What will it take to power all of Africa?

Sub-Saharan Africa is seen as a new frontier for investment and expansion and the economic growth rates have shown immense potential during the last decade. However, continued development is only possible when the power sector is in line with national development plans – and while the continent is blessed with power resources, the infrastructure and utilization are low, which is holding the continent back.

It is estimated that $300 billion will be needed for all of sub-Saharan Africa to have access to electricity in the next 15 years. Currently, we are at 25% which, if you consider consumption per capita, equates to one-sixth of the world’s average.

Urbanization is driving the need for energy and power in Africa and, as a result, we are seeing a number of initiatives underway from privatization to planned projects for the exaction of resources and a host of traditional fossil fuel-based energy and renewable energy initiatives to meet this growing demand. Full scale support for such investment projects is growing – but it will take time to see the full impact – as we move from vision to implementation.

Many African governments are looking at proactively spearheading power development within their respective countries, prioritizing areas to ensure projects move forward. In fact, governments in Africa have recently placed increased focus on energy projects, and it is estimated that approximately $45 billion is required per annum to fund the generation, transmission (including interconnectors) and distribution of electricity sub-sectors on the continent.

With this, Africa is still intensely dependent on fossil fuels. While certain governments are proactively looking at available alternatives, the development of renewable energy will largely be driven by government policies, and the primary focus at the moment is to close growing demand-supply gaps, rather than making changes in the energy mix. Governments are also looking at how they can make the most of their existing financial assets by conducting asset sales – particularly for assets that tie up fiscal capacity – in order to recoup their investment, which in turn can be “recycled” into new expansion of generation, transmission and distribution projects.

The region is characterized by ageing power infrastructure that is unable to meet the current power demands. This is exacerbated by a number of challenges, including underutilization of generation capacity due to low maintenance of assets, loss-making power utilities due to low collection rates and high operational inefficiencies, ineffective transmission infrastructure and high transmission losses of up to 25%, poor planning, and low skills levels and management capacity. Added to this, many projects in Africa are plagued by inadequate governance, where there is a distinct lack of policies and regulatory frameworks in the energy sector and a lack of independent regulators. This further limits the enforcement of such policies to attract investors.

In addition, sourcing adequate funding for projects presents its own set of challenges. Government guarantees are instrumental in enhancing the bankability of projects and attracting investors, but donors also have an important role in funding new energy projects. It has, however, become abundantly clear that private-sector engagement and involvement is vital for countries that struggle to secure the necessary funding and skills for their energy projects. In fact, partnerships between government, providers/donor initiatives and the private sector are critical to ensure projects that capture resources can be turned into bankable ideas that ultimately turn on the lights.

What’s more, some of the dominant sources of funding in sub-Saharan Africa include Development Finance Institutions (DFIs) and multilateral institutions such as the African Development Bank, Development Bank of Southern Africa, KfW German development bank, the FMO Dutch development bank and the World Bank.

And, where donor funding cannot be obtained, joint ventures between the private and public sectors have proven to be acceptable for financing energy projects in many African countries. Countries such as Morocco, Kenya, Tanzania, Uganda, Ghana, Nigeria and Senegal, for instance, have opened their doors to foreign and local investors in their power sectors. And there have been successful cases of independent power producers (IPPs) projects in North, West and East Africa.

In South Africa, the IPP model is also proving to be successful. The South African government successfully implemented the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), which entered into its fourth round in June 2014 with the first round of projects recently having reached a financial closer. The success of the REIPPPP in South Africa is evident. It showcases the private sector’s willingness to invest in the power sector, where there is a transparent and well-designed procurement process, transactions provide reasonable levels of returns and key project risks are mitigated by government.

There are also a number of large greenfield projects. The most notable projects are the new coal-fired power plants in South Africa, Medupi and Kusile, which will add about 4,800 MW each to the national grid. These are among the largest power plants in the world and are planned to be commissioned in phases between 2015 and 2020. Another greenfield project worth noting is the Inga III development in the Democratic Republic of Congo planned for 2017-2018. The project has the greatest potential in Africa, with an estimated generation capacity over 40,000 MW.

On the other hand, the power sector in Nigeria has seen successful establishment of a strong institutional mechanism. The privatization stems from a broader plan to accelerate the pace of reform, which seeks to transform Nigeria from a country generating barely 3,000 MW in 2009 to a target of 40,000 MW by 2020. Apart from the privatized entities, targets were also set for other market participants, with the ultimate aim of ensuring stable and reliable power availability to Nigerians and a viable power sector for investors.

During the privatization process, the expectations of both the investors as well as the employees working in the power sector were adequately addressed. The success achieved so far in spite of several formidable challenges is commendable and may act as a key lesson for other countries planning to follow the path of reforms.

Whichever model is used, there are two key factors that are required for successful projects – a clear energy regulation framework coupled with political will to implement the projects. The more transparency there is and the more defined the responsibilities, the less red tape and faster the roll-out.

Pooling and leveraging commitments of governments and private-sector partners is critical if we are to overcome the barriers that have constrained Africa’s power sector, which ultimately will constrain its economic growth and development. While countries in Africa will continue to develop the cheapest available energy resources, ideally we would like to see more countries adopt models that will work best based on their geography and available materials to speed up progress in bridging the demand-supply gaps.

The World Economic Forum on Africa 2015 takes place in Cape Town, South Africa from 3-5 June. 

Author: Klaus Findt, Head of Infrastructure in Africa, KPMG 

Image: Electricity pylons carry power from Cape Town’s Koeberg nuclear power plant July 17, 2009. REUTERS/Mike Hutchings