Because electricity cannot be reliably stored on a large scale, it must be produced as and when it is needed. Therefore there must be sufficient electrical generation capacity available to meet peak demands; otherwise power outages will occur. This is why not all power stations need to generate electricity all the time and why energy generated varies as the demand for energy varies.
In Tanzania, TANESCO is the grid operator and controls the electrical grid system. It monitors the system and turns generating equipment on and off as required; which is referred to as dispatching. TANESCO has control over if, when, and at what level, private generation companies sell electricity directly to industrial, commercial and domestic consumers in Tanzania, or it may determine whether a different form of contract would be more appropriate. TANESCO normally dispatches generators with the cheapest variable cost to meet the base load, with more expensive generators being used only to meet the peak demand.
Most consumers in Tanzania buy power from TANESCO. Private generation companies, like Songas, sell all their electricity output to TANESCO, meaning Songas has only one customer. Long-term contracts are therefore necessary to provide a stable cash flow and allow investors to make investment decisions and fund operations. If private generating companies could sell electricity directly to the thousands of industrial, commercial and domestic consumers in Tanzania, a different form of contract would be more appropriate. However, this is not the case and therefore the form of the power purchase agreement, between TANESCO and private generation companies, is based on a tried and tested model used successfully throughout the world.
