Renewable energy opportunities in Africa
- Investor Services
Renewable energy opportunities in Africa: the case of Senegal
Renewable energy represents a major investment opportunity in Africa. While this trend is driven by promises of great rewards, the sector remains nascent in Africa and carries its own specific challenges – which are often unique to the continent and very different to those faced by ‘traditional’ investors in extractive industries or conventional energy projects.
Only 30% of Sub-Saharan Africans have access to electricity; this is the lowest rate of all regions, according to the African Development Bank (AfDB). Reliable and affordable electricity supply is the starting point to drive investment, to feed other large-scale projects and to meet the needs of Africa’s growing middle class. African governments are paying the political price of chronic shortages, and have made this issue a key policy priority.
This has very much been the case of Senegal – where a short-termist policy of reliance on dirty generators and imports from Mauritania, a heavily indebted national utility company (Sénélec), and chronic power cuts fuelled violent street protests and eventually contributed to the defeat of president Abdoulaye Wade in 2012. Wade’s successor Macky Sall has been making a show of taking the problem seriously in hand. In addition to restructuring Sénélec and rehabilitating existing infrastructure, Sall has embarked on a policy of diversification with a strong focus on renewable energy. A dozen new power plants have been commissioned in a short period of time, with the aim of doubling generation capacity by 2017. These reforms have alleviated some of the pressure by improving reliability and halving prices per kw/h. Yet with domestic demand increasing at a dizzying rate of 8% a year, there is a drive for even more investments.
So with a concerted policy driving investments and a large and increasing demand fuelled by economic growth and rapid urbanisation, coupled with renewable resources available throughout the continent (particularly solar, wind and hydro power), the renewable energy sector is a promising market for investors in Senegal and elsewhere in Africa. Key commercial players will want to position themselves to make the most of this “frontier” opportunity. This also means carefully assessing the risks they will face, which are very different from those faced by mineral investors.
- For instance, while the policy drivers create a broadly supportive environment for investors in the sector, and although renewables are mostly shielded from the type of significant shifts in fiscal and regulatory terms that affect traditional extractives, the regulatory environment is often underdeveloped or lacking in maturity, creating unpredictability and leaving a small pool of local technical expertise in government and public bodies managing the sector.
- The strategic importance of these projects can also backfire: in countries characterised by weak governance structures, political pressure to speed up project delivery and align projects to the calendar of upcoming elections can create challenges, from threats of contract cancellation to low-level bribe demands to expedite administrative procedures.
- In addition, for investors in renewables, the credit worthiness of state-owned utility companies – which sometimes fail to meet their contracted payment obligations – is a major challenge. In the case of Senegal, towards the end of the Wade administration Sénélec had amassed debts in excess of $600m and regularly struggled to pay its suppliers, forcing the state to bail out the company through costly subsidies.
- Land is a highly sensitive issue in many African countries. With ambitious solar and wind farms often requiring large tracts of land which may involve protracted negotiations through intermediaries with local communities, investors are exposed to complex land right tensions, possible delays and challenging relations with local communities.
- Understanding the local context – including identifying formal and informal decision-makers and dynamics between relevant institutions – is also paramount to a successful deal. This is particularly relevant to Senegal, where local public figures or religious communities often play a key informal role in influencing elected decision-makers in such deals.
- Finally, there are basic technical challenges: and grid integration, balancing and stability as well as capture and distribution potential are patchy and successful investments into projects may require planning taking into account mini-grid solutions and broader grid infrastructure improvement.
If the renewable energy trend in sub-Saharan Africa turns out to be a profitable one, key commercial players will want to position themselves to make the most of this “frontier” opportunity by carefully threading with the key risks it presents and structuring their deals appropriately.
- Marie Bonnenfant, Africa Consultant