The Solomon Islands is developing the largest hydropower project in the Pacific region. Communications Consultant, Sarina Laurence, introduces IWP&DC to the Tina River hydropower project
Surrounded by the stunning crystal blue Pacific Ocean, the Solomon Islands is a remote archipelago rich in natural resources. It is also the scenic backdrop for the largest hydropower development project in the Pacific region; a 15MW dam at an estimated cost of US$240.8 million to be commissioned by 2025.
Located on the Tina River tributary of the Ngalimbiu river, 30km north of Honiara, the capital of Solomon Islands, this is the first large utility-scale renewable energy project to be developed under a public-private partnership (PPP). It is designed to dramatically increase the amount of renewable energy in the Honiara national grid by nearly 70 percent while reducing reliance on expensive diesel power. With a 15MW installation, the project will lower the cost of electricity for Solomon Islanders and will also pave the way for the country to exceed by two and a half times, its 2025 greenhouse gas emissions reduction target.
The Solomon Islands is a remote archipelago rich in natural resources
Still in its construction infancy, work on the first of four phases of the development has recently begun. This marks an important milestone and indicates Tina, unlike similar projects of the past, will become a reality and deliver benefits to the people of the Solomon, despite the challenging environment it operates in. Until recently, the project suffered from uncertainly, but the start of 2020 bought new hope for the many stakeholders involved with the completion of the financial close, none more so than the people of the Solomon Islands who are in desperate need of relief from the burden of heavy electricity prices.
Over a decade ago, the Solomon Island Government adopted a policy to develop domestic sources of energy, particularly hydropower and other renewables to mitigate the impact of high cost diesel fuel. Beyond the aims of lower cost electricity, the Solomon Islands National Energy Policy (SINEP) aims to enhance energy security at a national level, by increasing the share of renewable energy to 50 percent of total installed capacity by 2020. SINEP estimates the country’s hydropower potential to be 300MW. The Tina site was selected after several studies conducted by the World Bank of sites around Honiara purposely to supply the Honiara Grid as the Honiara Grid accounts for most of the customers.
Despite having one of the lowest population densities in the world, the Solomon Island Electricity Authority (SIEA) plans to implement its least-cost expansion plan to expand its network coverage, improve system efficiency and significantly expand the use of less expensive, indigenous renewable energy sources. With the completion of the project, financial projections suggest that the retail tariff could be further lowered. This will be a welcomed necessity for the struggling population of the Solomon Islands, whose heavy reliance on imported diesel, high cost of generation and high retail tariff means basic electricity is out of reach for most. Once commissioned, access to the capital’s grid in Honiara will increase from 9% to 70%.
The Ministry of Mines, Energy and Rural Electrification (MMERE) is the supervising ministry for the energy sector, and its energy division bears responsibility for legal and regulatory development, institutional strengthening and supervision of the state-owned utility, SIEA. Operating under the Electricity Act, SIEA is a vertically integrated power utility that is responsible for electric power generation, transmission and distribution to all urban and provincial centres. The project office, a division of MMERE, is set up and run independently to be able to provide advice and expertise in project management.
Honiara is the capital of the Solomon Islands. The Tina River hydro power project will increase renewable energy in the Honiara national grid by nearly 70 percent.
The challenges and risks
The project, locally known as Tina, has been through challenging times spanning over 13 years. It is a well-known fact that infrastructure development in this part of the world presents with many complexities, all of which have tested Tina time and time again.
Financially, the country is still recovering from many years of intermittent political turmoil and civil strife which resulted in a 40 percent decline of GDP. The Solomon Islands then was left exposed during the global financial crisis of 2009 and an oil price spike in 2008 and subsequently during 2011 to 2013, which demonstrated the Solomon Islands’ vulnerability to global oil price volatility as the country’s balance of payments came under severe pressure since fossil fuels account for about a quarter of all imports.
Unique environmental, political and economic challenges facing potential investors during pre-feasibility studies for other infrastructure projects have proven to halt previous opportunities before they have even had a chance to begin. In pre-feasibility, the task of overcoming such major obstacles to development have seemed unsurmountable. Some of these are the high cost environment resulting from the country’s remoteness as well as its small market, lack of competition, high transportation and energy costs, and customary land issues. Furthermore, weak infrastructure links due to the island’s remoteness presents formidable challenges to service delivery and economic integration. Mother nature is also at play with challenging geographical conditions making the islands vulnerabilities to natural disasters such as cyclones, tsunamis, flooding, drought and earthquakes.
The battle of the land
For the last 13 years, moving forward with Tina has had its fair share of challenges because of the battle over land. Ninety percent of the country’s land ownership is customary and because of this, over four years of negotiation was necessary to finalise a package which was signed off in late 2019. The outcome was worth the patient wait and has now set a precedent for other developments in the Solomon Islands to follow suit.
A unique land acquisition process was established to distribute compensation and royalties equally to all members of newly established tribal cooperatives, along with the establishment of a joint government-landowner land management company. It is also the first in the country to introduce unique landowner participation schemes that promotes sharing of project benefits, through royalty payments and land lease agreement, with tribes that have customary land ownership. All land selected for the project, including the dam site, reservoir, powerhouse, access roads, construction lay-down areas and quarries, is non-residential land, and no physical displacement of people will occur.
The introduction of the benefit-sharing mechanism to benefit the wider community was finalised in December 2019 and named the Community Benefit Sharing Programme. The programme will span the construction phase of the project and beyond, and provides layers of individual and community-based benefits from project funding and profits upon commissioning.
World partners to fund Tina
Global experts are working together with the Solomon Island Government on the first large-scale infrastructure project of its kind. The Solomon Island Government, plus six different financiers have been involved at various levels of investment. This unique combination of grants and loans provide for different project components completes a complex but highly governed model necessary in a developing country with a volatile economic and political environment:
- Abu Dhabi Fund for Development (ADFD): $15m (approved January 2017);
- World Bank: $34m (approved August 2017);
- Government of Australia: $13m (approved June 2017)
- Green Climate Fund (GCF): $86m (approved April 2017);
- Korea-EX-IM Economic Development Cooperation Fund (EDCF): $32m (approved August 2017)
- Asian Development Bank (ADB): $30m (approved 26 September 2019).
Furthermore, Tina Hydro Limited (THL) was established to develop, finance, construct and operate the 15 MW hydropower plant. Contracted to THL, Hyundai Engineering Co (HEC) is a subsidiary of Hyundai Motor Group and one of the largest Engineering construction companies in Korea.
The total project cost is estimated at US$240.48 million and covers four separate components:
Component 1 Hydro Power Facility (HPF):
The total cost for Component 1 is estimated at US$185.66 million. The largest cost item is the proposed Engineering-Procurement-Construction (EPC) price of US$140.0 million excluding taxes (under negotiation with K-water and HEC). Other notable costs include development costs of US$20.7 million and contingencies of US$16.7 million. The development costs include PC operation cost and cost of advisors during the four-year construction period, including the estimated cost of the owner’s engineer currently at US$3.5 million. While these costs will continue to be negotiated, it is also important to ensure sufficient costs are allocated to ensure quality construction and full compliance with environmental and social management requirements.
Component 2 Access Road:
The estimated cost of US$ 26.0 million is based on detailed designs and ongoing negotiations with the sponsors.
Component 3 Transmission Line:
The cost of US$22.82 million is based on estimates made by an international consulting firm contracted by SIEA to prepare a detailed concept design, which included assessment of different routes and requirements to upgrade the connection point (i.e. Lungga Power Station) to accommodate the 66 kV voltage connection. This study was completed in November 2016.
Component 4 Technical Assistance:
The estimated cost of this component is US$7.0 million. A notable call out in the financing is the Government of Australia which has provided ongoing support in the project preparation and is committed to co-finance the project.
Due to the inherent high cost environment of the Solomon Islands, further exacerbated by the complex technical conditions to develop a major hydropower plant, financing costs associated with commercial loans would have made the project financially unviable. The Solomon Island’s Government therefore requested IDA and other financiers to provide concessional financing.
Furthermore, to address the risks inherent in investing in a relatively untested investment environment with a recent history of political unrest, a MIGA insurance has also been requested by Korea Water Resources Corporation (K-water) and Hyundai Engineering Co (HEC).
Signing off financial closing the for Tina River hydropower project
The components of Tina
The Tina hydropower project will consist of four components: (i) Hydro Power Facility (HPF); (ii) access road; (iii) transmission lines; and (iv) Technical Assistance (TA).
Component 1: Tina River Hydropower Facility (Estimated cost: US$185.66 million).
Under a 34-year PPA (including four-year construction period), the project company will develop, finance, construct and operate the hydro facility with an installed capacity of 15MW located on the Tina River, 20km southeast of Honiara, and will comprise:
- A 72m high RCC dam located in a narrow gorge on the Tina River;
- A waterway including a 3.3 km headrace tunnel, surge shaft and a surface-type steel penstock (3m diameter) to convey water from the dam to the powerhouse;
- A powerhouse 5.7 km downstream of the dam site that will house three MW Francis turbines and an extra bay for future installation of a possible fourth 5MW turbine.
Component 2: Access Road (Estimated cost: US$26 million).
Component 3: Transmission Lines (Estimated cost: US$22.82 million).
Power to be generated from the hydro project will be evacuated to HES through two parallel single-circuit 66kV transmission lines of 23km to the existing Lungga Diesel Power Station. The cost of this component includes the upgrading the switchyard of Lungga Power Station, the highest system voltage at present being 33kV. Since the transmission lines are only required by the time of testing and commissioning of the project in 2022, the exact route has not been decided by the implementing agency, SIEA. Financing from IDA will be on-lent by the government to SIEA. Cost in excess of this allocation will be arranged between the two.
Component 4: Technical Assistance (Estimated cost: US$7.0 million).
This component supports the operation of the project office under the MMERE to finance consultants to:
- Monitor overall project implementation,
- Prepare and periodically update a Project Operations Manual in cooperation with the other implementing entities,
- Provide awareness building and training for various stakeholders,
- Monitor and support environmental and social safeguard arrangements and the Gender Action Plan (GAP),
- Maintain a Dam Safety Advisory Panel (DSAP) and an independent environmental and social monitoring agent,
- Conduct a cumulative impact assessment,
- Liaise with various government counterparts and other stakeholders,
- Support implementation arrangements agreed under the land acquisition process,
- Support communities in utilising their share of project benefits for community development, and
- Report to financiers on project performance and achievement of objectives.
A non-governmental organisation (NGO) will also be engaged to work with landowning tribes and assisting with the planning and implementation of the benefit sharing mechanism and the proposed protected area management.
Unique transformational characteristics
There are primary and secondary benefits to this development, many of which offer important and unique characteristics. Unlike other renewable energy projects, this increase will serve to benefit the nation with renewable generation going from 1 percent in 2016 to 85 percent in 2025 (with 68 percent from the Tina hydro project and the remainder from expected solar). Furthermore, GHG reduction will be more than twice the islands’ entire commitment with this utility-scale hydropower project – undoubtably perhaps the largest investment project in the country.
The proposed project is expected to have wider transformational benefits beyond the power sector. As the first major build-own-operate-transfer (BOOT) scheme invested by a foreign investor, and as an example of successful introduction of innovative approaches to acquiring community-owned customary land and obtaining social acceptance. The project will also set an example for risk sharing arrangements and help improve the investment environment for international private finance.
Finally, the introduction of a benefit-sharing mechanism to benefit the wider community; and a unique land acquisition process which distributes compensation and royalties equally to all members of newly established tribal cooperatives, and establishes a joint government-landowner land management company, rounds out a unique and highly complex project with layers other risks and benefits.
As a result, all of these factors have helped build private sector confidence to invest in large-scale investment projects, in particular infrastructure, in the Solomon Islands.
Social and community impact
The direct beneficiaries of the project are SIEA and its residential, commercial and industrial customers who will benefit from a lower national uniform electricity tariff resulting from the proposed scheme. Individual households, public and private enterprises, will have the opportunity to apply the savings to other uses such as education and business expansion. Household disposable income is expected to increase, particularly in the project area, due to jobs during construction, improved road access, royalties and benefit sharing investments.
The Community Benefit Sharing Program (CBSP) is designed to contribute to a fair redistribution of the benefits generated by the project in favour of those most adversely affected and to take the opportunity presented by hydropower to advance the development of less privileged members of society. CBSP scheme is currently being designed to deliver two elements:
A minimum guaranteed or ‘base benefit share component’, to support investment in basic-need services, which are essential to the development of the communities; and
A ‘variable component’, linked to the performance of the plant (power generation) to support additional community development projects.
The Solomon Island Government adopted a policy to develop domestic sources of energy, particularly hydropower and other renewables. Not only is this an important strategy to mitigate the impact of high cost diesel fuel, it also has a significant impact on climate change. Renewable energy and the Tina River Hydro Development Project is critical for greenhouse gas emissions reduction and for the government to achieve its Intended Nationally Determined Contribution (INDC) commitment. SIG’s INDC is to reduce GHG by 18,800 tons of carbon dioxide equivalent (tCO 2 eq) per year by 2025 and by 31,125 tCO 2 eq per year by 2030. With an installed capacity of 15MW, Tina is expected to annually generate, on average, 78.35GWh of clean renewable energy to displace equivalent amount of energy to be generated by current and future diesel generators.
When completed and operational in 2025, the Tina hydro scheme will demonstrate the Solomon Islands are ready to execute big projects on a world stage. For a nation with a government eager to build a brighter future for its people, the financing of the development of Tina River Hydro will attract further investment opportunities and new jobs.
The author is Sarina Laurence, Communications Consultant, Tina River Hydro Power Development Project Office. www.tina-hydro.com