Some time ago, I posted a brief paragraph or two highlighting inefficiencies or gaps within the development process of African renewable projects. Due to remarkable interest, I in turn wanted to explore this idea further and this is the first piece in a series of articles focussing on various challenges, trends and their corresponding initiatives. I communicate regularly with a large number of developers, equity investors and industry experts, which provides broad exposure to a number of projects/organisations.
Initiatives to expand and improve the electrification of Africa are well documented and have been around for a number of years. Collaboration between governments and private sector have been fostered through PPP initiatives and regulatory support mechanisms. There however have been significant challenges impeding this activity, evidenced by the amount of capital invested and megawatts actually added to the grid. Despite all the initiatives, too many households lack access to power. Africa is a large continent with distributed populations and generally insufficient transmission and distribution infrastructure.
Monetisation, the mobile phone example and tailored solutions
Looking at the example of the mobile phone market, its an industry far younger than the energy market but has a market penetration rate of nearly 70% in sub-Saharan Africa. One may argue that as an industry it is not as reliant on capital intensive fixed assets. It does still need its own (often self-powered) signalling infrastructure but in my mind its inherent strength is the ability to monetise its business. Mobile phone access in SSA will likely reach near 100% before power access reaches 60%.
Through pay as you go tariffs, the mobile networks have largely eliminated credit risk whilst minimising investor risk. This addresses one of the biggest challenges to African development, the inability to secure returns for investors. At the end of the day investors want to see how they’ll recoup their money (plus returns), furthermore they want guarantees. This is especially true for rural electrification where returns are very difficult to achieve without heavy subsidisation.
In order to gain strong short to mid-term improvements in access to power, alternative solutions need to adopt principles similar to the mobile phone example, addressing Africa’s inherent challenges. There are emerging dynamic solutions exhibiting different financing strategies, and new avenues for collecting revenue. Co-operative business models combining local ownership, pay-as-you-go and other dynamic cash collection strategies has ensured penetration into new markets and the emergence of a profitable off-grid (rural) sector. In essence, emergent solutions are less capital intensive, smaller, distributed, featuring minimised risk and from a short to mid-term perspective more suited to some of the prevailing factors.
I’ve seen a number of large global entities creating or acquiring smaller off-grid solutions companies which I think is a sign of these markets gaining credibility. What in my opinion could be done better is cross pollination between industries. I’ve had the pleasure of witnessing a new initiative involving food production, rural electrification and the formation of a pilot study for a larger application. Africa has sought to retain more of the industry value chain, most noticeably with beneficiation targets in the mining sector. This project tied into food waste on rural fruit farms and sought to develop industry (its own power off-taker) and mini-grid. They still needed to find an off-taker, but for processed food products. If successful, a rural site (including the local community) gains access to power, a rural profit centre is seeded, crop waste is minimised and you start addressing the corrosive forces of rural squalor and urban overcrowding. Its early days and I’m naïve but we need different approaches.
Large is not always better
Does this mean the death of larger utility scale development? Certainly not, long term national prosperity will always be tied to a strong, reliable energy grid especially in areas featuring high population density and heavy industry. Especially where one has access to reliable grid connection, larger utility-based strategies remain king. Large projects deliver more megawatt hours for each dollar of investment, hence more practical for areas of concentrated usage and mature markets
Although large generation facilities will still be a mainstay there is emergence of smaller solutions from a couple of megawatts up until around 20mw. Traditionally DFIs and institutional lenders shy away from smaller investments as they prefer to consolidate investments in chunks but, the 1- 20 mw range is gaining keen market interest. Reasons for this include lower levels of political interference, shortened development cycles but mainly smaller solutions, close to point of use put far less stress on vulnerable transmission infrastructures. In Africa large projects often gain some sort of politically motivated legacy resembling a ‘vanity project’. It is important to note that smaller projects often have similar feasibility costs than larger ones, hence there is an optimum range below which does not make investment sense.
The Elephant in the room…. The Grid
We just touched on the level of grid sophistication and the challenges posed. Intermittent forms of generation place unique stresses on transmission networks, solar and wind are characterised by fluctuation. Solar naturally produces only during the day offering excellent peaking generation, but even this is prone to micro-fluctuations due to cloud cover and short-term factors. These variations in frequency and voltage can destabilise transmission grids, and the larger the facility the harder the network has to work to manage fluctuations. Smaller solutions use storage to smooth out the output but larger grid-based solutions require considerable base load and reasonable network management systems to act effectively. In regions like Kenya we are seeing an uplift in the approval of smaller base load solutions like small hydro and geothermal. Longer term investment into resilient network management systems and transmission infrastructure will be required to realise renewable and connectivity targets. Private investment in transmission, is more difficult to achieve, because these systems are usually government owned and as natural monopolies, are harder to unbundle and privatise. Off-grid is one strategy to compensate, but long-term investment is key, regional collaboration and long-term strategy are critical, as is cost/kWh.
Off-grid and other dynamic solutions however can be threatening to utilities. They have been greeted with mixed degrees of apprehension and in some cases open resistance. Much effort needs to be made to smooth over the points of contention, including an enabling feed-in tariff structure. One factor that supports development is the prevalence of mobile connectivity. Ironically my chosen business benchmark may form part of the driving force as pressure on leaders to deliver western standard access to necessities build constantly. A population ever more aware of the discrepancies in living standards demand solutions. Effort needs to be made to ensure that it is not an opposing stance that is adopted, common ground needs to found. Developers need to understand that access to energy is vote-winning political currency, a currency the governments want to control.
It is important to note that development strategies are not mutually exclusive not necessarily competing. If we are to only follow the large utility-based strategy, we then have to accept there are young generations that will leave this life before they have access to power. Dynamic solutions have a complimentary role to play and may well seed rural commercial activity, in turn making utility scale solutions bankable through seeding rural profit centres. Utilities and governments are maturing in terms of their ability to facilitate IPPs. The development community needs to be part of this process to ensure their interests are represented. When developing projects bankability needs to take the various limitations into consideration beyond standard need and technological assessments.
Please feel free to participate in this conversation, regarding your experience in challenges, possible approaches and ideas . The aim of this series of articles is to stimulate conversation