ENERGY INSIGHTS | 01 MARCH 2019 Closing the gap on Africa’s energy challenges Absa | Corporate and Investment Banking > Insights and Events > Closing the gap on Africa’s energy challenges Bhavtik Vallabhjee Senior International Banker & Head: Power, Utilities and Infrastructure SHARE Africa’s poor electrification rate makes this an excellent opportunity for investors, particularly in the renewable energy space. Africa is a continent blessed with an abundance of natural resources – water, wind, thermal coal, natural gas, and of course plenty of sunshine – but the electrification rate across the continent remains extremely poor. Of the 1.2 billion people who live in Africa, it’s estimated that more than 650 million have no access to energy, relying instead on fossil fuels like diesel for electricity generation and harmful cooking fuels like wood, charcoal, and kerosene. This sets our continent back on meeting energy access goals, restricts industry progress, and diminishes the continent’s economic growth by two to four percent every year . Developing countries across Asia are all making significant progress, with many countries currently well on track to reach universal energy access by 2030, while India, with a population of 1.34 billion people, is on track to reach universal access by the early 2020s . Energy as an investment opportunity Looking forward, financing Africa’s energy infrastructure is a major opportunity for investors. Africa’s power and energy sectors are critical drivers of growth and development across the continent. To ensure the industry reaches its full potential and addresses the needs of citizens, investors and businesses must keep up with a rapidly changing African energy landscape. For example, South Africa holds two thirds of the power generation capacity in sub-Saharan Africa (approximately 46,000 MW). Granted our dominant industries like mining are heavily energy reliant, but this simply goes to show the enormous opportunity that exists for investment into power supply infrastructure in the region. But what kind of power are African countries investing in? More and more countries and companies worldwide are focusing on green energy and investing in low-carbon technologies – a trend that became more pronounced following the commitments made at the COP 21 United Nations Climate Change Conference in late 2015. Fortunately, developing economies are in a unique position to leapfrog more developed nations by investing in cleaner, more environmentally friendly sources of power at a lower cost, which is one of the key factors contributing to improved use of renewable energy power across the continent. Currently, countries like Morocco, Tanzania, Mozambique, Kenya, Mauritius, South Africa, Uganda and Ghana amongst others have taken initiatives in the development of renewable and clean energy projects, particularly solar and gas to power. With the current low cost of gas compared to several years ago, (through the shale gas revolution in the USA) gas power plants have increasingly become more competitive compared to clean coal technologies and present an affordable solution for developing nations on the continent. Lithium-ion batteries could be a game changer for Africa Although renewable energy resources hold great promise and can provide energy while overcoming Africa’s infrastructural challenges, this form of energy would still need to be stored. There’ve been massive investments in the field of battery storage research and development by leading global companies like Samsung, Tesla, Total and BYD over the past five years. The trend is likely to continue and will gain momentum going forward. As the costs of Li-Fe battery storage falls, coupled with already low cost of solar photovoltaic modules, the future of the electricity market may well be solar photovoltaic plants. This, combined with Li-Fe battery storage to despatch energy as and when needed, would in time displace CSP technologies, which by comparison is costly. South Africa holds almost 80% of the world’s known reserves of manganese (producing 5.3 million MT per annum ) – an important component of the Lithium-ion battery. The price of manganese is relatively low, so manufacturers have been able to import it easily from South Africa. A growing market will eventually justify the creation of a local battery production plant, but serious investment is first required for a large-scale facility. There is huge opportunity for businesses involved in building transmission networks There are five regional power pools in Africa (Southern, Eastern, Western, central, Northern). The electricity grid in each of these regions is largely disjointed, and unlike Western Europe or North America, there is little cross-wheeling of power across regional power pools. There are several interconnector projects across Africa being tendered by utilities with the aim of progressively connecting the various power grids, which would address the current supply-demand imbalance of power in certain jurisdictions. Demand for rail in Africa will increase significantly over the next decade South Africa is said to have about 18,200 kms of rail network which represents about two thirds of functional rail in Sub Saharan Africa (SSA). Except for South Africa, the railways of SSA have been in decline since independence. Competition from road, political instability, corruption, poor management and lack of investment have left most African railways with very old rolling stock, and infrastructure that is in poor condition. Most railways remain owned by national Governments, while some have their operations and maintenance concessioned out to the private sector. Most struggle – governments generally lack the required budget; rail utilities are often not creditworthy; and resources or expertise to develop complex projects like rail are lacking. With the need to exploit and transport new bulk commodity (coal, iron ore, manganese) projects to port in Africa means that demand for fully functional rail networks is set to increase significantly over the next decade. With India having the third-largest rail network in the world which is very efficiently run, this poses huge opportunities for Indian companies (either as operators, developers, or rolling stock suppliers) to demonstrate that expertise to African governments – even if this means approaching on an unsolicited basis to propose technical and financial solutions to governments. Last but not least – we’re rich in oil and gas Mozambique has the 9th largest gas reserves in the world with >187 tcf of gas, with Tanzania (which shares the same Rovuma Basin) having about 45 tcf of gas. One of the region’s largest project financing transactions (Coral LNG) recently closed a deal value in excess of US$30bn in Mozambique with two more similar deals in Mozambique imminent. Many other countries in Africa like Nigeria, Ghana, Angola, and South Sudan, amongst others have serious oil and gas reserves. The spin-off effects from this will be huge for local economies with the possibilities of cracker plants, fertiliser and petrochemical plants, pipelines, gas-to-power plants, LNG export terminals. Once again this poses sizeable opportunities for Indian corporates playing in this space. Africa presents a compelling investment case The political and economic climate across the continent has steadily improved over the last two decades or so, and despite the frustration of long lead times associated with developing infrastructure projects, on a risk-return adjusted basis, Africa still boasts far better returns than developed markets. As Absa Corporate and Investment Bank, we have an extensive pan-African presence on the ground in 12 countries and have the balance sheet strength and risk appetite to partner with you and provide the necessary funding, technical and structuring skills to bring deals to profitability and successful financial close. The Indian government’s tremendous efforts over the last several years have put it on a fast track to achieve one of the biggest success stories ever in electrification. With the right investment in the right infrastructure, and with the right partners, Africa is well poised for solid socio-economic growth and sustainable development. Opportunities in Africa abound. Sources: 1 https://africa-energy-portal.org/blogs/why-financing-africas-energy-infrastructure-major-opportunity-investors 2 https://cleantechnica.com/2017/10/20/universal-energy-access-2030-compatible-meeting-global-climate-goals/ 3 https://investingnews.com/daily/resource-investing/battery-metals-investing/manganese-investing/op-manganese-producing-countries-south-africa-china-austraia/ Bhavtik Vallabhjee Senior International Banker & Head: Power, Utilities and Infrastructure https://cib.absa.africa/wp-content/uploads/2020/07/file_example_MP3_700KB.mp3 Related Articles
