Easier Financing Helps Economic Growth in Sub-Saharan Africa
Those who take the plunge by investing in energy projects in Africa need to go in with their eyes wide open, according to Standard Bank
More workable and pragmatic models for project finance are helping improve the pace of projects in Africa and remove some of the bottlenecks that existed previously, says Standard Bank.
Significant risks, however, still remain. The regional picture varies in terms of progress by country and further uncertainty is caused outside of South Africa because of the tendency to use dollar funding for power projects whose revenue is in local currency.
According to David Humphrey, Global Head of Power and Infrastructure at Standard Bank, those that take the plunge by investing in energy projects in Africa need to go in with their eyes wide open: “For example, unless there is a ‘user pays’ for the currency volatility risk (as in Kenya), the increasing local currency funding requirement caused by depreciation against the dollar becomes a real risk, as it is often followed by liquidity and convertibility constraints in the affected country. In other words, dollar funding is not a ‘silver bullet’, and comes with significant risk.
“But what is clear is that the potential remains enormous and Africa remains firmly on the radar of major investors, with significant funding coming through from big multinationals, including those in America. Economic growth in sub-Saharan Africa has exceeded five percent a year for more than a decade and US multinationals are noticing.”
CE of US engineering giant General Electric, Jeff Immelt, continues to see Africa as GE’s most promising growth region. His company has built a US$6 billion business in Africa over the last decade, virtually from scratch. GE Africa now operates in 35 countries on the continent and the company recently pledged to invest US$2 billion in new investments in Africa by 2018, with the electric power sector seen as a top priority. In 2014, Standard Bank sealed a R3.4 billion financing agreement with General Electric aimed at increasing access to power and infrastructure across 10 countries.
The US’s Power Africa initiative, launched in 2013, has gotten the ball rolling from a US perspective. It aims to double access to power with its six partner countries in Africa - Ethiopia, Ghana, Kenya, Liberia, Nigeria and Tanzania. More than US$7 billion has been committed via financial support and loan guarantees, but that amount almost doubles when private sector project finance commitment is added.
McKinsey & Company’s recent “Brighter Africa” report says significant momentum in power is being seen across the continent, with governments becoming more sophisticated and increasingly opening up to private-sector and foreign investment. Monumental gas discoveries in East Africa between 2010 and 2012 have attracted investment and increased fuel-supply options for power generation. The report notes that the United Nations’ Sustainable Energy for All initiative has attracted more than US$120 billion in commitments for the sector in Africa.
The McKinsey research predicts that by 2040, sub-Saharan Africa will demand about 1,600 terawatt-hours of power, led by growth in industrial and residential demand. If sub-Saharan Africa achieves these demand levels, it would represent a fourfold increase in power consumption compared with today, representing about 4.5 percent annual growth. In reaching these levels, sub-Saharan Africa’s power consumption in 2040 would be half that of the European Union in 2010, or the equivalent of Latin America and India combined in 2010.
As this demand increases, the need for innovative funding arrangements is becoming increasingly important and if deals are structured well, the overall cost of an investment and overall capital needs are reduced.
The development of an environment more conducive to the growth of an IPP industry is already beginning to take shape and bodes well for the future. The Triumph Power Generating Company Limited stands out as the first locally owned IPP in Kenya. Its first project is the development of an 83MW heavy fuel oil power plant and power produced by Triumph will be sold to Kenya Power and Lighting Company under a 20-year Power Purchase Agreement (PPA).
Mr Humphrey says the renewable sector will continue to play a more pertinent role in alleviating some of the energy shortfalls across a continent that is struggling to keep the lights on.
While progress on the REIPPP in South Africa has been slower than anticipated, recent bidding rounds have shown some promising signs, like lower tariffs being achieved due to active competition. The successes achieved can certainly be replicated across Africa, where opportunities abound for solar, wind, hydro and gas projects, but where only 20 percent of people are connected to power grids.
Standard Bank has seen 13 of its projects connected to the grid already, supplying 826MWs into the grid. Successes include the 75MW solar photovoltaic (PV) Solar Capital De Aar (Pty) Ltd facility, which was awarded preferred bidder status under REIPPPP. The project is located near De Aar in the Northern Cape Province of South Africa and was the first phase of what could become a 300MW solar farm. The company says the De Aar development is part of the larger plan to deliver 25 solar farms on 50,000 hectares of land in the Northern and Western Cape provinces. Standard Bank was mandated as lead arranger, financial advisor and provided senior debt funding and interest rate hedging to the project.
“While challenges remain, the upsurge in global interest to provide funding or to get involved in building projects directly, especially when combined with the correct structured products, is going to improve access to electricity for millions of people that are currently without,” says Mr Humphrey.
“The future of the energy sector in Africa will continue to be exciting and rewarding for those that manage their risks correctly as a result,” he concludes.