Gregor Paterson-Jones has explored the African renewable energy landscape in detail over the last two decades. Here he highlights 6 key trends, affecting the African renewable market landscape.
Rapid decline in cost of renewable energy and in solar particularly
Renewables have seen massive declines in the past 2 years with LCOE of solar and wind now dropping below fossil fuel alternatives and Solar module prices are predicted to drop rapidly in the first 12 months of 2018 to as low as $250,000 per MW.
BNEF are forecasting a further drop equalling 35% year on year by the end of 2018, and we are seeing successful bid Middle eastern and US at lower than $0.02 per Kwh. It is expected that the drops in solar will have a greater effect on the African market in general than other technologies, given rapid deployment profiles, lower site-specific capacity requirement, and numerous very high irradiation sites across the continent.
Wind prices have dropped significantly internationally, but the evidence base for Africa in this regard is scant. The major price drops experienced across the earlier rounds in the South African auction process have not been in evidence due to the interruption in the signing of PPA’s. However, one would expect the prices to continue dropping in the new rounds now that South Africa’s procurement process has been continued.
There is even less data available from Biomass. International evidence has not shown as fast a drop in Biomass prices as with wind and solar. Biomass project project prices and implementation suffer from lack of secure feedstock and creditworthy suppliers and newer technologies such as Advanced Gasification have not yet found traction in Africa.
Hydro at scale is still one of the lowest LCOE sources, however private sector (Non-government and non-Chinese ) have not realized price drops. This is in line with the technology maturity which has resulted in relatively stable civil engineering and turbine pricing.
Move from Feed in Tariffs to auctions
A feature of recent policy developments across Africa is the use of an auction tariff regime as opposed to a feed-in tariff. This is a trend globally.
South Africa, with its strong civil engineering sector and large renewable independent power producer (IPP) programme (which provides investor certainty), had the lowest installed cost for an operating solar PV plant (around USD 1.4/W for the best project) on the continent prior to the Zambian. Eskom has signed the PPAs in rounds 3.5 and 4 after a 2 year delay, and the government has committed to a further 1.8 G, we can expect the prices to drop further in the next round recently announced for a total of 1.8 GW. Auctions reduce cost due to their competitiveness and on-grid commissioned and planned utility-scale solar PV projects between 2014 and 2018 in Africa range from around USD 1.2 to USD 4.9/W (USD 1 200 to 4 900/kW). Although Africa is currently home to a very small set of utility-scale solar PV projects, costs have been declining over time. In 2017 the Zambian market produced an auction bid as low as $0.04c / Kwh equivalent.
However, winner-take-all auctions favour well capitalized international players with a low cost of capital and efforts to include local players need to be considered when structuring a support package. PEVP have conducted a detailed market study of all renewable energy developers across Africa including financiers of development stage projects. The result is that there are few private sector players actively spending private sector money in early to mid-stage development of on grid projects. If you combine this market knowledge with market developments regarding competitive procurement, a picture emerges. Early stage projects and less experienced developers are being left behind. This is a gap that a project preparation facility should be filling.
Explosion of the Solar Home system market but most players still not EBITDA positive
Globally, there has been substantial cumulative sales (over 130 million devices since 2010), growth (~60% CAGR), and significantly increased penetration (~17%) of the potential market of off grid and unreliable-grid households. The total sales value generated by the OGS sector has exceeded USD 3.9 billion globally.
Three product categories (pico, plug-and-play SHS, and component-based systems), catering to lighting and beyond (e.g. communication, cooling, entertainment, refrigeration), and two distinct business models (cash-based versus Pay-As-You-Go) have emerged. East Africa PAYG has pioneered and continues to dominate the commercial funding space in the SHS and solar lighting markets globally.
More than $223 million in investments was committed to off-grid solar companies in 2016, particularly for pay-as-you-go models, which are leading new investments and are increasingly viewed as a new category of infrastructure investment. In comparison, $158 million was raised the previous year.
These investments, consisting of commitments by private equity funds and individual equity rounds, are breaking the previous trend of relying on impact investors and donor capital. Clearly, private-sector lending is also on the rise. From 2012 to 2017 PAYGO businesses raised USD 773 million, equal to ~85% of all funds raised. These investments are highly concentrated, with just four companies accounting for 67% of total PAYGO investments. This suggests that investors have aggressive expectations on how fast PAYGO companies can grow.
There is no shortage of early stage capital for the established PAYG players in the established markets for solar home systems, and in fact, certain market commentators who are active investors in the SHS market, indicate that there might well be too much chasing greater risk pools.
Furthermore, the sustainability of businesses in SHS sector will largely be driven by increasing the share of wallet and not necessarily by providing additional access to electricity. Facilities should guard against funding credit for consumption of white goods under the guise of funding electricity access, as it is the extension of the energy access sales to larger appliance sales where the business model of the larger, more successful off grid players in the PAYG market is almost uniformly heading.
Mini Grid market still faces stiff headwinds
While the promise of minigrids is high, current market penetration, even in the most promising markets, is below 1 percent. At current pricing, most mini grids still require concessional finance to be able to deliver returns. Personal research conducted with larger portfolio Mini Grid partners across Africa confirm that on average at current pricing points Mini Grids still require 30-50% capital subsidy to reach returns attractive to the private sector.
Commercial debt is prohibitively expensive and access to project financing is limited, such that companies must own and operate projects they develop—rather than monetizing them and using the proceeds to grow their development pipelines. Even in the most successful systems, electricity prices are high, typically above $1.00/kWh, which hampers economic development, the ultimate goal of electrification. Note this is significantly above the BNEF component build up costing in their recent African Mini grid market reports, which in my opinion is a poor indicator of actual on the ground project cost across Africa.
Regulatory risk in the form of unpredictable policies and utility plans is high in most markets, discouraging companies and investors. As of yet, there is no clear road map forward for proving commercial viability and driving rapid growth.
The missing middle: Transmission and Distribution
Africa has a transmission and distribution problem which is often ignored in favour of generation support and funding. This problem is particularly acute in East Africa.
Power Africa assessed projected generation and transmission in key East African countries to see if the new power generation projects that Power Africa is seeking to support would ultimately be able to deliver power to people and industries. For example, KivuWatt in Rwanda and the Lake Turkana Wind Project in Kenya were limited in their ability to transmit power after the power generation projects were completed, resulting in financial losses that could have been avoided if there had been better transmission planning.
Power Africa analyzed the anticipated order in which planned power generation and transmission projects are expected to come online in five East African countries. The following key observations were published:
- Energy surplus is already a reality – all five of the countries studied (Ethiopia, Kenya, Rwanda, Tanzania, and Uganda) will be in a surplus position in the next 5 years.
- Transmission infrastructure must be accelerated to deliver the surplus power beyond the borders, or to areas where energy penury exists
- Investment is required in hard infrastructure and energy systems management, as well as trading arrangements.
- Increased private sector financing of transmission infrastructure is needed.
This last issue points to the need for planning and research to be performed to investigate the extent to which public private partnerships may be utilized to bring in private sector investment in the Africa transmission and distribution infrastructure sectors, but it also identified that co-ordinated cross broader planning should be enhanced to maximise the usage of generation assets in surplus areas. Privately owned merchant interconnectors are a reality in the European markets for example and often can be implemented more rapidly than public sector cross border projects.
The rise of the ‘Green Investment Bank’ model
Not an African trend admittedly but a trend that has had a knock-on effect in development financing and will continue to be a theme affecting investment in African Clean Energy finance vehicle development. Green Investment Banks are dedicated domestic vehicles or regional investment vehicles that are created for the purposes of promoting and investing in Green projects, funds and sometimes companies.
They are usually policy instruments aimed at addressing five market failures:
- Overcoming investment barriers
- Building confidence by reducing risk
- Developing local expertise
- Transforming markets, and
- Reducing local financing costs
Typically, they offer a wide array of instruments across the capital structure and focus on a specific regional or domestic market. In addition, they often are responsible for financial innovations in their sectors or regional markets. The Green Investment Banking ‘Street Lighting’ Energy efficiency loan, the Fund of Fund Energy efficiency tender and the dedicated operational asset Offshore Wind Fund are all good examples.
The rise of the Green Investment Banks or Green Investment Fund has a number of common themes:
- They do not for the most part offer grant based or concessional finance – they usually invest ‘ commercially’ but have to prove that they are ‘additional’
- They target difficult or underinvested sectors or regions
- The treatment of market additionality is usually embedded in their investment process evaluation
- The evaluation of ‘green’ based on a robust methodology is also embedded into their investment processes
- They offer multiple financial instruments based on market need and have been responisi ble for significant innovations in their markets to date – they focus on both Fund of Fund (platform) and direct investments based on market need and size of target investment
- The governance is traditionally structured to facilitate rapid but well documented investment decisions and more closely resembles that of the private sector than the public sector
- The Green Investment Banks have hired private sector investment experts and management to fulfil investment and executive roles, in some cases requiring waivers on pay scales and structures to which the public sector is heir
The learnings for the development finance market is that private sector finance disciplines and processes can successfully be adapted to the public sector finance vehicles, and they can fulfil commercial and developmental objectives in dedicated clean energy investment vehicles in both developed and developing markets. We are now seeing the first dedicated Green Investment Vehicle in Africa (South Africa is the first one)