Africa’s billion dollar energy market

IN Africa, talking about a billion-dollar market, a billion-dollar business or a billion-dollar man/woman still seems like a lofty dream: A far fetched concept that most aspire to attain, but hardly ever reach even if they work 24/7.
For many an African child, all he or she can do is ogle at billionaires featured in the glossy pages of Forbes Magazine that carry the usual suspects like Bill Gates, Warren Buffet and Mark Zuckerberg.
For many more of the African child, their dreams hardly go beyond musing over prospects of escaping the life of a herd boy tending to goats and cattle or toiling in the fields or going up and down to the well as a common village girl.
The dream is always to run away to town and look for any job and get rich quick through whatever means possible, given the unemployment and lack of formal opportunities that surround each and every one of us in Africa.
What we must do is exploit the economy around us with its opportunities so that we can uplift our own communities.
There are many industries we ought to now take as our own, arouse our own curiosity: Adopt, adapt and innovate; this is the real radical transformation of the mind. We eat, but never ask who grows the food, we braai, but never probe who reared the cattle, we switch on the lights and never probe who generated the power. These are the simple questions we must ask and provide answers to.
Energy is defined as the power derived from the utilisation of physical or chemical resources, especially to provide light and heat or to work machines.
This resource is so desperately needed in Africa; it is one of the biggest opportunities we have to break the cycle of poverty, bring about 800 million people in sub-Saharan Africa into meaningful economic participation.
The will to actively participate is there, according to the African Progress report of 2015. In sub-Saharan Africa, over 600 million people live on less than US$2,50 a day, 60 percent of them on less than US$1,25; and assuming that they use an average monthly household income of US$6 on energy, this would represent an annual market in energy of US$10 billion currently not being utilised.
The number is impressive in terms of supply and business opportunity, but highlights a critical problem — the fact that the market does not serve the underprivileged well in sub-Saharan Africa.
When you compare Africa vis- a-vis the national cost of electricity in the United States, the continent’s poorest are spending about US$10 per kilowatt hour on power, compared to US$0,12 in the US and US$0,15 in the United Kingdom.
This translates to sub-Saharan Africans spending on average 20 times more towards energy and this is a direct result of lack of or poor infrastructure, a lack of resources to properly innovate and as such we are left with outdated technologies that are also very poorly maintained.
Encouragingly, this can be fixed.
The opportunity is there for those ready to put their money to work. Two thirds of the energy infrastructure that sub-Saharan Africa requires is yet to be established.
Currently, many African business and households are relying on the more expensive option of using either petrol or diesel fueled generators.
A growing number are now starting to take up gas for cooking in place of charcoal and firewood and some still are finding relief in small off grid solar installation, although even with this option the upfront costs is still a deterrent for many.
Africans are ready to spend their hard-earned money to see their dreams come true, whether it’s a school child using a solar light instead of a candle to study at night,  and to light their grocery stores on the busy pavements of African cities during end of day rush hour well into the evening using candles.
Productivity is increasing and with it new opportunities arising.
There seems to be willingness by governments and international corporations to participate and assist Africa in meeting its  sustainable energy needs and, at the same time, allowing for new market participation where Africa can be built by Africans for the African child.
Francois Hollande, the French President, after the climate talks in Paris, said his government would double investment in renewable energy generation across all technologies to more than US$2 billion between 2016 and 2020.
 In addition, China recently pledged US$60 billion in development aid at the China-Africa Summit in Johannesburg.
The new buzzword has been public private partnerships (PPPs) and, although initially treated with caution, since 2010 these PPPs have been adding US$4 billion annually to Africa’s gross domestic products — where they are active. Credit should be given to African governments that are willing to provide an enabling environment for such projects by facilitating much needed policies that are required to make such partnerships work.
International private equity capital has also been flowing into the sector, highlighting the investment opportunity there. As highlighted by the African Progress Report, some shareholders in Uganda invested in energy projects are earning returns on investment of 20 percent.
American asset manager, Carlyle Group, raised US$591 million on its initial African fund.
In 2015, Helios Investment partners announced a closure of a heavily subscribed US$1,1 billion African focused fund, which is focusing on energy.
Actis Technologies launched a US$1,9 billion renewable energy platform, Lekela Power, aimed at funding wind and solar technologies and one of the world’s largest private equity firms Blackstone announced a partnership with Dangote Industries to invest US$5 billion over five years in the African energy industry.
The kind of investment we need on the continent is, however, the kind that trickles down to the independent power producers, the actual project developers where (though funding has often been pledged and provisions made) it hardly ever gets to complete the projects for two primary reasons: Lack of adequate bankable projects and an overestimation of risk by firms and custodians of funding capital destined for such projects. While advocating for prudent risk management, constructive engagement between equity partners and project developers is essential.
The key ingredients for any successful renewable energy project and what is deemed most important for the investor is securing a power purchase agreement.
All other related agreements, the loan agreement, the grid connection agreement should be aligned with the power purchase agreement.
The reason for this is that whatever technology you use for generating electricity, the end goal is to generate revenue by selling power, it is also the principal agreement that defines the revenue streams and thus the credit quality of the electricity generating project.
Such an agreement can be secured for between 15-30 years with the off-taker usually being the national power utility company in that country over mostly a 25-year period.
Investors can come in either as an equity investor at various stages of the project or lender.
Working on such utility scale projects require much work and the payback period for the investor can be long, but comfort lies in knowing that your returns are guaranteed not by the project developer or owner’s balance sheet, but rather by consistent cash flows stemming from the power purchase agreement signed by the off-taker.
There are many ways to make a billion dollars and this is one sure way and even if you fail you will still make a cool few million dollars.

Post Author: Muaz Cisse

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