Institutions share their energy investment perspective in Africa

1st March 2021 By: Marleny Arnoldi - Creamer Media Online Writer

In an Africa Energy Indaba panel moderated by Standard Bank renewable energy head Rentia van Tonder, on March 1, she pointed out that a lack of financing remains a major prohibitor for power generation project development in Africa.

She said political and credit risks remain prevalent for investors, which necessitates the development of innovative funding solutions toward making projects more bankable.

African Development Bank (AfDB) energy director Wale Shonibare, meanwhile, mentioned that 598-million people remain without access to electricity in Africa, while investments in African power supply rank among the lowest in the world and have shown little growth since 1990.

Africa will be home to more than 4.3-billion people by 2050, further driving the electricity access deficit.

Making up for the current deficit of energy supply and maintaining grid infrastructure is projected to cost $120-billion a year – four times the current investment rate of $30-billion a year, Shonibare highlighted.

AfDB alone has deployed more than $20-billion over the past 20 years to develop the African energy sector. The bank has developed  a large set of financing instruments, including guarantees, equity participation and special funds, to provide its regional member countries with financing solutions adapted to their macroeconomic conditions.

Shonibare said there were two key energy markets in Africa – countries able to export and countries focused on domestic consumption.

To this end, the AfDB evaluates which markets require concessional lending and credit enhancement solutions, or which markets can attract international and commercial investors.

The bank says independent power producer (IPP) auctions are growing on the continent, including in South Africa and Egypt.

However, IPPs can be challenging owing to operationally and financially weak offtakers in fiscally-constrained countries.

“The creditworthiness of offtakers is at the core of the investment conundrum for power generation assets. There are key issues that severely affect the financial standing of power utilities in Africa, including high transmission and distribution losses.

“The average distribution losses in sub-Saharan Africa were equal to 16% in 2018, compared with 9% on average in other developing countries excluding Africa,” Shonibare noted.

Additionally, power utilities in Africa generally have tariffs below cost-recovery levels. Only 19 out of 39 utilities in sub-Saharan Africa earned enough revenues to cover their operational expenses in 2016, and only four of them covered at least half of their capital expenses.

African power utilities also have poor billing and collection rates, averaging 88% in 2018.

“If we consider some key solutions in Africa, we have to move away with the single offtaker model to regional power pools. Pooling efforts will create more robust regional power grids, with the potential of lowering capital investment requirements and reducing operational costs.

“Further, with only 29% of the population having access to electricity, energy poverty is an acute problem in sub-Saharan Africa’s rural areas. Extending the grid to these low-density locations is very expensive and decentralised solutions represent a better option for electrification,” Shonibare explained.

The private sector has been struggling for years with erratic power supply and grid shutdowns; to remedy this, industrial groups are now planning sizeable projects that will serve both their own consumption and the grid. These type of projects are anticipated to represent at least 30% of all solar capacity installed in the coming years. 

Lastly, AfDB suggests developing local currency financing solutions at scale. Most of Africa’s on-grid power sector is financed with debt from foreign sources in hard currency, which brings exposure to currency volatility and makes the energy sector harder and most costly to manage.

Today, domestic debt and capital markets in some countries offer new funding sources to move away from the dollar funding model.

Africa has 16 landlocked countries, and most countries border more than one other country, which further incentivises the development of regional power pools.

The least cost way to reach full access by 2030 and to meet demand from newly connected households is to accelerate the deployment of decentralised systems, Shonibare argues.

The number of minigrids was multiplied by 4.6 times between 2009 and 2019. The deployment of decentralised solutions to 440-million people will be needed to reach universal access by 2030.

The AfDB has looked at removing market barriers preventing the deployment of decentralised solutions at scale by providing subsidies and crowding in local capital.

UK Export Finance West Africa country manager Steve Gray remarked that demand to localise supply chains is increasing, particularly in Africa. With the launch of the African Continental Free Trade Agreement (AfCFTA), there is potential to ensure a supply chain in Africa to service domestic market needs, but also a continental market, but this will require policy decisions across various themes such as special economic zones, renewable energy supply chain capacity and a stable macroeconomic environment. 

UK Export Finance has earmarked £10-billion to support exports in Africa this year, while it can provide financing in 16 African currencies.

“We actively aim to bridge the financing gap and demonstrate the viability of commercial financing in less developed economies,” Gray stated.

The agency has already started with £4.2-billion worth of investments across 11 projects in sectors including renewable energy.

Private equity fund Africa Infrastructure Investment Managers investment director Olusola Lawson recommended that individual countries set up their own roadmaps and raise financing for a self-sustaining energy system first, before looking at trans-national projects, to avoid ambitious plans that take decades to realise.

Siemens Energy Southern and Eastern Africa CEO Thabo Molekoa commented that the transition to low-carbon energy, which most of the continent is actively pursuing, will shake up the geopolitical status quo, which traditionally governed how energy systems work.

“We need to start recognising the role each country can play toward trading electricity. It can provide many benefits if the system is reliable and properly governed.

“We need bespoke energy roadmaps to realise each country’s energy transition and for an African super-grid to realise, we have to induce political interest in it.”

European Union South African head of cooperation programme Bernard Rey said that interconnection, market fluidity and grid infrastructure remains challenging on the continent, despite the benefits that energy trade integration holds for different countries.

US government initiative Power Africa deputy coordinator David Thompson said Africa needs $25-billion of investment every year into distribution and transmission and, to promote that, "you need information on priority corridors and information that helps quantify financial benefits to energy trade".

“One thing within stakeholders’ control is to help policymakers and investors access information to make sound decisions.”

Through Power Africa’s interagency, development and private sector partners, it has helped facilitate the financial close of over 11 000 MW of new generation, about half of which is renewable, and 19-million new connections, which benefits about 88-million people.