As appetites threaten to wane elsewhere, many African countries are showing hunger for renewable energy projects. Finbarr Bermingham reports.
In much of the world, the renewable energy sector is under siege. In the US, the discovery of shale gas has been greeted as the country’s ticket to energy independence. But the plunder of yet another fossil fuel is viewed by greens as a thorn in the side of renewable energy and thus the planet, and enthusiasm for solar, wind and hydro projects has been plummeting since drilling began.
In the UK, as the big six energy companies drive household energy prices up by double-digits, political fire has been turned on green energy initiatives. The government recently had to reassure lobbyists that renewables obligations and feed-in tariffs would be ring-fenced, despite claims by energy companies that they were the cause of above-inflation price hikes. The debate rumbles on.
In recent years, the beleaguered Spanish government has made successive cuts to feed-in tariffs – the wholesale price, subsidised by governments, at which solar energy can be guaranteed to be sold. This has acted as a deterrent to potential developers of and investors in a sector once worth US$20bn to the Spanish economy.
In the post-Fukushima era, Japan and Germany have abandoned their nuclear energy policies. The latter is one of the more progressive users of alternative renewable energy sources and continues to lead the way in areas such as wind, but the former has resorted to the mass import of natural gas from the Middle East, Russia and Australia to fill the gap that will be left by the dismantling of nuclear facilities.
Critics of renewable energy often dismiss it as ‘a rich man’s game’. It seems ironic, then, to hear stakeholders from throughout the sector refer to Africa – home to some of the world’s poorest nations – as a land of green opportunities. Some of the most interesting renewable energy initiatives in the world are happening in Africa – at a time when nations there are at varying stages along the way to industrialisation, historically the point of economic development at which environmental concerns are hung out to dry.
It would be naïve, though, to think that the initiatives are being driven solely by environmental concerns. With fast-flowing rivers, perdurable sunshine and vast, rugged and ocean-beaten coastlines, large parts of Africa are suitable – at least in theory – for renewable energy sites. Swathes of the continent are off-grid and even countries with well-established electricity networks are prone to frequent power outages.
Much of the work underway, then, has been propelled by necessity, rather than political or ideological grandstanding. There seems to be acceptance that even as oil reserves are discovered, gas-fields located and mine shafts sunk, renewable is a valuable component of the energy mix. Depending on the stage at which an individual country is at in its development, you’re more or less likely to see commercial trade financiers on transactions; but generally-speaking, for green investors, Africa is quickly becoming the smart place to put your money.
Traditionally, renewables projects have been the preserve of development finance institutions (DFIs) and indeed, this is a trend that continues for the most part in Africa, as well as everywhere else in the world. KfW and the European Investment Bank (EIB), for instance, were among the major lenders to the giant Butendiek wind farm in the North Sea earlier this year, which at a cost of €1.4bn, is one of the biggest in history. Since it was in Europe though, nobody was surprised to see the likes of UniCredit and Bremer Landesbank on the ticket too.
In Africa, the need for DFIs has been amplified further still. The costs required to get projects off the ground are often too cumbersome to entice commercial lenders alone and sometimes the entire project is bankrolled by development banks. But there’s been something of a shift in the pattern in recent years. As the cost of the underlying technology comes down and the quality of the project goes up, initiatives are becoming more profitable.
Take, for instance, the Turkana wind farm project in Kenya. Despite Tullow Oil’s recent discovery of oil reserves in the country, this complex, standalone independent power plant (IPP) has generated much excitement. Upon completion, the 300MW facility will supply 15% of the country’s power requirement. But with the lake cradling the country’s northern border with Ethiopia, the project site is almost 600km from the capital, Nairobi and 1,105km from the other major population centre, Mombasa. Getting the electricity onto the grid requires the construction of a costly 428km transmission line.
As John Sayers, a partner at law firm Simmons and Simmons puts it: “You have the age-old problem of not being near the site of consumption and there’s no cable to transmit it from source to consumption point… and who’s going to pay for that?”
As such, the US$149.5mn debt finance was arranged by the African Development Bank (AfDB), with the likes of the EIB and French development bank Proparco involved as well. Eventually, they were joined on the ticket by a number of private banks, attracted by the ultimate commercial viability of the project.
“300MW is a massive wind farm and it is forecast to have an 80% delivery rate,” Mike Peo, head of infrastructure, energy and telecoms at Nedbank, one of the commercial lenders, tells GTR. “The wind resource is superb and the Kenyan government is the ultimate buyer, so it’s a very well-structured deal.”
West Side Story
Growing at 7% a year and with substantial confirmed offshore oil reserves, Ghana has almost become a by-word for African economic progress. While its nominal GDP is only slightly larger than that of Kenya’s, Ghana is generally viewed as being a step ahead in its development and on the way to ‘middle-income’ status.
The country is also about to become home to Africa’s largest solar energy facility, the 155MW Nzema plant, which will provide electricity to more than 100,000 homes. The US$400mn plant in the country’s west is being built by Blue Energy, a British firm. Doug Coleman, the company’s chief projects director, tells GTR that he expects the project to reach financial close by the end of January, with construction to begin in May 2014.
“There’s a mixed bag of sources of finance,” he continues. “I can’t say much because there are matters of commercial sensitivity, but at the moment, it’s primarily commercial debt.”
Coleman views Ghana’s state of development, its investor-friendliness and legislative certainty as being vital in being able to attract the commercial finance. “The country makes the difference,” he says. “We’re looking at a stable, multi-party democracy, very clear regulatory mechanisms in place for energy policy – including renewable – and an independent regulator for both tariff and quality.”
Logistically, Nzema presents fewer headaches than Turkana. While a lot of the equipment used in the plant will have to be imported, the site is just 70km from the deepwater port of Takoradi. The infrastructure is modern, with the continually-developed West African Highway providing road links from Takoradi. Perhaps most importantly, the facility will feed directly into the existing electricity network that interconnects West Africa – meaning there’s no need to roll-out the sort of transmission lines required in Kenya.
Coleman mentions Namibia, Kenya, Tanzania and South Africa as the Sub-Saharan African countries possessing the interest, political will and prerequisite climactic conditions required for building similarly large solar plants – and it’s South Africa which demonstrates that the further up the development chain you go, the more scope there is for getting such things done.
South banks show
South Africa’s monetised national wealth dwarfs that of any other African nation and yet, in recent years it has been beset by energy shortages and blackouts, resulting in the introduction of load-shedding (the practice of reducing or cutting the supply of electricity to an area to avoid overloading the generators) in 2008. The public utility Eskom has come in for harsh criticism, but the decisive action of the government over the past few years has garnered chatter of a more positive variety.
To date, we’ve seen three rounds of bidding for the ambitious Renewable Energy Independent Power Producer Procurement Programme (REIPPP), which will help to plug gaps in South Africa’s electricity supply using a combination of onshore wind, concentrated solar thermal, solar photovoltaic (PV), biomass, biogas, landfill gas and hydro projects.
Rounds one and two have reached financial close, with the first electricity from round one expected to hit the grid early in 2014. Once the deadline for financial close of round three passes in July 2014 (successful bidders for 17 projects were selected in early-November), 64 renewable energy projects will have been signed, sealed and partially-delivered, eventually adding just under 4,000MW – or 10% of South Africa’s current total electricity capacity – to the national grid.
“There are different ways of developing a renewables market,” says Sayers at Simmons and Simmons. “There’s the approach taken in most other parts of Africa: low-key, fluid and flexible, where you might be talking to potential developers on a one-off, speculative basis. But South Africa went for the big plan. They needed to, and if you’re going big you need to really make sure you’ve got something that will work for the market on a whole. I think they’ve achieved that.”
Perhaps the most remarkable thing about the programme is the amount of commercial debt it has been able to attract – local and international banks have rushed to participate in REIPPP. On the majority of deals, the mandated lead arrangers (MLAs) have been South African banks. Rand Merchant Bank provided R1.1bn (about US$106mn) to round two’s Jasper Project – a solar development near Kimberley – in July. Investec and Nedbank were joint MLAs of projects in both the Western and Northern Capes in June and July 2013, contributing around US$330mn between them across the projects.
For round three, Nedbank has agreed to underwrite seven of the 11 debt-funded projects, to the tune of R6.8bn. Peo says they did so because the government has made the project’s “imminently bankable”. Most notably, the offtake agreement issued by Eskom has been underpinned by a blanket government guarantee, offering security to the banks and sponsors that has been lacking elsewhere on similar projects elsewhere on the planet.
“We’ve seen various situations in Spain, Italy and Portugal where tariffs or tax exemptions have been revised,” Peo explains to GTR. “We believe we have a regulatory framework which says if the government changes the rules of the game in 15 years, they’ll pay out the bank debt. Because this is a competitive bidding process, once the government made a selection, the power purchase agreement (PPA) is set in stone, on a fixed tariff. So if the government decides in 10-years’-time that the tariff that’s embedded at the minute is making the country uncompetitive because there are cheaper, newer supplies of energy, they’d be obligated to pay out to both the developers and the banks.”
This level of security attracted an unprecedented 93 bidders for the 17 projects of round three, meaning the prices the government has been able to secure for its PPAs has fallen as the rounds have gone on. The lowest tariffs locked-in for wind projects in round three are almost at grid parity (the same price as electricity generated from coal-fired plants or any other form of energy). In an industry that’s often condemned for being heavily-subsidised, this is almost unheard of.
By making the projects commercially-viable, South Africa has rolled-out a groundbreaking renewable energy programme that will provide a more immediate plug in the gaping gaps in its electricity network. The country has two 4,500MW coal-fired plants under construction (also on a PPA, guaranteed basis), but while they’re expected to take four to five years to get online, the solar PV facilities will take on average 12 months, with concentrated solar following in 18 to 24 months.
But it would be disingenuous to say the situation in South Africa is representative of Africa as a whole. In terms of development, the country is an outlier. Even in the most remote parts of the country, the cost of getting hooked-up to the existing grid isn’t astronomical. The cases explained, though, show that as Africa continues to develop, opportunities for profitable renewable energy projects will continue to emerge.
