By Ronak Gopaldas
Lack of reliable electricity supply has long been a constraint to growth for several African markets. It is estimated that approximately half of Sub-Saharan Africa’s (SSA) population do not have access to electricity. Those that do, pay on average nearly twice as much as in other parts of the world.
Global pressure to shift away from environmentally damaging ‘dirty energy’ (coal, fossil fuel) coupled with the rapidly falling cost of renewable energy production (solar, wind, hydro) has already attracted significant interest and investment, but a great deal more will be required to support the continent’s industrialisation and growth ambitions.
In this piece, we examine the current state of Africa’s energy sector and unpack who the primary market players are. We also look at some of the obstacles to growth and investment and where future renewable energy market opportunities lie.
- Africa’s energy landscape
- The case for renewables
- Leading the charge
- Lessons from Asia and opportunities in Africa
1. Africa’s energy landscape
While most countries in Asia are on track to reach universal (100%) access to electricity by 2030, Africa is only projected to reach 60% in the same period (up from its current 50%). Achieving universal access in Africa will require connecting 80m Africans (from the current 20m per year) every year for the next 7 years at an estimated cost of US $50bn per year until 2030 (figure 1). Achieving a net-zero emissions target by 2050 is conservatively estimated to require the investment of US $2.8 trn, a figure that exceeds the entire continent’s annual GDP output. With the bulk of African government’s already running sizeable fiscal deficits, the only way this could be achieved is through far greater levels of private sector participation.
Excluding South Africa, 1bn people in SSA share the same generation capacity as Germany, which provides electricity for 83m people . While the continent has made great strides in rolling out electricity to its people the reality remains that less than half the population in SSA (500m) have access to electricity (figure 2).
The 2020 World Energy Outlook report published by the International Energy Agency (IEA) says that almost two thirds of 771m people around the world who do not has access to electricity live in SSA
. When it comes to looking at equity the energy deficiency in the rural countryside is far worse than urban areas. Just 29% of Africa’s rural inhabitants have access to electricity (figure
3). This despite decades of steady improvement in electricity access seen across the continent.
The Covid-19 pandemic, however, has not only stalled progress but seen a regression. The economic shock of Covid-19 reduced the ability of households to pay for energy services, weakening the financial positions of governments and energy producers, many of whom were forced to scale back infrastructure investment plans. The IEA estimates that under a slow economic recovery scenario, this could see an additional 80m Africans without electricity by 2030. This is likely to have a long-lasting impact on Africa’s energy aspirations. Lockdowns and supply chain shocks saw sharp increases in the price of natural gas, coal, and electricity markets leading to longer-term administered price inflation.
The already weak fiscal position of many African governments has been made worse by lost revenues, increased borrowings, and the redirection of public expenditure to vaccine procurement and medical supplies. Unemployment increased as the informal sector reeled from the consequences of the pandemic. All the while the population of Africa continued to grow. After dropping at an average rate of 9% annually between 2015 and 2019, the number of people without electricity in SSA is expected to rise by 2% for the first time in eight years .
Africa’s current energy mix, which has been relatively constant over the past 30 years, is part of the problem. The continent is heavily reliant on fossil fuels, which is a large pollutant and significant driver of climate change. Natural gas (39.1%), coal (30.3%) and oil (8.3%) account for three quarters of the continent’s electricity generation (figure 4).
A lack of investment and maintenance in ageing infrastructure means it is not just electricity generation that
is the only challenge. Two thirds of Africa’s grid is considered unreliable. Africa will not be able to cover its energy gap without significant investments. For that it needs to implement significant policy reforms and attract private
sector investors. Not to do so will consign the continent and its people to falling far short of their economic and productive potential.
2. The case for renewables in Africa
Renewable energy makes up approximately 20% of Africa’s energy mix, but is largely dominated by hydropower, which accounts for 16.5% (37GW) of the total electricity output. In river water endowed states like the Democratic Republic of Congo (DRC), Ethiopia, Malawi, Mozambique, Uganda and Zambia, hydropower generates 80% of the country’s electricity . But while hydropower is green it does come with its own set of ecological, social, financial, and even geopolitical problems. Large hydropower projects often invite resistance from environmental groups and indigenous communities. Dams can alter the flow of fresh water, submerge pristine areas of rainforests, and force the evacuation of entire communities. The high cost of large hydropower project can also put an immense financial burden on government and taxpayers. In the case of Africa, some hydropower projects have been so controversial that they threaten to ignite war. The Grand Ethiopian Renaissance Dam (GERD) is one such case. The nearly US$5bn project undertaken by Ethiopia has been stiffly contested by Egypt. As a lower riparian state Cairo fears the dam will disrupt the flow of the Nile and comprise its water security. Neighbouring Sudan, which also shares the river, has moved from being broadly welcoming to being suspicious.
Nevertheless, Africa’s hydropower potential, as an energy resource, remains largely under-utilised – 11%, according to the IEA. Despite being relatively clean, the challenges with hydropower are much like those of coal, oil, and nuclear-powered plants. It comes with enormous funding requirements and need long lead times to become fully operational. Construction of the GERD, for instance, began in 2011 and is still only 80% complete.
Other forms of renewable energy - geothermal, solar and wind - account for less than 4% of Africa’s power generation
but hold the potential to make up a much larger contributor to the energy mix. In 2018, the International Renewable Energy Agency (IRENA) and the African Development Bank (AfDB) put Africa’s
solar energy estimates at 10TW, hydro at 350GW and wind at 110GW
. Apart from its enormous potential, there are other important factors that will ultimately drive Africa’s transition to a renewable future:
According to the IRENA more than half the renewable energy capacity added between 2019 and 2020 achieved lower power costs than the cheapest new coal plants. Since 2010, solar costs have fallen 82% and onshore wind generation by nearly 40% (figure 5).
New photovoltaic and wind technology has driven the cumulative installed renewable capacity higher globally lowering electricity unit costs
. These are benefits of scale. Once renewable generators have been installed (still high upfront capex, but cheaper than traditional baseload power stations), their running and maintenance costs are a fraction of coal and
oil power stations. Not only is green energy more affordable from an investment perspective but input costs are nominal and not subject to price fluctuations.
For Africa in particular, funding is one of the primary challenges for new energy builds. Coal, gas, and hydro powered capacity has typically been funded by government debt, or government guaranteed parastatal bond issuances. According to Dr Keith Palmer, the founder chairman of the founder chairman of the Emerging Africa Infrastructure Fund (EAIF) 80% or more investments in African infrastructure is undertaken by public sector but poor governance and lack of operational capacity means that often their balance sheets are often in red. Sovereign credit rating downgrades and limited fiscal space have seen borrowing costs escalate, making public sector investments in energy projects particularly costly. Private sector participation, however, which has for the most part been crowded out by sovereign financing, is unlikely to increase for another reason. Private investors are under increasing pressure from shareholders to cease funding for new coal fired plants. HSBC recently released its policy on financing thermal coal. It wants all clients to present a roadmap on how they will exit fossil fuels by 2023 . The bank, which has already stopped financing new coal fired power plants, has committed to cut its exposure to thermal coal producers by 25% in 2025 and by 50% in 2030. Several other banks like Standard Chartered and NatWest have implemented similar policies.
On the continent, South African banks have been more measured in their approach, with Rand Merchant Bank, Nedbank and Absa phasing out coal fired project funding over the next five years and divesting completely over the next two decades . Globally too, pressure is mounting to cease fossil fuel investment, ultimately driving down the cost of funds for new renewable projects.
There are several reasons why public / private partnerships are the only viable way to achieve universal electricity access in Africa, particularly under decentralised generation and transmission conditions. Firstly, the limited fiscal space of many African governments mean they are simply unable to raise the capital on their own. In instances where they can, funding is expensive due to weak credit ratings. By contrast, the private sector globally is actively looking to deploy large pools of capital at attractive rates. Capital is being selectively deployed, however, and green energy projects are a particularly attractive investment space. Secondly, greater efficiency and oversight in the private sector mean they are better positioned and incentivised to rapidly bring to market successful and sustainable projects at a lower cost. By sharing both the risk and the reward of investment and opening greater competition, the unit cost of electricity will be driven lower to the benefit of African citizens, businesses, and economies, driving job creation and employment. IRENA estimates Africa’s energy transition could see continental growth accelerate to 6.4% and add 26 million jobs by 2050.
The green energy sector has a far greater employment multiplier effect than fossil fuels . While fossil fuel industry creates 2.7 jobs per US$1m investment renewables create between 7.5 and 15 for the same expenditure .
PWC estimates that renewable investments have the potential to create 5m jobs in Africa by 2030. But in a continent where coal, oil and gas are significant job creators, there will need to be a concerted drive to reskill workers to prepare them for roles in the renewable sector.
The world’s energy transition is being led by developed countries, particularly in the EU. EU climate law compels member countries to collectively lower emissions by 55% from 1990 levels by 2030 and be net-zero emitters by 2050. At the United Nations Climate Change Conference (COP26) held in 2021, 40 countries committed to phasing out coal-fired power, while more than 30 countries and institutions pledging to halt the international finance of fossil fuels . The aim is to contain global warming to within 1.5 degrees Celsius above pre-industrial levels by halving CO2 emissions by 2030 from 2010 levels . Ultimately the target is net-zero emissions. Failure to do so is predicted to result in irreversible and catastrophic climate change and environmental damage.
Despite accounting for only 3% of cumulative global CO2 emissions, Africa is also facing increasing pressure to shift its energy future to renewables, despite many countries being rich in coal and gas and not having had the benefit of a developed and adaptable infrastructure (figure 6). Many developing countries around the globe have pushed back on the aggressive targets set, arguing that they are unfairly being punished for the high emission levels of the developed world.
Nevertheless, 35 of Africa’s 54 countries have committed to achieving net-zero emissions by 2050 (shift the energy base from fossil fuels to renewables), a target PWC estimates will require US$2.8trn worth of investments . The targets are ambitious but necessary, not just for the world but for Africa which is already experiencing the effects of climate change in the form of severe droughts and flooding in other parts of the continent.
Whether Africa’s transition to renewable energy is voluntary or through being locked out of funding, it is logical and inevitable. Renewable energy is cheaper, attracts financial backing, is a strong job creator and imperative to limit the effects of climate change. Many African countries have already embarked on their green energy journey. Egypt, Ethiopia, Kenya, Morocco, and South Africa are leading the charge in renewable energy supply on the continent .
3. Lighting the way
Electricity coverage varies widely in Africa. In North Africa, countries like Egypt have succeeded in attaining universal access to electricity (more than 99%). In South Africa 94% of the population gets electricity – although grid power is often
unreliable. Nigeria, Africa’s most populace country, has been a laggard. Barely 62% of its population to electricity - although 91% of its urban population have access to some source of power
. The use of diesel generators is common in Lagos. East Africa fares better. Kenya and Rwanda have made significant progress in increasing electricity access over the past two decades, both growing
from below 10% access to 85% and 53% respectively (figure 7).
Kenya opened its market to independent power producers (IPPs) in the mid 1990s, attracting extensive foreign direct investment and doubling electricity access in just 5 years. Now almost 30% of the country’s installed
capacity is owned and operated by IPPs with the balance being held by the state-run Kenya Electricity Generating Company (KenGen). Over 70% of the country’s electricity comes from renewable sources. The massive Olkaria geothermal plant complex
accounts for more than 20% of all electricity produced in the country.
. The 310MW Lake Turkana Wind Project, a joint venture between Dutch developer KP&P, London-based Aldwych International and Nordic development finance institutions, which opened in 2019, is one of the
largest wind power projects on the continent and runs 365 turbines.
Despite early success with IPPs, Kenyan President Uhuru Kenyatta ordered the cancellation of all ongoing and incomplete power purchase negotiations with KenGen in September 2021 and replaced the country’s energy minister
. The move was an attempt to renegotiate more favourable pricing terms for the country’s embattled state-owned utility after Kenyans were forced to pay for idle capacity as demand fell due to Covid-19. In part, Kenya
became a victim of its policy reform success, where industrial customers opted to develop their own solar capacity, weakening KenGen finances
. The Kenyan case is but one example on the continent of how private sector participants can have their business model upended by changing legislation despite contractual sign-off.
- South Africa
South Africa’s total installed capacity is 58,000 MW, more than 80% of which is thermal
. The lack of energy mix diversification is a legacy of the country’s abundant coal deposits which in the past allowed it to generate some of the cheapest electricity in the world. A mix of poor policy, corruption,
funding constraints and a lack of new builds and maintenance has seen the country experience frequent bouts of rolling blackouts – something that the South Africans euphemistically call ‘load shedding’. It refers to a practice of
cutting electricity on a rotational basis in a bid to avoid the collapse of a grid
. Eskom, the national utility has been incapacitated under a debt burden of US$33bn, which is equal to 1% of the national GDP. That means it has not been able to reinvest in maintenance of the distribution network. Nor has
it been able to upgrade. The result has been devastating. The rolling blackouts have cost South Africa as much as US$70m per day in lost industrial output – eroding competitiveness and hurting the economy
Private power producers, have until recently, been locked out of supplying electricity to the grid. But this is beginning to change thanks to the Renewable Energy Independent Power Producer Procurement Programme (REIPPP). Several companies announced plans
to generate their own renewable electricity through private installations, signing 27 power purchase agreements in June 2018
. Since June 2021 firms generating less than 100MW no longer require a license to produce electricity (the threshold was previously 1MW). They do, however, still need a grid connection permit to ensure grid compliance
The legislative reform has seen a flood of private sector investment (US$10bn) with 10,000MW of new renewable investment planned. The opening of bid windows 6 and 7 of the country’s Renewable Energy Independent Power Producer Procurement Programme
(REIPPPP) is expected to call for a further 2,600MW and 1,600MW respectively
. Tech firm, Amazon announced in late 2020 that it will generate its own renewable (as much as 28GW of solar) electricity for its data centre in Cape Town. It wants to be completely independent of the national utility
. Several mining companies
, which have been forced to repeatedly halt operations during load shedding have also announced large plans to generate their own power through renewable resources to guarantee stable power supply. Gold Field’s
South Deep operation was the first to commence investment in 40MW of renewable energy in 2017 having applied for ministerial deviation
. The Minerals Council of South Africa estimates that domestic mining companies have already committed US $2.7bn to install 2,000MW of renewable energy
As in the case of Kenya, regulations in South Africa too can be fluid, negatively impacting foreign investor appetite. South Africa’s journey to renewable inclusion has been long and bumpy despite the country being in desperate need of greater generation
capacity. The country’s renewable sector, however, received a big boost late in 2021 when South Africa struck a landmark deal with a club of developed country donors at the United Nations Climate Change Conference (COP 26) to shift it away from
. The deal known as the Just Energy Transition Partnership (JETP) offers US$8.5bn in grants and concessional lending (until 2026) to reduce emissions. It entails the early retirement of coal power plants, the build of
cleaner energy sources and transition support for coal dependent regions. The deal paves the way for far greater participation from the private sector and is likely to lead to greater policy stability and transparency.
In a country that boasts universal electricity access, Egypt is forging ahead with ambitious plans to shore up its electricity capacity with renewable wind and solar sources and transition from its heavy reliance on gas and oil. It
started as early as 2014 when it announced incentives for the generation of 4.3GW of renewable energy. The bid window was 100% oversubscribed and saw 67 private sector consortia qualify for participation. But funding impasses,
foreign exchange shortages, contractual disputes and the devaluation of the Egyptian Pound saw just two projects concluded by 2017 under the initial 2014 incentive scheme.
The economic backdrop has since improved, and some 30 companies have signed offtake agreements with the Egyptian Electricity Transmission Company (EETC) - most centred around the Benban Solar Park in Aswan which was built at an estimated cost of US$4bn.
The solar park has a surface area capacity of approximately 37 square kilometres.
Similarly, the 500W Franco-Japanese Gulf of Suez wind project, sponsored by Engie (40%); Toyota Tsusho (40%), and Orascom (20%) has seen fresh tranche of investments from a British consortium. While Egypt’s regulatory environment
is well-established, the renewables sector itself is now saturated with foreign participants. It offers newer investors fewer opportunities.
Like Egypt, Morocco remains heavily dependent on hydrocarbons for its energy generation. But renewable energy does make a sizeable contribution to the overall energy output (37%). The Kingdom has now set an ambitious target of reaching 52% by 2030. The total installed solar capacity in Morocco stands at 711MW while the country’s wind potential is estimated to be 25,000MW but only 1220MW of installed capacity. Much of this, however, is for exports.
90% of domestic power consumption is powered by fossil fuels. The Kingdom continues to pursue gas power projects. Its showpiece Ouarzazate Solar Power Station (Noor) - the world’s largest exports its output to Spain and the United Kingdom via undersea cables where it can fetch higher prices . Essentially, Morocco, a water scarce country, is helping Spain and the UK achieve their emissions targets. The approach has come in for much criticism. Not only is the power sale not helping Morocco’s make the transition to renewable energy but is also putting Europe before Africa.
Rwanda’s progress in accelerating electricity access to its citizens contrasts with Nigeria’s, which has been far more gradual (figure 8). What the two do have in common, however, is their push toward mini-grid systems, which offers an innovative
sub-regional solution to areas with little or no access to the larger national grid.
Due to a lack of maintenance and investment in new capacity, Nigeria is only able to generate 4,000MW of electricity of its 16,000MW
installed capacity and is plagued by persistent blackouts
. Having been enticed by electricity reforms
, Husk Power Systems, an India-based hybrid power start-up began commissioning six hybrid solar
mini-grids in several communities in Nasarawa State in central Nigeria, electrifying the homes of 5000 people and 500 businesses. The company is planning as many as 500 mini-grids over the
next 5 years. The first phase was built under the Nigerian Electrification Project (NEP) with funding from the World Bank and AfDB using performance-based grants.
This model is also being used to great effect in Rwanda which has lifted electricity access from 20% of its population in 2013 to 51% in 2018. The Rwandan government estimates that almost half of the country’s electricity needs will have to be delivered
via mini-grid and off-grid standalone solutions due to a lack of infrastructure (Roussi, 2021). Across the continent, an unpredictable regulatory environment is the main barrier to faster electricity access growth and economic improvement.
4. Lessons from Asia and opportunities in Africa
Fanciful calls for a single, borderless continent with one unifying currency have even extended to a feasibility study commissioned by the African Union Development Agency - New Economic Partnership for African Development (AUDA-NEPAD) for the development of an African Continental Power Systems Master Plan. The
plan calls for a unified transmission network across the continent that would allow African countries to source and trade cleaner power more cheaply and efficiently. The complex politics, economics, geography, and population densities of Africa make
the realisation of such a pan-African grid difficult to imagine. Instead, to ramp up its progress under prevailing conditions, Africa must look to Asia to borrow from their successes. India has made tremendous progress in rolling out universal electricity
access to its population. The country’s reluctance to phase out coal and other fossil fuels aside, the Ministry of New and Renewable Energy (MNRE) paved the way for the construction of solar mini-grids through legislative reform and financial
support of up to 30% of the cost of solar installations.
Currently, more than 63 mini-grids provide 1900KW of clean and reliable electricity throughout India. The solution has been particularly valuable in more remote parts of the country where national utility scale projects are simply not viable. Like India,
Africa is densely populated in urban centres making grid connections relatively straightforward in metro areas. Both regions, however, also have substantial populations in remote areas where expanding and maintaining the grid would be too difficult
or not financially feasible. The Indian mini or micro-grid model in these isolated parts is proof of concept and demonstrate how a self-contained generation and distribution systems can reliably provide clean energy at lower cost and at the necessary
scale. This decentralised model is equally well suited to Africa’s topographical, political, and economic climate and should be pursued far more aggressively.
China’s role in expanding renewable solar energy in Africa and its involvement in hydropower projects on the continent is also critical to the success of Africa’s energy ambitions. China is the global leader in renewable energy installations
and has been extensively involved in the funding and engineering of hydro projects on the continent. It is estimated that Chinese investors provided more than US $16bn in credit to Ethiopia, partly for the construction of infrastructure supporting
the GERD. The country has provided similar support for renewable projects in Uganda (Isimba and Karuma hydropower dams) and the DRC (construction of the Busanga dam and hydroelectric power plant through Chinese firm Sinohydro)
China and India have both the expertise and funding means to help Africa dramatically ramp up its renewable electricity generation and reach its industrialisation, employment, and economic targets. For their part, however, African countries must create an enabling and investor friendly environment that attracts foreign funds, but on terms that are mutually beneficial. Constantly shifting investment and participation criteria have all too often deterred investment in countries like Tanzania and South Africa. The picture is, however, beginning to change, as African governments realise that they simply don’t have the resources or technological means to reach energy stability without participation from foreign participants and the private sector. Covid-19 has accelerated this realisation as fiscal pressures were exacerbated and may ironically, aid the continent’s green transition over the longer-term. For foreign firms and investors, the regulatory environment is slowly becoming more welcoming and the opportunities to participate in Africa’s renewable journey and leapfrogging of traditional national grid-based supply, almost limitless.