The recent UN renewable energy pledge joined by the Rockefellers has drawn much attention, and calls for a divestment from fossil fuels in favour of renewable energy investments. Stephen Heintz, Director of the Rockefeller Brothers Fund, says that the irony of a fortune built on oil now steering clear of fossil fuels is not lost on him. As a direct consequence of this pledge USD 50 billion will be moved out of fossil fuel investments in favour of more environmentally-friendly forms of energy generation. Africa, with an estimated $ 70 billion renewable energy projects under construction and more renewable energy projects commissioned in 2014 to date than were added from 2000-2013, can surely hope to attract some of this capital to its shores.
According to the International Energy Agency, of the USD 650 billion spent annually on power, USD 250 billion is spent on renewable energy, up from USD 65 billion in 2000. At 1,470 GW (gigawatts), renewable energy has a 21.7% share of global energy production, 990 GW of which comes from hydropower (the cheapest way to generate electricity today). China, the US and Germany lead in renewable energy capacity at 90 GW, 86 GW and 71 GW respectively (excluding hydropower). Of particular note is the surge in capacity of Solar Photovoltaic (PV) power generation to 100 GW globally, up from just 1.2 GW in 2000. Surprisingly, Germany leads in Solar PV generation capacity at 32% of the world total, followed by Italy at 17%.
Africa has long been known for its oil and gas industries, but that is set to change with around 20 African countries now having formal renewable energy policies in place and ambitious generation targets. Most of these countries have committed to feed-in tariffs (FiTs) that help incentivise private sector investment. Along with investment-friendly policies, there is also great potential for renewable energy on the continent with some sources estimating that only 7% of the hydropower capacity is being used and that Africa holds 49% of the planet’s solar energy potential.
An energy crisis is looming as production capacity cannot meet the growing electricity demand, which is rising at 3% a year. Renewable energy not only represents an opportunity to leapfrog a generation of technology, as has been done by the telecommunication industry in Africa, but is an opportunity to attract significant foreign direct investment in a growth enabling asset. Unreliable and insufficient energy supply is estimated to account for a 3 percent deficit in GDP in the worst affected economies. The cost of wind and solar power is falling dramatically, with solar power reported to be 60% cheaper today than in 2011. This will also work is Africa’s favour as it catches up, and quite possibly surpasses the rest of the world in terms of renewable energy use.
Some of the high profile projects that are currently being commissioned are the Gulf of Suez wind farm in Egypt, the recently announced Corbetti Caldera Geothermal plant in Ethiopia and the Tidal power plant on the Ada Estuary in Ghana each having a capacity of 1 GW. The highly successful Renewable Energy Independent Power Producer Procurement Programme (REIPPP) in South Africa aims to add another 3.75 GW from renewable energy sources by 2016. Africa has a total of 3.4 GW in renewable energy generating capacity under construction with another 12 GW planned for completion by 2020.
Finance and the cooperation of governments will be Africa’s biggest challenges. Keeping pace with the continent’s surging energy demand will place strain on domestic budgets and foreign direct investment will likely be required to close the funding gap. The banking industry in Africa, excluding South Africa, is ill equipped to deal with the significant funding needed for these projects. To date projects have been dependant on the DFIs, South African and non-African banks for funding. In this year Abengoa SA received a loan of $142 million from the African Development Bank for Xina Solar One, a 100-megawatt, $884 million solar-thermal power project in South African, while Lake Turkana Wind Power Ltd (one of the flagship renewable energy projects in sub-Saharan Africa) secured the majority of its funding for its 310-megawatt wind project in Kenya from various DFIs and a South African bank.
The finance-hungry energy industry will create myriad opportunities for investors to get exposure to the renewable energy projects, with exposure by means of debt, equity mezzanine finance and equity. The REIPPP program, for example, has seen numerous equity investors such as Futuregrowth (an Old Mutual specialist fund) and Enel Green power, an Italian utility company. On the debt side, 64% of funding has been provided by South African commercial banks and 31% by DFIs. It is expected that the commercial banks will sell down some of their debt positions to secondary capital markets and position themselves for additional exposure in future REIPPP rounds. The debt tenors are 15 to 17 years due to the longer term nature of the projects and make attractive investments for longer term funds such as pension or life funds, which have funded some of these projects to date.
– Jean-Pierre Olivier
Senior Analyst, RisCura Fundamentals
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