New thinking on Africa’s electricity problems demands commitment and faith

15 Jul 2024 - By John Hamilton | 10 minute read

With African electricity supply industries in a state of flux, everyone agrees the infrastructure needed for economic development can only come from the private sector, but the existing financial and commercial models are inadequate – and a desperate need for investment in transmission only makes this financing challenge harder. Some new thinking about how to crack these problems was presented at the African Energy Forum in Barcelona, but the boldest ideas require a leap of faith, writes John Hamilton*

Electricity supply industries (ESIs) are in flux across the African continent. As demand for clean affordable electricity mounts, policy-makers, utilities and regulators are confronting the challenge of adding more renewable energy (RE) to constrained grids, while private sector developers remain starved of finance and commercial financiers and multilateral development banks complain of a lack of bankable projects.

These competing conundrums are forcing participants back to the drawing board and some pockets of ambitious new thinking were evident at the Africa Energy Forum (AEF), held in Barcelona on 25-28 June – even as many of the usual themes dominated discussions.

There is much to do. It was notable that most of the participants canvassed by African Energy expressed a pessimistic outlook over the amount of private sector development under way across the continent.

Industry stakeholders said more national-level reforms and improved implementation are essential if significantly more private investment is to flow into African ESIs. A huge effort is needed to give clean sustainable energy to 300m more Africans – and to improve services for many more still. Even then, at least another 300m will remain without access into the 2030s and beyond (AE 508).

Making the great leap forward involves making the boldest plans work, which requires commitment, co-ordination, time and a leap into the unknown.

African Energy heard arguments for some of the most striking new ideas – starting with efforts to confront the urgent, but often intractable, problem of reconciling hard currency procurement and financing with revenue flows denominated in weak domestic currencies.

Introducing the African unit of account

Independent power producers (IPPs) and other investors remain acutely vulnerable to currency risk and what Autonomi Capital managing director Jonathan Berman called “the original sin of lending in dollars for local currency payments”.

The veteran banker observed: “As a financing community as a whole we haven’t responded well to this issue.” Most other regions, such as Asia and Latin America, have done much better.

The African Development Bank (AfDB) has proposed a revolutionary scheme for overcoming this, with a plan to create a pan-African currency backed by natural resources.

AfDB energy financial solutions, policy and regulation director Wale Shonibare first presented the idea at the AfDB’s end-May annual meeting in Nairobi. At AEF he led a session which discussed the proposal in detail.

The way resources are traded in Africa means countries are “leaving a lot of money on the table”, Shonibare said; an entirely new structure – geared to African needs – was required.

The Bretton Woods institutions created after the Second World War were designed to solve Europe’s problems rather than Africa’s, Shoibare argued. They “are not serving Africa’s needs… and, as we develop, we have to think about institutions which serve Africa’s priorities.”

The problem is that Africa attracts just 3% of global energy investment (AE 496). This, said Shonibare, “is a tiny fraction of what we need”. Referring to global climate finance schemes such as the Glasgow Financial Alliance for Net Zero (Gfanz) and other commitments to increase financial flows, he noted: “When people talk about the amount of money available, that money is not for us in Africa. Fund managers don’t have interest in projects in Lagos or Kinshasa.”

The problem is only getting worse. As currencies have depreciated against the dollar, authorities are less able to provide the sovereign guarantees required by international lenders. “Many countries are reaching debt sustainability limits and the IPP market is slowing down because these guarantees are no longer available,” said Shonibare.

African Energy’s own reporting bears this out. Even when power purchase agreements (PPAs) are fixed in dollars, problems of convertibility emerge. As developers in countries from Egypt through to Nigeria, Malawi, and Zimbabwe (which has recently experimented with a gold-backed currency) have learned to their cost, lack of dollars in domestic financial markets reintroduces currency risk via the back door (AE 505, 501, 487, 476).

By contrast, South Africa – for all its problems – has shown what can be achieved when projects can rely on domestic finance, which is available in the deeper rand market.

Shonibare’s solution is to create a basket of commodities with a low volatility index that will not depreciate – and might even appreciate – against the dollar. This would back a new currency, managed by a settlement agent: the African unit of account (AUA) – not to be confused with the AfDB’s existing unit of account, or UA, which is equivalent to one International Monetary Fund special drawing right.

Under this proposed system, an IPP developer would take local currency earnings to the settlement agent, which would settle in dollars. Participating countries would pledge a percentage of their known proven resources to trade through the agent.

While this would represent a major shift, Shonibare pointed out that precedents already exist.? Global examples include the gold standard and the Bank for International Settlements. In Africa, 14 countries already take part in the CFA franc zone, depositing 50% of their currency reserves with the French treasury. This could eventually be replaced by a new West African currency – the eco (AE 413).

Shonibare also argued that countries already carried out a version of the scheme, but without the benefits. “They are pledging forward revenues to China, and to companies such as Vitol and Glencore. These deals are unregulated. They are done under the table. People don’t know what has been agreed,” he said (AE 481).

Berman highlighted the critical role played in Africa by development finance institutions and multilaterals. He was “disappointed commercial banks don’t find more solutions… They almost fear the credit risk”. When it comes to financing newer technologies, like solar PV and batteries, “it is not beyond local banks to build up that skills base”.

Renewable IPP procurement reforms

Currency risk is one of the main factors that undermined earlier models for getting more cheap, clean power onto the grid – notably the World Bank Group (WBG)’s Scaling Solar scheme, which ran into irresolvable difficulties in Ethiopia in 2021 (AE 487). But the fate of this scheme has not undermined the necessity for well-designed auction processes. The African continent now has plenty of experience from multiple jurisdictions showing what is likely to work and what will fail.

At AEF, University of Cape Town Power Futures Lab director Wikus Kruger presented a detailed analysis on the design and implementation of RE auctions in a report published by GET.transform, a platform funded by German development agency GIZ. The report, Driving Growth: Effective Renewable Energy Tendering in Africa, sets out a series of country, programme and project level factors that must be implemented if auctions are to succeed.

Driving Growth also shows how decisions at one level interact with those taken at other levels, with its findings illustrated with case studies from South Africa, Mauritius, Botswana, Ethiopia and Morocco. The paper offers a series of recommendations to improve forward planning, increase institutional capacity, secure trust from the markets and prioritise the requirements of lenders.

Kruger argued that, if developers and governments spend a lengthy period of negotiations between an auction’s conclusion and financial close, the winning price is unlikely to be competitive by the time the project goes ahead.

It’s all about transmission

While just a couple of sessions focused on grid, storage and energy trading at AEF 2023 in Nairobi last year, more than eight panels discussed these topics in Barcelona – an indication of how much has changed in the past 12 months.

Industry participants are ever more engaged with the need to bring private finance into transmission infrastructure. As one session participant put it: “Who is going to fill the gap? The only answer is the private sector.”

South Africa is likely to lead the way with its plans to set up an Independent Transmission Projects Office (ITPO) to sit alongside its established IPP Office. However, plans to launch the first ITP tender by October may be optimistic.

ITP projects may be built and financed by the private sector, but should always be owned and operated by the state, said Development Bank of South Africa (DBSA) group executive Mpho Mokwele. “From an ownership point of view, it is important that the transmission infrastructure is inside the state-owned transmission company. As soon as you build the infrastructure you need to transfer it to the transmission company so that they own it,” he said.

Mokwele added that it is “important that transmission companies are part of the decision-making and policy-making process”. He expressed strong interest in DBSA’s participation in ITPO’s project management side.

Other panellists noted that transmission lines are some of the hardest projects to advance under private finance structures, because of the difficulties in securing wayleaves and the need for extensive environmental and social impact studies.

Substations, storage and digital transmission technology may be the place for private investors to start in many countries.

Among many elements needed to make the scaling-up of transmission possible will be more rigorous and forward-looking regulation.

Having chaired the AEF’s regulator session, Energy for Growth Hub’s Mohamed Rali Badissy concluded this was “an incredibly dynamic time in the market for regulators” who, with a lot of unbundling under way, were “being asked to structure transmission, battery and other tariffs for the first time.” C&I and embedded generation have emerged, “whereas before it was all about grid stability” he added.

Regulators are now “having discussions that happened in generation 10 or 15 years ago, but are now happening in the transmission space,” Badissy said. “Not least to prepare the public for how private transmission will work”.

Wheeling and cross-border trade

As the shift towards utility-scale commercial and industrial (C&I) IPPs continues in several countries – again led by South Africa – the need for power systems and regulatory frameworks that permit wheeling both within and across borders is becoming ever more urgent.

This goes beyond the business of building infrastructure into the area of harmonising regulations and building regional markets.

With both the West Africa Power Pool (Wapp) and Eastern Africa Power Pool (EAPP) about to open early-stage day-ahead markets this year, there are positive indications that attitudes towards market structures and operations are evolving at both national and regional levels (AE 498).

There are even some suggestions the Southern Africa Power Pool (Sapp) – for many years the undisputed leader of the regional groupings – may be forced to raise its game and consider more sophisticated structures under development elsewhere, including in a resurgent Wapp (AE 504). Sapp has already launched its regional fund for financing interconnections (AE 502).

Further innovations could follow. Speaking in an AEF session on bolstering transmission to release capital for generation, Sapp secretary-general Stephen Dhiwa anticipated potential developments in the Southern African market.

“Some transmission projects will move power from areas of high renewable energy to areas of high demand. We can create a dedicated renewable energy market as a way of increasing investment in renewable energy and allowing those customers who need renewable energy to buy it from such a market,” he said.

At the AEF’s opening session, AfDB vice president for power, energy, climate and green growth Kevin Kariuki pointed to the need for big initiatives to overcome Africa’s huge energy deficits and gaping social and economic inequality.

The ‘Mission 300m’ initiative – to gain energy access for 300m more people by 2030, unveiled in April by the WBG and AfDB – was one example. Along with SE4All and the Global Energy Alliance for People and Planet, the AfDB and WGB were “burning the midnight oil” to launch Mission 300m, which would be accompanied by country-level reforms.

* With additional reporting by Jon Marks.

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