A year after the US promised that it will double access to electricity in Sub-Saharan Africa, Sarah Rundell investigates Power Africa’s early successes, what must still be done and who is going to provide financing on the scale that is needed.
One of the few tangible outcomes to emerge from the fanfare surrounding the US Africa Leaders’ Summit back in August 2014 was President Obama’s announcement to triple the amount of generating capacity originally promised in his Power Africa initiative. Launched in June 2013, with the duel aims of massively increasing access to power in Sub-Saharan Africa where over two thirds of the population is still without electricity, and boosting languishing US Africa trade flows where only 1% of US goods currently wend their way to Africa, the initiative has all the potential to be the Obama administration’s lasting African legacy.
It’s a model based around encouraging US companies to invest in Africa’s electricity infrastructure with the support and expertise of multiple US government agencies, hand-holding with risk guarantees and technical help. The new target to produce 30,000MW of electricity generating capacity is concentrated in six African countries: Nigeria, Kenya, Tanzania, Liberia, Ghana and Ethiopia.
“We look at deals and figure out what is holding them up; using tools from multiple agencies we are pushing reforms that will drive investment,” says Andrew Herscowitz, the co-ordinator for President Obama’s Power Africa initiative in an interview with GTR, adding that the focus of the initiative will be on renewable energy projects and gas. “Power Africa projects will have a heavy focus on renewables but gas is also key to Africa’s energy mix. You can’t ignore the enormous amounts of gas coming on line,” he says.
It contrasts with much of the DFI-led electricity infrastructure investment that has gone before, and opens the door for the US power sector to some of the fastest-growing economies in the world. It will also indirectly boost trade flows by providing the electricity that can accelerate economic growth across Africa, allowing manufacturers in countries like Nigeria, where 40% of production costs go into the provision of electricity compared to 5-10% in similar economies, to finally compete internationally. “The more exciting impact on trade from Power Africa will be indirectly,” argues Ben Leo, a senior fellow at the Washington-based Centre for Global Development. “The lack of reliable and affordable electricity is a major constraint on African economies. If they can address this, more trade will flow.”
By combining a dozen government agencies, pledging US$7bn of public funds to the cause, and championing the US companies already investing in Africa’s power sector, Power Africa has galvanised unprecedented interest. At the last count, private companies had promised an estimated US$20bn in investment into the sector with multinationals like General Electric becoming flag bearers for the initiative. GE is expanding 15% annually into its African growth markets with total revenues in Africa last year topping US$5.2bn and the company winning more than US$8.3bn-worth of African orders. Recent sales include supplying aeroderivative gas turbines to Nigeria and Algeria and a “country to company” agreement with Nigeria to facilitate the transfer of skills and technology. Other multinationals active in Africa’s power sector include Dow Chemical, which supplies heat transfer fluids used in solar panels to South Africa with the support of US Exim ECA financing.
Smaller players include power construction company Symbion Power, which owns projects in Tanzania and Nigeria and is developing ones in Kenya and Ghana, and Contour Global, with operations in Rwanda and Senegal. Industry gatherings like the first African Geothermal Roadshow in Oregon in mid-2014, linking East Africa’s geothermal industry with the US, where leading groups like Ormat Technologies and US Geothermal have already built a presence, have roused fresh interest, showcasing opportunities outside the moribund domestic industry. “The US is the number one producer of geothermal in the world so there is a lot of expertise here,” says Andrew Palmateer, acting deputy director at the US-East Africa Geothermal Partnership (EAGP).
Early successes
In recognition that not all Africa’s power projects can be large, grid extension projects, Power Africa is also targeting off-grid and small-scale power developments in a “Beyond the Grid” initiative which will support US$1bn-worth of small-scale private energy schemes.
It’s too soon for any large scale projects to have broken ground under the initiative, but it has already had some notable successes. Power Africa is involved in US Icelandic firm Reykjavik Geothermal signing with Ethiopia to construct Africa’s largest 1,000MW geothermal power plant at Corbetti in the Rift Valley in a project that Herscowitz hopes will become the poster child for geothermal in Africa. “We are developing a comprehensive geothermal strategy that brings together the highest reward projects with the least risk. Investors in geothermal will look elsewhere until we can prove the business model and the resources. We hope that Corbetti closes in the next few months. Once that happens we will see all kinds of investors come in,” he says.
Power Africa experts are working with Kenyan wind group Aeolus on grid connectivity from its Kinangop Wind Park, and are heavily engaged in Nigeria’s power privatisations where 15 generating and distribution companies are being sold off. US DFI the Overseas Private Investment Corporation (Opic) recently lent its support to Nigeria’s Azura-Edo IPP with US$50mn in guarantees under the Power Africa banner. Similarly, Kenya’s giant 300MW Lake Turkana wind farm got a boost from Opic when it provided a US$250mn investment guarantee to support construction of the project in early 2014.
Efforts to build Africa’s largest wind farm at Lake Turkana floundered when the World Bank refused to provide risk guarantees in 2012, and only got back on track when the African Development Bank stepped in. In fact, exactly how Power Africa will measure its success is a sensitive issue given it has stepped into an existing project pipeline. Even if its expertise and capacity propels projects, it can’t necessarily count them as Power Africa successes since many, like Lake Turkana, have been underway for years. The African Development Bank, European donors and countries like Japan, currently financing Tanzania’s US$414mn new Kinyerezi plant in a joint venture with Sumitomo and Tanzania’s Electricity Supply Company, Tanesco, China, which is developing Ghana and Uganda’s hydro sectors, and France, have all been active in the sector for years.
Funding partners
Nor is it clear yet how US Exim will help fund projects. It pledged to stump up the lion’s share of the US$7bn of publicly-guaranteed funds promised in the initiative but critics say its ability to back some US$5bn worth of power projects in Africa is doubtful given its patchy track record in Sub-Sahara.
“Historically, US Exim has only ever had a very modest African power portfolio. I am sceptical that this will be met unless the bank ramps up its deal pipeline through smaller transactions or a handful of large ones,” says Leo at the Centre for Global Development. US Exim’s role is also limited because it can’t do the long-term lending that most power projects require. Uncertainty around its long-term future, since its charter was only extended by nine months in September, makes US companies loath to spend time and money pursuing support when uncertainties exist of that support ever materialising, argues Leo. “If the US government wants to truly prioritise supporting electricity in Africa it would create certainty around US Exim so companies will know it will be there when their projects are developing,” he says.
Another critic commentates: “Don’t expect US Exim to suddenly become an active lender in Sub-Saharan Africa.” It could be that US Exim’s biggest role is in rallying US companies to the African opportunity, attracting attention and interest to the sector, but nothing much else. “Power Africa doesn’t need US Exim to be a success; it’s not essential,” says the critic.
Opic, a more crucial player in Power Africa’s agency mix along with the US Agency for International Development and the US Trade and Development Agency, has much more of a track record in Africa and has already approved US$400mn-worth of funds in a “significant accomplishment” towards meeting the US$1.5bn pledged under the initiative, says Charles Stadtlander, an Opic spokesperson. Opic’s role could be limited however by its “primary focus” on renewables, despite the fact Africa will never plug its power gap through renewable sources alone and gas projects will increasingly come to the fore in countries where it is abundant, like Tanzania. Stadtlander counters that although the bulk of projects Opic supports are renewables, Congress has relaxed rigidity around the emissions cap that gives Opic-supported projects a renewables bias. “Opic had an emissions reduction goal which pledges to reduce emissions associated with its projects by at least 30% over 10 years and 50% over 15 years. However Congress has recently directed Opic to suspend its emissions cap policy. Although Opic will continue to measure and report the emissions of all its projects, the agency will follow Congress’ direction,” he says.
Justin DeAngelis at Denham Capital, a private equity group with three portfolio African power companies observes an encouraging new wave of investors emerging in the sector. “Opic and US Exim are significant agencies but there are other financiers out there,” he says, noting new investors from sovereign wealth funds and pension funds particularly. “These investors have moved outside their home region to invest in other physical assets. African power assets are long-dated and offer inflation protection – it’s a good investment.”
Critics also question the urgency with which some African governments are undertaking the reforms necessary for investment. A crucial sticking point is the lack of creditworthy off-takers, the government-owned utilities that purchase the electricity from the power producers and distribute it to consumers. “Some governments like Nigeria see it as an incredible opportunity and there is a happy confluence of opportunity and commitment. Other countries remain beset by bankrupt offtakers,” says one Washington-based commentator, referring to Nigeria’s privatisation process.
The creditworthiness of offtakers is a stumbling block for seasoned African investor Symbion Power, struggling to get paid by Tanzania’s Tanzania Electric Supply Company, Tanesco, in a country where only 14% of the population have electricity. “For more than two years, my company has been battling in one of the Power Africa countries to get paid fully and regularly, to the point where, as of February 2014, we are owed US$70mn. The debt will be even greater at the end of March when more invoices are submitted. This level of debt is simply unsustainable for a company of our size,” said Symbion CEO Paul Hinks, speaking in March 2014 at the Senate Foreign Relations Sub-Committee on Africa. “You have to ask: how many companies would be prepared to take this kind of long-term bet?” said the Washington-based commentator.
Power Africa’s Herscowitz agrees: “The creditworthiness of offtakers is an issue that governments recognise requires solutions and reform. Tanzania is well aware of the issues around Tanesco. It will get Tanesco to the point of creditworthiness, but it will take some time.”
Power development doesn’t happen overnight; projects take years to design and implement and Power Africa hasn’t triggered a jump in trade flows yet. But by encouraging policy reform and helping to reduce the risks of doing business in the sector it is unlocking private investment.
During the summit President Obama said he wanted “Africa to buy more American products and America buy more African products”.Power Africa is a way for this to really start to happen.
