Renewable Energy Investments in Africa

Following on the virtual collapse of the round one renewables projects in Egypt the focus inevitably turns to the source of the problems and how they can be avoided in other countries where renewables projects are seen as being fundamental to economic growth and where IFI’s are encouraging investment.


The maturing but slow market in Europe is being largely neglected by developers more interested in the more attractive and quicker activity in Africa. The reduction in tariff rates are however bringing a more realistic and level headed approach to profit expectations with rates for Tariffs now bedding down for third party financed projects at between 6 and 8 $cents/KWh. This means the more experienced and reliable developers are staying in the market as the risk reward ratio is more manageable by them. The countries which are notably ac-tive are: South Africa; Morocco; Egypt; Zambia; Kenya; Senegal; Rwanda; Sierra Leone; Ethiopia; Algeria; Burkina Faso.

In looking at developments in these countries whether with hindsight or foresight and with a view to ensuring the asset value whether developed and operating or under development one key question has to be answered.

If you have to finance or sell a project would a board or investment committee approve the project?

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Andrew Renton, Partner, Bird & Bird LLP

Often the focus on this question is based on an appraisal of the project financial model on a narrow basis with caveats for wider risk issues such as structural competence and legislative diligence. While the investment community will want to focus on the financial return they will not thank you for a project which fails in other areas. In emerging or new markets it is necessary to see beyond the project financial model and the return on investment and this applies especially to Africa at the moment. You must look at the national and regional support both socially and economically for the project as this is crucial to the viability of the project. You cannot proceed on the basis of assump-tion and assurance because uncertainty over the structural integrity of the project will kill investment and if by chance a project gets a promise of funding that funding will disappear as soon as issues arise and the project will not close or worse a fatal issue is overlooked and the project collapses taking down the developer and preventing funding on future projects. So before all the financial due diligence you must have a properly scoped and delivered due diligence on the legislative, regulatory, socio-economic and political risk to the project.

Experience suggests that where a government takes and open and consultative approach and relies on experience from other countries in delivering a structure which will allow projects to flourish with inward international investment then the legislative structure is more reliable and the government more open to accommodation of necessary change to allow projects to progress. Where this does not happen there may be obstacles for projects which are not foreseen by the government and which inexperienced advisors do not spot until a late stage in the project. This is especially so whereas is suggested here there is a need for a broader approach to brining joint solar and storage projects together essential steps in the viability check process include a full and properly scoped due diligence report on the region for the project. Experienced advisors will spot and report on areas of risk in the legislative and regulatory structures and those more forward thinking advisors will try and help the government (local or national) by suggesting ways in which the risks identified can be mitigated.

If for example; the deal structure contains circular completion provisions which allow the completion to be delayed; or confusion in the completion process; or by government delay; or there is a deficit in the legislative provisions securing rights in the project which are offered by one ministry but within the control of another. These issues seem remote to those working in more mature markets but it is inevitable that in emerging markets these risks arise. Knowing the developer has the ability to manage these risks will be an assurance to investors making the project more likely to receive investment.

It seems relatively simple but understanding the structure of a project and giving advice on it also requires an understanding of the legal governance of the project. This means that asking simple questions like, will the tariff be maintained for the whole term, can the tax regime change, will legislative change in the future affect the returns, do import restrictions apply; will events in neighboring jurisdictions affect the project.

Making a project investible under good governance is not about certainty. It is about knowing and understanding the risks and being sure the risks are manageable.

As projects in Africa take of as they are sure to do in the current economic climate it will be essential given the events in Egypt that developers and investors have a full understanding of the risks from a national, legislative, geo-political and economic point of view and once that is known reliance on a good financial model is a decision which the investors are more likely to make a decision on in an efficient and confident environment.

What then happens if as the market is desperate for a developer wants to create a storage facility alongside the Solar Park and to use the Solar Park to create excess power to fuel the storage facility which then provides a minor 24/7 base load capability and reactive energy for network frequency management and other services which are of value to operators.

Battery storage technology is on the cusp of being able to fill this gaping hole in Africa’s electricity requirements and those who care about the economic growth and development of such a great continent need to begin thinking about such solutions on a local and regional basis and finding ways to bring to fruition a pipe dream of many years.

Getting the model and structure right to make investors and Lenders interested is crucial and those who understand the value storage can deliver are surely moving towards this on a daily basis.

This raises a number of questions around the capability of technology to address the climatic conditions which apply in any particular location. Issues of humidity, corrosion, dust and soiling are factors which solar park developers are familiar with and for which design can mitigate risk. What about the ancillary technology of invertors and, security, sub-stations, network lines and poles all need to be thought about but the Solar industry is now mature enough to know how to deal with these issues.

Battery storage is arguably now at a point that it could be said solar was at 7/10 years ago. There is much learning to do and questions to be answered but it is arguable that the value of Storage in Africa is much more than in more developed network and grid countries. The potential for generating income from the significant value that can be derived from the services that storage can offer is a potentially attractive option for developers in Africa. Using a model which offers both 24/7 power availability and services to networks may help build a robust and investible financial model. The question of technology also arises and questions about inbuilt reliability failure protection by using string inverters or even string storage may soon see a viable way to create strings or pods that can be seen as reliable and financially viable at reasonable margins of producing quasi base load supply for conurbations which will welcome the opportunity to embrace economic growth opportunities and enhanced healthcare, education, communication and industrialization.

So where are the idealistic entrepreneurs who drove the solar revolution and why is battery storage which was a technology long before photovoltaics not being developed at a pace which can provide the solutions which are desperately needed in the continent?

The interest in Europe in investing in storage is now at a level where the market will inevitably succeed in the next few years. The safety of the European and more mature markets are undoubtedly attractive but is the industry which started out trying to solve the carbon crisis going to stop half way to fulfilling the search for the “Holy Grail” or is it going to follow the logic of the needed solutions for Africa and come up with a technology and financial model which will attract support from IFI’s to solve a problem which has beset huge areas of the continent since the industrial revolution.

The answer is not cleFotolia_75716987_Subscription_Monthly_XXL_4car but the number of storage projects in Africa is depressing low and those countries which are most active in solar projects are not embracing the opportunity to introduce legislation which would require those developing solar parks to also include storage as part of their project. There are around 8 current and operational projects and those are low power capacity. Some links are given below but the largest seems to be a 3 MW capacity project in Mali. Given the size of the need and the capability of the industry this is quite shameful.

To be fair the IFI’s are not really helping because they are relatively sanguine about their Socio Economic Impact Assessment reports. Maybe if they required a bit more thinking laterally within acceptable risk parameters then the joined up thinking around solar and storage would turn the lights on and a new horizon in renewable energy would be achieve.

It is suggested that the way forward in Africa is a joint Solar and Storage approach based on strong legislative and regulatory structures to enable these projects to propel socio-economic growth and where a combination of ingenuity, entrepreneurship and technology development brings a solution which can be applied where needed across the continent.

Andrew Renton,
Partner,
Bird & Bird LLP

 

Image Source: © vege – Fotolia | fotolia.com

 

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