A New Deal for Energy in Africa: what is missing?
Last week I participated in the Energy Week, held in Abidjan and co-organised by the ECOWAS Centre for Renewable Energy and Energy Efficiency (ECREEE), the African Development Bank (AfDB) and other partner organisations.
During the event the AfDB unveiled its New Deal for Energy in Africa and ran a High Level Stakeholder Consultative Meeting to gather insights from business and political leaders on how to achieve the goal of universal access to energy in Africa by 2025.
Access to energy has taken a prominent role in the AfDB since its new President, Akinwumi Adesina (PDF), assumed office on 1st of September this year. It was also the focus of the Africa Progress Panel 2015 report, 'Power, People, Planet', published earlier this year
The number of funds, initiatives, facilities and agencies that are pursuing universal access to sustainable energy in sub-Saharan Africa is vast and growing. The most relevant financing actors and assistance facilities were present at the event and made it clear that there is no shortage of technical and financial support to “light up” Africa.
At one point, a representative from the World Bank said “money is not an issue, let’s look for the real problems”. There does not seem to be a shortage of policies either.
Country representatives from the ECOWAS (Economic Community Of West African States) region presented their brand new National Sustainable Energy Country Action Plans, while the International Renewable Energy Agency (IRENA) presented their work on the Africa Clean Energy Corridor.
With a handful of exceptions, all sub-Saharan African countries have set renewable energy generation targets. In most cases, these are underpinned with policies such as Feed-in-Tariffs, adopted by eight sub-Saharan African countries, or competitive bidding.
With such a huge need for energy in Africa, why is there a lack of investment?
Private investors remain shy, but are badly needed to reach the US$55 billion per year required to meet demand and achieve universal access to electricity. International Development Banks (IDB) complain of a lack of pipeline. “Risks”, “guarantees” and “bankable projects” were the most frequently used words in the meeting.
In short, investors do not trust that they will be paid for the duration of their projects at a price that allows for cost recovery and acceptable profits. This is also the case in the countries that have approved Feed-in tariffs (FiT), especially if these are seen as too high to be accepted by consumers.
Consequently, due diligences required prior to financing are meticulous and can take years to complete, at a high cost that cannot be covered by small projects. Stepping into the breach, Chinese investors with their “quick-money, no-questions asked” style are playing an increasingly important role in the provision of generation capacity.
Is the straightforward reason that Africa cannot pay because it is poor?
Thirty three of the 48 countries in sub-Saharan Africa are Least Developed Countries with very low levels of income per capita. The offtaker is usually a national utility with financial difficulties. The majority of people making up the 600 million without access to electricity in the region cannot pay for a connection, as evidenced by very low electrification rates among households that are “under grid” (close enough to connect to a low-voltage line at a relatively low cost).
The answer, however is not that simple.
Africa can in fact pay and is paying more than it should. Emergency fuel oil generators are pervasive in the continent and charge exorbitant prices per kWh. This is partly the result of poor planning. Entrepreneurs targeting rural areas with little hope of getting grid connection any time soon are finding willingness to pay even 2 to 5 US$/kWh for a reliable and stable supply from minigrids.
It is true, though, that those that can pay for the electricity from diesel generators or private minigrids constitute only a minority among the 600 million, but suppressed demand is so high that meeting it at a lower cost would be a good start.
The need for patient capital: Africa can pay but not necessarily meet financier conditions
It would seem then that although Africa can pay, they are unable to meet the conditions imposed by financiers.
Investors in grid connected renewable energy plants impose payback periods of maximum 10 years, debt interest rates of 10% and twice as high returns on equity, after a thorough due diligence. Requirements for off-grid plants, that are considered riskier, are even more stringent. These conditions are particularly challenging for renewable energy generation, characterised by high upfront capital costs and low operating costs, as opposed to fossil fuel based generation.
Looking back at the electrification of the United States, the first country to be fully electrified, we find that capital was more patient then. Electrification in the USA was a long and complex process that took over a century to be completed. A key part of the success lay in the long-term subsidised loans to rural cooperatives, provided by the Rural Electrification Agency (REA) with federal government guarantees. The more recent successful electrification of China also depends heavily on special loans from the Agricultural Bank of China, with long maturities and subsidised interest rates.
Achieving full electrification in Africa requires inclusive growth
Another key element to achieve full electrification in Africa is inclusive growth. The positive impact of electrification for economic growth is used as a mantra in investment forums.
However evidence on the causal link from electrification to growth is inconclusive. The relationship seems to be bidirectional and communities with a solid economic structure and redistributed wealth are more likely to derive economic growth from better access to electricity and hence be able to pay a price that keeps utilities healthy. Evidence has also shown that, given a similar income per capita, countries with higher income distribution increase electrification rates more rapidly.
Many steps lie ahead to reach the goal of universal access to sustainable energy in Africa. More decisive and patient capital and policies for inclusive growth could well be the ones that make a difference.
Still, cheap finance cannot be used to compensate for problems with enabling environments. Strong political leadership is also needed to sort out the numerous problems with planning, procurement and contracting in African power markets.
Image: Solar panels at a thermo-solar power plant. Credit: World Bank Photo Collection - Flickr (CC BY-NC-ND 2.0)