Investing in Africa can offer four times the rate of return in G-7 coutries and double that in Asia. So why is it that more companies are not rushing to unleash Africa’s vast untapped potential?
Colin O’Hanlon, industry analyst, power and energy
Frost & Sullivan, UK
At around 450 kWh p.a., Africa has the lowest per capita electricity consumption in the world. Perhaps this reflects the fact that only 10 per cent of the continent’s population has access to electricity. The northern and southern regions account for over 80 per cent of electricity generated, and nearly three quarters of electricity is generated in Egypt, South Africa, Libya, Morocco and Algeria. This distinct lack of capacity coupled with the uneven regional access to power presents a compelling opportunity for investors.
Shortfalls in electricity generation and supply within each country have encouraged grid interconnections between them. Regional networks have tried to increase access to power by forming power pools; but while such initiatives are helpful in the short term, long-term solutions will have to centre on building new capacity.
If inadequate generation is the most obvious motive for companies to explore the power market in Africa, a raft of supporting trends is further enhancing its growth potential. Over the past decade, nationalised power companies in most countries have been partially or completely privatized. Restructuring domestic utilities has boosted the number of IPPs, build-own-operate-transfer (BOOT) and build-operate-transfer (BOT) schemes. These new energy policies are creating real opportunities for private power firms.
Many countries are aiming to increase rural electrification over the next decades. The most highly developed programme is in South Africa, where the national energy regulator is has a range of schemes. Most of the power in rural areas is being supplied by connection to the grid. However, the remoteness of many rural communities is likely to make such schemes costly and difficult. As a result distributed generation (DG) technologies, both renewable and conventional, are likely to make strong gains.
Figure 1. In the near term expansion will be driven by new offshore gas pipelines
The development of new offshore oil and gas resources in South Africa and Nigeria is another growth area. Commissioning new gas fired power stations in the near term will increase centralised capacity. Meanwhile, a widened gas network will provide opportunities for local generation and presage a move towards diesel fuelled gen-sets.
In general, the declining costs of complete power systems, installation and components are acting as a spur to market expansion. Reduced costs are expected to boost adoption levels by making power affordable to a wider base of end-users.
Africa’s electrical sector is rife with opportunities but has accompanying challenges. Most of these difficulties – high capital costs, the lack of resources and the slowdown in inward investment – are persistent, long term and are creating roadblocks in rapid market development.
A paucity of funds in most African nations has been compounded by the capital outlay required for power systems. This is a restraint to market growth. While falling costs will drive the market in the long term, project development in the near to medium terms will continue to be impeded by high capital requirements.
Many African economies lack the resources and funding to implement development schemes. What is more, finances from development agencies tend to be spread thin over several competing projects. To counter the dearth of funds, countries have been attempting to attract private sector investment. But such investments have been governed more by the prospect of available returns than by their social value. Foreign investments have been forthcoming, but have not fulfilled their potential. While many foreign companies consider Africa as capable of providing excellent returns, they are also wary of the high risk factors.
General investments in Africa have established the highest rate of return – four times more than in G-7 countries, double that in Asia, and two thirds more than in Latin America. However, attracting foreign investment remains problematic. For instance, world foreign direct investment into Africa fell from a high of $17 billion in 2001 to $6 billion in 2002. While much of this had to do with the slow recovery of the global economy, continued political and social instability is a deterrent over the long term.
Despite concerted efforts seeking to boost uptake levels, adoption of electricity in rural markets remains low. Several rural communities that have recently been provided with access to the grid have made limited use of the resource. Due to the relatively high cost of electricity many have reverted to traditional forms of energy production, such as biomass.
While all power technology sectors are forecast to develop, fossil and large hydro appear to offer the most consistent growth opportunities. Gen-set markets are expected to remain robust, with some expansion.
Despite large-scale dependence on hydropower, conventional fossil fired capacities comprise the bulk of the installed base. They are forecast to maintain positive growth over the long term. In the near term, expansion is set to be driven by new offshore gas pipelines feeding new centralised generating facilities.
Coal fired capacities remain the largest contributor to conventional energy generation although a number of large gas turbine stations have been built in recent years. With nearly 66 per cent of the total to 2010, the northern region is expected to develop the overwhelming majority of new projects, followed by the southern (17 per cent), western (15 per cent) and, central (2 per cent) regions.
Figure 2. More large hydropower projects will be connected before 2010
Hydropower is Africa’s only significant grid-connected renewable energy source. Compound annual growth to 2010 has been calculated at 94 per cent. This is based on the high amount of capacity due for commissioning towards 2010.
There is significant promise of new developments. The hydro potential of Congo alone could supply three times as much power as Africa currently consumes. Despite the enormous potential, however, the viability of future projects will hinge on their impact on the environment and on human settlements.
The central region is expected to develop around 47 per cent of projects to 2010, trailed by the southern (21 per cent), western (20 per cent) and eastern (9 per cent) regions.
The compound annual growth rate of the African gen-set market is calculated at 4.2 per cent overall between 2001 and 2010, with positive annual growth to 2010. The north is likely to exhibit the highest levels of demand until 2010. Of total DG technology sales, the largest proportion is projected to be diesel gen-sets.
Demand for renewable technologies is forecast to increase to 2010 with significant increases in wind, small hydro and solar PV across all regions. But while renewable energy is expensive, additions to the installed base will be limited.
The compound annual growth for the small hydro market to 2010 is calculated at 12 per cent. The majority of projects are in the central region (60 per cent). The eastern region is likely to account for 17.5 per cent of the new projects, followed by the northern (10 per cent), southern (7 per cent) and western (5.5 per cent) regions.
Installations of solar PV have been mounting recently, with high potential. South Africa, Egypt, Ghana, Morocco and Uganda are appraising or installing PV in rural areas. Large-scale projects will increase the installation rate in Egypt and South Africa: overall market growth is pegged at 27 per cent to 2010.
The southern region is set to develop the majority of projects to 2010 (62 per cent) while the northern region will house almost all the remainder.
Levels of wind turbine installations have fluctuated over the past few years. More consistent growth is now projected, with a compound annual growth of 20 per cent forecast to 2010. The annual installation rate is set to rise due to proposals in Egypt, Morocco and South Africa to develop a substantial capacity. The northern region is expected to develop most projects (84 per cent), especially in Egypt (up to 600 MW), and Morocco (around 400 MW). In the southern region, South Africa (160 MW to 2010) and Namibia (10 MW) are the main sites.
Biomass represents a critical energy source in Africa, almost all of it consumed on a domestic scale in sub-Saharan regions. There is potential for hundreds of small scale (500 kW) plants, but they are unlikely to provide large long term capacity.
The microturbines market in Africa is still undergoing structural change and demand remains relatively low. However, sales are increasing and centred on the oil and gas sector. Between 2001- 2010, compound annual revenue growth is likely to be 24 per cent.
The dearth of village electrification programmes has underlined the relatively small size of the hybrid solutions market, but there is tremendous scope for growth and large rural populations with no access to grid-supplied electricity offer the highest potential. Growing at a compound annual rate of 23.3 per cent over 2002 to 2010, revenues may reach $24.8 million. Major impetus is expected to come from South Africa, which plans to intensify its rural electrification initiatives.
The most established hybrid combination is PV with a genset. Wind turbine and gen-set combinations are secondary. However, lower prices and better performance should encourage growth in small-scale wind power solutions. Other renewables are peripheral to hybrid power systems and have generally low growth prospects. Fuel cells are the exception and may reach realistic commercialisation by 2007 to 2010.
One more nuclear station could be built in South Africa. However, the project is uncertain due to hostility to this form of electricity generation.
Eastern Africa has great potential to develop its largely unexploited geothermal resources. Kenya has over 120 MW of installed capacity but has plans to develop around 550MW more to 2020. Djibouti intends to develop between 230 MW and 860 MW and Ethiopia plans to develop 1000 MW.
The African power market presents immense opportunities for all types of generating technologies over a sustained period of time.
Investment in Africa has the capacity to provide exceptional returns. However, it can be highly risky. Realising the potential of Africa’s power markets will depend on securing financial aid in a climate of political, economic and social stability.