With a population of 800 million, predicted annual economic growth rates above 5 per cent and a glaring shortfall in capacity, sub-Saharan Africa offers an appealing market for power generation companies willing to face a notoriously challenging investment context.

PEi Report and Nicholas Newman

Sub-Saharan Africa’s rivers are estimated to hold a potential for hydropower of 1750 GWh per year, of which only 7 per cent has been exploited Source: Eskom

In terms of its per-capita endowment of primary energy, sub-Saharan Africa (SSA) is close to the global average. Its 800 million people make up about 9 per cent of the world’s population and they are estimated to share 8 per cent of global gas reserves, 10 per cent of the world’s oil, and 13 per cent of hydropower resources – as well as much more than their fair share of solar radiation.

But those are the only aspects of this market that fall within the norms. Current installed capacity across the region is estimated to total only 68 GW, about that of Spain. But the true gravity of the region’s power shortfall emerges by excluding South Africa’s 52 GW, which leaves the region’s other 750 million inhabitants looking woefully under-powered.

Only 30 per cent of the region’s population has access to power, according to an IEA report. And even those with access to electricity are unlikely to have a secure and stable supply, which has made standby generators increasingly commonplace for both businesses and homes. Less than a dozen of the region’s 48 nations are free of acute shortages. Since 1995 Africa’s power sector is estimated to have grown by an average of 1 per cent per year, although capacity needs to grow by more than 10 per cent to meet demand, according to the World Bank.

Yet the market could unquestionably hold massive potential for power companies. Not only are global players already taking an interest but major projects are underway in sectors ranging from hydropower, coal, gas and renewables. New nuclear plants are even being planned – confidently in South Africa and, rather more optimistically, in Nigeria.

Regional economic growth

Optimism over the market – despite the region’s abject failure so far to meet its energy needs – rests largely on sub-Saharan Africa’s relatively sunny economic prospects.

In its most recent forecast for the world economy, the IMF predicts that sub-Saharan Africa will experience solid growth of 5.2 per cent in 2011 and 5.8 per cent in 2012. Within the region, the fund sees three distinct trends. Oil exporting nations are expected to grow fastest by 6.0 per cent in 2011 and 7.2 per cent in 2012. Low-income countries are on track for slightly slower expansion: 5.9 per cent in 2011 and 6.5 per cent. Mid-income countries, which are more exposed to overseas markets, are forecast to average a solid 3.5 per cent growth this year and 3.7 per cent in 2012.

Arun Velusami, a partner at Norton Rose with almost a decade’s experience in African power projects, sees a recent improvement in the overall context for investing in the power sector.

“A number of African economies have withstood the economic crisis well,” he said. “These African economies have continued to grow – and, in conjunction with that, there has been the continuing rise of India and China, which are competing for natural resources in Africa and generating a lot of wealth there, which is in turn creating increased demand for energy.”

In Velusami’s view, the region is now making significant moves to shake off its longstanding reliance on gensets in plugging its glaring capacity shortfall. “Aggreko has stepped in to fill a lot of gaps over the last decade, but African countries are attempting to reduce their reliance on emergency generation solutions, as diesel is very costly in terms of foreign exchange,” he said. “Countries in the sub-Saharan region are seeking to develop other resources such as hydropower and to start exploiting their gas resources.”

Fossil Fuel Resources

While sub-Saharan nations are not, as a whole, as richly endowed in energy resources as some of the nations to the north, several countries have significant reserves for thermal generation.

In coal, South Africa stands out with 30 billion tonnes of proven reserves, according to the BP Statistical Review for 2011. Zimbabwe is placed second by BP with a figure of 500 million tonnes, although other nations lay claim to similar amounts. In a strategic shift from reliance on its diamonds, Botswana announced a Coal Roadmap in September for optimizing benefits from substantial reserves. Nigeria’s government has also recently declared a goal of exploiting coal resources it describes as abundant and ideal for power generation.

“Not only does Nigeria have huge coal deposits in Enugu, Kogi, Gombe and Benue states but we have the world’s cleanest type of coal,” Minister of Power Bart Nnaji told journalists in September as he announced plans for three coal fired plants, each with a 3 GW capacity, to come online in the states of Enugu, Kogi and Gombe by 2015. The government would underwrite about 25 per cent of the plants’ construction costs, he added.

Zimbabwe also aims to turn its coal to greater use. A raft of recently approved independent power projects includes the 2400 MW Sengwa coal fired plant and the 2000 MW Lusulu coal fired plant. Hwange power plant, the country’s largest coal fired plant, was also brought back to full capacity of 750 MW in July for the first time in a decade.

Tanzania is turning to coal in its attempts to diversify from hydropower. Australia’s Intra Energy Corporation (IEC) has announced plans to invest $236 million in Tanzania’s first privately funded coal mine and a coal-fired power plant. The mine’s first consignment of coal is expected in October 2011. Output is due to hit 500 000 tonnes by 2013 and to eventually reach 5 million tonnes a year. IEC aims to set up a 120 MW coal fired power plant near the mine and is considering building a 400 MW plant in the southern Tanzanian town of Mbeya and another 400 MW power station in Dar es Salaam, between 2013 and 2018.

South Africa’s several ambitious schemes for expanding its coal fired capacity include the giant Medupi power station. Its six Hitachi boilers, each powering an Alstom 800 MW turbine to produce 4800 MW of power, will make it the world’s largest dry-cooled coal fired power station. The first 800 MW unit is expected to be commissioned in early 2012, with the others following in nine-month intervals.

Second as a feedstock to coal – estimated to provide 45 per cent of Africa’s current power generation – comes natural gas with a share of 28 per cent. Here the leading player is Nigeria, which also holds the lion’s share of oil resources to, in theory, generate plenty of funds for building generation capacity.

In fact, Nigeria’s reserves of 5.3 trillion m3 of gas are at the heart of the country’s epic struggle to tackle a crippling power shortage. A goal has been set of 40 GW by 2020 – up from a current figure of about 4 GW. These efforts must build from the wreckage of a generation of largely gas fired national independent power plants (NIPPs) approved in 2002 with a goal of raising national capacity to 10 GW by 2010.

The Egbin power plant, which currently meets about a quarter of the country’s electricity needs, illustrates the challenges. The 1320 MW plant is now running at 1080 MW and requires substantial investment for overhauling its six units. A planned transfer of 51 per cent to Kepco is dragging on but is due to complete this year, according to the latest reports. Meanwhile, efforts to repair six of the 335 MW Olorunsogo Power Plant’s eight turbines are, according to press reports, being frustrated by the lack of operating manuals in languages apart from Chinese.

While Nigeria is estimated to hold about 80 per cent of the sub-Saharan region’s gas deposits, at least 16 of the 42 countries in the region have reserves, which organizations such as the World Bank are eager to see exploited.

Nuclear generation

South Africa hosts sub-Saharan Africa’s only nuclear reactors and is overwhelming favourite to build its next nuclear plants too. Koeberg nuclear plant’s two reactors, each of 900 MW, were commissioned in 1984 and 1985 and provide a key power source for the Western Cape. The first of South Africa’s next generation of nuclear plans are due online by 2024 or 2025, energy minister Dipuo Peters recently told reporters on the sidelines of an energy ministers’ conference. The planned nuclear plants are due to eventually provide 9600 MW, or about a quarter of the country’s current supply.

The only other country in the region tentatively considering nuclear is Nigeria, where the government in Abuja made a firm commitment last year to start the process for seeing the country’s first nuclear power station online by 2020. But many regard this timeframe as unrealistic.

Renewables

Renewables projects in sub-Saharan Africa cover both ends of the scale. The jumbo option includes hydropower, where sub-Saharan Africa has already established substantial renewable generation, albeit a fraction of the vast potential. A report by Frost & Sullivan concluded that the region could generate 1750 GWh per year from hydropower, of which only 7 per cent had been exploited.

While also prone to blackouts, South Africa’s power infrastructure is by far the largest and most sophisticated in sub-Saharan Africa, featuring facilities such as the 400 MW Palmiet pumped storage plant Source: Eskom

Key rivers could offer huge resources of 100 GW from the Congo and 10 GW from the Zambezi, found the report. Ethiopia was given a hydro potential of 30 GW and Nigeria 20 GW. China has moved forcefully into the region’s hydro sector with projects totalling $9.3 billion in value, according to Bloomberg and International Rivers. Private sector schemes being constructed include the 1870 MW Gibe III in Ethiopia, which would be Africa’s largest dam, 5 km wide and 50 metres high, with an expected annual output of 6500 GWh.

The continent’s west coast offers an attractive wind resource while East Africa’s Great Rift Valley is estimated to offer a potential 15 GW available for large-scale geothermal projects. Solar radiation is high throughout SSA.

The African Development Bank is funding wind development across the continent. Kenya, also intent on developing eight 100 MW geothermal plants, aims to build the region’s largest wind farm. The Lake Turkana Wind Power Project’s 365 wind turbines would feed 300 MW to the grid by the end of 2012, adding 30 per cent to the country’s installed capacity.

In large-scale renewables South Africa looks poised to reprise its leading role in conventional generation. Its government’s recently revised support structure for renewables has already garnered interest from 320 developers and is on track to deliver 3725 MW by 2016, according to government officials. The African Development Bank (AfDB) has also lent South Africa’s Eskom $365 million for wind and solar projects.

Yet several commentators expect renewables to make their biggest contribution to sub-Saharan Africa through small-scale projects. Camco, an active player in SSA for 20 years, now sees a vast opportunity for renewables in distributed projects that reach the 92 per cent of the region’s rural populations still without electricity.

“In the last year we have seen a step-jump in capital and receptiveness,” said its president, Yariv Cohen, speaking shortly after the company announced winning contracts to develop a PV cluster in Tanzania and clean development mechanism projects in Uganda worth a total of £1.8 million ($2.8 billion) in revenue.

The blistering progress of renewables in Africa is clear in recent figures from Bloomberg, which found a 384 per cent rise in investment over 2010 from $0.7 billion to $3.6 billion. “You can feel it on the ground – a change in the pace,” says Cohen. “Need for localized energy is the key driver and renewable energy fits this bill perfectly.”

In his view, while South Africa is more likely to adopt a similar path to Europe in establishing large-scale projects because of the developed grid, the rest of sub-Saharan Africa could pioneer in distributed, smaller scale renewables. “If you look at what mobile communications have done, the same will be true for energy,” he says. “In fact, it’s not even possible to connect many places to the grid – it’s too expensive.”

One of the region’s most innovative renewables projects is in Sierre Leone, where Addax Bioenergy has signed a €258 million ($352 million) loan to establish a sugarcane plantation and ethanol refinery along with a biomass fuelled power plant that would supply about 20 per cent of the country’s grid power.

A shifting investment backdrop

For Cohen, all sub-Saharan markets are now poised for “explosive growth”. “The markets are opening up and maturing very fast. Maybe the year to enter each market will be different but they are all going to be opening up in the next few years,” he says.

Velusami’s optimism is more guarded. “It is still a very challenging place to work – most investors continue to be wary,” he says. Yet he sees prospects for power projects improving under the twin pressures of economic growth and a desperate lack of capacity.

In Nigeria, for instance, the pursuit of capacity is propelling genuine regulatory changes. “The privatization is real,” he says. “The government has been trying to reform the sector in a piecemeal fashion for the past decade and they have taken the decision that the best way of achieving this is by utilizing the private sector, so they are selling distribution and generation assets.”

In his view, this sale will happen, if not necessarily to the planned timescale. “There is no plan B,” he says.

The World Bank is also spreading its influence. Having contributed largely to Kenya’s record for independent power projects, the bank is now assisting Tanzania by putting in place a framework to track private sector investment.

With rather different motives, China is also making its contribution to the sector – often in terms of “a resources play” to unlock raw materials. The occasional risks of this are illustrated by the 560 MW Sunon Asogli Power Plant Project, intended to supply Ghana’s craving for capacity but currently stranded because the pipeline from Nigeria to supply it is still carrying no gas.

Across the region, privatization is now widely recognised as key to resolving the chronic power shortage. Not that such policy commitments provide, in themselves, much reassurance. Zimbabwe, for instance, prides itself on pioneering independent power projects, yet remains shunned by the World Bank, which calculates that the nation needs an investment of about $13 billion in its power sector.

In fact, an increase in tariffs is far more crucial to getting the power projects off the ground, says Vincent Maposa, an analyst for Frost & Sullivan in South Africa. But, in his view, these hikes are not only essential but inevitable.

“Given the prevailing power shortages, and insistence by power utilities and governments that current power supply anomalies are linked to unviable tariffs, changes to prices are likely to occur at an increased pace,” he says.

He expects South Africa and Zambia – along with other East and West African nations that are now adjusting their policy and regulations – to lead in developing new capacity. An expansion in regional trade in electricity will also drive significant increases in electricity prices, he adds.

“Comparability of prices will also minimize the subsidization of state owned utilities by central government, particularly during periods when power is imported from a country that charges relatively high prices,” he says.

Ambitious plans are underway to unite Africa’s power grids. At present, the most extensive is the South African Power Pool (SAPP) established in 1995, which links South Africa with all the nations of the southern cone as far north as Tanzania.

Other grids at various stages of planning are the West African Power Pool, due to complete by 2020, and the East African Power Pool (EAPP) aimed at strengthening the interconnection of electricity networks of five countries: Burundi, DRC, Kenya, Rwanda and Uganda. Once completed the EAPP will consist of 700 km of new transmission lines and 262 km of upgraded lines. An interconnector with Ethiopia that will permit EEPCo to export up to 2000 MW into the EAPP grid is also planned.

Meeting the hunger for power

An alternative proposition would be that it is less the development of grid connections than a lack of contribution to them from South Africa that will force change. Eskom currently exports 6 per cent of its electricity to countries including Botswana, Mozambique, Namibia, Zimbabwe, Lesotho, Swaziland and Zambia – a figure that is expected to total about 13 TWh this year. But as South Africans become increasingly familiar with blackouts, such exports look politically unsustainable, which could heighten the pressure on other nations to get power projects underway.

The growing involvement of India and China in sub-Saharan Africa provides further grounds for optimism, both through their contribution to economic growth as well as their investments.

That said, the region will remain a tough place to do business. No nations in the region are without their challenges. Even in South Africa, which is closest to a European context, projects risk stalling and losing transparency in the political process.

“Many projects in Africa are unique – and they usually take a long time to reach financial close,” says Norton Rose’s Velusami.

“I think the key thing when working on African projects is to be aware of and respect the local culture – and to understand the rationale for the project, which could be strategic when acting for governments or economic, in terms of looking for a good return when acting for project developers.”

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