Africa Needs Investment To Drive Its Clean Energy Transition

Michael Meeser, Chief Investment Officer at Revego Fund Managers

Access to affordable renewable energy sources in the coming years will be critical in ensuring growth that uplifts all communities. Success will hinge on the technologies used, partnerships between the public and private sectors, and access to capital, both through primary and secondary markets.

Capitalising on Africa’s population boom to realise the continent’s economic potential will require pervasive access to reliable and affordable energy. According to the United Nations Population Division, Africa’s population is expected to increase by roughly 50% over the next 15 years to over 1.8 billion by 2035 – the fastest growth rate globally. And sub-Saharan Africa will play a key role in ensuring the continent’s economic prosperity. The region’s population will remain the youngest in the world by 2035 and this predominance of working-age individuals (aged 15 to 64) will drive economic activity and further urbanisation.

Yet, over 600 million people currently live without electricity in sub-Saharan Africa. This lack of energy access stifles economic growth and sustainable development. As such, Africa’s energy transition may have a more profound effect on the economy than the switch from fixed landlines to mobile phones.

However, building large power stations with large transmission grids is not feasible in Africa due to the prohibitive costs, a lack of supporting infrastructure and the reliance on finite fossil-fuel resources. Over-reliance on non-renewable energy sources also poses risks to sustainable economic growth and human health.

Turning to renewables

Thankfully, renewable energy offers a viable solution. The continent already benefits from an abundance of renewable energy sources in the form of solar, wind, biomass, hydro and geothermal energy is another potential source of abundant power in certain African countries.

According to a report by the International Energy Agency (IEA), much of Africa has excellent solar resources, while sub-Saharan Africa has yet to exploit the full extent of its hydropower potential. In addition, coastal and highland areas across the region offer ideal conditions to generate energy from wind. These factors could help sub-Saharan Africa meet half of the region’s power generation growth by 2040. However, making this ambitious target a reality will require radical policy changes, enabling regulatory frameworks and significant investment to drive Africa’s clean energy transition.

The rise of renewable energy

African countries that remain heavily dependent on non-renewable energy sources, such as North Africa’s oil and gas and South Africa’s coal dependencies, face various challenges. Dwindling resources, spiralling maintenance costs, the environmental impact and the poor reliability of ageing generation fleets are forcing utilities to consider alternative energy sources. South Africa’s recent State of the Nation Address also highlighted rapidly expanding energy generation capacity as a key priority for SA’s recovery plan and so these countries have to change the composition of energy generation where renewable energy will eventually supplant fossil-fuel-dependant generation as they phase out legacy technologies and sweat sunk costs in existing infrastructure.

However, other nations are already leveraging the lower relative costs of renewable energy infrastructure to leapfrog both developed and developing nations that remain tied to their existing infrastructure.

Developing countries that still have underdeveloped grid networks also have the opportunity to leapfrog to next-generation smart grid network technologies when expanding their infrastructure. This will create more responsive and flexible grids able to accommodate a diverse energy mix. And as global production of components for solar PV panels, wind turbines and battery technologies has scaled-up over the last 10 years, the industry has achieved economies of scale that continue to drive down the cost of these technologies.

Understandably, energy utilities in various African countries are already implementing large-scale projects to support rising demand. Zambia, Botswana and Kenya have all embarked on large-scale solar renewable energy projects that will also deliver downstream benefits for other industries and the broader economies.

For example, Kenya began construction of the Meru County Energy Park in January 2020. The project will provide up to 80MW of renewable energy from 20 wind turbines and more than 40,000 solar panels to supply 200,000 homes. South Africa also boasts numerous acclaimed renewable energy projects, which feed into the country’s Renewable Energy Independent Power Producer Procurement (REIPPP) programme. These include the 50MW ACWA Power Solafrica Bokpoort concentrated solar power (CSP) plant and one of only a few storable renewable energy projects with utility-scale base-load and load-following capabilities.

African countries can also benefit from the adaptability and versatility of renewable energy generation technologies such as photovoltaic (PV) solar to create decentralised renewable energy projects that can provide electricity to rural or remote areas where existing grids don’t reach. Such self-generation is a major component of addressing the energy crisis.

Additionally, building renewable energy projects is significantly shorter and less prone to cost and schedule overruns than the resource-intensive build projects required for fossil-fuel generation units. This means countries can bring capacity online much faster.

Enabling technologies

Advances in digitisation and industry 4.0 technologies are also helping to address challenges around distribution and storage. For example, smart IoT-enabled platforms can automate energy provisioning on a controlled basis to match demand with supply to improve grid efficiency and reliability. Developments in energy storage have also helped to address base-load constraints due to the inherent generation challenges of intermittent solar and wind energy production. Battery, pump hydro and liquid air storage now ensure renewable energy generation can support uninterrupted power supply.

Furthermore, renewable production has become more efficient due to technological advances. For example, bifacial panels have increased the performance ratios of solar PV plants from around 70% to almost 90%. And development continues on wind turbines. Changes to hub heights and rotor diameters have made turbines bigger and more efficient. The net effect is that the levelised cost of electricity produced by wind is now one of the cheapest forms of renewable energy and is comparable to coal without the negative environmental impact.

Public-private partnerships remain crucial

Clearly, the technologies and resources needed to realise Africa’s energy transition already exist. What the continent needs now is the political will to realise Africa’s potential as a global leader in renewable energy production.

The OECD’s Financing Climate Futures: Rethinking Infrastructure report affirms that enabling policies and financing from the public and the private sectors, along with new business models, can work in tandem with official development finance to play a catalytic role in Africa’s clean energy transition.

Africa needs wider liberalisation in its electricity generation sectors. While governments can justifiably retain control over the transmission grid to ensure equitable access to electricity, Africa requires a favourable environment conducive to public-private partnerships that can bring additional generation projects online in a short period of time.

Deepening access to capital

A willingness among developers and their funders to back renewable projects in Africa should flow from the right enabling policies. Of growing importance will be the development of a secondary market to help developers to exit projects once they reach a certain stage and to give access to these projects to a broader pool of investors.

In a global market where interest rates are at or close to historic lows, renewables can offer an attractive, relatively low risk return for investors seeking out a reliable income return. The growth in yield companies (yieldcos), developed specifically to invest in viable, income earning renewable projects, can satisfy this requirement, for institutional and retail investors alike.

Yieldcos are well established globally and proved to be resilient investments following the global lockdowns of March and April last year. Many have outperformed the broader market investor universe.

The listing this year of Revego Energy Africa Ltd on the JSE, Africa’s largest and most liquid stock market, will mean that domestic investors will soon have access to this exciting asset class, with a specific focus on Sub-Saharan Africa. By bringing in secondary investors into the sector, the advent of renewable energy yieldcos on the JSE will hopefully provide the liquidity needed to kickstart the kinds of projects that can capitalise on Africa’s undoubted potential.