An analysis by Terje Osmundsen, CEO of Empower New Energy
Businesses in Africa suffer from the world’s highest costs of electricity. Rooftop and ground mounted Solar PV on the user’s site can slash industry’s energy costs, improve their competitiveness and create hundreds of thousands of jobs, but government regulations are holding investments back.
The Coronavirus pandemic has left Africa’s economies bleeding. After 25 years of uninterrupted growth, gross domestic product in Sub-Saharan Africa is expected to contract by 2.8% this year. Economists in the African Union fear 20 million jobs are at risk, and that governments will lose 20-30 % of their revenues due to the crisis. Against this backdrop, the demand for a post-pandemic recovery plan for Africa is rapidly gaining momentum.
What should a plan to stimulate Africa’s economic revival look like, other than debt relief, aid packages and fiscal stimulus?
There will be no sustainable growth in Africa unless the recovery efforts also address the Achilles heel of most African economies, which is the lack of manufacturing and technology-related jobs. Despite an overall growth in manufacturing production in the last two decades, the share of manufacturing in the gross domestic product (GDP) of the countries of Sub-Saharan Africa declined from 18% in 1975 to 11% in 2018. Similarly, the share of manufacturing in the countries’ total employment fell in the same period.
High cost of electricity
Costly and unreliable electricity is one of the major impediments to Africa’s growth and job creation. Regular power outages are a well-documented phenomenon hitting businesses and families hard.
A study with data from more than 3,000 firms in 37 African countries concluded that more than one of four businesses in Sub-Saharan Africa suffer heavily from regular power outages, with an average 5 % loss of yearly revenues. In some of the continent’s largest economies, more than 25% of businesses lose double-digit sales due to power outages. As a result, businesses in most countries have become heavily reliant on diesel back-up generators, which adds an additional layer to the total energy bill for energy-users in Africa and can create uncertainty in more remote areas where supply can be unpredictable. The more than 40 million diesel gen-sets are also a heavy polluter and a fast-growing source of CO2 emissions.
After digging into the numbers, however, I was surprised to discover how much Africa’s businesses also pay for the electricity they get from the grid. As shown in the table below, businesses in 9 of the selected 10 East and West Africa countries pay 25-100% more for electricity they get from grid than businesses in other parts of the world. As summarized in the table below, the world average end-user tariff for businesses in 2019 was $0.12 per kWh. The same source, GlobalPetrolPrices.com, reports that businesses in Kenya paid $0.18 per kWh in 2019, and those in Uganda $0.16 per kWh. As for West-Africa, a recent comparative study published by ECOWAS Electricity Authority reports that the tariffs paid by businesses there ranged from $0.16 per kWh in Nigeria to $0.24 in Senegal and Guinea respectively. The business tariff in Ghana was $0.19 and in Ivory coast $0.17 per kWh .
average World Ghana Nigeria Ivory Coast Guinea Sierra Leone Benin Senegal Kenya Uganda Tanzania
$ per kWh 0.12 0.19 0.16 0.17 0.25 0.20 0.20 0.24 0.18 0.16 0.10
In my view, these numbers highlight a serious and overlooked handicap of doing business in Africa: how can you expect entrepreneurs and businesses in Sub-Saharan Africa to be competitive, if they, in addition to having to suffer frequent power outages, have to pay 20 to 100% more for grid electricity than their competitors in the USA, China or Europe?
Solar for business: Highly competitive, but investments suppressed
Installing solar PV on-site, either rooftop or ground-mounted, represents a vast potential for Africa’s businesses to reduce their costs of electricity while at the same time contributing to a relative reduction in Greenhouse Gas emissions. Companies’ daytime electricity costs can be reduced 25-50% by going solar, subject to variations in local conditions, costs, and execution models. However, the on-site market has so far been very slow to develop in Sub-Saharan Africa. Only 74 MW of installed capacity was recorded with commercial and industrial users by January 2019, according to a report by Bloomberg NEF.
Most of the Commercial & Industrial installations in Sub-Saharan Africa built so far have been financed by the end-user as an outright purchase, and not by third-party investors or financial partners as is most common in other parts of the world. In the Bloomberg report cited above, access to third-party financing is referenced as the main barrier to rapid deployment of on-site solar in Africa.
It is pleasing to note that there are now a number of investment funds focusing on medium-sized renewables in Africa, including the impact equity fund managed by our team in Empower. Availability of finance should no longer be considered a major hurdle but in order to convert the opportunities to investable projects, government regulations play a vital role:
Net-metering: In most markets except Sub-Saharan Africa, energy-users are allowed to inject surplus electricity to the grid and receive a regulated tariff paid by the receiving utility company. As many companies may not operate 24/7, allowing for unused electricity to be sold back to the grid could help on-site solar to become financially viable. It is unfortunate but highly important that net-metering is not allowed in any of the nine countries cited above. Notably, Kenya and Ghana have both introduced legislation to enable net-metering, but these new regulations are not yet implemented.
The absence of net-metering makes investments in on-site solar PV less attractive.
Long-term contracts: In most parts of the world, the reference business model for on-site solar PV for Commercial and Industrial customers is so-called private Power Purchase Agreements (PPAs). PPAs typically come with a with 15-25-year tenor. The advantage for the buyer under this model is that it enables significant savings on the energy bill from day one, with no up-front payment. Most importantly, the PPA model gives the buyer complete peace of mind: the buyer is only obliged to pay for electricity that is actually generated and delivered during the whole contract period, without having to worry about operation, maintenance, or asset management. Finally, powering a factory from an on-site solar PV installation through a PPA creates no liability on the off-taker’s balance sheet; the monthly energy payments are treated as an operational cost.
Of the nine countries listed above, Kenya, Ghana and Nigeria have entrenched into local legislation the use of PPAs for certain categories of projects. In Ghana, for example, PPAs can be used for relatively large users of energy, or so-called bulk customers. In the majority of the Sub-Saharan African countries, however, private PPAs are still not legal.
Of course, it is possible to raise third-party financing without a PPA, for example via longer-term rental or lease-to-own contracts. However, with such contracts, the buyer assumes more responsibility and risk for the performance of the plant. Additionally, the obligation to purchase the plant creates a liability on the buyer’s balance sheet, increasing the buyer’s total cost of finance and potentially limiting business expansion through debt financing.
To conclude, governments across Sub-Saharan Africa can boost the competitiveness of their industry and accelerate electrification by openning their energy markets to allow for on-site solar PV generation. Solar for business is not only key to achieving a post-Corona recovery for Africa, it is also a most cost-efficient roadmap for reducing CO2 emissions and addressing several UN Sustainable Development Goals. For every million dollars invested in on-site solar generation in Sub-Saharan Africa, 15-30 000 tons of CO2 will be saved over the next 30 years, and 50-100 jobs created. The Corona-pandemic is a crisis, but it is also a unique opportunity for Africa to put competitiveness and sustainable industrialisation on top of the agenda.
Original article published here