Can new energy financing initiatives help electrify Africa?
Electrification is Africa’s biggest energy issue, though innovative new initiatives may help lure the capital needed to bring power to communities. In the Middle East, reforms are cutting long-held tariff subsidies and welcoming private investors to many countries for the first time.
Africa and the Middle East installed solar capacity
Source: EY analysis based on Mergermarket data.
Q4 2017 transactional highlights
- 6 deals worth just US$1b took place in Africa in 2017, highlighting difficulties in attracting capital
- US$40b to US$70b (estimated) required per year through 2020 to meet Africa’s electrification agenda
- 27.4 GW expected solar energy capacity in Africa by 2019 – from 10 GW in 2017
- US$12b to be invested in renewable energy by the African Development Bank through 2020
In 2017, weak macroeconomic factors and an unstable political environment continued to deter investors from Africa’s power and utilities (P&U) sector, despite urgent need for new generation capacity. In the Middle East, the focus was on energy reform, with several governments moving to reduce subsidies and enable private ownership of assets.
Investment highlights in 2017
- Greenfield development continues in Africa, with many projects focused on developing new renewable capacity. The European Commission will contribute US$368m to the Africa Renewable Energy Initiative, which is expected to invest US$5.9b in building an additional 1.8 GW of renewable energy generation in Africa.
- European players make small investments, sometimes in partnership with local companies. France’s Engie acquired Fenix International, a Ugandan home solar systems company, to expand its solar footprint in Africa.
- Smart technologies, particularly microgrids, appeal to investors, attracted by their potential to help meet electrification goals.
Top five investment deals, Q4 2017
Top investment deals in Africa and the Middle East
Will reforms and renewables encourage more energy investment in Africa and the Middle East?
In 2018, new financing initiatives aimed at reducing risks for investors may encourage more to enter the African market, helping some countries meet electrification targets. Multilateral banks are offering support such as political risk guarantees, which offer co-financing as coverage against specific political or sovereign risks, to companies setting up independent power producers (IPPs) in the region. Similarly, in December, German development bank KfW and the African Trade Insurance Agency launched a US$74.2m Regional Liquidity Support scheme - a cash liquidity instrument designed to provide renewable IPPs with up to 50 MW coverage for power purchase agreements (PPAs) if an off-taker delays payments beyond the grace period.
These new approaches in funding energy projects highlight the opportunities of P&U investment in Africa and the Middle East. As interest rates increase globally, Africa will appeal to astute investors prepared to take on additional risks for the prospect of higher returns.
Key P&U investment themes for 2018 include the following:
- Expanded energy reforms: In addition to Middle Eastern energy reforms in Egypt, Israel and Saudi Arabia, many African countries, including Angola, Ghana, Kenya, Nigeria and Zimbabwe, have announced that they will unbundle and privatize some electricity assets and eventually introduce retail competition.
- Greenfield renewables to continue throughout the region: In particular, Kuwait, Iran and Egypt will soon host major projects.
- More investment in nuclear: Russia is investing in nuclear in Egypt and Nigeria. Saudi Arabia will install two 3.3 GW nuclear power plants by 2027.
- Growing foreign investment: Investors from Europe and China have emerged as strategic investors in the region, a trend set to continue.
- Increased focus on new technology: Dubai has launched incentives to promote the uptake of electric vehicles, while Jordan will develop battery storage to help integrate renewable energy into the country’s energy mix.