Africa’s power deficit is an oft discussed hindrance in long-term development across the continent. Emerging as the slowest recovering economy from the pandemic, how important is power to the recovery?
Facing the first continental recession in 25 years, the strength of recovery across Africa will have long-lasting implications for many – more so than in other parts of the world. Reversing some of the early damage is only the first step, remaining on track with pre-pandemic growth is the next.
Prior to the pandemic, six of the 10 fastest growing economies were in Africa and that rate of development can be achieved and surpassed with the correct calibration of economic strategy and collaboration, which will be boosted by greater regional integration, with the rollout of the AfCFTA.
The power deficit has long constrained development, deterred investment and weakened productivity. On the axis demonstrating correlation between GDP per capita and access to electricity, the continent lags behind global averages significantly.
A key component of the long-term approach is the development and implementation of renewable energy sources. Upfront costs are higher but continuously falling. The regulatory and financing barriers are being lifted so the outlook remains very positive. Return on investment for an economy in middle to low-income countries can be very high. This is Africa’s time to transform, the fundamentals support that, and getting the energy strategy correct will ensure we see that happen.
The build back better narrative has taken grip across the global north and to some extent across Africa. However, there is a temptation for fiscally constrained public sector to turn to easily accessible, high-polluting power sources. How can we avoid this?
The ‘build back better’ conversation we have here in Africa is slightly different to that in the global north but certainly no less important. What is essential is developing a strategy cognisant of certain constraints, like financing, to maximise the near-1.5TW renewable energy generation potential across the continent.
Part of the process in doing that includes the need to include a steady pipeline of projects. Only two in 10 projects pass the feasibility and business planning stage – as a higher risk premium is placed on infrastructure development across the continent. This limits the number of bankable projects investors can finance and as a result holds back development.
Success of these projects, and a rapidly improving regulatory environment, will contribute to improved investment and ultimately reduce reliance on high carbon emitting energy sources in the long-term.
The pandemic has shown the resilience of African infrastructure, specifically within renewable energy. The investment case is very high. What developments in the market reinforce this positive sentiment?
Over the course of the pandemic, many infrastructure assets have displayed significant resilience – chief amongst them, renewable energy assets. African Infrastructure Investment Managers’ (AIIM) portfolio has stood strong in the face of the economic downturn, reaffirming our investment thesis and the importance of renewable energy.
This has maintained positive investor sentiment and bodes well for the long-term outlook of financing these projects. Beyond this, the instruments of project financing are shifting from those more commonplace a decade or two ago. The influence of development financing institutions is also dampening, and more nimble private sector players are inheriting some of that responsibility.
The emphasis placed on sustainability as a non-negotiable necessity have spurred innovative approaches to financing and project development. Green bonds, for instance, have witnessed astronomical growth in issuance. Of the circa USD160b issued between 2007 and 2018 Africa has been the slowest adopter, with only 0.4%, so the ceiling for growth remains very high on a continent where impact generated per dollar spent is greater than any other part of the world.
Public-private partnerships (PPP), not new or innovative, are also growing in popularity and importance, opening the space for independent power producers (IPPs). Their approach has facilitated greater deployment of decentralised power plants, which means scaling can be achieved more rapidly and installation costs are materially lower.
Africa’s renewable energy potential is huge but underserved. Despite having 40% of global solar generating potential, it contributes to around 1% of capacity. What are some of the factors holding it back?
Currently an overwhelming majority of the energy generating capacity is reliant on fossil fuels and biomass. However, the potential for renewable energy generation is massive. The IMF’s ‘Where the Sun Shines’ report [March 2020], suggests that financing of renewable energy projects is the biggest challenge that we face in unlocking Africa’s renewable energy sources.
However, this comes at a time where costs of associated technology are falling rapidly and the availability of bankable projects, being propelled by enabling policy, is growing. This has been evident across the lifespan of the Renewable Energy Independent Power Producer Procurement (REIPPP) programme in South Africa, in which AIIM is the largest equity investor.
With investments in projects north of 1,500MW, we have seen a reduction in procurement costs of 69% and 37% in solar and wind assets, respectively. Simultaneously, the programme has benefitted from a continuous pipeline of investable projects. In other parts of Africa, deployment has been assisted by programmatic development like the IFC’s Scaling Solar.