For European navigators sailing off the African coast, strong winds around the Cape of Good Hope used to be an ominous prospect. For European investors setting their eyes on the African continent, they’ve clearly turned into a source of great hope.
Last October, Ireland’s Mainstream Renewable Power was chosen as the preferred bidder for three of South Africa’s largest wind farm projects, totaling a planned capacity of 360 megawatts (MW). The plants were part of the government’s latest round of renewables tenders, comprising 17 projects of a combined 1.5 gigawatts (GW). South Africa now ranks among the top 10 nations for renewables investment, punching above both Brazil and France in 2012.
Other opportunities are springing up elsewhere on the continent. In December, African Infrastructure Investment Manager (AIIM) backed Kenya’s $150 million Kinangop Wind Park – the first independent, large-scale wind farm in East Africa. This followed an agreement between power-focused Endeavor Energy and JouleAfrica to develop a 252MW hydroelectric plant in Sierra Leone, and the connection to Ethiopia’s grid of the 120MW Ashegoda wind farm – currently Africa’s largest.
Yet there could soon be much more. “Provided we develop it properly we could supply Africa solely with renewable energy,” says Youssef Arfaoui, chief renewable energy specialist at the African Development Bank, Africa’s largest financier of clean energy. For example, he notes that the Inga hydropower plant, located in the Democratic Republic of the Congo, has potential estimated at 44,000MW – half the continent’s current installed capacity.
Sub-Saharan Africa would certainly welcome the move. Nearly 70 percent of the region’s population has no access to electricity, and its total generation capacity is roughly equal to that of Spain – which has about 5 percent as many inhabitants. And demand for electricity is fast increasing, reckons Sean Long, chief executive of Endeavor Energy. “Africa has seen continued economic growth even through the financial crisis, and you see more and more citizens moving to cities.”
TRADE NOT AID
Ten years ago investors had little interest in African renewables, recalls Torbjorn Caesar, co-head of energy at fund manager Actis. But he believes things have now changed. Thanks to the vast amount of subsidies deployed in the sector by Western governments, the price of wind turbines and solar panels has fallen dramatically over the last couple of years. Meanwhile oil prices have increased substantially.
It also helps that a number of equipment producers – included Chinese suppliers – have set up shop on the continent, says Beryl Phalatse, investment manager at South Africa-based Harith General Partners.
As a result, Caesar argues, renewables now compete on an equal footing with other electricity sources. “Renewable power is generally not a subsidised activity in these markets. Governments simply want the cheapest available electricity for their people.” He underlines that Actis, which closed a $1.15 billion power focused fund last December, has greatly increased its presence in the sector – despite being technology-agnostic. “It just happens that renewables are the most commercial source of power.”
This has not been lost to other players, says Jasandra Nyker, chief executive of sub-Sahara-focused Biotherm Energy. “There is a huge interest from both international and local investors in these kinds of projects. And many of them are now expanding their horizon and looking outside South Africa.” While the sector is still perceived as risky – because of the upfront capital expense and the lack of suitable insurance products – a number of assets have now been de-risked thanks to DFI support and better structuring, she argues.
The variety of projects on offer also lures a wider array of players to the market, argues Andrew Johnstone, managing director of AIIM. “Different types of investors step in at different stages of project and process development.” In addition to local developers and DFIs, these now include European utilities, private equity firms and infrastructure funds.
Yet this fresh window of opportunity may not last forever, cautions Johnstone. “The South African region is benefitting from the very low cost of European capital. Investments in renewable projects are offering quite strong yields with an emerging market flavour to it, with a fair degree of predictability and good counter-party credit. For utilities looking to make capital investment the alternative is a sluggish market in their home region, or unattractive returns on cash or bonds.”
But with attractive opportunities now emerging in their home market, he thinks capital could grow more expensive. “We don’t expect European utilities to continue dominating the market perpetually.”
Most worryingly, he says, inflation could come into play at other levels. “Most markets closed down on equipment suppliers after the global financial crisis, and global production capacity decreased as a result. If and when renewable energy becomes attractive again in the developed markets, supply and demand dynamics could push equipment prices back up again.”
Such threats are all the more pertinent as return expectations sometimes remain too high – although Nyker reckons many investors have started to adjust their sights. She points out that returns for solar projects are now lower than during 2008 to 2009. “It’s definitely becoming more of a utility return play than an exceptionally high return play.”
This perhaps explains why, outside South Africa, reaching financial close can still take time – sometimes several years – potentially weighing on investor confidence. “In some instances some regions may be taken less seriously than others because of that.”
FRAMEWORK IN PROGRESS
South Africa’s renewables programme provides a useful template of how such concerns can be addressed, explains Johnstone.
Initiated in 2007, Johannesburg’s three successive rounds of competitive auctions have led to a drastic reduction in procurement and power generation costs, even as perceptions that the risk had been dissipated out of the award process drew an increasingly international profile of investors to the market.
The imposition of strict deadlines to reach financial close was also key to the programme’s success, Johnstone says, as was the move away from fully indexed tariffs.
Of course, notes Arfaoui, the South African example provides no one-sizefits-all solution. With each nation having access to different resources – both in terms of traditional fuels and cleaner sources – it is up to its leaders, advisers and partners to work out the right energy mix and timetable for phasing in renewables.
But there are signs that ambitious strategies are burgeoning elsewhere on the continent. “The government is putting focus on renewable energy sources to meet the expected installed capacity of 2GW by 2030,” said Kenya’s Energy Regulatory Commission, in reply to our queries about the country’s energy policy.
Nairobi’s initiatives to support this goal include the removal of import duty and VAT on renewable energy, equipment and accessories; feed-in tariffs covering wind, small hydro and biomass; and a Green Energy Facility to pool donor contribution. Phalatse also singles out Uganda, Nigeria and Namibia as having firmed up their renewable policies recently.
Encouragingly, observes Caesar, it is now generally easier to arrange financing for renewables projects than for conventional power stations. In particular, DFIs will often agree to support fossil fuel-fired plants – so as to bridge short-term capacity needs – only if it supports the goal of developing clean technologies in the long run.
“That’s exactly what we are doing in Comoros: rehabilitating fossil fuel power plants, while preparing for transition to clean energy production by exploiting the potential of hydro, geothermal and solar,” says Arfaoui.
It may thus take time before renewables can fully play their part in plugging Africa’s power gap – but at least the current seems to be flowing in the right direction.