissioned an
independent expert to analyze BR's pricing model, and the draft
report, released September 4, questions the underlying methodology
used to calculate the tariff and concludes BR's pricing is nearly
double what the LEC should be willing to pay. The study further
notes BR's oft-touted claims of carbon neutrality cannot be verified
without a comprehensive environmental impact assessment.

Fuel At What Price?
--------------


6. (SBU) The report attacks BR's pricing model on two fronts.
First, the author asserts BR's claim to require $149 million in
up-front investment is inflated, estimating the cost of comparable
biomass plants in similarly developed countries at no more than $70
million. Second, the author argues BR overstates the true value of
its fuel source, which it purchases from sister company BRF. While
BR intends to charge the LEC $60 per ton based on the opportunity
cost of exporting wood chips to Europe, the report suggests that
transportation costs make Liberian wood chips too expensive for
export. The report concludes BR could charge 12.5 cents per kWH,
yielding a healthy return on equity of 25 percent, while sparing LEC
and the GOL from unsustainable subsidies.


7. (SBU) In a written response September 14, BR refutes these
conclusions, calling the assumptions "highly speculative," charging
the report's author with using outdated data, and observing that he
never visited Liberia to examine operations. In a September 25
meeting with Econoff, Don Durand, chief operating officer at
Buchanan Renewables, defended both components of BR's pricing. He
accused the author of making misleading comparisons between Liberia
and other more developed and thus low-cost markets, and cited the
necessity of importing all heavy equipment, constructing roads, and

MONROVIA 00000725 002 OF 003


renovating the port at Buchanan as extraordinary costs that drive
the high fixed investment. Further, he dismissed the notion that
given the absence of an export market, fuel costs should not exceed
$43 per ton of rubber chips. He stated BRF has signed a three-year
contract with the Swedish utility Vattenfall to provide two million
tons of rubber chips annually at a cost of $68 per ton, and a
five-year contract with Norway Biowood at $69 per ton.

Carbon Neutrality and Productive Farmers?
--------------


8. (SBU) But BR seems disinclined to renegotiate the 23 cent tariff,
questioning why a pricing model that has remained consistent for
more than a year is now so hotly disputed. Instead, it argues the
project offers intangible social, economic and environmental
benefits that a conventional heavy-fuel oil plant lacks. BR claims
the biomass plant may pilot a new model for green energy production
in low-income but timber-rich countries, and asserts that use of
indigenous rubber wood frees Liberia from both the foreign exchange
risk and inflation-provoking vagaries of global oil prices.


9. (SBU) Much of BR's pricing defense hinges upon the environmental
and social benefits that accrue to sister company BRF. By removing
unproductive rubber trees, BRF claims to accelerate farm
rejuvenation, offset otherwise prohibitive costs to smallholders,
and unlock income and employment opportunities for rural
populations. It argues that replanting trees would make the power
plant carbon neutral. However, given the success of the rubber chip
export business, the benefits to small-scale farmers would remain,
even if BR never builds its power plant.


10. (SBU) In a line-by-line refutation of the IFC/GON report, BR
maintains it possesses detailed data and documentation supporting
its claims. However, the company has yet to share an environmental
impact assessment, projections of income-generation for small
holders, or an engineering feasibility study, stating only that they
submitted documents to OPIC's satisfaction.

A Negotiated Solution?
--------------


11. (SBU) President Sirleaf, swayed by the IFC/GON report but
impatient for immediate progress in the energy sector, convened a
meeting between donors and BR October 1. While receptive to donor
concerns, she warned she is under political pressure to provide
lower-cost energy, and cannot tolerate further roadblocks, whether
from donors, BR or her own staff. She accepted donors' offer to
hire a professional energy negotiator and advised BR to cooperate
fully and furnish documents it had previously withheld. The
President set a deadline of October 21, saying she would make a
final decision on whether to move forward with the BR deal based on
the negotiator's written recommendations.


12. (SBU) Even if all parties break the stalemate, the President
said she will pursue other options to avoid a BR energy monopoly.
The GOL plans to issue an expression of interest for a 20-megawatt
heavy-fuel oil (HFO) independent power project, and the President
said Soros Economic Development Fund may provide some financing.
[Note: American firms such as Contour Global and Ormeco
International, sensing the GOL's flagging enthusiasm for BR, have
made exploratory trips to Monrovia in recent months, and assured
Econoffs they could deliver power production by the end of 2010,
according to BR's original timeframe, but at less than half the
cost. End Note.]

COMMENT
--------------


13. (SBU) The proposed tariff is untenable. Beyond the question of
a viable management contract and subsidies to LEC, expensive power
hobbles economic growth and sets formidable barriers to entry for
would-be entrepreneurs. USAID will continue to advocate for a
transparent and competitive process that puts the long-term
interests of Liberia first.


14. (SBU) BR's reluctance to renegotiate with the GOL or share
information with donors may be within its rights, but it provokes
avoidable suspicion and limits donors' inclination to defend the
project's strengths. Greeted two years ago as a new model for green
investment and the solution to Liberia's energy shortage, BR appears
alarmed by its fast-eroding political clout, and seems to be
circling the wagons. We hope that its intractable stance on pricing
is a negotiating tactic rather than a definitive assessment of its
own long-term interests. A failing LEC with tariffs too high to
sustain an increasing base of residential and small business
customers cannot be BR's recipe for sustained growth; if a
negotiator compels BR to recognize this reality, a deal may still be
salvaged.

MONROVIA 00000725 003 OF 003




15. (SBU) If BR fails to lower the tariff, heavy-fuel oil may be a
viable interim solution, bridging the gap between diesel and
lower-price hydroelectric and biomass options. BR's model may be
less novel than they represent; equipment for biomass and biofuel
power plants is widely manufactured, and another provider could
replicate BR's project in three years' time. However, the GOL will
need to carefully ensure that the unraveling of a highly-publicized
project does not discourage future infrastructure investment.


16. (SBU) BRF, for its part, has invested too much to abandon
Liberia entirely. The parent company threatens to withdraw if the
BR deal flounders, imperiling hundreds of jobs in Buchanan. But
given that the wood chip export business appears to be a growth
industry, BRF's presence is likely assured, and the benefits to
small-scale rubber farmers will persist. Further, the parent
company would maintain its technical services subsidiary, which
employs otherwise-idle heavy machinery on road construction and port
operations.


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