The African Development Bank (AfDB) launched the New Deal on Energy for Africa in 2016, which lays out AfDB’s strategy to help the continent achieve universal electricity access by 2025—a more ambitious timeline than the UN Sustainable Development Goal of universal energy access by 2030. In this context, the bank has elevated energy as a top priority sector. The decision to elevate the sector has to do with the cross-cutting role energy plays for economic development at large. Importantly, within energy sector, renewable power features on top of the bank’s agenda. In an exclusive interview with REGLobal, Dr Daniel Schroth, Acting Director for Renewable Energy & Energy Efficiency at AfDB talks about the various initiatives being undertaken by the bank to promote renewable energy development across the continent, ground realities and challenges, emerging financing trends and risks, impact of Covid-19, and future plans.
How has the economics of renewable energy evolved vis-à-vis alternatives in Africa over the past few years? How does it vary across the continent?
Renewable energy solutions in Africa have proven to be economically viable, largely underpinned by significant innovations across technologies. There is sort of a gradual shift on the renewable energy mix side from traditional hydropower plants to solar PV, both to ensure energy access to all as well as support sustainable economic growth. If we look specifically at solar PV, there have been substantial cost reductions over the past few years. According to IRENA report, solar PV prices have fallen by 82 per cent over the period 2010-2019. In just the last two years in Africa specifically, there has been a decline of 30 per cent in terms of cost of solar PV.
All African countries have a terrific renewable energy potential, although there are regional variations. For instance, solar resource is abundant all across the continent, though there is particularly high solar irradiation levels in the Sahel countries and the Southern African deserts of Namibia. There is also significant wind potential, both onshore as well as offshore. A few years ago, we financed the largest wind farm in sub-Saharan Africa at lake Turkana in Kenya. Among other African countries, Morocco has a significant offshore wind potential. There are also some renewable energy resources which are more concentrated in certain parts of the continent. For example, along the rift valley in eastern Africa, there is significant geothermal energy potential in countries such as Ethiopia and Kenya. It is also a very interesting source of renewable energy because it provides a sort of baseload power. Finally, Africa continues to have huge hydropower potential which is largely untapped. This potential is for both large scale as well as small scale hydro power.
How do the energy sector dynamics for Africa compare with the rest of the world in terms of total demand, per capita consumption and power supply?
On the demand side, electricity consumption is rather low as it is growing at less than half the rate of developing Asian countries. Electricity demand in Africa is currently at 700 TWh and about 70 per cent of that demand is coming from the North African economies such as Morocco, Egypt, and Tunisia, as well as South Africa. So sub-Saharan Africa, excluding South Africa accounts for just about 30 per cent of the total electricity demand. Similarly, if we look at electricity demand on a per capita basis, International Energy Agency in the Africa Energy Outlook for 2019 estimated a figure of about 770 kWh for African countries, while India’s per capita demand is to the tune of 910 kWh and an average of 2,000 kWh in other developing Asian countries. The electricity demand is fairly low if North African countries and South Africa are excluded.
How has the policy landscape evolved in Africa to increase the overall energy availability and promote renewable energy development?
Over the past couple of years, renewable energy has very much entered the mainstream in terms of energy sector development across the continent. Most African countries have set specific renewable energy targets and a lot of African countries have introduced policies and regulations to promote renewable energy development. There has been development in building the enabling environment for investments in renewable energy.
There is enormous potential for renewable energy in Africa. The global renewables outlook of IRENA indicates that 67 per cent of power generation in Africa could be met by renewables by 2030. This would be a dramatic shift from the current electricity supply of the continent which is still dominated by fossil fuels.
What is your opinion on the impact of Covid-19 on the ongoing projects and investments?
The Covid-19 pandemic has had an impact on every aspect of the economy and society. On one side, the pandemic has sort of brought to the forefront importance of having sustainable power. On the other side we have seen supply chain disruptions and difficulties in undertaking critical activities including construction activities and feasibility of work due to various travel restrictions that have been imposed. We have also seen a very difficult situation for the already fragile offtake by the utilities in many African countries. They have experienced reduced demand and revenue, while at the same time many governments introduced social tariffs to soften the impact of Covid-19 on the population. This is an exceedingly difficult situation for utilities. Also, for many of the companies that are operating the decentralised energy access base, the situation is quite critical. Hence, there is an urgency for focussed response from various partner institutions to help the companies through the pandemic.
AfDB has adopted a Covid-19 rapid response facility across all sectors to the tune of $10 billion, most of which has been deployed through targeted budget support to help African countries cope with the crisis. For some African countries, it also includes some specific support for instance, to help utilities.
On the African Development Bank’s side, we are also working on a Covid-19 offgrid recovery platform, which is intended to provide blended finance through existing funds that are operating in the energy access space in Africa to provide relief and recovery capital for decentralised energy companies. We have allocated $20 million from our Sustainable Energy Fund for Africa (SEFA) for the platform which coupled with other resources particularly from the intermediaries will make this roughly a $50 million blended finance initiative for the decentralised energy companies across the continent. We intend to bring the same to our Board of Directors for approval later this and to then be deployed very quickly to provide needed relief to the companies.
What is AfDB’s current exposure in the renewable energy sector? How much capacity has been financed so far in this sector?
Taking a time period from 2007 to 2020, we have financed a renewable energy capacity of around 4.5 GW. This includes investments in hydropower, concentrated solar power as well as solar PV segments, geothermal and wind. An example of a large concentrated solar project financed by AfDB is Ouarzazate Solar Power Station in Morocco and an example of hydropower is Nachtigal hydropower project in Cameroon. Solar probably has the highest share in overall investments, followed by hydropower, wind and geothermal. In terms of total sum, we have invested over $3 billion and have mobilised more than $600 million from funds that are administered by the bank or to which the Bank has access to. For example, we have been rather successful in mobilising climate funds, making the projects more competitive to bring the costs down.
“…in the time period from 2008 to 2012, the share of renewables in power generation investments was at about 15 per cent, which increased to over 80 per cent for the period between 2013 to 2019.”
To illustrate the transition from conventional power to renewable power generation in Africa: in the time period from 2008 to 2012, the share of renewables in power generation investments was at about 15 per cent, which increased to over 80 per cent for the period between 2013 to 2019.
In terms of type of financing, the bank mostly provides debt funding, although we also take equity position in critical equity funds. For example, we incubated and launched the Facility for Energy Inclusion (FEI) two years ago, which is a debt fund to support the smaller scale projects including mini-grids, the solar home systems, commercial and industrial solar. We have created a dedicated vehicle for this kind of market segment which is difficult to finance for the bank directly because of the high transaction costs relative to the size of those investments. This facility for energy inclusion which is operating through two separate funds is fully operational and has supported a first set of projects. FEI has been very successful in terms of having a blended finance structure where the bank mobilised concessional first loss capital from the European Commission as well as from Germany via KfW and this was then blended with our own resources and we brought other investors into that vehicle as well.
Among the countries in which AfDB works, where do you see the maximum renewable energy deployment taking place? Accordingly, how are AfDB’s investments spread across countries?
Our investments are not disconnected from the general trend, particularly in larger scale programmes, and auctions being organised across the continent. In terms of portfolio, we have significant investments in Morocco, Egypt and South Africa but also growing portfolios in other African countries. We have also been looking to finance solar projects in challenging geographies for example, last year we approved financing for the first solar project in Chad – 32 MW Djermaya project, which also enters into one our flagship ‘desert to power’ initiative where we try to seize the solar potential of the countries along the Sahel. We are working very closely with many other countries and in the first instance, developing credible plans and mobilising resources mainly for project preparation. This is because in many cases we see that there are a lot of project ideas or concepts, but they are not at the level where financing can be attracted. Thus, there is significant need for project preparation.
How does AfDB view the African renewable energy sector in terms of risks and returns on investment? What are the key challenges that this market currently faces?
There are several challenges that exist. One of the challenges is particularly for the private sector grid-connected utility scale solar projects. This pertains to the current situation of the utilities – these offtakers are not creditworthy in many parts of Africa. Hence there is a need for guarantees and other mitigation steps that need to be undertaken to get those projects financed.
“…these offtakers are not creditworthy in many parts of Africa. Hence there is a need for guarantees and other mitigation steps that need to be undertaken to get those projects financed.”
We also see challenges related to ageing transmission and distribution network in many countries. There needs to be a focus on providing support for the transmission and distribution systems for them to be flexible as well to be able to integrate more variable renewables into the system.
In several countries, the challenge would be the lack of cost reflective tariffs. This is also an issue for mini grid developers as they cannot charge a cost reflective tariff, which would be viable if there are subsidies being provided. Thus, there is a need to develop a level playing field between what is being provided for extension of the grid and what is being provided for decentralised energy solutions. This is critical for Africa if one wants to achieve sustainable development goal number 7 of universal access to electricity.
What is your opinion on the challenge related to the quality of projects that are being set up?
The whole aspect of project and equipment quality is important, particularly at the time when these specifications are being designed for a tender. One must be clear and, in those specifications, highlight the quality standards that must be met.Similarly, there are quality control initiatives for decentralised solar home systems, notably the lighting global quality standards, which is a particularly important element to look at if one is financing something in the solar home system space. In some instances where poor quality solar home systems were distributed and they broke down very quickly, it really spoiled the market for some of the credible companies operating in the space.
What has been the response of the governments across African nations to address these issues and challenges?
On the transmission side, one aspect from the perspective of deploying more renewables is the critical importance of interconnections. Many of the African countries are small and, in that context, if they are operating in an isolated manner it is also less attractive to some investors. Increasing interconnection capacity between various countries, strengthening the power pools that exist in Africa, such as the west African power pool or the southern African power pool are very important. This allows to develop regional solar capacity which is then distributed across the entire network. For example, in the West African power pool, they identified as a part of their master plan a few regional solar generation plants which are particularly located in very promising solar power countries such as Burkina Faso, Mali or Niger. With that perspective, power can be availed to the wider West African market. On the utilities front, reforms are needed to cover several areas, from governance to efficiency aspects to reduce technical commercial losses. There are a number of countries that have embarked on this reformed course but it requires sustained political will and also really targeted support to bring this to a successful conclusion. Our sense is that there is still a lot of work to be done in this space.
“Increasing interconnection capacity between various countries, strengthening the power pools that exist in Africa, such as the west African power pool or the southern African power pool are very important.”
What are AfDB’s plans for the near future in the renewable energy and energy storage space? Besides solar, which other renewable energy technology do you see the maximum potential for in Africa?
One thing that we are looking at very closely is how we can make the power systems more flexible which can ensure seamless integration of variable renewable energy sources. Battery storage systems are one of the key solutions in this regard. There is tremendous potential on the battery storage side. For example, we are working on a project which would be the first utility scale battery storage project in South Africa. This could be a game changer for this type of solution that can then also be expanded and rolled out in other countries across Africa.
Last year, we also launched a Green Base Load Program as part of our Sustainable Energy Fund for Africa (SEFA). Under this program we are able to provide African countries with technical assistance to look at the best possible options in terms of renewable energy deployment and potentially avoid new fossil fuel generation to come on board. Concessional investments are also expected to reduce the cost at the program level. In terms of potential, there is enormous solar potential and we are placing a lot of focus on solar including through programmatic initiatives, such as what I mentioned earlier, such as the desert to power initiative. We also see hydro power with significant potential particularly in countries such as the Democratic Republic of Congo where there is enormous hydro potential which could power good parts of the continent.
What would be your message to the project developers that are wanting to invest in Africa?
The message for investors is to look at Africa very seriously. In many respects, Africa has the potential to be one of the most significant markets in terms of deployment of renewables, going forward. There is a significant unmet demand still characterised by close to 600 million Africans that do not have access to electricity in the first place. Hence, there are very significant opportunities. There is also a significant support that is being availed through a large number of institutions, whether it is the development finance institutions, financial donors and climate finance that look at providing support in terms of preparing projects but also help mitigating some of the risks that are still associated with these types of projects.
“”There is a significant unmet demand still characterised by close to 600 million Africans that do not have access to electricity in the first place. Hence, there are very significant opportunities.”
The market requires investors that really are ready to invest time and money while some risks still persists. It is not always easy in some countries, as it requires time to get a foothold. However, at the end of the day, I believe that the benefits of investing in Africa largely outweigh the risks.