Chasing the African Dream: Energy, Financing and Unfulfilled Prophecies
Africa, with its untapped markets and abundant natural recourses, has been the common secret amongst many energy investors over the past couple of decades. Its high growth rates, rapidly growing population and unexploited resources have marked it as the Promised Land for various businessmen. However, results so far have been widely variable.
In trying to explain why Africa has not proved to satisfy the investors' dream, one does not have to go further than the application of simple demand and supply economics. The African population is estimated to more than double itself by 2050. At the same time, and while the rest of the world is battling to get past the effects of the recent recession, GDP growth rates of 5-8% have been common in many Sub Saharan African countries. Growth rates, which are mostly driven by economic activity in the rapidly urbanised cities. They also illustrate the development of a new working class that is also growing rapidly, along with its purchasing power and its corresponding demands for higher energy consumption.
The current energy generation capacity of Africa stands at 147 GW; of which 68 GW are located in the Sub-Saharan region (40GW is the capacity of South Africa alone). However, a large part of the population of Africa still lacks access to electricity. Considering that Africa accounts for 15% of the world's population and just 5% of the global primary energy use, the African per capita energy consumption is a third of the global average. More specifically, access to modern energy varies between virtually zero, for the lowest income part of the population (which according to studies accounts for about 600 million people), to 70% to 90% for the most affluent one.
Therefore it becomes clear that the current Africa trajectory, along the lines of high growth rates, increased urbanization and rapidly growing middle class is rather unsustainable in the long term. This is because large parts of the population suffer from the huge shortfall in the installed capacity for the provision of cheap and reliable energy. Current estimates indicate that Africa will have to install 250 GW of additional capacity by 2030 in order to meet its future demand growth (which is almost twice the size of its current capacity).
Moreover, many of these countries still depend on old, expensive and unreliable fossil-fuel powered generators; coal, oil and gas collectively account for 81% of the total power generation capacity. Even though this capacity does not manage to supply the African population fully nor in a stable manner; it still costs between 1% and 5% of their annual GDP. Considering the high debt and poverty rates of most of these countries that in many cases rely on various financial support schemes, this is a figure that could be widely optimized. Based on such projections, several announcements of ambitious national energy plans have been made recently. According to these plans, several government agencies and officials are actively attempting to attract the interest of energy investors, providing them with financial backing and regulatory support for their investments. Some of the countries project themselves as global export hubs for their local resources (e.g. LNG, Crude oil); while others opt to focus on the regional markets by promoting the development of inter-country interconnections.
Africa's natural resource potential cannot be questioned, its renewables potential are unparalleled, while its hydrocarbon potential has been proven and still expanding. For instance, Nigeria and Angola are proven international players in the crude oil market, while Mozambique and Tanzania are currently looking into the development of their natural gas prospects by attracting the attention of major oil & gas players. Kenya and Ethiopia have been developing wind projects, while geothermal, hydro-electrical and solar plays have been becoming all the more frequent in most countries, especially South Africa.
Coupled with growing demand and government backing, these resources can form the key ingredients for a successful investment recipe. However, even if the end prize may indeed be very tempting, current challenges faced by international energy investors are also very significant. Experience in the developed markets has shown that for any medium to large energy project to materialise, alignment between different key stakeholders is central.
The sheer size of the investments required is such that African governments will need to cultivate public-private partnerships in order to scale up investments in generation capacity. In other words, any project in order to succeed would need to have the support of both the government itself, as well as various local partners, sponsors and stakeholders. Otherwise, the project will face continuous obstacles in the implementation phase, minimising its chances of eventual success.
Regarding international sponsors, a number of Private Equity firms and investment funds are currently exploring options in the region, but many have yet to make any final investment decisions. On the debt side, various development and commercial banks as well as other financial institutions (e.g. Export Credit Agencies) have also indicated their willingness to finance energy projects in Africa, but only in the case of strong sponsorship and adequate local support.
While access to both equity and debt financing is improving, the business environment and policy framework are still not robust enough to attract the level of private investment required to install the additional 250 GW by 2030. This is because most African states are still characterised by under-developed unstable regulatory frameworks and evolving electricity support schemes. These uncertainties, coupled with government mandated pricing and widespread red tape practice, hinder long-term energy investments.
To add to these challenges, political, exchange rate and credit risks must also be considered, even though a number of mechanisms are gradually becoming available to mitigate them. The credit worthiness of the sponsors as well as the payments security of the state-owned operators are always at risk and hard to guarantee. So good knowledge of the partners and business counterparties in such projects is critical, but not always enough in securing the returns that are required in making these investments really worth the additional risk.
Going forward, big changes need to be implemented so that large-scale energy investments in Africa go beyond the so far well trusted route of export oriented projects only, which are perceived as lower risk investments since the business counterparty is the international market. For instance, African governments would have to develop clear and stable policy frameworks that will inspire confidence to the private investors. They would have to also adopt credible local content rules in order to support their local manufacturing sector, to stimulate local employment and to promote the requirements for stable energy production. They would need to enhance the use of renewable energy sources in their long-term energy plans in order to build generation capacity that does not place an additional burden on their trade balances. Enhanced use of renewables for local electricity generation would also allow for increased exports and additional revenues from exported natural resources such as natural gas, coal and oil. But most importantly, they would need to prioritise the development of a continental electricity grid, which will allow the development of projects, which are currently lacking the necessary access to end demand points.