Insights from the Africa Energy Forum 2016

By Brendan Harmse
Commercial Director Trust Corporate Services at TMF Group

African countries are increasingly looking to private investors as they grow their ability to produce electricity, liberalizing their energy sectors to support investor participation. Public sector and utilities handled most energy projects historically, but now Independent Power Producers (IPPs) are growing rapidly.

There are currently 126 IPPs in 18 SSA countries.  Of the 23 that closed in 2015, 16 were in South Africa. In Sub-Saharan Africa (SSA) there is a strong and growing demand for electricity. Energy use has increased 45% since 2000, and the majority of SSA countries are frequently experiencing power outages. Two-thirds of households (around 600m people) have no electricity.

The dynamics and opportunities for investment in the African energy sectors were hot topics at this year’s Africa Energy Forum (AEF) in London.

A ‘must-read’ World Bank Group commissioned report Independent Power Projects in Sub-Saharan Africa: Lessons from Five Key Countries was launched, drawing valuable experiences from Kenya, Nigeria, South Africa, Uganda and Tanzania. The report explains why IPPs are crucial to help deliver electricity to the mentioned 600m people.  Enabling factors include:

• More competitive procurement efforts
• Clear and conducive policies, structures and regulatory environment
• Systematic power sector planning and
• Financial viability of public utilities.

  

Kenya is among the countries in SSA with the most experience in IPPs. Nigeria represents an interesting case of accelerating investment in new power capacity in an electricity sector undergoing radical reform. South Africa was a latecomer to introducing private investment and IPPs into its electricity sector. However, this situation has now changed in the area of renewables, with potential gas-to-power IPPs also on the horizon.

Uganda occupies a unique space in the history of power sector reform and investment in Africa. It was the first country to unbundle generation, transmission, and distribution into separate utilities and to offer separate, private concessions for power generation and distribution. Tanzania has vast conventional and renewable energy resources, including recently-discovered significant offshore gas reserves. Yet the country struggles to generate sufficient power to fuel growth and development. Network failures further undermine what little power is produced. Approximately 46% of this nation’s total power consumption is thus from off-grid self-generation.

Are off-grid solutions the answer to filling Africa’s power gap?

This was a hotly-asked question. Almost 80% of the Africans living without electricity are based in rural areas where connecting to the grid is probably just a dream. To counter this, off-grid solutions have been gaining momentum, with cheaper and more affordable products, increasing global investment interests and more innovative ideas entering the market.

The “Off the Grid Club” launched at the AEF. This new membership program intends to bring together credible off-grid technology providers, financiers and regional leaders to invest in and develop scalable power solutions for Africa.

Country Focus: Tanzania

What this panel (which I participated in) illustrated is that Tanzania has a lot a potential that is – unfortunately – yet to be fulfilled. Notwithstanding ambitious envisioned reforms for the electricity sector, Tanzania’s present structure continues to be characterised by non-transparent deals and a poor-performing, vertically integrated, state-owned utility – the Tanzania Electric Supply Company (TANESCO). Some donor funding from the United States of America’s “Power Africa” initiative was suspended after the October 2015 Zanzibar elections (won by the opposition), was annulled on grounds of alleged fraud. The re-run election was boycotted by the main opposition. Bureaucracy-related delays and lack of clarity also seem to be scuppering other viable, smaller projects.
Panellists concurred with the above report that “when power is not planned, procured, and contracted transparently and consistently, the implications are potentially grave, far-reaching, and ongoing.” A hope was expressed for more secure local gas supply to be established in due course. Tanzania deserves new private and public project successes, however, most panellists were rather sceptical about whether they would be achieved. News reports recently mooted that Tanzania has secured significant foreign direct investment for major projects in various industries.

South Africa

The South African panel was of high interest and it featured debate ranging from creating a green manufacturing industry around the country’s successful renewables IPP programme, to a potential gas-to-power IPP program. It was mooted that the latter could play a vital role to address the country’s power needs.  One of the main unresolved considerations was on how the foreign currency risk relating to gas imports would be incorporated in tariffs.

Coal-fired power plants currently account for approximately 85% of South Africa’s power generation. This is a delicate situation, with growing global adoption of carbon emissions restrictions resulting in higher costs. Local resistance to, and benefits of, the introduction of a nuclear base load programme in the medium-to-long term was also discussed.  A number of experts, from especially the United Kingdom, were assisting with the latter.

Eskom more recently wrote to the South African Energy Minister that it would not without engagement over the matter, be signing any new IPP power purchase agreements after the current round of renewable energy producers concludes. Could Eskom be thinking that it may have more than the required capacity when all the current projects are completed? As a local analyst voiced, it “leaves one important question regarding the future of the government nuclear build programme.” Whatever the answer, its cost will increasingly be watched if indeed Eskom stops signing new IPP agreements.

Statistics shared showed there is a clear opportunity to power Africa, but the opportunity is not without its challenges. Competing consumer and developer interests are finding middle ground in some countries and striking out in others. Low energy prices for relatively poor consumers are the preferred political outcome. But there is a certain price level below which investment either slows or is cancelled altogether.

Given the region’s envisaged growth and increasing consumer demand, potential for investing in Africa’s sizable renewable energy market is high. Securing suitable land in rural areas for renewable energy projects and addressing related rural community needs, are key to ensuring longer-term project stability and viability.

Low transmission fees are a bottleneck in the power supply grid. Fees rarely reflect the market and, when combined with the high maintenance costs for existing lines, are inadequate to facilitate investment in new transmission line builds. Fees will have to increase. Another challenge for the transmission infrastructure and distribution, is that most renewable energy projects are being developed in outlying rural areas which have the greatest exposure to sun and wind. Grid extensions will be required in the long term to support future power generation.

Navigating country-specific legislation related to African energy production, including tax provisions and feed-in tariffs are a common challenge. Cross border investments in jurisdictions where companies have little or no presence can also prove difficult to manage without local support.

TMF Group can help with their range of accounting, payroll and corporate secretarial services. They also provide agency and administration (process agent/security agent and independent directors/trustees) for various debt financings.

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