Africa's energy sector is experiencing a profound transition, driven mainly by policy and regulatory interventions by many countries to transition to a zero-carbon energy system and promote socioeconomic development objectives. In addition to securing energy security, there is a need to increase access to affordable and reliable energy for people across the region.
The African Development Bank estimates that over 640-million people in Africa have no access to energy, corresponding to an electricity access rate for African countries of just over 40%, the lowest in the world. Per capita energy consumption in Sub-Saharan Africa (excluding South Africa) is 180kWh, compared to 13,000kWh per capita in the US and 6,500kWh in Europe.
To achieve universal electricity access by 2025, a strong focus will have to be on clean and renewable energy solutions, providing at least 160GW of new capacity, 130-million new on-grid connections, 75-million new off-grid connections, and providing 150-million households with access to clean cooking solutions. This will require an investment of between $60bn (R1-trillion) and $90bn per year.
These are staggering amounts that governments will not be able to raise, let alone provide. However, from this perspective alone, the case for investment in renewable energy is clear, coupled with accelerated electrification and grid enhancements, if we are to achieve universal energy access by 2030. The obstacles many countries are facing in expanding the energy sector include policy and regulatory uncertainty, a lacklustre investment climate, sovereign risk affecting commercial and development finance access, and poor grid access capacity and energy infrastructure.
Public-private sector partnerships can plug the funding gap and attract large-scale investments in renewable energy
This is where public-private sector partnerships can plug the funding gap and attract large-scale investments in renewable energy. Such partnerships can leverage collaboration between the private sector and government, address critical infrastructure needs, including energy projects, and provide a foundation where private investors and government bodies can work together to fund and manage these projects.
Each African market is unique, and many countries are at different stages in developing their renewable energy sectors, including accessing funding and attracting both domestic and foreign direct investment. To power Africa's energy revolution, South Africa's REIPPPP (Renewable Energy Independent Power Producer Procurement Programme) can provide valuable and practical lessons that other countries can adopt or implement.
However, a start would be for these countries to clearly outline their energy sector strategy and how they intend to execute it. In South Africa, for example, the Integrated Resource Plan (IRP) provides a road map for meeting the country's forecast electricity demand.
As part of the IRP, South Africa continues to reform the energy sector, which has already boosted private sector investment in the renewable energy sector through the REIPPP and Battery Energy Storage System ) programme. Streamlined energy regulation and incentives for renewable investment to boost energy generation are some of the positive outcomes of the reforms being implemented in South Africa.
The number of people in Africa without access to electricity. That’s an access rate of about 40%, the world’s lowest
— IN NUMBERS: 640 million
These reforms and initiatives are worth replicating or adopting elsewhere across Africa. However, further energy reforms will be required to attract project promoters and funders and appropriate regulatory and policy interventions. In addition, collaboration with funders and financial institutions such as Nedbank, already one of the leading providers of sustainable finance solutions in the renewable energy sector, will be needed.
It is interesting to note that countries such as Zambia and Uganda have implemented energy auctions that almost mirror those in South Africa. There is room for scaling up to attract more investment, and replicating these models across other African countries could enhance the development of the energy sector on the continent.
The importance of policy reforms must be balanced. For example, there has been a positive spill-over of policy reforms in South Africa through increased interest by project promoters from Europe and the Middle East who are returning to the energy sector. The same approach could work elsewhere across the region.
Like any investment, proposed energy projects need to be deemed bankable. Given that financial and capital markets in many countries are still small, there will be a need for export credit agencies, which will enable financial institutions to provide loans and insurance and credit guarantees. The guarantees will be pivotal to mitigating potential project risks, especially when project sponsors or governments fail to fulfil payment obligations. These guarantees reduce risk from a banking perspective, making projects even more attractive for investment. Export credit insurance is also important because it can make projects more bankable and increase the likelihood of projects meeting financial close.
It is also important to stress the importance of ensuring project execution within the agreed programmes and within appropriate timelines. There is little to no ambiguity when it comes to private sector investment guidelines from a power generation perspective, and the private sector knows what role they are to play. However, from a grid infrastructure perspective, the private sector is not sure what role they will play at this point as clear guidelines have yet to be set out. These guidelines are vital as they would outline the private sector's role and how the proposed public-private partnership model would function.
As African countries reform their energy sectors, they must be guided by the need to diversify their energy mix for a more sustainable future and the unavoidable imperative of adding generation and grid capacity to foster industrialisation, address the low electrification rates across the region and ultimately promote inclusive economic growth.
• Ephraim Sehloho is a Senior Coverage Banker at Nedbank Corporate and Investment Banking.
