Many sub-Saharan African countries have set ambitious targets around the incorporation of renewable energy in their power mix over the next decade. EXXAfrica’s latest briefing explores the opportunities and challenges for private investors in some of the continent’s most prominent economies.
It is estimated that over 640 million Africans still do not have access to electricity – representing a staggering 60 percent of the total population of the continent. While a hindrance to economic and social development, this gap also means that sub-Saharan Africa constitutes the world’s largest untapped market for electrification, and consequently represents a huge opportunity for renewable energy.
Our latest analysis briefing provides a bird’s eye view assessment of this opportunity in sub-Saharan Africa’s three largest economies – Nigeria, South Africa, and Kenya – over the next decade and highlights promising shifts in some smaller economies as well.
While Nigeria is endowed with vast natural resources that could be harnessed for renewable power, this potential remains largely untapped. Of its installed capacity, between 80-85 percent of electricity generation comes from thermal power – mainly gas. According to the US Power Africa Programme, despite having over 12 MW of capacity, most days Nigeria only generates around 4 MW of power. Coupled with a rapidly expanding population, Nigeria has ever growing energy needs. In an attempt to turn this around and address massive electricity shortfalls in the country, the government has developed several plans to ensure growth in renewables over the next decade.
The Nigerian Renewable Energy and Energy Efficiency Policy (NREEEP), approved in April 2015, commits Nigeria to achieving a greater share of its national electricity supply from renewable energy sources by 2030. To achieve this, the country’s Renewable Energy Master Plan (REMP) intends to increase the supply of renewable electricity to 23 percent in 2025, and 36 percent by 2030. Through this, renewable electricity would then account for 10 percent of Nigeria’s total energy consumption by 2025 before being expanded to around 20-30 percent by 2030. While Nigeria’s REMP provides for 20 percent by 2030, individual government ministries have promised 30 percent by 2030.
While hydropower is the main source of renewable energy generation in Nigeria today, given the risk of droughts, the country is looking to diversify its energy resource mix with a strong focus on solar. Over 2017 and 2018, for example, the country invested more than USD 20 billion in solar power projects to boost the capacity of its national grid and reduce reliance on it by building mini-grids in rural areas without access to electricity. To this end, a USD 350 million World Bank loan is being used to build 10,000 solar-powered mini-grids by 2023 in rural areas.
In addition, according to a ‘job census’ report by Power for All, a non-governmental organisation, growth in the renewable energy sector is already having a positive spinoff in terms of job creation where the sector’s workforce is now comparable with traditional power grids and utilities in Nigeria. The sector currently employs 4,000 informal jobs compared to 10,000 employed across the country’s traditional energy sectors. Most importantly, jobs in the renewable energy sector are expected to grow by 100 percent in the next four years in Nigeria.
Despite the vast potential for renewables in Nigeria, growth has been hindered by a lack of funding, prolonged discussions around tariffs in bilateral engagements with investors – as opposed to through open tenders – volatility of the local currency, the basing of tariffs in Naira as opposed to US dollars, and unresolved liquidity issues in the sector.
There are further concerns that the government will continue propping up the currency and maintain costly subsidies, both policies which foster massive fraud and embezzlement. As the budget deficit widens, debt servicing spikes, and some banks continue to struggle, there are growing concerns that Nigeria may be running into ‘bankruptcy’. EXXAfrica addressed such issues in various recent analysis briefings (See NIGERIA: WEAK TAX COLLECTIONS AND ASSET SEIZURES POSE RISK TO REPAYMENT OUTLOOK).
According to South Africa’s Ministry of Energy, around 91.2 percent of electricity generation comes from thermal power stations whilst around 8.8 percent comes from renewables. The release of the country’s long-awaited Integrated Resource Plan (IRP), approved and made public on 18 October 2019, has the potential to change this, however. The last such plan was the IRP 2010 promulgated in March 2011. The latest plan maps out the scale and pace of new electricity generation capacity to be commissioned until 2030 and has a strong focus on renewables.
The IRP provides for 14,400 MW of new generation to come from wind, 6,000 MW from solar photovoltaic (PV), 3,000 MW from gas, 2,500 MW from hydro, 2,088 MW from storage and 1,500 MW from coal. Given the long lead times, preparation will start now for new nuclear builds that will come online after 2030. South Africa’s only nuclear power station, Koeberg, is coming to the end of its life by 2024. The government is in talks with the state utility, Eskom, to refurbish the station and extend its life until 2044. Thereafter, modular nuclear power station stations will be built to replace the decommissioning of coal-fired plants.
As demonstrated, there is a strong focus on renewables in the plan with 48 percent of new energy capacity to come from wind, 20 percent from solar, 10 percent from gas, and eight percent from hydro. Moreover, the private sector is expected to largely fill this gap, as there will be no more complex and expensive baseload infrastructure projects that the country previously pursued. Indeed, upon the launch of the plan, Energy Minister Gwede Mantashe confirmed this when he noted that government urgently needed another 4,000 MW installed as quickly as possible. It is expected that there will be at least two IPP rounds within the next two years.
In addition to presenting an opportunity to IPPs, the growth in renewables also has the potential to help kick-start manufacturing in this regard as well. Equipment manufacturers of wind and other renewable energy inputs have said that these projects would go a long way to establishing South Africa as a manufacturing base for components, boosting exports to the rest of Africa.
One of the main criticisms of the IRP is that it repeats the past mistake made of assuming a demand for electricity that is far too high. In 2016, the difference between actual electricity sent out compared to the expected amount to be sent out was 18 percent. The median forecast for such growth is based on an average GDP growth rate of 4.26 percent by 2030, whilst the low forecast is based on 1.33 percent.
Many do not believe this will materialise. Not only is this likely to impact electricity tariffs and Eskom’s ability to service its debt, but it may mean that the IRP will have to be updated in a few years should demand growth prove to be lower. Such revisions are likely to impact policy certainty and investor confidence. EXXAfrica has covered the isusue of enery sector reform in various recent briefings and a new report on renewables in the power mix is upcoming in coming weeks (See SOUTH AFRICA: PRESIDENT FACES CRUCIAL DECISION ON ESKOM REFORM IN POLICY ADDRESS).
Kenya leads in exploiting renewable energy sources in Africa as these sources already contribute significantly to the overall energy mix in the country. The country currently has an energy mix consisting of around 85 percent of renewables, for example, largely driven by geothermal and hydro. The next ten years promises to provide even more opportunity in this regard.
Kenya has a stated goal of 100 percent renewable energy generation by 2030 to be complemented by a diverse technology mix. Although hydropower contributes significantly to energy production at the moment, given the risk of unreliability during periods of drought, the government is looking to enhance solar, wind, thermal, and geothermal generation in its long-term plans.
One of the ways in which the government is ensuring this is by entering into major public-private partnerships. This was demonstrated as recently as August 2019 when the Kenyan Investment Authority and Meru County Government entered into a Memorandum of Understanding with global renewable energy developers to build Africa’s first large scale hybrid wind, solar PV, and battery storage project – the Meru County Energy Park. The park will provide up to 80 MW of renewable energy, consisting of up to 20 wind turbines and more than 40,000 solar panels.
Electricity generation from wind specifically is also expected to attract significant investment over the next decade. In March 2019, for example, the largest wind power plant in Africa – the Lake Turkana Wind Power Project (LTWP) – became fully operational. Further wind energy investments from the private sector are expected to be facilitated by the country’s Feed in Tariff (FiT) policy and its Least Cost Power Development Plan. In this regard, Kenya’s power industry generation and transmission system planning is undertaken on the basis of a 20 year rolling Least Cost Power Development Plan (LCPDP), which is updated every year. Wind has been prioritised in this.
The growth in renewables is also expected to have a significant impact on the job market, as witnessed in Nigeria. According to Power for All, decentralised renewable energy companies in Kenya account for 10,000 jobs – only 1,000 fewer than the national utility. Moreover, renewable energy jobs are expected to grow by 70 percent in Kenya over the next four years.
Following a review of Purchase Power Agreements by a taskforce in 2016, a number of key recommendations were made to improve the market. Chief among these was the reduction in the tariffs under the FiT policy to help manage costs and keep in line with the LCPDP. Policy certainty around mini-grids was also called for, as was improved access to finance and land.
Recent cancellations of high-profile hydropower dam projects have also called into question the viability of some projects, the risk of contract frustration, and the persistent threat of corruption affecting large projects. In July 2019, Kenyan Finance Minister Henry Rotich was arrested on suspicion of financial misconduct related to the construction of two dams overseen by Italian construction company CMC Di Ravenna. The case is highly politically motivated and the projects concerned have since been cancelled (See KENYA: FINANCE MINISTRY FALLS AT THE HEART OF POLITICAL POWER STRUGGLE).
Beyond these three large economies, Ghana and Ethiopia have been identified as having significant renewable energy potential as well.
Looking at Ghana, in February 2019, its Energy Commission lodged its own REMP, setting out the blueprint for power production until 2030. Under the plan, Ghana aims to increase installed renewable capacity – which, under the classification, excludes hydropower projects greater than 100 MW – from 2015 levels of 42.5 MW to 1,364 MW by 2030. To achieve this, the government plans to enact tax reductions; exemptions on import duties and value-added tax through to 2025 on materials, components, machinery and equipment that cannot be sourced domestically; and, import duty exemptions on plant parts for electricity generation from renewables.
Looking at Ethiopia, despite its large energy potential, the country is experiencing energy shortages as it struggles to serve a population of over 100 million people and meet growing electricity demand, forecasted to grow by approximately 30 percent per year. Its Growth and Transformation Plans I and II seek to rectify this, outlining multi-year plans to transform the country into a middle-income country by 2025 and to starkly increase electricity generation, particularly through hydropower – which accounts for 70 percent of current power generation – but also through solar power and wind. Numerous tenders have already been released to help reach this target, with the latest tender call for the provision of mini-grids in 25 rural towns being made in mid-October 2019.
Sub-Saharan Africa’s smaller economies also present significant opportunities for investors. The five countries with the highest renewable energy investment as a percentage of GDP globally, for example, are all emerging or developing economies. From sub-Saharan Africa, Rwanda and Guinea-Bissau make this list. Other smaller economies have also set renewable energy targets, demonstrating a commitment to the development of this sector. This includes Cape Verde, Djibouti, and Swaziland.
From the continent’s largest economies to its smallest, it is clear that there is a focus on the development of renewable energy in sub-Saharan Africa. Growth of this sector promises to not only plug the gap with regard to electricity generation, particularly in light of a growing population, but to help the continent achieve its climate goals.
While the opportunities and indeed the challenges differ from market to market – as a result of local political, socio-economic and security challenges – investors should nevertheless recall some of the more generalised risks that they may face when investing in this sector in sub-Sahara Africa.
These may include:
– A weak or underdeveloped regulatory environment;
– Shifting energy policies under new regimes;
– The creditworthiness of state-owned utility companies;
– Corruption and/or political pressure;
– Lack of financing for projects; and,
– Contestation over land.