Off grid and captive power solutions sustain investment in Africa’s energy sector
With recent reports estimating that six hundred million people are without access to electricity in sub-Saharan Africa, significant and sustained investment is required across Africa’s entire energy generation and supply value chain.
While even a decade ago meeting Africa’s energy backlog was considered unaffordable, today, many largely technology-driven factors are creating new opportunities for investment in Africa’s energy sector.
Significant improvements in the cost and quality of renewable technologies are enhancing the feasibility and attractiveness of energy projects in Africa. Combined with new battery storage capabilities, “these changes offer investors, funders, governments and consumers a fundamentally different energy make-up and mix – presenting Africa with a new universe of energy ownership, supply and funding opportunities,” says Renita van Tonder, Head of Power at Standard Bank.
The trend is clear. As the size and number of large government-funded and implemented non-renewable power projects in Africa has decreased there has been an uptick in smaller mixed public-private (or entirely private) off-grid power projects with rational, local end-user funding.
To date, Standard Bank’s power and infrastructure portfolio has been biased towards large scale projects and finance solutions developed for grid-dependent power producers. While large utility-owned non-renewable projects will remain an important part of the energy value chain, off-grid offers a faster way to close Africa’s power gap.
“By expanding Africa’s energy mix beyond state-funded utility-provided non-renewable grid solutions Africa can – much more quickly and affordably – support its immediate industrial and business growth needs,” says Stephen Barnes, Global Head of Power and Infrastructure for Standard Bank.
Renewables – especially privately or partially privately-funded new off-grid and captive power solutions – are set to sustain and expand investment while increasing affordability and access to electricity in Africa’s rapidly evolving energy landscape.
From a funding perspective, off-grid deals have shorter tenors and can often be denominated in local currency. As such, off-grid projects lend themselves to Africa’s traditionally more illiquid and hard currency constrained environments. Since local currency debt structures support the development of domestic currency markets renewables projects denominated in local currency could make domestic African pension funds, for example, relevant to domestic energy supply, directly leveraging domestic savings for national development.
To date, Africa’s off-grid power landscape has seen the most growth in the solar home systems (SHS) and commercial and industrial (C&I) segments.
Africa’s SHS energy segment is currently dominated by small 8 to 200 watt solar panels mounted on the roofs of small rural homes – with larger customised solutions in the affluent market. By allowing customers to pay in instalments via pay as you go, SHS are breaking the affordability barrier for off-grid solutions in Africa. “As such, looking ahead, most of the growth in terms of households covered by off-grid power solutions could come from service-platform developers able to leverage strong distribution platforms,” says van Tonder.
In Africa’s C&I energy segment, off-grid solar systems have created new markets for investment across the value chain, from the product developer to the integrated service provider. For example, factories and business complexes that produce their own renewable (largely solar) power are proliferating across the continent. Large mines too often also supply electricity to local communities. These captive power systems operate mini and localised grids, “effectively acting like utilities in the supply and sale of power to local communities and businesses,” says Mr Barnes. Going forward, there is further opportunity to target tier one property companies or corporates with large property portfolios in Africa, “creating local offtake financing solutions for rooftop solar installations on their properties – and then selling energy to local communities,” adds van Tonder.
Standard Bank has developed an off-grid strategy focused on developing a continent-wide off-grid project pipeline aimed at driving the growth of Africa’s off-grid renewables sector. “With Standard Bank’s established presence in 20 markets, we are particularly well-placed, for example, to use available information to identify and unlock rational off-grid user-pay opportunities for revenue-independent power development and supply across the continent,” says Barnes.
Given Africa’s energy deficit and sovereign credit challenges, the continent’s energy future will need to blend the full range of energy sources and technologies, renewable and otherwise, “in both grid-connected and off-grid solutions that mix public and private, and local and global, investment in affordable and sustainable revenue generating structures,” says van Tonder.
Developing this diverse energy supply and generation mix will require an equally diverse funding mix if it is to be sustainable.
The global trend towards public private partnerships (PPPs) is currently playing out across the African continent. While non-cost reflective tariffs in some countries make PPP financing solutions more challenging, recent moves towards cost-reflective tariffs in Mozambique, Ghana and Zambia facilitate the relevance of PPPs as a viable funding model – providing the potential to further improve the electrification rates across Africa.
Adding localised privately funded and user-pay solutions to the national grid or allowing entirely independent off-grid solutions to take pressure off the grid, “provides debt-stressed African sovereigns with a way of funding the development of power projects – by moving substantial investment off government balance sheets,” explains van Tonder.
Another opportune trend for Africa is that development finance institutions (DFIs) and export credit agencies (ECAs) driven by their governments’ environmental agendas are increasingly willing to partner with commercial banks to fund projects that integrate renewable power into African grids – or provide entirely off-grid alternatives that bring affordable and sustainable power to more Africans. Debt structures including more patient DFI or ECA funding, “allow commercial banks to support the longer-tenor projects that characterise large power and other infrastructure projects,” says Barnes.
At the global level ongoing low yields in developed markets are encouraging cyclical investment in emerging market assets. In this environment, “well-structured renewable or mixed power projects supported by innovative PPP and user-pay legislation will provide sustainable long-term yield for developed world funds,” explains van Tonder.
This is an exciting time for Africa. The continent’s governments, banks, businesses and consumers – and the world’s investors – are faced with a, “significant technology-delivered opportunity to build a sustainable, affordable and long-term yield-generating energy ecosystem in Africa with the potential to drive growth and broaden prosperity for generations to come,” says Barnes.