A briefing providing insight into the developing market of solar power in Sub-Saharan Africa and its capacity to address the energy deficit which exists in the region.
Solar power is the natural choice for meeting the energy deficit in Sub-Saharan Africa. Why? High levels of solar irradiation and falling capital costs, coupled with the absence of fuel supply issues and an abundance of capital chasing renewable energy projects in Africa, make utility scale solar photovoltaic (PV) projects easier to develop and finance than conventional fossil fuel projects. Concentrated solar power (CSP) technology generally provides larger capacity and is, importantly, more flexible, being coupled with advanced storage solutions that have significant load shifting capability.
The capability of solar PV to be deployed off-grid also creates a significant opportunity to provide power to Sub-Saharan Africa’s 600 million people (approximately 70 per cent of the population) currently living without access to electricity supply. Monetising this potential is clearly more challenging than developing utility scale projects. However, in addressing its deficit, Sub-Saharan Africa has the opportunity to circumvent the expensive, dirty and often unsustainable paths of energy development followed by many industrialised nations. Instead they can turn straight to the most advanced existing technologies. This creates exciting opportunities for those in the power industry.
The rapid downward trajectory of solar PV capital costs globally is a major factor in framing the energy mix for Sub-Saharan Africa. The cost of solar panels has fallen by 75 per cent in the last five years. This is accompanied by traditional financiers being increasingly comfortable with investments in solar PV projects, reducing the premium otherwise attributable to technology risk. In 2014 alone, US$150 billion was invested in solar generation globally.
Although not reflective of today’s cost of deployment in Sub-Saharan Africa, the tariff of 5.84 US$/kWh achieved by ACWA Power for the 200MW Mohammed bin Rashid Al Maktoum Solar Park in Dubai shows what is achievable. Likewise, the average solar PV pricing for round 3 of South Africa’s Renewable Energy Independent Power Producer Procurement (REIPPP) Programme was 10 US$/kWh, a drop of 71 per cent compared to the 2011 round 1 pricing levels.
With increased competition, solar PV tariffs look set to continue to outperform more expensive diesel generation, even in an environment of low oil prices in the medium term. Reports have found that solar PV technologies are competitive even with oil at US$10/barrel and gas at US$5/MMBtu.
More significantly, the absence of a fuel charge component from solar PV tariffs, coupled with generally lower operation and maintenance costs than fossil fuel projects, makes solar PV projects less susceptible to inflation and commodity price changes. This provides greater stability for host governments and local utilities.
Feed-in-tariff schemes applicable to grid-connected solar PV have been introduced in a number of Sub-Saharan African nations. These include established power markets such as Ghana and Kenya. Tanzania and Zambia are also in the process of introducing REFIT legislation for smaller scale projects. Although the tariff level in Kenya is generally considered to be tight, desired tariff levels can be achieved in the right locations when using the right technology. For example, Kenya’s feed-in-tariff for solar PV in the 10-40MW range is currently 12 US$cents/kWh. This provides some level of certainty for developers and will therefore help to achieve renewable energy targets.
However, the implementation of feed-in-tariff structures in Sub-Saharan Africa is not achieved by regulatory mechanisms alone. Tariff levels, duration of the feed-in-tariff and capacity limits for plant size and technology type are set by policy and regulation. But usually the tariff figure has to be plugged into a power purchase agreement under which the developer is required to construct the plant and is entitled to receive payment for the energy delivered. This is a double-edged sword. It provides developers with private law rights against national power utilities, which are less susceptible to domestic legal risk (such as change in law), but it also means that there is a process of negotiation with the off-taker. That, in turn, gives rise to longer development timeframes and less certainty as to commercial terms than might otherwise be the case. It also increases transaction costs, which is a challenge for smaller projects where the costs of conventional project finance already render them marginal.
The alternative to the renewable energy feed-in-tariff structure is a competitive tender scheme, the success of which is clearly illustrated by South Africa’s REIPPP programme launched in 2011. This competitive bid process requires developers to have term sheets in place outlining their construction arrangements and debt and equity funding prior to award. It is based on bankable and non-negotiable documentation with the utility and government that provides an adequate offtake and political risk framework. To date, there have been four bid submission phases of the procurement programme and the country consequently provides by far the most developed market for renewable energy in Sub-Saharan Africa. Over the first three rounds of the REIPPP programme, 64 solar PV projects, totalling almost 1.5GW, have been awarded. The REIPPP programme has been widely regarded as a successful regime as a result of the competitive nature of the bidding process.
One reason why a competitive auction process in the context of solar PV projects is compelling from a host government’s perspective is the number of developers operating in this sector. In a typical tender process for a Middle Eastern gas-fired independent power project (one of the most competitive markets for large scale power generation capacity), a field of four to six pre-qualified competing bidding groups would be expected. By comparison, for the first phase of the Sheikh Maktoum solar park in Dubai, the procurer pre-qualified 24 bidders!
Competitive processes for capacity generation have been introduced in countries such as Chad, Cameroon, Rwanda, Uganda and Zambia. In Senegal, the government will this year launch a procurement process for a 50MW solar park project as part of its objective of generating 20 per cent of its power from renewables by 2017. The increased mandate of the Kenyan Public Private Partnerships Unit may also see more power generation capacity being procured by competitive tender in Kenya.
From a developer’s perspective, as well as introducing greater competition and the possibility of incurring development costs without realising a project at the end, auction processes introduce a ‘process risk’ which might be expected to reduce market appetite. Successful auctions rely on the procuring authority doing more of the project development work, investing in establishing processes and documentation that result in a bankable deal. Transparency is also crucial in ensuring a process free from abuse. Sub-Saharan Africa’s track record with procurement processes (outside of South Africa) is, at best, mixed. Timelines of significant projects have either slipped, been shortened, or even cancelled. With a view to replicating the success of the South African competitive tendering regime in the wider Sub-Saharan region and addressing some of these issues, the World Bank launched its ‘Scaling Solar’ initiative in 2014. This programme aims to improve the market for private solar PV projects in Sub-Saharan Africa, in order to rapidly expand private investment in utility-scale solar PV power in the region. Ultimately, the objective is to provide long term, reliable and cost competitive renewable energy.
In formulating the challenge, the World Bank Group identified the main issues as being a lack of market scale; high transaction costs; high perceived risk and cost of capital; and limited institutional capacity in domestic utilities and host governments to effectively procure projects. The Scaling Solar programme will be deployed through collaboration between the World Bank Group’s advisory, lending and insurance teams. Central to the programme are substantially standardised forms of power purchase agreement and government support agreement, providing a robust, bankable framework that seeks to tread a middle path between the various stakeholders’ interests. This is designed to enable host governments to offer stapled financing to all bidders, potentially with a credit enhancement package to back government political risk undertakings, thereby lowering financing costs. It should also help to build local capacity in project preparation and administration of procurement processes, as well as ensuring that the highest standards of transparency are employed. The World Bank Group targets first power within two years of its advisory team being engaged.
For developers, this should translate into reduced development costs and a significantly shortened development timeline. It also has the potential to create critical mass in the market, by employing consistent tendering and bankable documentation that opens up regional opportunities.
Like conventional power projects, solar PV projects in Sub-Saharan Africa are largely looking to development finance institutions (DFIs) (such as Europe’s FMO, DEG, Proparco, and KfW, and South Africa’s IDC and PIC), and multilaterals such as International Finance Corporation and African Development Bank for debt financing because of the credit risk of some host governments and the political risks in some countries. Credit enhancement tools are provided principally by the World Bank (in the form of MIGA political risk insurance and IDA partial risk guarantees) or similar products from African Development Bank. These generally augment the contractual undertakings of host governments, rather than being stand-alone mechanisms, and are important in addressing the poor creditworthiness of many African utilities. Apart from the DFIs and multilaterals, the sources of financing for solar PV projects in Africa are as diverse as the industry’s supply chain.
The strength of US-based solar power developers, as well as the momentum and structure of the Power Africa initiative, has resulted in significant funding by Washington-based Overseas Private Investment Corporation (OPIC) for solar PV projects in its target countries. OPIC also provides early stage development funding to African projects through its US-Africa Clean Energy Finance initiative. This was used on Gigawatt Global’s 8.5MW solar PV project in Rwanda to help fund development costs, enabling the project to get to financial close within eight months of the concession being awarded, with construction being completed seven months later. Other similar programmes include grants provided by USTDA and USAID.
Chinese lenders also feature in African solar PV financings. Industrial and Commercial Bank of China (ICBC) is particularly active in pursuing its Chinese clients into Africa, as illustrated by its strategic relationship with Standard Bank.
In spite of an increasing take-up of Islamic finance in Sub-Saharan Africa generally, the use of Islamic finance for solar PV projects is not yet widespread (the first solar sukuk of its kind is being launched by an Australian developer for a 250MW solar PV project in Indonesia).
However, the increasing activity in Sub-Saharan Africa by Gulf-based sponsors is likely to drive growth in this area in the future. Large scale projects and the growing desire of institutions to play a greater role in Africa will be a key factor of such growth. For example, the Islamic Development Bank (IDB) launched its US$180 million Renewable Energy for Poverty Reduction programme in 2014, targeting West Africa in particular.
The relatively small size of individual solar PV projects in Africa and the high transaction costs of project financing certainly means that a more commoditised approach to financing would be welcome for the industry. However the desire for standardisation is somewhat at odds with the complexities of successfully developing and financing power projects in Sub- Saharan Africa. This is because the need to understand and mitigate risk through contractual and insurance-based mechanisms (and to provide liquidity support for struggling utilities) remains, whatever the technology.
Now is the time to capitalise on the opportunities for solar power in Africa. Utility-scale projects are growing rapidly in number, markets are developing and institutions that can make a difference are focused on improving scale and repeatability. Grid issues remain a challenge, and significant investment is required to reinforce and expand transmission and distribution capacity.
However, the real prize is the commercialisation of off-grid solutions – unlocking the potential to provide power to Sub-Saharan Africa’s 600 million people currently living without access to electricity supply. This is challenging from a technology perspective as much as a commercial one. It requires effective storage technologies at a competitive cost to shift load and enable solar PV to meet a non-industrialised demand profile.