Bridging the energy gap in Africa: Resources are high, utilisation is low

by Klaus Findt 0

Sub-Saharan Africa is seen as a new frontier for investment and expansion and the economic growth rates have shown immense potential during the last decade. However, continued development is only possible when the power sector is in line with national development plans – and while the continent is blessed with power resources, the infrastructure and utilisation is low, which is holding the continent back.

It is estimated that 300 billion US dollars will be needed in order for all of sub-Saharan African to have access to electricity in the next 15 years. Currently, we are at 25 per cent which if you consider consumption per capita equates to one sixth of the world’s average.

Urbanisation is driving the need for energy and power in Africa and as a result, we are seeing a number of initiatives underway from privatisation, to planned projects for the exaction of resources and a host of traditional fossil fuel based energy and renewable energy initiatives to meet this growing demand. Full scale support for such investment projects is growing – but it will take time to see the full impact – as we move from vision to implementation.

Many African governments are looking at proactively spearheading power development within their respective countries, prioritising areas to ensure projects move forward. In fact, governments in Africa have recently placed increased focus on energy projects and it is estimated that approximately US$45 billion is required per annum to fund the generation, transmission (including interconnectors) and distribution of electricity sub-sectors on the continent.

With this, Africa is still intensely dependent on fossil fuels. While certain governments are proactively looking at available alternatives and, development of renewable energy will largely be driven by government policies, the primary focus at the moment is to close growing demand-supply gaps, rather than make changes in the energy mix. Governments are also looking at how they can make the most of their existing financial assets by conducting asset sales – particularly for assets that tie up fiscal capacity – in order to recoup their investment which, in turn, can be ‘recycled’ into new expansion generation, transmission and distribution projects.

The region is characterised by ageing power infrastructure that is unable to meet the current power demands. This is then exacerbated by a number of challenges, including; under-utilisation of generation capacity due to low maintenance of assets, loss-making power utilities due to low collection rates and high operational inefficiencies, ineffective transmission infrastructure and high transmission losses of up to 25 per cent, poor planning, low skills levels and management capacity. Added to this, many projects in Africa are plagued by inadequate governance, where there is a distinct lack of policies and regulatory frameworks in the energy sector and, a lack of independent regulators. This often further limits the enforcement of such policies to attract investors.

Further to this compounding mix; sourcing adequate funding for projects presents its own set of challenges. Government guarantees are instrumental in enhancing the bankability of projects and attracting investors, but donors also have an important role to play in funding new energy projects. It has, however, become abundantly clear that private sector engagement and involvement is vital for some countries that struggle to secure the necessary funding and skills for their energy projects. In fact, partnerships between government, providers/donor initiatives and private sector are critical to ensure projects that capture resources can be turned into bankable ideas that ultimately turn on the lights.

What’s more, some of the dominant sources of funding in sub-Saharan Africa include Development Finance Institutions (DFIs) and multi-lateral institutions such as, the African Development Bank, Development Bank of Southern Africa KfW German development bank, the FMO Dutch development bank and the World Bank. And, where donor funding cannot be obtained, joint ventures between the private and public sectors have proven to be acceptable for financing energy projects in many African countries.

Countries such as Morocco, Kenya, Tanzania, Uganda, Ghana, Nigeria and Senegal, for instance, have opened their doors to foreign and local investors in their power sectors. And there have been successful cases of Independent Power Producers (IPPs) projects in North, West and East Africa.

In South Africa, the IPP model is also proving to be successful. The South African government successfully implemented the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), which entered into its fourth round in June 2014 with the first round of projects recently having reached financial closer. The success of the REIPPPP in South Africa is evident. It showcases the private sector’s willingness to invest in the power sector where there is a transparent and well-designed procurement process, transactions provide reasonable levels of returns and key project risks are mitigated by government.

There are also a number of large Greenfield projects. Most notable projects are the new coal fired power plants in South Africa: Medupi and Kusile, which will add about 4 800MW each to the national grid. These are among the largest power plants in the world and are planned to be commissioned in phases between 2015 and 2020. Other Greenfield projects, to which are worth noting is the Inga III development in the Democratic Republic of Congo planned for 2017-18. The Grand Inga project has the greatest potential in Africa, with an estimated generation capacity over 40 000MW.

 On the other hand, the power sector in Nigeria has seen successful establishment of a strong institutional mechanism. The privatisation stemmed from a broader plan to accelerate the pace of reform which seeks to transform Nigeria from a country generating barely around 3 000MW in 2009 to a target of 40 000MW by 2020. Apart from the privatised entities targets were also set for other market participants, with the ultimate aim of ensuring stable and reliable power availability to Nigerians and a viable power sector for investors.

During the privatisation process the expectations of both the investors as well as the employees working in the power sector were adequately addressed. The success achieved so far in spite of several formidable challenges is commendable and may act as key lessons for other countries planning to follow the path of reforms.

 Whichever model is used, there are two key factors that are required for successful projects – a clear energy regulation framework coupled with political will to implement the projects. The more transparency and the more defined the responsibilities are – means less red tape and faster rollout.

Pooling and leveraging commitments of governments and private sector partners is critical if we are to overcome the barriers that have constrained Africa’s power sector, which ultimately will constrain its economic growth and development. While countries in Africa will continue to develop the cheapest available energy resources, ideally we would like to see more countries adopt models that will work best based on their geography and available materials to speed up progress in bridging the demand-supply gaps.

*Klaus Findt is KPMG Head of Infrastructure in Africa is attending the World Economic Forum on Africa 2015, which takes place in Cape Town, 3-5 June.