Africa can’t increase access or industrialise without a huge upscaling of private investment

17 Jun 2024 - by Jon Marks , Marc Howard

Can the private sector really come to the rescue of a situation where some 570m sub-Saharan Africans still lack access to electricity – equivalent to over 50% of the SSA region’s population? Of the global population without access, more than 80% live south of the Sahara, according to the International Energy Agency (IEA).

Multilateral development banks (MBDs), development finance institutions (DFIs), donor governments and other public sector players continue to play the leading role in supporting electricity supply industries (ESIs) across the continent. They will likely continue to do so, but expensive public sector studies and policy documents tend to come to the same conclusion: that market solutions are essential to resolving the ‘energy trilemma’ of providing security, sustainability and affordability.

The new Tracking SDG 7: The Energy Progress Report 2024 – issued by the IEA, the International Renewable Energy Agency (Irena), the United Nations, World Bank Group and World Health Organisation – points to one critical area where private financing and entrepreneurship can make a big difference by providing decentralised renewable energy (RE), comprising stand-alone solar solutions (Tier 1 and Tier 2 access solar lights and home systems) and mini-grids. These projects often receive public sector support, but can also be driven by micro-scale on-the-ground interventions.

?“The high cost of extending electricity grids into rural areas with low population density and low demand for electricity explains why decentralised solutions are playing an ever-greater role in rural electrification,” The Energy Progress Report observes. “They offer a lower-cost alternative to grid expansion, because they can be rapidly deployed to meet lower levels of demand. In urban areas, by contrast, grid densification is needed to respond to rising demand from expanding populations.”

Rare are the cases where unqualified success can be claimed for the sort of state-dominated, vertically integrated structures that have configured most African national ESIs for decades (AE 500 ). Often insolvent, under-funded and inefficient public utilities are leaving a legacy of high cost/low reliability service that is neither cost-reflective nor generative of the capital needed to expand electricity access and improve services.

The challenge is immense on a continent where the UN projects there will be some 2.5bn Africans by 2050, accounting for 26% of the world total and doubling today’s 1.2bn population (as shown in a graphic published in AE 500 ). If universal access is to be achieved, the Africa-wide ESI must supply an eyewatering 1.8bn more people over the next 25 years.

However, The Energy Progress Report’s ‘five custodian agencies’ reported: “The year 2022 saw a reversal in progress in efforts to expand access to electricity, with the number of people living without it growing for the first time in over a decade.” While some 571.1m people lacked access in 2022, up from 566.1m in 2010, “the region faces a shrinking fiscal space owing to persistent inflation, high interest rates, and low affordability thresholds.”

Eighteen of the 20 countries with the largest access deficits in 2022 were in SSA; the top three –Nigeria (86m), Democratic Republic of Congo (78m) and Ethiopia (55m) – accounted for nearly one-third of the entire global deficit. The report observed that SSA’s share of the global deficit “ballooned” from 49.6% in 2010 to 83.3% in 2022.

These trends are shown in the African Energy’s map and graphic below- Generation capacity additions 2023 and access 2010-22.

The preferred formula would be for the private sector to lead in filling these gaps, from the mobilisation of local pension funds and other investment firms – a long-held aim that has many enthusiasts (but not necessarily within the funds themselves, which are concerned about the risks of making big punts on infrastructure) – to a huge scaling up of commercial deals for major projects and for business development down to the most micro scale (AE 505 ).

This would, of course, receive substantial MDB, DFI and other public support, but take-off requires many more investors piling into big projects, be they conventional big ticket generation schemes, the new wave of independent transmission projects (ITPs) or other models of funding that the state provided before. Also critical will be the scaling-up of platforms offering commercial and industrial (C&I) developments, mini-grids and even rural electrification.

An IPP uptick

Among a limited number of reasons to be cheerful, analysis of the African Energy Live Data platform shows a significant uptick in the number of independent power projects (IPPs) commissioned over the last year.

Significant additions of generation capacity include Scatec’s 270MW Grootfontein solar photovoltaic (PV) cluster in South Africa, Geometric Power’s 188MW Aba gas-to-power plant in Nigeria and Copperbelt Energy Corporation’s 60MW Itimpi-1 solar PV plant in Zambia.

However, overall progress still falls far short of what is needed. Indeed, only half the 6.8GW capacity additions expected by African Energy Live Data in 2023 actually reached commercial operations. This aggregate 3.4GW addition was the lowest amount of new capacity added in Africa since 2018, and just two countries – South Africa and Nigeria – accounted for most of it.

Industry sources routinely tell African Energy that the limited recent capacity additions and their heavy concentration in a few markets reflect difficult trading conditions. Raising capital has been constrained by a challenging macroeconomic context, driven by factors including the inflationary spike that following Covid-19 and Russia’s invasion of Ukraine, and conflict in countries including DRC and Sudan; this is compounded by currency, debt and other macro-crises (AE 506 , 503 , 496 ).

Furthermore, sources frequently tell African Energy, in many countries reforms intended to unbundle and restore profitability to utilities are only partially carried through. Despite the political fanfare accompanying these efforts, such reforms still too often don’t tackle entrenched networks of graft or patronage, bureaucracy that is either somnolent or interfering, and unstable (or at least unreliable) juridical and political regimes.

Pioneers take the big risks…

With considerable stamina as well as boldness, a coterie of private sector players (and their supporters in forward-looking DFIs, MDBs and governments) are showing innovation can be applied to overcome some of the structural obstacles inhibiting progress.

Just one example is Africa GreenCo and GuarantCo’s agreement to provide guarantees for up to 225MW to be sold by RE IPPs into the Southern African Power Pool (Sapp) (AE 504 ).

Private investment in African transmission projects is a new phenomenon that is much to be welcomed – a potential ‘game-changer’ if ever there was one, given the scale of investment needed (AE 507 , 489 , 464 ). But this will require substantial new support structures being put in place.

Also of note are innovative models being applied in the C&I space. One example is Anglo American and EDF Renewables’ Envusa Energy joint venture, which has pioneered a portfolio funding structure and achieved financial close in February for the first phase of the 520MW Koruson II wind and solar cluster, which will supply the mining giant and its subsidiaries in South Africa from 2026 (AE 502 , 498 ).

but old mainstays still have a big role

Africa’s oldest, most consistent source of utility-scale electricity generation, hydroelectric power (HEP), remains a mainstay on many grids. Some 1.4GW of new HEP capacity was added in 2023, over 40% of the total, according to Live Data.

Such are the scale of individual HEP projects that they largely remain the domain of state actors, although private sector players are increasingly seeking roles as developers, operators and carrying out rehabilitation and capacity upgrades.

Over the last year, greenfield HEP capacity was added by projects including the 600MW, six-unit Karuma plant in Uganda, Mainstream Energy Solutions’ 700MW Zungeru plant in Nigeria and Sicomines’ 240MW Busanga IPP in DRC (AE 500 , 493 , 479 ).

A further 470MW has been added from the first two units of the nine-unit Julius Nyerere HEP plant in Tanzania, where the remaining seven turbines are expected to be commissioned this year for the plant to reach its 2,115MW installed capacity (AE 506 ). Construction of the 5.2GW Grand Ethiopian Renaissance Dam (Gerd) , where 750MW of capacity has been operational since 2022, is also expected to be completed this year (AE 503 ).

Rehabilitation of HEP capacity will also be increasingly important, as utility-scale assets that were commissioned decades ago need upgrades and facilities impacted by climate change need remedial work. Major rehabilitation projects completed in the last year include the restoration of output at Malawi’s 129.6MW Kapichira run-of-river plant, which was badly damaged by Storm Ana in 2022 (AE 488 ).

Among other sources of baseload, the resistance of western DFIs and many MDBs to funding hydrocarbons schemes has dampened the prospects for natural gas, despite its widely perceived status as being Africa’s ‘transition fuel’ – an essential element in supporting the wider use of RE and making rational use of domestic resources to increase energy access and drive industrial development in countries that have marketable reserves (AE 505 , 502 , 474 ).

Funding may still be available when a project is well structured and makes a credible developmental argument. Meanwhile, regional financiers have emerged as enthusiastic backers of big gas schemes, including the Lagos-based Africa Finance Corporation, Cairo-based African Export-Import Bank (Afreximbank) and South Africa’s Standard Bank. Backers of the Africa Energy Bank expect the oil and gas-focused AEB to start commercial operations this year (AE 503 ).

African Energy Live Data shows that 1.4GW of gas-fired capacity was added to African grids in 2023, via GTP projects that included the 130MW third unit at Eni’s Okpai Gas Phase II IPP in Nigeria, the 253MW fourth phase of Globeleq’s Azito built-own-operate-transfer plant in C?te d’Ivoire, and Mytilineos’ 555MW Tobruk CCGT plant in Libya. (AE 490 , 482 , 465 ).

Live Data gives some scope for optimism

Analysis of the pipeline of power projects suggest a hike in generation capacity additions can be expected in the near/medium term. Live Data has recorded some 8GW of new projects being announced in Q1 2024 alone.

These included several large projects in Nigeria, where the federal government and Sun Africa are in discussions for 961MWp of utility-scale solar PV developments, paired with 456MWh of battery storage (AE 469 ). US IPP Sun Africa also says it will start construction this year of solar PV projects to supply a total 504MWp in Angola (AE 507 ).

In South Africa, the list of projects reaching financial close over the past 18 months includes Enel Green Power’s three 110MW wind farms in the Eastern Cape, and Red Rocket and Reatile-Jade Energy’s 240MWp Ursa Energy Virginia solar PV plant in Bloemfontein (AE 505 , 501 ).

But capacity additions are proceeding at a much slower pace in many African markets – even though analysis of the deal flow shows that, where funding has been made available, projects have been commissioned even in markets where political, security and economic conditions have made attracting private funding difficult.

Examples within the last 18 months include the additions of commissioned on-grid solar PV capacity in Niger (30MWp), Burkina Faso (68MWp) and Central African Republic (40MWp) (AE 498 ). However, these projects were developed using concessional and grant funding, which may not again be so forthcoming in these markets, which were overtaken by coups d’état supported by Russia.

Strong public sector support will remain central to many projects happening, even if investors are inspired to enter or increase their engagements to Africa, which is widely seen as the energy market of the future.

Vying with water, health, education and so much more for resources, access to energy remains among with biggest developmental issues facing a continent where the UN Sustainable Development Goal 7 (SDG 7) target to give “access to affordable, reliable, sustainable and modern energy for all” by 2030 will be missed by a substantial margin.

The Energy Progress Report, in common with the wider literature, shows the extent that international public financial flows to developing countries remain essential, while arguing for a much bigger private sector role. But even while public sector support of clean energy research and RE production rebounded in 2022 to $15.4bn ?(up by 25% on 2021), it “remains far short of the 2016 peak of $28.5bn… [and] the current trend shows that the world is not on track to meet the goal of expanding access to clean energy… especially among least-developed countries, landlocked developing countries and small island developing states.” Further: “The 2022 comeback was driven almost entirely by European sources.”

No wonder the clarion call is for a hugely scaled-up private sector contribution. African Energy’s analysis of the deal flow and market sentiment suggests there are some bright spots amid the gloom, but those remain too few to come anywhere close to SDG7 and similar aspirations, however admirable many of the efforts being made.