Greening and Cleaning Africa's energy sources: Supporting the roll-out of Africa's energy infrastructure in the 21st century

by Asmita Parshotam

Although vaccine roll-out has begun in many developed countries, supplies are limited. There are yet no plans for equitable vaccine distribution. The pandemic in the developing world is likely to continue well into 2021, extending its economic impact. Consequently, countries must find new ways to keep their economies afloat. In Africa, mitigating the pandemic's adverse economic effects will require finding partners in the private sector, then working closely with them to identify innovative ways to ensure continued socio-economic development.

Access to clean and green energy is a crucial development target. African countries need well-designed, operated and sustainable infrastructure to address the continent's increased migration, growing urbanisation levels, and expanding populations. Unfortunately, with an electrification rate of just over 40% (the world's lowest), 640 million Africans have no access to electricity.^[1] Infrastructure development is costly, and few African countries can meet these costs without assistance. As a result, African governments require collaborative partnerships with the financing community, private sector developers and operators to support and roll-out Africa's energy infrastructure ambitions.

This brief provides an overview of current trends and developments in the continent's renewable energy (RE) sector. It then identifies the challenges and risks inherent in the financing, development and roll-out of energy infrastructure projects. The brief explores the roles that private sector players can play in financing energy infrastructure projects and participating in the uptake of clean green energy technologies across Africa. A concise analysis of the energy value chain identifies private sector engagement opportunities. The brief concludes with future issues for consideration by stakeholders in Africa's growing RE sectors. 

An overview of infrastructure financing and the growth of Africa's RE sector

Development can be prolonged and expensive, especially when the target is infrastructure. Well-designed, gender-aware and sustainable infrastructure is needed to improve living standards, enable socio-economic development, and bridge gaps among poor and prosperous communities. Meeting Africa's infrastructure development needs will require investing around US$130 to 170 billion per year, and closing gaps between available resources and overall needs would demand between US$68 to 108 billion annually.^[2] In sustainable energy generation alone, Africa needs to invest US$41 to 69 billion annually from now to 2030.^[3] Sub-Saharan Africa's cumulative RE investment needs for the 2017 to 2050 period range from US$ 1.2 to 3.6 billion (Figure 1 below), depending on the economic scenario. Figure 1 below displays the cumulative RE investment needs in sub-Saharan countries from 2016 to 2050 that will result from the full deployment of RE options by region and category.

Figure 1: 

 

As a result, the African Union (AU) and the African Development Bank (AfDB) work closely with their member states to close these gaps. The AU's Agenda 2063 prioritises industrialisation and infrastructure development through its Programme for Infrastructure Development in Africa (PIDA). This initiative focuses on increasing access to renewable and environmentally friendly energy through capacity building projects and regional power pools.[4]

Whether located in Rwanda or Raleigh, every modern manufacturing plant needs a reliable supply of stable electrical power. However, the absence of widespread, regular electricity harms Africa's economic performances and constrains its efforts to improve its manufacturing capacities. Averaging nearly US$0.20 per kWh, the cost of electricity to manufacturing enterprises in Africa is around four times higher than elsewhere in the world. "This reflects both high-cost utility power (at around $0.10 per kWh), and heavy reliance on emergency back-up generation during frequent power outages (around $0.40 per kWh)."^[5] More than half of African firms consider infrastructure (power shortages and costs associated with transportation) to be the most challenging constraints they face in daily operations.^[6]

The main barrier is the prohibitively high cost of expanding the main grid, especially for less developed countries. However, challenges also present opportunities for sustainable growth. Development of Africa's energy sector must promote equitable access to clean energy, and RE technologies such as solar PV and mini-hydro will help offset the energy deficit.^[7] Investing in Africa's expansion of its RE sources would allow the continent's economy to grow four times larger than today while consuming only 50% more energy.^[8] This new infrastructure will lead to more effective use of African resources, accelerate economic inclusion, and enable equitable socio-economic development gains across the continent.

Current trends point to increased access to financing for the sector. The Infrastructure Consortium for Africa (ICA) reports that Africa's energy sector attracted financing commitments from ICA members^[9] totalling US$43.8 billion in 2018 – an all-time high and a 67% increase on the 2015-2017 figure.^[10] This funding reflects the increasing interest in the energy sector from development partners: in 2018, 40% of all disbursed official development financing went to the energy sector.^[11] The private sector has also responded to emerging opportunities to participate in and grow energy infrastructure across Africa. While the operational environment faces many challenges (see Box 1 below), the prospects for private sector engagement in Africa's infrastructure development are promising. The next section identifies areas where the private sector can play an essential role in furthering and financing Africa's green energy industries.

Sparking the private sector's interest: gains and opportunities in financing and participating in Africa's RE sector

There are many ways private sector actors can participate in Africa's RE development. Multinationals, local companies and small and medium enterprises (SMEs) can join public-private partnerships (PPPs), join RE value chains, and work closely with government agencies to develop the sector.

• Public-private partnerships and financing for RE projects in Africa

RE projects have proven to be attractive and receive financial support from development finance institutions (DFIs), governments and donors alike. However, private sector investment in infrastructure projects across Africa accounts for approximately 4% of Africa's funding mix.^[12] There is room to improve and enhance the private sector's interest in RE development across Africa.

There are several ways to participate in funding infrastructure. These include PPPs, mobilising private capital through commercial loans to publicly owned entities such as state-owned enterprises (SOEs), and participation in local and international capital markets. ^[13] Leveraging private sector investments will remain important in the face of increasing debt levels resulting from the COVID pandemic will likely increase the scrutiny of projects and lead to stricter financing terms.^[14] Regulatory frameworks will require review to ensure that RE infrastructure projects remain attractive for private sector investment (see Box 1 below). This trend increases the need for innovation and reform amongst African countries to ensure the development of well-managed, bankable and executable energy sector projects.

The private sector and DFIs must work together to facilitate access to power for communities that lack electrification. The AfDB recently launched several innovative approaches to funding RE projects. These include local-currency funding for pay-as-you-go home solar systems projects in Cote d'Ivoire, financing additional connections in Zambia, and working with the private sector to fund Nigeria's Rural Electrification Project (REP).^[15] The REP is a large-scale green mini-grid development. The government-led initiative (supported by the World Bank and AfDB) provides electricity from renewable power sources access to households and small businesses in off-grid communities.^[16] In such cases, the private sector plays a vital role as the primary actor responsible for electrification in unconnected areas. The World Bank's Investment Guarantee Agency helped the Egyptian government introduce feed-in tariffs for RE projects, enabling the country's first wind farms and solar parks to get off the ground.^[17] As a result, the Benban solar park, Egypt's largest, now comprises dozens of private sector investors. While various DFIs and donors provided financing for the solar park, the private sector undertook power plant development.^[18] The AfDB and World Bank's support for RE projects highlight the vast array of innovative solutions to Africa's energy deficit and avenues for collaboration between the public and private sectors.

Of course, funding large-scale infrastructure projects goes well beyond the DFI domain. Commercial banking can play an essential role in securing infrastructure development financing via loans to project companies. South Africa's Renewable Energy Independent Power Producer Programme (REIPPP) facilitates commercial financing and loans through links with major private banks. Uganda's privately owned Bujagali hydropower IPP project received funding from Absa and Standard Chartered banks.^[19] 

Another way to enable private sector participation is through PPPs. The term describes contractual relationships to deliver public services among government and private business ventures.^[20] These take many forms (see Figure 2). Well-executed PPPs can offer well-managed, risk-mitigated projects and deliver high-quality public services.^[21] However, PPPs need responsive dialogue processes to work well. The AfDB's Africa Energy Market Place provides a forum for public-private dialogue. The resulting interactions help overcome barriers to mobilising and scaling-up private investment in the energy sector.^[22] This important tool can help national governments identify and address bottlenecks, project roll-out challenges, and other operational realities. Ultimately, such collaborative efforts enhance the bankability of energy projects.

Figure 2: Forms of PPPs and degree of private sector involvement

^{Source: N Khatleli (2020) Guidelines for implementing PPPs in SADC. SAIIA Policy Briefing 193. Johannesburg: South African Institute of International Affairs.}

PPPs can contribute to growing a domestic RE value chain and promoting more inclusive energy access. Even in fragile country contexts, the growing interest in supporting RE projects is positive. The Chad Djermaya Solar Power Plant (worth 18 million euros) is the first sizeable IPP plant and the first electricity sector project in Chad to be delivered by a PPP. It will contribute 10% of the country's power generation and reducing its reliance on diesel generation.^[23] In the Democratic Republic of the Congo, the private sector leads development of three solar mini-grids (3-10MW) and pilots electrification based on renewable mini-grid solutions.^[24] Fragile low-income countries' capability to attract private sector participation in funding domestic energy supply is key to furthering electricity access in these countries. Correctly deployed, the PPP model for funding infrastructure can be a win-win for government and private companies alike.

There remain operational challenges and difficulties facing the private sector's expansion and participation in African countries (see Box 1 below). Addressing these constraints can bring about significant improvements to a country's operational environment that facilitates private sector participation and financing for RE infrastructure projects.

Box 1 – Challenges facing the growth of Africa's RE industry

Africa's legal, regulatory and institutional frameworks are not equally developed, which poses constraints to attracting private capital infrastructure across the continent. Comprehensive project preparation and well-executed project pipelines are integral to garnering private sector interest. However, many countries lack effective in-country management, contributing to poor project performance and construction delays.[25] The absence of well-defined infrastructure programmes and bankable project pipelines is also a significant issue in many African countries.[26] Many countries struggle with providing bankable projects for the private sector and struggle to secure local and FDI without assistance from DFIs and donors to improve project plans. PPP frameworks are also not well designed, while governance challenges pose additional hurdles in creating a PPP friendly climate for investors. Unlike in other parts of the world, pension funds in Africa are generally not allowed to invest in infrastructure projects and even fewer outside their own countries.   Private sector players often participate in power generation as IPPs and in distribution to final consumers (DISCOs). A public company (the SOE / public utility) usually owns the transmission lines and purchases power produced by IPPs (off-taker) to sell on to DISCOs. The off-taker typically guarantees payment for IPP-produced power at a pre-agreed rate. The lack of a financially credible off-taker is often a significant constraint for IPPs to negotiate and sign power purchase agreements. One potential solution is government guarantees backed by DFIs. However, this can increase project costs and thus, off-take tariffs. Many multilateral institutions and governments tend to focus on funding large-scale megaprojects. This preference often overlooks those smaller-scale schemes such as on-grid renewables and distributed power that can potentially make considerable progress towards ensuring equitable energy.

• Collaborative partnerships among multinationals and local companies 

Investments and local partnerships for national RE projects are increasingly essential to building local skills and expertise needed to ensure the growth and longevity of RE initiatives. South Africa's REIPPP flagship project aims to cultivate local and foreign partnerships and encourage foreign direct investment (FDI) and skills transfer. Although not without its political challenges, the programme has contributed investments to the value of US$ 11.9 billion to the South African economy to date. There are now 112 independent power producers (IPPs) operating in the country.^[27] Other African states followed the trend to grow and develop their energy sector through private sector engagement. For example, Kenya first sought private investment in the generation sector and is now pivoting towards funding for the transmission sector.^[28] Morocco hosts the largest solar plant on the continent (the Noor-Ouarzazate plant), which applied the IPP model to energy generation. The Global Energy Transfer Feed-in Tariff (GET FiT) Programme supported the roll-out of several RE programmes across Africa. The programme launched through a portfolio of 17 small-scale RE generation projects in Uganda with a total installed capacity of about 160 MW. In Uganda, GET FiT mobilised US$450 million in investments directed at increasing national energy production by around 20%, guaranteeing energy supply to roughly 200 000 households.^[29]

The REIPPP structure supported the development of a local industrial RE sector and leaned on FDI and foreign corporate participation to kickstart the industry. The REIPPP's transparent and private-sector friendly bidding process, based on clearly defined minimum qualifying criteria and a broad-based black economic empowerment (BBBEE) component to encourage local shareholding and content, is viewed as a model for other developing countries.^[30] However, some observers criticise South Africa's heavily-weighted enterprise development requirements as confusing and expensive.^[31] There are also broader concerns around the absence of skills development required for ensuring the longevity of green industries.^[32] Instead, the government's focus has been on the quantum of jobs rather than technological capabilities and skills associated with the renewable energy value chain that encourage long-term sustainability.^[33]

Private companies and state-owned utilities can also form viable partnerships. For example, in November 2013, AES's energy company purchased a majority stake in Cameroon's power utility. Privatising certain SOE functions can maintain SOE competitiveness. The resulting improvements in delivery and costs will benefit local private sector participants and enable broader participation in a country's energy sector. Nigeria's US$2.5 billion privatisation in 2013 saw local companies form consortia with foreign players — including Siemens, Manila Electric, Symbion Power, and KEPCO — and emerge as winners of most projects.^[34] Private sector partnerships that encourage mixed consortiums can build networks for local companies, boost skills diversification and technical development, and improve competitiveness. 

• Working with government to develop energy industries with equal opportunities available for women-owned businesses and SMEs

In developing local RE industries, it is vital to keep energy access affordable for poor and rural communities, while creating opportunities for small-scale producers and women-owned enterprises. For example, the private sector can work with governments to roll-out smart grids that can generate significant energy savings for users.^[35] Another approach is to leverage donors to work with the private sector in developing Africa's RE sector. Power Africa (an initiative backed by USAID) received commitments totalling more than US$54 billion from its more than 140 private sector partners.^[36] Donors who traditionally work in poverty alleviation leveraged their collaborations with private sector actors to develop mini-grid and distributed power services.^[37]  Likewise, partnering with private sector partners can support access to digital technologies for poor and rural communities, which can reduce costs, generate energy savings and ultimately make access to RE more affordable.

Women are often micro-entrepreneurs and on-sellers of RE, who use RE to increase the profits and efficiency of their informal enterprises. Across Africa, women entrepreneurs have proven themselves capable of independently operating and constructing RE technologies when provided with the appropriate training and support.^[38] Solar Sister's work in Nigeria and Tanzania is testimony to this. Simultaneously, the ECOWAS Centre for Renewable Energy and Energy Efficiency in West Africa implemented projects targeting women as sellers of off-grid solar RE. Encouraging micro-entrepreneurship in the RE sector is a meaningful way to ensure that clean energy technologies can reach the last mile, i.e., rural and peri-urban communities. It also provides an opportunity for the integration and involvement of small-scale producers into larger RE value chains, enhancing the industry's longer-term sustainable growth through skills development, network building, and the roll-out of clean energy rural areas.

The African RE sector provides opportunities for SMMEs to participate in backward and forward linkages across the energy value chain. RE is projected to provide almost 30% of all power demanded by 2023.^[39] RE technologies open up the possibility of creating energy value chains through backward and forward linkages, including manufacturing, assembling of related technologies, installation, repairs and maintenance.^[40] These opportunities are well-suited to furthering participation amongst local companies in RE industries. International trends show that highlight solar PV and wind energy dominating the market, backed by a growing small-scale embedded generation market (mostly solar power for commercial and industrial businesses).^[41] African countries may engage SMMEs in the RE sector through local manufacturing opportunities. These range from the local fabrication of significant wind energy components such as blades and towers, manufacturing PV panels and batteries, installation and civil works for RE plants and operation and maintenance of RE facilities.^[42]

Small enterprise participation in the RE industry also requires financial support, which local commercial private banks may provide. The commercial financing models designed to facilitate the inclusion of small enterprises in RE industries can further SME participation. In South Africa, the Facility for Investment in Renewable Small Energy Transactions (FIRST)^[43] is an essential avenue for future considerations of how best to incorporate small entrants into the energy sector. FIRST is supported by Rand Merchant Bank (a commercial South African Bank) and the German KfW Development Bank. The project has helped simplify access to funds (in terms of requirements and document submission) for smaller RE projects in the commercial sector. Core funding is focused on projects R50 million or more, although FIRST will consider and support projects as small as 200kW.^[44]

Conclusion and recommendations

African governments that wish to increase RE's investment levels must act on several fronts. First, they must create sound frameworks to manage these investments. At a policy level, PPP frameworks must balance the interests of the critical stakeholders:  governments, aid agencies, private investors, operating agencies, and the people that will benefit from access to power. The regulations governing every step of the RE life cycle should encourage private sector investments. The growth of viable RE infrastructure across the continent rests on well-planned and bankable projects.

Direct procurement by local governments of power from the private sector is a step toward increasing the viability of Africa's RE sector. Private operators can now supply energy directly to many municipalities and local governments. Johannesburg and Cape Town both plan to procure RE independent of national energy supplier Eskom.^[45] This approach motivates investor participation in the RE sector by enhancing private sector growth prospects.

Businesses and Governments must jointly contribute to a bottom-up approach to greening the economy. This approach requires treating green industries as central to the long-term future economy (unlike South Africa's current "add-on" approach).^[46] Ideally, policy will help entrench green practices across all sectors, while developing and building new green-based industries.^[47] Growth of domestic industries may initially require partnership with multinationals, especially to fill gaps in skills and technical capacity. However, stimulating local industrialisation and encouraging competitiveness among domestic RE companies requires policy changes. The policy focus must shift to building the capabilities of sustainable industries to engage in global value chains.^[48] This approach can easily include opportunities to supply African and international networks with RE. Such models should be developed not as simple supply-demand links among national markets, but around market synergies, integrated markets and complementarity.^[49]

Policy must shift toward exploiting regional export opportunities and encouraging private sector collaboration across the continent. The South African green-tech manufacturing market is worth at least R30 billion, with a growing demand for green-tech in neighbouring countries.^[50] This presents the opportunity for manufacturers across the SADC region to develop and grow the RE industry across Southern Africa. It will build competitiveness in domestic sectors and encourage local manufacturing and services, particularly technology components and solar PV installations. This path will support the longer-term goals of improving industrialisation and regional value chain creation as envisaged by the African Continental Free Trade Area.

While the pandemic is slowing FDI and capital flows worldwide, it must not defeat Africa's development of clean green energy sources. These are essential to the continent's continued growth. A continued focus on 'greening' Africa's economy will enhance its competitiveness in a global market. The sustainability trend will also secure the continent's role in industries that can compete in a mid-21^st century economy. The diversified nature of clean energy and its related value chains provide a wide array of opportunities to develop complementary skill sets and specialisations. Private firms will play essential roles as building blocks for RE industrial development. Private financial support for industry growth can diversify access to financing and enable smaller enterprises to participate in the green economy. The private sector has the skills, technical expertise and experience needed to ensure the longevity of fledgeling green energy sectors. Their role should be elevated through the extensive use of external, private-sector advisors on programme design and implementation elements.^[51] Ultimately, infrastructure development works best when government and the private sector work together towards common goals and the betterment of African society.