Bhavtik Vallabhjee| Barclays Africa
Africa’s power and energy sector is a critical driver of growth and development across the continent – so in order to ensure that the industry reaches its full potential and addresses the energy needs of citizens, it is necessary for businesses and producers to keep up to date with a rapidly changing landscape.
In this way, we have identified five key trends that will impact on the way that people live and work:
More countries and companies worldwide are focusing on going green and investing in low-carbon technologies – a move that became more pronounced following the commitments made at the COP 21 United Nations Climate Change Conference in late 2015.
Appetite for coal projects is declining globally, but the trend is particularly noticeable and growing in OECD (the Organisation for Economic Co-operation and Development) member states. Organisations headquartered in some of these countries have largely exited investing in of coal power plants , making public statements that they are focusing more intensively on low-carbon tech. China, too, is starting to make strides in the move away from its reliance on coal plants towards cleaner energy.
As low-carbon technologies and green energy continue to become more commonplace, financing coal power plants will become increasingly difficult. Similarly the pool of potential suitors to acquire such assets in mergers and acquisitions (M&As) deals will also consequently shrink.
What’s more, there is a growing push from African countries such as Morocco, Senegal and South Africa, among others, to move from coal as feedstock to sources such as gas to fuel power plants. Renewable energy solutions in solar, and wind in particular have increased markedly due to the falling cost of these technologies making them competitive. Similarly, with the low cost of gas more latterly compared to several years ago, (e.g. through the shale gas revolution in the USA) gas power plants have increasingly become more competitive compared to clean coal technologies. Connecting renewable energy onto the grid is becoming more affordable as Africa is blessed with abundant natural resources such as great solar irradiation and wind resource. E.g. the best solar sites in the Northern Cape in South Africa, for example, receive over 2 500Kwh/ m2 hours of sunshine every year, with average solar radiation levels of between 4.5 and 6.5 kWh/m2 (kilowatts per metre squared per hour) every day. To put things in perspective, this is over two and a half times what Germany – a world leader in solar energy – receives, indicating the immense potential to tap the continent’s natural resources.
As such, it stands to reason that it is this dynamic that will ultimately impact on and alter the power landscape in Africa. While Africa has typically lagged behind developed markets in the uptake of renewable energy, this will become a feature of the past as appetite for renewable energy increases.
A critical part of the uptake of renewable energy is the use of an auction tariff regime as opposed to a feed-in tariff. South Africa already has the auction tariff system in place, as the country studied the best-of-breed practices in other markets globally before deciding to adopt a similar approach here in S.A. . The move has worked well for the country and resulted in the cost of tariffs falling, which is beneficial to consumers. There are similar initiatives in many other markets globally, including in Africa.
There has been massive investment in battery storage and research and development in the field by leading global companies such as Samsung, Tesla, Total and BYD in the past five years – and it is going to continue to gain momentum going forward, particularly when coupled with solar photovoltaic plants for storage of energy.
What will drive the growth of battery storage further is that the costs will drop substantially in the next three to five years.
It is well documented that African countries have endured challenges in the past with providing their citizens with electricity – more than 600 million people across the continent are still without power, illustrating that much still needs to be done in this space. It is my view that with the rise of trends like decentralized distributed generation, closing that gap will become more easily achievable.
Distributed generation has the ability to bring more citizens into the energy fold through the building of smaller power stations at specific load centres, rather than building bigger, centralised stations that need to transmit power long distance. This also assists in reducing transmission losses as power would not need to be evacuated over long distances. The introduction of multiple, smaller grids can substantially assist in transmitting power to where it is needed, bringing down the number of people without electricity.
There are huge opportunities in the decentralisation of renewable energy and businesses and countries that embrace the shift and invest in the space will yield good returns.
In developed markets such as the US and Europe, many countries’ grids are linked or integrated to evacuate power from a country with a surplus to one that has a deficit and is in need of power. This is not the case in Africa, where there are very distinct regional power pools – such as the northern, southern, eastern, western, and central power pools – with very little overlap and integration between them.
Although investment in transmission projects to link grids is slowly increasing in prominence, with many examples of transmission projects in countries such Ethiopia, Kenya and Mozambique, it is a gradual development and an expensive exercise. It is for this reason that growth in this area will continue to be slow and developments will only be visible over the next decade or even longer. However, as transmissions projects serve as a pre-cursor to power generation, investment in this space is a necessity and, as such, will continue to occur.
Due to the large supply-demand gap in power on the continent, there will continue to be a large number of power projects being developed in the region. The political and economic climate across the continent has steadily improved over the last 2 decades or longer, making Africa a strong investment case for international developers. Despite the frustration of long lead times associated with developing infrastructure projects, on a risk-return adjusted basis, Africa still boasts far better returns than developed markets. Projects are generally well structured making the default rate on projects almost negligible. With its abundant natural resources for power (good solar radiation, wind, hydro and biomass potential, gas finds, amongst others), the energy landscape is changing – Africa will continue to be a compelling investment case.
Get the best of CNBC Africa sent straight to your inbox with breaking business news, insights and updates from experts across the continent. Sign up here.