VZCZCXRO1544
RR RUEHMA RUEHPA
DE RUEHMV #0725/01 2780939
ZNR UUUUU ZZH
R 050939Z OCT 09
FM AMEMBASSY MONROVIA
TO RUEHC/SECSTATE WASHDC 1373
INFO RUEHZK/ECOWAS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF JUSTICE WASHINGTON DC
RHEHAAA/NSC WASHDC

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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