Energy Investment in Sub-Saharan Africa

By: Nuveshen Naidoo, n.naidoo@primeafrica.net

In articles elsewhere in this communication an argument for investing in Africa was made off of Sub-Saharan Africa’s (SSA) economic growth potential. This article specifically investigates the potential for energy-related investments in SSA.

The demand for energy in SSA currently far exceeds supply, as a result, various African governments, as well as the US government, have initiated large scale, power infrastructure support initiatives to attract global investment. These investments are fundamentally demand driven, but also seek to develop Africa’s large energy resource potential.

The demand is fundamentally driven by a large, fast-growing and increasingly prosperous SSA population. The SSA population in 2015 is estimated to exceed 900 million people, or approximately 13% of the world’s population. By 2050 the United Nations forecasts this number to be 2.1 billion, roughly 22% of the world’s total. These favorable demographics, supported by increasing urbanization and diversification of economies, will further drive demand for energy and its associated infrastructure.

Approximately half of all SSA inhabitants do not currently have access to electricity, and those that have access often have an unreliable service, or rely on expensive forms of energy such biomass for cooking and heating, or diesel generators for electricity. However, SSA has various energy resources that can provide for a much expanded power supply. These unique conditions in SSA’s energy sector allow for substantial opportunities for investment.

Since the 2009 economic crisis, various African governments, as well as the US government, have increasingly been actively supporting private sector investment in energy infrastructure projects in SSA. This is a departure on the traditional model where power generation was done mainly through state-owned energy companies. The new trend has been towards the procurement, by the relevant government, of power generated by “independent power producers”, commonly referred to as IPPs. These types of programs are typically in the form of guaranteed off-takes of power supply, typically by existing state-owned energy companies, at agreed-upon tariffs, and through long term contracts. These types of arrangements significantly reduce investor risk.

Two particularly exciting developments are USAID’s Power Africa program, and South Africa’s Independent Power Producer (IPP) procurement program.

Power Africa (https://www.usaid.gov/powerafrica), launched by President Obama in 2013, intends to bring together technical and legal experts, the US private sector, SSA governments and the African Development Bank (AfDB) in partnerships to increase Africans’ access to power. The objectives of the initiative are to develop 60 million new electricity connections and 30,000 MW of new generation capacity in all SSA countries. The AfDB has committed more than $1.65 billion in energy infrastructure funding to date, and its new investment vehicle the Africa50Fund seeks to invest $10 billion for infrastructure projects, leveraged to $100 billion. To date Power Africa has assisted in the financial closure of 4,100 MW of projects. Power Africa is administered by USAID and provides a range of supporting and enabling services. For instance, the US Government has expressed interest in working with the AfDB to develop a Partial Risk Guarantee (PRG) that will top up/co-guarantee its existing African Development Fund PRG instrument.

South Africa’s Renewable Energy Independent Power Producer Program (REIPPP) has, since 2011, already delivered more than US$14 billion in investment in the sector through a competitive process that has led to rapid improvements to the cost of power. South Africa has already awarded contracts totaling 6,300 MW primarily for photovoltaic, wind and concentrated solar projects with the goal of achieving 17,800 MW by 2030. The success of the REIPPP has led to the establishment of similar IPPs for coal (2,500 MW) and gas (3,126 MW) projects. According to South Africa’s Integrated Resources Plan the country also aims to develop 9,600 MW of nuclear, 6,300 MW of coal and 11,000 MW of other generation by 2030. Power Purchase Agreements (PPA) for renewables and coal are 20 and 30 years, respectively with the government’s National Treasury providing a guarantee over national power utility Eskom’s payment obligations.

With the International Energy Agency expecting capacity to quadruple to 385,000 MW by 2040, the outlook on energy in SSA is bright. In the near term we can anticipate renewables dominating investment, being driven by falling prices, greenhouse gas reduction targets and the distributed nature of energy demand. In the short to medium term, coal projects also play a part with low costs and vast reserves in many parts of the continent. In the long term, natural gas is expected to play a crucial and increasing role. Southern Africa has off-shore and (unproven) shale gas reserves. The South African Government’s Gas Utilization Master Plan (GUMP) envisages LNG as a key enabler for a gas economy and the first LNG-CCGT (liquefied natural gas – close cycle gas turbine) is being planned in the harbor city of Coega.

Over the medium term however, the energy investment outlook is therefore also expected to broaden its scope to improving power transmission networks and to the development of infrastructure to support a diverse natural gas economy. Over the long term we expect to see a well-connected, efficient and sophisticated regional energy market.

The African market however is not homogenous, with many different country and sector specific influences and risk factors affecting growth in the component markets, meaning that investors still need to be prudent in their portfolio allocations. The investment opportunities in all aspects of power production, distribution and associated services are numerous. EHS-Support and Prime Africa can offer US investors a range of tools and services including market intelligence reports, acquisition targeting, and due diligence to assist with the identification of investment opportunities, navigating regulatory requirements and investment risk management throughout the investment life cycle, in energy and other emerging sectors.

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Prime Africa consultants will be in the United States in October, presenting market and economic analysis techniques for assessment of risks in acquisitions in Africa and other emerging markets at numerous forums. Prime Africa completes African market analysis for numerous multinationals and has conducted major economic and business risk analysis projects for private sector clients and investment banks for African projects. EHS Support and Prime Africa are available for an in-person meeting. For more information on energy investment in SSA, please contact Kevin Simpson, or Nuveshen Naidoo at n.naidoo@primeafrica.net or +27 76 390 0137.

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