New technologies have created previously unimaginable solutions to Africa’s energy backlog. At the same time the continent’s energy industries are going to have to box clever to stay abreast of the new developments. There is much interest from the global energy sector, especially in the booming economies of East Africa. But while the technological and especially the business innovations are often remarkable, mass roll-out still lies ahead.
‘Renewables is the big happening thing right now,’ says De Buys Scott, senior partner in the deal advisory team and head of the infrastructure advisory division for consultants KPMG in Johannesburg. He argues that Africa needs both on-grid energy development, involving national utilities, and off-grid programmes, especially in far-flung rural areas. ‘There’s plenty of development in both spaces,’ he says. Recently, however, some of the most dramatic action has been off-grid. ‘Every time I look up, a new small renewables off-grid or micro-grid project seems to have popped up,’ says Scott.
In 2017, the push for the installation of micro-grids is stronger than ever. One of the drivers is donor finance, especially that offered by US development agency Power Africa through its Beyond the Grid programme. Power Africa aims to double the continent’s connectivity by enabling 60 million new small-scale and off-grid connections for homes and businesses. The agency is building a network of investors and practitioners. Power Africa’s primary tool is early-stage grant finance, available for pre-feasibility studies, development of innovative business models and capacity building. Its ambition is to leverage US$1 billion in private-sector investment.
In Kenya, Power Africa is partnered by M-KOPA, an international ‘pay-as-you-go’ energy provider. The company’s CEO, Jesse Moore, believes that in the energy space, Africa is developing in the same sort of way it went with mobile telephony. It’s going to leapfrog the age of on-grid wire connections and go directly to off-grid wireless solutions, he says. In Moore’s opinion, ‘the new model dovetails nicely with grid expansion’. Africa needs to push on both fronts.
‘Off-grid has a market potential of perhaps 300 million people,’ says Moore. ‘It is not necessarily the household market, but rather the rural, poor market.’ The trick in Kenya, he adds, is to implement systems that this market can afford. In a dramatic illustration of how technological innovation is self-reinforcing, he points out that M-KOPA’s customers use another wireless innovation – the M-PESA mobile phone payment system – to pay for the electricity they consume. The new technology is invariably cheaper than the old paraffin, torch battery and diesel alternatives it replaces.
Although M-KOPA has connected 500 000 houses to stand-alone power systems, the model is still a work in progress. ‘The big question is how to scale up from 500 000 customers to 5 million, or 10 million,’ says Moore. Referring to the investment case for off-grid solutions, he points out that it is developing in exactly the way that should be expected of disruptive technologies. ‘The technical solution is the starting point. It takes a bit of time to work through the business model. Then you need volume [of customers],’ he says. Indeed, it might be argued that volume is the next frontier in African energy, and not only in the case of off-grid renewables.
South Africa – which is still the continent’s key market, in Scott’s opinion – illustrates the problem. When its Renewable Energy Independent Power Producer Procurement (REIPPP) programme was introduced in 2011, the biggest issue facing its energy sector was inadequate generation capacity.
The REIPPP leveraged ZAR194.1 billion in investment and was widely regarded as a world-leading exemplar of an intelligent, well-managed renewables programme. But, in 2015, South Africa’s sole bulk-energy purchaser, national power utility Eskom, started to delay the signing of power purchase agreements (PPAs) with independent producers.
PPAs are the final piece of the puzzle in each independent project. Only once these are in place is the revenue stream assured, and only at that point will the investment go ahead. At mid-2017, final sign-off was outstanding on 37 PPAs. Although South African President Jacob Zuma announced, in February, that the agreements would go ahead, Eskom was still stalling at the end of May. Reports suggest that ZAR57 billion is awaiting final approval before it flows. The problem is that while electricity supply in South Africa was constrained when the REIPPP was designed and introduced, it is no longer a problem. Now the issue is much lower levels of demand than had been planned for.
South Africa’s slow economy is a factor in this, but Eskom has partly created its own problem. The phenomenon of ‘grid defection’ has been widespread. Many major users have gone partly or completely off-grid in order to secure supply. Energy-saving has been a massive focus in industry and the plummeting cost of renewables, especially solar, has rendered this an attractive option to big, vulnerable producers such as South Africa’s mines.
It is not inappropriate to see the issues in South African energy as evidence of the gaining micro-economic efficiencies of renewables off-grid and micro-grid solutions compared to big on-grid, utility-driven alternatives. This is likely to be the case in the future.
Scott says huge renewables programmes worldwide are going to make the sector more cost-competitive through increased competition. India, for example, has committed to installing 100 GW of solar capacity, of which 20 GW will be built in 2017.
However, this does not mean the day of the national utility is done. Africa is a vast and divergent continent. Levels of development readiness vary enormously between countries and so too, in parallel, do the energy issues that arise. Outside of South Africa, the emphasis has been on the first phase of the value chain – electricity generation. This, Scott suggests, will remain the necessary preoccupation of less-developed economies. But the larger economies are moving into areas where they need to become savvy regarding areas further up the value chain, especially grid efficiency, distribution and market development.
‘I can think of half-a-dozen transmission [grid strengthening and regional power pool] projects in Southern Africa alone, with more further north,’ he says. These are invariably interactions between national utilities, and require commitments between governments.
In fact, energy consultants Frost & Sullivan see a major role for utilities in rolling out micro-grids. The company’s business unit leader for energy and environment in South Africa, Travis Hough, says there are four possible routes to rolling out smart grids. ‘It could be done through a privately funded model, through a consortium involving the community, through the utility acting alone or via the model we prefer, a hybrid.’
This model involves private investors working with utilities, drawing on the strengths of each and discarding the weaknesses.
‘Utilities have the expertise in monitoring and collection, and experience in operating under local conditions,’ says Hough. ‘What they lack are good credit lines. A part of the role of the private-sector player is simply raising the funds. But, in addition, it is the private-sector operators who have the experience with renewable energy and technology at present.
‘These smart grids are outside the utilities’ range at the moment,’ he says. A hybrid model mitigates investor risk and allows utilities to tap into outside expertise. However, he warns, partners in any hybrid joint venture will have different priorities. ‘The utility has a mandate to get power to the people and stimulate the economy, while the private-sector partner is a business,’ he says. ‘It takes quite a balancing act to keep both parties happy.’
Much is happening in the energy sector in Africa, ranging from solar projects in all but 10 countries, to big hydro-energy programmes (Grand Ethiopian Renaissance on the Blue Nile, and Grand Inga in the DRC), big wind-power projects in nine countries (Algeria, Chad, Egypt, Kenya, Morocco, Senegal, Somalia, South Africa and Tunisia), gas-fired power stations in Tanzania, Ghana and Mozambique, as well as Kenya’s geothermal power plants.
Nevertheless, as Scott says, ‘there is still an enormous power deficit on the continent. Only one-in-three Africans are connected’. That leaves a huge potential market still to be tapped.