A two-to-three hour drive outside Cameroon’s capital Yaoundé, French energy giant Électricité de France is building a hydroelectric dam along the Sanaga River.
The buzz in the town of Edea is the near $1 billion in investment expected to arrive soon.
An accompanying 40-mile transmission line will transport the energy produced to the main grid in Yaoundé. The plant enables a five-fold increase in the country’s aluminum production for the state-owned company in Edea and, with 420 megawatts of electricity expected by 2019, adds significantly to the country’s power generation, which is barely above 1,000 megawatts today.
Power production, transportation and sales were liberalized in 2001 in Cameroon with the privatization of the state-owned power utility SONEL under a 20-year concession. SONEL—renamed ENEO Cameroun S.A. in 2014—monopolizes transmission and distribution, purchasing electricity from private producers through power purchase agreements with explicit governmental licenses and controls for private commercial producers.
Some Cameroonian locals are still hesitant to celebrate until the project is complete. Barriers, challenges, and setbacks are the usual story in this region.
Sub-Saharan Africa, with a combined population of nearly 1 billion, produces approximately the same amount of power as Spain, population 45 million. Power consumption, slightly over 120 kilowatt hours per capita per year, is only a tenth of that found elsewhere in the developing world and barely enough to power one 75-watt light bulb per person for four hours a day. All these statistics highlight the opportunity to power Africa.
The currently installed generation capacity of sub-Saharan Africa is approximately 70,000 megawatts. South Africa accounts for 44,000 megawatts, equivalent to the installed capacity of Argentina. Up to 25 percent of the installed capacity is not operational for various reasons, including age and lack of maintenance.
The majority of the existing power stations in Africa were built before the 1990s. Under-investment in the past two decades failed to combat the need for new power facilities in the face of increasing maintenance cost, unexpected outages and subsequently declining efficiency.
The power generation mix in sub-Saharan Africa is diverse with hydro power stations, coal and gas power plants as well as diesel-fired turbines which are mainly used for base load generation due to the conspicuous under-capacity in the power market.
Hydro power—which has the greatest potential—is highly seasonal and subject to drought. But countries’ growing ability to store power and fully tap into the overflowing potential of hydro should overcome any concerns raised by droughts in the short term.
Gas-to-power plants have potential in some countries with a growing gas supply. For example, it could play a vital role in the South African Department of Energy’s plan to combat the country’s mounting power crisis. Coal-fired power plants currently account for approximately 85 percent of South Africa’s power generation. This is a delicate situation with an increasing competition for coal resources and a growing global adoption of carbon emissions restrictions resulting in higher costs for consumers.
Thermal power is also in play, with the floating thermal power plant at the Nacala port in Mozambique as the seductive advertisement for its great prospects.
Nuclear remains on the back burner due to its trials and tribulations in several developed countries. South Africa remains home to the region’s only nuclear power plant with 1,800 megawatts of installed capacity.
Like power generation assets, Africa’s transmission infrastructure is ageing and insufficiently maintained. Systems are unable to support new power generation build as well as back the introduction of renewable energy. Significant energy is lost between the source of supply and points of distribution. An estimated 20-to-25 percent of consumable power is lost in Africa, compared to a global average of 10 percent. As power generation expands, the transmission infrastructure and subsequent lost energy in transmission in the current market will drastically undercut the actual growth in power available to the consumer.
Low transmission fees are an obvious culprit in this power supply grid. Fees rarely reflect the market and, when combined with the high maintenance costs for existing lines, are inadequate to buoy investment in new transmission line builds. Those operating in the transmission subsector will have to make a herculean push in raising capital and changing the rules. There are currently a lot of separate system operators in most countries, which result in loss of economies of scale. Small municipalities often struggle to maintain the distribution networks and are in need for additional investment. Fees will accordingly have to increase with private investors stepping in to sponsor some projects.
New transmission lines are not only needed within African countries but are also across borders to strengthen supply and distribution. Examples include ZIZABONA, the transmission line project between Zimbabwe, Zambia, Botswana and Namibia which connects four countries. A planned regional transmission backbone project in Mozambique will connect the central-north and southern power systems in Mozambique to meet the growing domestic and industrial demand as well as support exports to South Africa.
Another challenge for the transmission infrastructure, and consequently for the distribution grid, is that most renewable energy projects are being developed in areas with great exposure to sun and wind. These areas are not always close to existing transmission infrastructure. A contribution from renewable projects to grid development or joint power and transmission projects could help. The reality is that grid extensions will be required in the long term to outfit future power generation, whether they’re built as part of larger power projects or as solo projects.
Competing consumer and developer interests are finding middle ground in some countries and striking out in others. Low energy prices for relatively poor consumers are the most desirable political outcome. But there is a certain price threshold below which investment either slows or is avoided altogether. A more regulated market with a focus on policies that buttress investment security could help ease the tension.
Weaning consumers off low prices in some countries will remain imperative to sustainability, similar to the efforts with fuel subsidies. Tied to this equation is the process associated with securing input resources at reasonable prices, including oil and gas. Local competition is drastically altered by the entrance of foreign buyers such as China. Higher input costs accordingly push up the consumer price required to make a project bankable or investable. Political and business leaders must find a way to navigate the terrain and appease enough of the right people — whether consumer, community leader, or private investor.
Carbon-emission concerns bring new voices to the conversation. The right balance from an economic perspective must be found between meeting the region’s power needs and satisfying the green desires of international bodies.
In the short term, coal will remain a vital part of power generation. But in a region of constant growth and burgeoning consumer demand, the potential for investing in Africa’s sizable renewable energy market shouldn’t be ignored.
Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at email@example.com.
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