Addressing Africa’s energy deficit



With recent reports estimating that 600-million people are without access to electricity in sub-Saharan Africa, significant and sustained investment is required across Africa’s entire energy generation and supply value chain.

Renita van Tonder

While even a decade ago meeting Africa’s energy backlog was considered unaffordable, today, many largely technology-driven factors are creating new opportunities for investment in Africa’s energy sector. Significant improvements in the cost and quality of renewable technologies are enhancing the feasibility and attractiveness of energy projects in Africa.

Combined with new battery storage capabilities, these changes offer investors, funders, governments and consumers a fundamentally different energy make-up and mix – presenting Africa with a new universe of energy ownership, supply and funding opportunities.

The trend is clear: As the size and number of large government-funded and implemented non-renewable power projects in Africa has decreased there has been an uptick in smaller mixed public-private (or entirely private) off-grid power projects with rational, local end-user funding.

Until now, the bank’s power and infrastructure portfolio has been biased towards large-scale projects and finance solutions developed for grid-dependent power producers. While large utility-owned non-renewable projects will remain an important part of the energy value chain, off-grid offers a faster way to close Africa’s power gap.

Renewables – especially privately or partially privately-funded new off-grid and captive power solutions – are set to sustain and expand investment while increasing affordability and access to electricity in Africa’s rapidly evolving energy landscape.

From a funding perspective, off-grid deals have shorter tenors and can often be denominated in local currency. As such, off-grid projects lend themselves to Africa’s traditionally more illiquid and hard currency constrained environments. Since local currency debt structures support the development of domestic currency markets renewables projects denominated in local currency could make domestic African pension funds, for example, relevant to domestic energy supply, directly leveraging domestic savings for national development.

To date, Africa’s off-grid power landscape has seen the most growth in the solar home systems (SHS) and commercial and industrial (C&I) segments. Africa’s SHS segment is currently dominated by small (8 to 200 W) solar panels mounted on the roofs of small rural homes – with larger customised solutions in the affluent market. By allowing customers to pay in instalments via pay-as-you-go systems, SHS is breaking the affordability barrier for off-grid solutions in Africa. As such, looking ahead, most of the growth in terms of households covered by off-grid power solutions could come from service-platform developers able to leverage strong distribution platforms.

In Africa’s C&I energy segment, off-grid solar systems have created new markets for investment across the value chain, from the product developer to the integrated service provider. For example, factories and business complexes that produce their own renewable (largely solar) power are proliferating across the continent. Large mines too often also supply electricity to local communities.

These captive power systems operate mini and localised grids. Going forward, there is further opportunity to target tier one property companies or corporates with large property portfolios in Africa, creating local offtake financing solutions for rooftop solar installations on their properties – and then selling energy to local communities.

Given Africa’s energy deficit and sovereign credit challenges, the continent’s energy future will need to blend the full range of energy sources and technologies, renewable and otherwise, in both grid-connected and off-grid solutions that mix public and private, and local and global, investment in affordable and sustainable revenue generating structures.

Developing this diverse energy supply and generation mix will require an equally diverse funding mix if it is to be sustainable. The global trend towards public private partnerships (PPPs) is currently playing out across the African continent.

While non-cost reflective tariffs in some countries make PPP financing solutions more challenging, recent moves towards cost-reflective tariffs in Mozambique, Ghana and Zambia facilitate the relevance of PPPs as a viable funding model – providing the potential to further improve the electrification rates across Africa.

Adding localised privately funded and user-pay solutions to the national grid or allowing entirely independent off-grid solutions to take pressure off the grid, provides debt-stressed African sovereigns with a way of funding the development of power projects – by moving substantial investment off government balance sheets.

At the global level ongoing low yields in developed markets are encouraging cyclical investment in emerging market assets. In this environment, well-structured renewable or mixed power projects supported by innovative PPP and user-pay legislation will provide sustainable long-term yield for developed world funds.

Contact Hayley Crane, Standard Bank, Tel 083 795-7422, haley.crane@standardbank.co.za

 

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