26 June 2016, Johannesburg — Africa is uniquely placed to build a sustainable, renewable energy matrix with immense potential, says Rentia van Tonder, head of power at Standard Bank. “However, how quickly, efficiently and at what cost the continent builds this energy infrastructure will be influenced by sovereign wealth, governments’ commitments and capital markets,” she points out.
The World Bank estimates that only 24 percent of people across sub-Saharan Africa have access to electricity. Furthermore, limited, inefficient or expensive distribution networks ensure that the bulk of what little power is available is narrowly concentrated in a handful of countries and commercial centres.
The rapid evolution of renewable energy generation and distribution technology provides sub-Saharan governments with a range of new sustainable energy alternatives. However, base-load electricity remains a key driver.
“Scalable wind and solar projects are often smaller and more focused, requiring less capital and time to develop,” says Van Tonder. “Smaller renewable projects, while often generating less power, can nevertheless support growth in investment if focused on the most productive sectors of an economy through focused investment.”
Renewable energy projects also have the advantage of costing less the longer they operate, depending on the specific technology and operation and maintenance agreements. This means once they are paid off – through user-pay tariff structures that correctly reflect cost – they can be re-focused on supplying cheaper power to non-capital generating elements of the economy.
“Creating the institutional infrastructure to attract global capital at affordable rates and then manage it efficiently remains important,” says Van Tonder. “The development of local currency pools of liquidity and capital is essential. In short, if Africa is to achieve power self-sufficiency, we need to move beyond having to rely on the US dollar to fund every major project.”
While project finance is often raised in foreign currency, project revenues on the continent are generally denominated in local currency. Where the exchange rate between the currency of revenue and the currency of debt diverge, the cost of debt increases dramatically. This carries the risk of extending repayment periods – or defaulting entirely – with exponential cost implications over the long term.
Given these risks and costs, the attempts currently being made by legislators across the continent to deepen domestic capital markets should be encouraged and Pan-African multilateral forums would do well to consider how Asia and other emerging regions deepened local capital markets as a critical development enabler.
Africa stands uniquely placed to develop a diverse and sustainable energy mix, in the shortest time. The strategic use of renewables can also deliver this at the lowest costs and least environmental impact while building energy infrastructure with the longest shelf-life addressing the long-term power needs of the continent.