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Africa’s ever-growing energy needs: opportunities and challenges

Introduction

The African economy has been resilient in the recent past and despite the fall in the price of many commodities between 2014 and 2017 large companies in Africa cleared US$1.4 trillion in profits in 2016, and the region's real output growth was 2.2% in 2016 and is projected to increase to 4.1% in 2018. Africa's growing energy demands are cumulative and represent 2-4 per cent of its combined GDP annually, and its untapped potential capacity in energy generation is more than 10 terawatts.

Prospect

Over half the population in Africa and most of its commercial entities service their energy needs through alternative sources, including fossil fuel powered generators, which are very expensive compared to utility scale conventional power and renewable power plants in developed economies. The continued increase in Africa's population (currently 1.3bn and set to double by 2050), combined with its potential as a global economic growth driver, have brought to the fore the necessity for African governments to find solutions to their energy generation capacity deficit and to address associated infrastructure needs. Whilst various African governments have in the last decade taken strategic steps to attempt to resolve the region's energy deficit, progress is being achieved at a relatively slow pace. If former UN Secretary General Ban Ki-Moon's Sustainable Energy for All by 2030 (SE4ALL) initiative is to be met, and Africa is to realise its economic potential, increased focus and commitment is needed to ensure expeditious and sustainable development.

The precipitous drop in oil prices to US$26.14 a barrel (WTI) in February 2016 from US$147.27 a barrel (WTI) in July 2009 (an 82% decrease), fueled in part by OPEC's decision not to cap oil production, took a heavy toll on the economies of African oil producing nations, including most notably, Nigeria, Angola, Algeria, Egypt, Libya, The Republic of Congo, Sudan and South Sudan. Policy makers in nations hardest hit are seeking to diversify their economies away from oil overdependence as a result of oil's history of vast fluctuation and unpredictability, but they currently view oil extraction and production as being much more economically appealing than it was two years ago given that it seems to have stabilised for the time being in the range of approximately US$60 a barrel (WTI). Additionally, African governments are turning to solar power following a substantial drop in the levelised cost of electricity to a record low price of 2.34 US cents/kWh in Saudi Arabia's Sakaka solar photovoltaic project in early 2018. There are great prospects for utility scale solar developments to help meet Africa's energy constraints. In March 2018, Egypt launched a US$2.8 billion solar power programme to generate capacity of 1.8 gigawatts. A project this scale would have cost approximately 2.5 times that price three years ago. The appetite for renewable energy resources in Africa is growing quickly and this is notable given that the region's solar power generating capacity potential is largely untapped.

Current position – progress is slow but imminent

An estimated US$835 billion investment into both electrification and transmission is required to tackle Africa's energy deficit. The financing of energy projects in the region dipped 60% in 2016 from a previous peak of US$33.5 in 2015. The need for further investment and financing is recognised and there is strong political will in the region to engage in electricity generating initiatives. Ethiopia, Ghana, Kenya and other governments across Africa have been developing projects to increase their energy production capacity. The projects include a mix of conventional and renewable energy sources (primarily, hydropower; biothermal; and some solar power), with local partners providing alternative energy sources on-grid and off-grid. The Africa Development Bank has committed to 10GW of solar power projects across the Sahel region, central-north of Africa, by 2020.

Possible solutions

Addressing the region's energy problems has the potential to yield lucrative market opportunities; however, like most investment opportunities, there is a risk element. We consider below strategic action required by Africa's leadership, international stakeholders and the role independent power projects (IPPs) could play in the dialogue.

Africa's leadership

Africa governments could facilitate cross-border energy sharing initiatives and develop harmonised codes, policies, and regulations to enhance efforts in the region and tap into the sector's overall growth capacity. A framework aimed at fostering mutual assistance in matters of common economic interests exists between African states within which such discussions could be had. The African Union, Economic Community of West African States, West African Economic & Monetary Union, and the Mano River Union are all platforms that could facilitate the exploration of cross-border energy sharing initiatives. Ethiopia and Kenya have a project under construction through which both nations can utilise cross-border transmission lines. Other African nations, particularly in West Africa, could also explore the prospect of energy infrastructure sharing initiatives.

Africa's investment partners

Tackling Africa's US$835 billion energy deficit presents significant opportunities for both traditional partners in the international community and new entrants with an appetite for doing business in emerging markets. Whilst Africa's global investment partners are traditionally Western nations (primarily the UK, US, and France), investment into Africa from China has soared within the last eight years and the reaction prompted varies from it being a mutually beneficial opportunity to former U.S. Secretary of State Tillerson's warning to African states that they should maintain greater independence from potential foreign influence.

The US's Power Africa initiative launched by the Obama administration in 2013, and supported by the current administration, focuses on connecting US businesses with opportunities in Africa's energy sector; however, the intended growth in economic activities between the US and Africa has been slow. Donor countries within the Organisation for Economic Co-operation and Development (OECD) tend not to finance large hydropower projects or coal-fired power plants, yet, hydro power is increasingly a major source of energy for Africa. The Middle East has also expressed interest in investing in energy projects in Africa, particularly in relation to gas and solar power. Recently, Islamic Development Bank and Asian Infrastructure Investment Bank entered into a partnership to fund infrastructure projects in Africa, including in the energy sector. There is a strong case for additional investment and financing in Africa's energy sector by the Chinese and the US and new entrants; however, the likelihood of additional investment depends in part on ensuring a fair risk allocation in project and financing contracts, using appropriate contractual and project structures and ensuring that public interest is reasonably protected.

IPPs and Public Private Partnership (PPP)

IPP projects can help to address Africa's energy challenges. There are various IPP projects across the region with Ghana having recently launched the first thermal IPP project in sub-Saharan Africa. IPPs in the Gulf Cooperative Countries (GCC) have been particularly successful over the past 20 years in achieving goals similar to those of Africa and may serve as a benchmark for power projects in the region.

The prevalent contract types in these projects are Build, Own, Operate ("BOO") and Build, Own, Operate, Transfer ("BOOT").

A BOO structure requires the off-taker to purchase the energy produced by an IPP and sell it to consumers with the payment of the IPPs' production guaranteed at a predetermined rate. There is a revenue risk aspect to consider and finding a financially credible off-taker could prove challenging. A way around this could be to establish a Public Private Partnership ("PPP") alongside which becomes the off-taker. The PPP initiative could be backed by guarantees from international financial institutions ("IFIs") and the host government to mitigate the off-take revenue risk. However, although PPP units have become a fiber of investment ministers in many African nations, there are no stand-alone PPP laws, and capacity building is required to ensure the efficacy of such projects.

Under a BOOT structure, there is often a concession agreement between the host government and the project company wherein the sponsors of the project company bear the risk of completion and then sell the power generating asset to the government at completion or at the conclusion of the concession period.

Deciding on a project structure that would mitigate additional risks posed by doing business in the region, and help ensure bankability, is key both to the successful delivery of a project and the sanctity of the contractual framework. Further challenges to consider are barriers to trade such as tariffs, quotas, cultural sensitivities, and protectionist measures.

Conclusion

Africa's energy market offers a great opportunity to investing in a sector with largely untapped potential capacity. However, Africa must progressively seek to harness its human resources capacity, build on its expanding private sector driven economy which is stimulated by both regional and foreign investment, have robust legal and regulatory regimes in place, engage the civil society in consultations and PPP initiatives, and pitch its prospects to development partners committed to investing in mid to long term projects. The collective effort by, and participation of, African governments, regional and global stakeholders including IFIs, and independent power producers is of key importance if Africa's economic growth is to continue and its energy generation capacity deficit is to be addressed in earnest.