14 Jun

Funding Africa’s Energy Gap Presents Significant Investment Opportunities


Unreliable energy and weak policy have deterred investment, but positive change is afoot, notes Vuyo Ntoi co- Managing Director of Africa Infrastructure Investment Managers.

Africa’s energy shortages are well documented and one of the fundamental reasons is that the population growth has outstripped the capacity for the generation of energy and thereto, the continent’s status and reputation of having unreliable and disparate energy generation and supply continues to stifle the economic ambitions, as it deters investment.

South Africa is a case in point, as power cuts first hit in 2007 and 14 years later load shedding is remains a factor for everyday business and household life.

The economic impact has been substantial. Media reports state that a calculation by the Council for Scientific and Industrial Research (CSIR) found that in 2019 alone load shedding resulted in lost economic output of about R700-million per load shedding stage per day. The outages reportedly cost the economy between R60-billion and R120-billion.

This situation forced us to look to alternative energy solutions including renewable energy. Businesses selling domestic and industrial solar systems, energy generator back-up units, and Uninterruptible Power Supply (UPS) units is commonplace.

Unfortunately, while diverse steps to living sustainably, building sustainable businesses, and contributing towards “green” living today has been progressive, it must be appreciated that the associated costs for the implementation of energy alternatives is a significant factor.

Despite the decrease in cost per unit, on the back of the increased demand, it still ranges from around R60K for a domestic 5KvA Solar System to around R600K for a 413kVA 3-Phase Diesel Generator. Industries such as mining, and manufacturing are thus incurring substantial capital expenditure to sustain their operations. The result is that access to green energy products excludes the majority of the population, and predominantly small, medium and micro-enterprises (SMMEs).

Another key consideration and driver for renewable energy is climate change that is affecting every country on every continent. The mining and manufacturing sectors have faced pressure from governments, investors, and society to reduce carbon emissions. SA as Africa’s largest per capita emitter of greenhouse gases, reaffirmed its commitment and undertaking to ease reliance on fossil fuels at the COP26 summit in Glasgow last November.

In the White Paper on Renewable Energy of 2003 policymakers had taken a series of decisive actions to increase independent power production. Subsequently, the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) in March 2011 was introduced by the Department of Energy (DoE).

The REIPPPP is one of government’s urgent interventions to enhance the power generation capacity. Its main objective is to secure private sector investment for the development of new electricity generation capacity, thereby giving effect to the policy decision to diversify South Africa’s energy mix and bringing additional megawatts onto the country’s electricity system through private sector investment in wind, biomass and small hydro, among others.

It is against this foreground that policy makers have taken cognisance of the task at hand and more recently, on 10 June 2021, President Cyril Ramaphosa announced that a significant amendment to schedule 2 of the Electricity Regulation Act had been made to increase the Nersa [National Energy Regulator of South Africa] licensing threshold for embedded energy generation projects from 1MW to 100MW, without a licensing requirement.

The continued unshackling of responsibility from the State regulator is a step in the right direction in further reforming the electricity sector towards achieving a stable and secure supply of energy. It speaks to essential trimming of red tape, and increased opportunities for IPPs alongside job creation, but also the collaborative approach of a government determined to get energy policy correct.

Noteworthy, of all SA’s renewable energy sources, solar holds the most potential because of the country’s geographic location, we receive an enormous amount of solar energy. There has been a rapid development of solar technology, financing instruments have become more innovative, and public policy increasingly advocates reduced reliance on the national grid.

The commercial and industrial (C&I) solar sub-sector, which sits in the flexible space between large utility-scale solar and smaller, domestic solar, accounts for three quarters of power demand in Africa and is essential to improving the current and future energy fortunes of the continent.

The falling cost of energy storage solutions is also helping to bolster the economic attractiveness of C&I solar. A pioneer for enhanced C&I solar uptake is African Infrastructure Investment Managers (AIIM’s) own portfolio company, Starsight Energy, a market leader in Nigeria, whose expansion into East Africa signals a success on the opposite side of the continent.

There is an abundance of renewable energy generation sources in SA that has been tapped into successfully through the REIPPP programme. Over its lifetime, procurement costs of wind and solar have fallen by 37% and 69% respectively and helped to nearly double the number of IPPs involved in the country.

As contemplated by the Integrated Resource Plan the country envisages an energy mix to which solar and wind will contribute a quarter by 2030. Its programmatic structure addresses some major hindrances around investment in South Africa’s energy sector, as well as the continent more widely. Fourteen years of policy development has produced a transparent framework, enabling significant private sector investment in the renewables space.

Media reports in 2021 recorded that in a bid to reduce its dependency on coal-generated electricity the Department of Mineral Resources and Energy (DMRE) announced in October 2021 that it had selected 25 preferred bidders for just under 2.6GW of renewable capacity in the fifth bid window (BW5). Under the programme, the bidders will be allocated 1.6GW of onshore wind and 1GW solar capacity.

Mineral Resources and Energy Minister Gwede Mantashe told reporters that together the renewable energy projects will see an investment of R50-billion and create nearly 13,900 employment opportunities in the country. As reported by Reuters, the capital requirement is more than R180-billion funding to set up clean power generation assets and R120-billion for transmission equipment.

It is evinced that the IPP market is developing well and that there is a continuous pipeline of bankable projects making it easier to inject the increasing amounts of private capital into attractive investments. Simultaneously, a robust regulatory framework eases investor trepidation, capturing the best of a competitive landscape, for example eThekwini is the country’s first municipality to advertise a tender for private power generation.

Such moves will help achieve their desired balance of sustainable, dispatchable and reliable power generation, lowering costs of procurement, potentially serving as a blueprint for others looking to replicate it.

The reluctance to unbundling Eskom was the single biggest impediment to the growth within the IPP sector. SA has taken an essential policy and regulatory step that can serve as a blueprint for the continent as a whole. As of 2014, 21 countries in sub-Saharan Africa had state-owned utilities with no private sector participation.

This aversion to private sector involvement is waning but has led to an escalation of the cost of energy production. This heightens the burden of subsidies, affecting the potential of much needed investment in power infrastructure and impacting production capacity, reducing regional GDP by an estimated 2%.

Considering the energy generation potential of the continent, this negative economic impact should be marginal, if it should exist at all. Putting this into context, Africa has 40% of the world’s solar energy generation potential but contributes only 1% of global production.

Already around 10% of industrial, commercial, and residential consumers self-generate their electricity but this is far from what could be achieved from a coherent, sustainable policy environment. Such power is produced at well above market rates, impinging on profitability and productivity.

The African Continental Free Trade Agreement places an emphasis to develop Africa as a whole: to embrace concerted efforts to boost productivity, increase efficiency and limit reliance on external players. SA may be acting in isolation in lifting self-generation limits, but it has done so knowing that the entire continent is keeping a close eye and that its tenacity may be the catalyst that illuminates the continent once and for all.

Unreliable energy and weak policy have served as major deterrents to investment across the continent. Funding the investment gap in African energy infrastructure requires an effective, robust regulatory framework across the board, attracting private capital and closing the gap in access to energy.

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