By Lido Fontana

The opportunities for independent power producers in southern Africa are growing, but it is a complicated picture. The constant rhetoric of “Africa Rising” appears plausible, but it very much depends on where in Africa one is referring and whether the political will exists both now and for the long term to ensure the good progress that is being made continues well into the future. 

Big Picture 

McKinsey & Company said in a recent report on the potential growth of the sub-Saharan electricity sector that by 2040 electricity consumption in the region is likely to grow from total current demand of less than Brazil to a level  equal to today’s consumption in India and all of Latin America combined.

Trends that make this a plausible forecast are significant urbanization and population growth that has taken place over the last few decades coupled with aging and inadequate infrastructure. While many challenges in the sub-Saharan power industry remain, progress is being made. Decisive action is being taken by several sub-Saharan African countries, in addition to a number of international initiatives which are supporting this growing movement for change. 

From South Africa’s internationally-praised renewable independent power program, which has attracted significant foreign investment, to Nigeria’s privatization initiative which is creating a new competitive power market, sub-Saharan countries are  initiating programs for change. Such efforts are being complemented by the likes of Power Africa, which was launched by President Barack Obama in 2013. 

China’s omnipresence in Africa also cannot be ignored. According to McKinsey & Company, direct investment from China has risen dramatically over the past 20 years. In 1996, Chinese direct investment was only $56 million. By 2005, this  had jumped nearly 30 times, to $1.5 billion. Just six years later, the total was $15 billion. About 65% of this is in sub-Saharan Africa, of which just over a third goes directly into the energy sector. 

Power Africa, which looks to work with African governments, the private sector and other partners such as the World Bank and African Development Bank, is currently focused on five key countries — Ethiopia, Ghana, Kenya, Nigeria
and Tanzania — to add more than 10,000 megawatts of clean, efficient electric generating capacity. By expanding mini-grid and off-grid solutions and building out power generation, transmission and distribution structures, Power Africa will make electricity access available for 20 million people and commercial entities. 

The Millennium Challenge Corporation signed a US$498.2 million compact with the government of Ghana to transform the country’s power sector by investing in projects for distribution, energy efficiency and renewable energy. According to MCC CEO Dana Hyde, the compact represents the largest US government transaction to date under the Power Africa initiative.

While the sentiment being generated out of Africa is generally positive, risks remain. Political will is certainly moving in the right direction, but not all dangers have evaporated for investors. Understanding each local market within the context of  the broader sub-Saharan African market is key. Often regional factors play a part in local projects and this needs to be fully understood. Attractive returns are possible, but this is often matched by a healthy dose of risk. 

Drilling Down: South Africa

Eskom is South Africa’s public electric utility and remains the largest producer of power in Africa. It is among the top seven utilities in the world in terms of generating capacity and among the top nine in terms of sales; however, this African giant of electricity generation, transmission and distribution is on the ropes.

Standard & Poor’s recently downgraded Eskom’s credit to “junk,” saying it now regards its management as “weak.” In particular, the agency pointed to the recent suspension of chief executive Tshediso Matona — an electricity sector  ovice who had been in the job only six months — and three other executives to make way for an inquiry. This stands in stark contrast to the accolades Eskom received in 2001, winning the power company of the year award at the Financial Times global energy awards in New York. 

For a time, South Africa could boast about its ability to produce the cheapest electricity in the world. Its vast coal resources played an important part in this, but inadequate planning and lack of investment, coupled with increased demand
that grew steadily from the 1990s, resulted in Eskom having to implement “load shedding” in late 2007 and early 2008. Eskom even went as far as declaring force majeure in January 2008 and  required South Africa’s gold and platinum mining companies to shut down their operations. Given the significance of the mining industry on the South African economy, its reputation for foreign investment suffered along with GDP growth. 

Eskom was able to steady the ship, albeit temporarily. Load shedding was avoided for a time, while Eskom ran its fleet to maximum capacity with little reserve margin, sometimes as low as 1%, and engaged in costly power buy-back  arrangements with large industrial consumers in addition to postponing important maintenance.

Today, South Africa is once again experiencing rolling blackouts, as the strain on Eskom’s aging fleet and its inability to bring key new builds of Medupi (4,800-megawatt coal fired, comprising 6 x 800-megawatt units), Kusile (4,800- megawatt coal fired, comprising 6 x 800-megawatt units) and Ingula (1,500-megawatt pump storage) on line within the required time frames and within any semblance of the original budgets begin to take a toll. 

With Eskom being responsible for 95% of the electricity supply in South Africa, the government stated publicly that it is time to increase private sector generation capacity. The South African Department of Energy has been asserting a 
role in this, particularly in the development of policy around energy planning. It undertook a comprehensive consultation process that resulted in issuance of an integrated resource plan in 2011 — called “IRP 2010” — as it was effectively completed in 2010. 

The IRP 2010 is a long-term national electricity capacity plan that sets out the strategy for establishment of a new generation and transmission capacity for South Africa over the next 20 years, including forecasted requirements in respect of demand-side management and pricing, and the plan includes capacity provided by both Eskom and independent power producers. The IRP is meant to be reviewed every second year to ensure its relevance in view of technological and environmental developments internationally. 

The overall result is that a significant allocation of 42% of the new capacity under the IRP will come from renewable energy (solar PV, CSP and wind, totaling 17,800 megawatts), but this is dependent upon assumed learning rates and resultant cost reductions for renewable options. 

While this is a significant step toward a greener economy, it should be noted that the total generating capacity planned for 2030 will still have approximately 45.9% allocated to coal, which remains, for now, a cost-effective method of  generation given the abundance of the resource in South Africa. Change had to happen though. With 93% of Eskom’s electricity being generated from coal-fired stations, there is a consequential environmental footprint. Equally important is the impact on water resources in South Africa, where water scarcity is a critical issue. For this reason, the new Medupi and Kusile power stations will use dry cooling technology.

The renewable independent power program launched by the Department of Energy has made strides toward advancing the targets of government for more private sector involvement in electricity generation. Following multiple bidding rounds, wind and solar IPPs are starting to export power into the national grid. In the United Nations Environment Program and Bloomberg New Energy Finance, South Africa was called a “runaway star” and one of the top 10 investor countries in renewable energy in 2012. With approximately 3,900 megawatts of capacity from three rounds of competitive bidding by independent power producers, estimates are that over US$10 billion has been invested. This is even more impressive given that it was anticipated the 3,725 megawatts initially sought would be over five bidding rounds. IHS, a consultancy, called South Africa the world’s most attractive emerging solar market in 2013.

South Africa is blessed with very good wind and solar resources. According to the South African Department of Minerals and Energy, the average solar radiation varies between 4.5 and 6.5 KWh/m2 (compared to 2.5 KWh/m2 in Europe and 3.6 KWh/m2, at the most, in the US), and annual wind speeds along the coast can translate into 200 W/m2. 

The renewable independent power program has sought to procure generation from a range of renewable sources, including photovoltaic, wind, CSP, small hydro, landfill gas, biomass and biogas. There have been four bid submission windows to date as well as a CSP-only bid submission date in March 2014, with a fifth scheduled for August 2015. The 28  referred bidders from the first bid window reached financial close in November 2012, and most projects are producing power into the grid. The 19 preferred bidders from the second bid submission window reached financial close in May 2013 and the third bid window reached closed in February 2015, with 17 preferred bidders. An additional 3,200 megawatts have been allocated by the Department of Energy and the approach has been successful in introducing IPPs into the South African market.

Falling Tariffs

More importantly, successive rounds of bidding have effectively driven down prices paid to independent power producers. Since round one was launched in 2011, tariff prices have fallen by over 65% for solar PV and over 40% for wind. Certainly the economic downturn in Europe since the renewable independent power program was launched in late 2011 also contributed to ensuring sufficient competition to lower prices. Round one was undersubscribed, but each round since has been heavily oversubscribed. 

The total megawatt value of bids submitted in window three amounted to 6,023 megawatts while the available allocation for this window was 1,473 megawatts. In round three, the average price of 74¢/KWh was achieved for wind (down from the average of ZAR 1.14 in window one); 99¢/KWh was the average price achieved for solar PV (down from the average of ZAR 2.75/KWh in window one) and ZAR 1.64/KWh the average price for concentrated solar power (down from the average of ZAR 2.69/KWh in round one). 

Round three was also important in that it heralded the largescale introduction of Enel Green Power into the renewables program. Enel was able to offer very low tariffs for projects by
using corporate finance which squeezed out the smaller developers looking at more expensive project finance solutions.

However, speculation is rife that developers have staged somewhat of a comeback in round four with tariff prices that are competitive with those being potentially offered by Enel. It
also remains to be seen, given the significant amount of megawatts awarded to Enel in round three, whether the same appetite exists within Enel for so many projects at such low tariffs.

Connection risk remains and, as Eskom becomes increasingly stretched, this risk will be more acute as the rounds progress and a significant number of IPPs look to connect to the national grid. Deep connection works have always been a concern for the program as it matures, and vital strengthening of the network must be implemented.

In addition to the renewable independent power program, the Department of Energy has recently launched a separate baseload independent power program. The policy-adjusted integrated resource plan capacity includes, among other elements, the following proposed new generating capacity in the country in the form of projects approved under the IRP 2010:

• 6,250 megawatts of new coal capacity (14.7% of the total new capacity),
• 3,910 megawatts of new open-cycle gas turbine capacity (9.2% of the total new capacity), 
• 2,370 megawatts of new closed-cycle gas turbine capacity (5.6% of the total new capacity),
• 9,600 megawatts of new nuclear power capacity (22.6% of the total new capacity),
• 2,609 megawatts of new hydro power capacity (6.1% of the total new capacity),
• 8,400 megawatts of new wind capacity (19.7% of total new capacity),
• 1,000 megawatts of new concentrated solar power capacity (2.4% of the total new capacity), and
• 8,400 megawatts of new photovoltaic capacity (19.7% of the total new capacity).

Effectively what the most recent determinations from the government mean is that all the megawatts required to be built in South Africa in the medium to long term will be undertaken
by independent power producers rather than by Eskom, which has traditionally constructed the majority of baseload capacity in South Africa.

Regional Opportunities

Of importance is that the South African government’s determinations also provide for cross-border procurement that can be undertaken for this power, and this is likely to open the way for
various possible sources of power beyond South Africa’s borders, including hydro power from large projects possibly in Mozambique or the Democratic Republic of Congo and gas  projects from the significant gas reserves in Mozambique. 

The implications of Eskom’s decline affect not only South Africa, but also the entire southern African region. The Southern African Power Pool (SAPP) was created with the primary aim to
provide reliable and economic electricity supply to consumers of each of the SAPP members, consistent with the reasonable use of natural resources and the effect on the environment. These members are made up of utilities such as Eskom and its counterparts in the southern African region.

The determinations by the South African government could be a catalyst for development in the entire African sub-region, as the transmission assets necessary to deliver this power expand the transmission capacity in the sub-region, and energy capacity can be added to the megawatts available to intermediary countries to fuel development there. Large-scale power projects will always require a bankable offtaker and, for now, Eskom plays an important role in this.

South Africa, through Eskom, is (or was, prior to the energy crisis in South Africa) Africa’s largest net exporter of electricity, sending power to Lesotho, Swaziland, Botswana and Namibia as well as exporting to Mozambique and Zimbabwe. 

As the economies forming part of SAPP grow, they are increasingly realizing that they cannot rely too heavily on Eskom and South Africa to guarantee their energy needs going forward, and this is leading to opportunities in the energy space in those jurisdictions. Independent power producers have, for example, grown in the Mozambican market, with Aggreko generating
emergency power for sale into the South African grid and Mozambique. Sasol and Gigawatt are also developing independent power projects around the Ressano Garcia region in Mozambique, close to the South African border.

According to a recent report by McKinsey & Company, regional integration would lead directly to capital savings, in addition to savings of between 6% (in southern Africa) and 10% (in east Africa) in the levelized cost of energy. McKinsey & Company predicts that this equates to an annual reduction of nearly $10 billion in the amount the African consumer needs to pay by 2040. 

These savings translate into a direct reduction in the required tariff an end user would pay if the overall system were to be fully cost-reflective. One downside of regional integration is that the more widely available and cheaper coal and gas-fired capacity ends up being favored over more expensive solar power, resulting in an overall increase in carbon emissions of 4% in 2040. Also, because of differences in load factors, there would be an 11% decrease in all installed capacity while coal and gas-fired capacity would increase or remain the same. 

Natural gas is increasing in prominence as an energy source in southern Africa. The significant discoveries of natural gas off the coast of Mozambique in 2012 and the potential for shale gas development in the Karoo Basin, situated under the large expanse of the semi-desert area in the central region of South Africa, has led both private and the South African authorities to focus their attention on natural gas as a key component of South Africa’s energy future. The Department of Energy has appointed external consultancies Wood Mackenzie and Mott Macdonald to assist it in the preparation of a gas utilization master plan, or “GUMP,” to direct the development of gas infrastructure and the creation of an institutional environment appropriate to the management of South Africa’s gas resources in an environmentally-responsible manner over a 30-year period. 

The Department of Energy has indicated it intends to explore possibilities for using gas to allow inclusion of more renewable energy in South Africa’s generating portfolio. Because gas power can be turned on and off as necessary to stabilize the grid, it is a form of energy conducive to supplementing alternative technologies such as wind and solar.
Unfortunately the market is still waiting for the release of the draft GUMP. The government indicated in April 2014 that a draft would be available in May 2014; however, as of March 2015,
nothing had been released.

Sub-Saharan Africa has rich primary-energy resources, with estimates that there are enough coal, gas, geothermal, hydro, solar, and wind resources to deliver more than 12 terawatts of capacity. A very brief snapshot of which resources are most prevalent in certain sub-Saharan African countries shows where the opportunities lie: 

• Mozambique – gas and coal,
• South Africa – coal, wind and solar,
• DRC – hydro,
• Tanzania – gas,
• Ethiopia – hydro and geothermal,
• Kenya – geothermal and gas, and
• Sudan – wind.

In addition, Ghana’s largest independent power project (350-megawatt gas- and oil-fired) recently achieved financial close, with a South African construction company, Group Five, securing the EPC contract and Rand Merchant Bank (a division of South Africa’s third largest bank FirstRand Bank) as coordinating lead arranger for the full commercial debt package, with support from the Export Credit Insurance Corporation of South Africa. The US$900 million project will account for 10% of the total installed capacity and 20% of available thermal generating capacity in Ghana and is expected to help deregulate Ghana’s electricity sector.