Renewable energy might be good for the environment, but that’s far from its only advantage.
“For someone who lives in the middle of the Savannah miles away from diesel storage, the price of diesel isn’t the price of diesel, once you factor in storage and transport,” Alastair Herbertson, investment specialist with Investec Asset Management, told AFKInsider.com.
On the other hand, install a few solar panels and a micro-grid, and that remote village suddenly has improved access to reliable power — without the headache of costly logistics and without the heavy investment in extensive power lines and traditional infrastructure.
In other words, renewable energy can be more than an environmentally-friendly investment in a clear conscience: it very well might be an economically viable way of helping to electrify a continent.
The market is broadly split into two categories: utilities-level projects and small, widely distributed ones.
When it comes to utilities-scale projects, Herbertson sees solar-thermal energy as a major player, as it can accommodate energy storage. “I’ve been a huge supporter of the technology… It also can be used as a heat storage, and until battery technology is more advanced it’s the most likely renewable power that we can use that can store energy.”
Herbertson is referring to one of the major issues around renewable energy: the storage of power.
Margo Buchanan, “Fuel supply risk is a big one — in other words, you can’t control when the wind blows or when the sun shines. But a good project will have comprehensive resource measurements that are incredibly accurate,” Margo Buchanan, specialist consultant in the power sector for Futuregrowth Asset Management, told AFKInsider.
This is likely to be an issue for renewables in general until batteries improve; both Herbertson and Buchanan expect the next decade to bring the technology forward.
The financial landscape around renewables is as varied as Africa’s geography. “Each technology has its own characteristics and its own pool of lenders,” says Herbertson.
“Taking the more developed technologies,” he explains, “A lot of them are annuity-type returns… Even equity in those transactions have more of a fixed income return profile.” Well-developed and understood technologies, in other words, have fairly predictable rates of return.
On the other hand, when it comes to “the more racy technologies,” like geothermal, “we start looking for some sovereign support.” Because these more complex projects have to account for a variety of contingencies they aren’t as aggressively financed and require the support of a suitably ambitious government.
Johan Muller, program manager for energy and the environment in Africa with Frost & Sullivan, explained to AFKInsider that “the returns [on renewable projects] hinge on various factors, such as the feed-in tariffs, construction costs, and the overall levelized cost of energy figures.”
In South Africa, he notes that the first participants in the country’s renewable energy program enjoyed highly favorable returns, which compensated for the risk involved in the ambitious new venture.
From the perspective of infrastructure investor Emile Du Toit, “The hurdle returns for power projects are similar for [traditional sources] and for renewables, simply because we require a minimum return to invest.” Du Toit, the head of infrastructure investment with Harith General Partners and chairman of the Southern African Venture Capital and Private Equity Association, told AFKInsider.com that in cases where there is more uncertainty around a project, more support is negotiated with government sources of funding.
“From a simplistic point of view, there is no real difference in returns for me as a private sector investor in power projects.”
The complexities of renewables
But sovereign support isn’t just about risk and returns management: it’s also about the sheer amount of capital required.
“Utilities-scale installations — especially hydropower — have eye-wateringly large capital requirements upfront, which is why you need multiple parties” to participate in financing such developments, says Herbertson.
“All power projects are capital intensive,” Buchanan says, “Because the cost of financing the infrastructure is expensive. A technology like [concentrated solar power] is more expensive than traditional thermal technologies like gas or coal. Other renewables like wind and solar are increasingly competitive with thermal generation.”
For Du Toit, however, the cost of renewables continues to outstrip traditional sources.
The issue is of particular importance because, he says, “What Africa needs is power at the most competitive rates available.” From a pure development standpoint, Du Toit believes that “the bulk of new generation capacity should actually be coming from the usual thermal sources.”
“Renewables are not yet commercially competitive with thermal power,” he says. While there are enormous social benefits, “the bottom line is that [renewable energy] is more expensive.” That being said, Du Toit says that capital costs are falling, which is one reason governments are increasingly supportive of renewable energy.
It’s not just cost that needs to be considered. For Muller, renewables must be incorporated into a broader electrification strategy. “Yes, it is a cleaner energy than, for example, coal, but it must be pragmatic enough to handle the needs of industry,” says Muller. For utilities-scale projects, “Grid connectivity is a major hurdle, as well as aging or lack of transmission lines.”
In other words, damming a waterway or installing a wind farm won’t solve Africa’s electricity problem in itself, but it could make a contribution as part of a broader strategy that addresses these issues, and which might include many different sources of energy — including the traditional ones.
Muller puts it this way: “In countries where there is a large energy demand, the renewable energy options need to be carefully weighed up against the most optimal energy mix.”
Thus, when it comes to the question of how Africa’s electrification will look a couple of decades from now, it’s entirely possible that we’ll see a whole host of technologies at work, and a mix of old and new.
But whatever the mix, it’s the hope of many that we’ll see a whole lot of lights dotting the African landscape.