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Africa's Renewable Energy Sector Looks to Woo Overseas Investors

With an ever-growing gap between supply and demand, Africa needs to rapidly ramp up its power generation if it is to meet the needs of its expanding economies, with overseas private sector investment now actively being sought.

Photo: African wind farms: Providing renewable energy across the continent.
African wind farms: Providing renewable energy across the continent.
Photo: African wind farms: Providing renewable energy across the continent.
African wind farms: Providing renewable energy across the continent.

Africa desperately needs more electricity, with economic projections indicating rapid growth for many of its constituent nations. The African Union has forecast that Africa's collective GDP will multiply six-fold between 2010 and 2040. In order to fuel this growth, it is estimated that the continent's power-generation capacity will have to increase from 590 terawatt hours to 3,100 over the same period.

Energy is the biggest driver of economies. Access to affordable, durable electricity, together with the technology to light up the continent's vast rural areas, which are largely cut off from national grids, is becoming the most critical factor in Africa's development.

Conventional utility grids are already straining at full capacity and relying heavily on fossil fuels. Such a situation cannot sustain the massive growing demand and there is limited government capital on hand to remedy this. This has created a gap for international private-sector energy players to make up the shortfall.

Renewables

African electricity state monopolies, in co-operation with the private sector, are now seeking smarter, cheaper and faster ways of producing energy to tackle the continent's huge electricity deficit. Many experts are convinced that the continent needs to increase its proportion of electricity produced from renewable sources – predominantly solar, wind and hydroelectric.

Speaking at the World Economic Forum on Africa in Rwanda, Jubril Adewale Tinubu, Group Chief Executive of Oando, the Nigerian energy giant, emphasised the need for a changing energy mix. He said: "Africa has no choice but to move rapidly towards a smart mix of energy systems if it is to grow and prosper in step with the rest of the world."

Africa has a growing private sector market for renewable energy ventures. As a result, investors see considerable potential in developing technologies that can lead to clean, sustainable energy generation.

The energy markets of many African countries are undergoing a structural shift towards a more integrated renewable energy economy. Addressing African Utility Week, an annual conference of global energy professionals held in Cape Town, Mongezi Ntsokolo, Group Chief Executive (distribution) of South Africa's state power utility, Eskom, said: "The traditional model of electricity generation as a natural monopoly is being disproven by small alternative power entities."

Several African governments have already shown a policy commitment to renewable-energy deployment by making investment vehicles available for independent power producers (IPPs). The rapid roll-out of solar and wind energy projects in recent years in certain African countries seems to suggest that renewables have an increasing role to play in Africa's overall energy mix.

Ahmed Jaffer, Chairman of KPMG Southern Africa, said: "Renewable energy is emerging as a mainstream energy source in Africa, an alternative that Africa needs. This alternative, however, may have implications for conventional coal-based generation."

Speaking at African Utility Week, Michael Liebreich, Founder of Bloomberg New Energy Finance, emphasised the positive investment climate that exists for renewable energy, saying: "The accepted wisdom has been that clean energy is good in theory, but prohibitively expensive in practice. This is wrong."

Liebreich cited statistics showing the cost of solar energy has fallen by 80% since 2010, making it an economically viable source. With the price of solar expected to decline further, the conventional coal-based generation market is facing serious competition in the form of renewable energy IPPs.

Photo: Electrification: Many remote parts of Africa are still off the grid.
Electrification: Many remote parts of Africa are still off the grid.
Photo: Electrification: Many remote parts of Africa are still off the grid.
Electrification: Many remote parts of Africa are still off the grid.

One of the main advantages of solar is that it can provide modular solutions in Africa's more remote areas. This makes it a more feasible option than extending expensive power lines to small, far-flung communities. At present, South Africa is taking a lead in the continent's drive towards greater use of solar energy.

Wind is another renewable-energy source that has enjoyed rapid development over recent years. This has stimulated interest from the private sector, with technological improvements driving down the cost of wind energy, enabling wind projects to feed power into the grid at a competitive price. South Africa, in particular, has huge wind energy potential. This has seen a substantial number of wind farms popping up as part of the government's renewable energy procurement programme.

Another opportunity in Africa's power and energy sector lies in hydroelectric technology. Acknowledging this, Jaffer said: "Central Africa has the richest hydro resources in Africa. Large-scale hydro development is attractive, as it can lower the average cost of electricity more cost effectively than other technologies, while also providing base load power to the region."

If the Democratic Republic of Congo's Grand Inga hydroelectric project comes to fruition, it will help meet sub-Saharan Africa's electricity demand. Once online, its output and benefits will be shared among several neighbouring countries, helping to address electricity supply deficits and support economic development across the region.

Many sceptics, though, see renewables as playing only a marginal role in energising Africa, compared with, for example, the potential of large-scale nuclear power. For those countries that can't afford the huge initial capital costs of nuclear plants, renewables look set to have an increasing role to play. In line with this, the World Nuclear Industry Status Report 2016 confirms the reality that nuclear power is in decline globally while the renewable sector is growing.

Encouraging the Private Sector

Renewable energy is clearly changing the way state power utilities in Africa operate, particularly when it comes to encouraging greater involvement by the IPPs. In many ways, the private sector is now becoming indispensable to African energy production.

There is a real appetite for FDI in renewable energy. The energy authorities of several African countries are adopting an open energy market model, paving the way for companies to invest in power generation. Assessing the significance of this, Evan Schiff, Event Director of African Utility Week, said: "Investing in the power sector in Africa can be very lucrative and we have the success stories to prove it."

According to Liebreich, 2015 saw a record investment of US$330 billion globally in renewable energy. In Africa the figure is around US$6 billion per year, about half of which is in South Africa.

According to Jaffer, Chinese investors are now eyeing opportunities in Africa. Overall, South Africa remains one of the countries where they see the greatest potential for good returns, largely because conventional energy generation is constrained. Outlining the current level of investment, Jaffer said: "In April 2015, South Africa's Department of Energy approved 79 IPP projects, which will collectively generate some 5,000 megawatts."

South Africa – a country said to be one of the world's least energy-efficient – has identified an urgent need for private-sector entities to compete in its energy industry. The country has attracted high levels of foreign investment through its globally lauded Renewable Energy Independent Power Producer Programme with the aim of diversifying away from coal-generated electricity. As a result of this initiative, South Africa aims to generate a fifth of its electricity from renewable sources and to have 95% of homes electrified by 2025.

Table: The Economics of Energy in Africa
Table: The Economics of Energy in Africa

Climatescope is an index that assesses 55 countries in terms of their clean-energy investment potential. On this index, the top 10 most attractive countries in Africa for overseas investors are South Africa, Kenya, Uganda, Nigeria, Rwanda, Tanzania, Ethiopia, Ghana, Malawi and Zambia. The top three of these also rate among the top 10 worldwide on the same index. This shows that these African countries are highly competitive in terms of attracting overseas investment in the clean energy sector. China – number one on the Climatescope index – attracts one-third of all the global investment in clean energy.

Paul Runge, Managing Director of Africa Project Access, has some words of advice for potential investors in the African energy market. He says: "The Chinese and others secure projects in our continent because they supply holistic solutions, including finance. The economic model of African energy is changing from government-run projects to private, commercially viable initiatives."

Africa is potentially the largest power market in the world. According to Schiff, investment of more than US$40 billion a year will be needed if Africa is to meet its predicted energy demand by 2040. This would require a private-sector financing increase of 10 times the current level. This is clearly an opportunity for private business to help bridge Africa's energy deficits.

Photo: African Utility Week: Delegates call for increased FDI in the renewables sector.
African Utility Week: Delegates call for increased FDI in the renewables sector.
Photo: African Utility Week: Delegates call for increased FDI in the renewables sector.
African Utility Week: Delegates call for increased FDI in the renewables sector.

Summing up the way ahead, Jaffer said: "Climate change should not be seen as a challenge, but an opportunity. Investors need to see that the future of sustainable energy technology in Africa is brimming with possibilities."

Mark Ronan, Special Correspondent, Cape Town

Content provided by Picture: HKTDC Research
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