Renewable Energy Finance for Africa

Extracts from Key Note Presentation to the ICA 2015 Plenary

“Implementing Renewable Energy Initiatives in Africa”

Vivek Mittal

Cape Town May 2016

!

Millennium Resource Strategies Limited

A Developer’s Consideration

RiskandReward

Capital

Commodities

Technology

Attractiveness (Risk and Reward) of investments in any particular technology at any particular point in time is a function of; - Government Policy - Commodities - Available Technology - Capital Flows

Developers are good at assuming and managing technology, implementation, O&M and capital – INTRINSIC RISKS They are not able to mitigate Sovereign and tariff related risks – EXTRINSIC RISKS, and want these mitigated by others

2

Key Drivers of the Renewable Energy Sector

Global Renewable Energy Trends

$ 2.35 trillion invested in global clean energy between 2004-2014

Annual rate is $ 300 – 350 billion

7.7 million jobs created

This has matched investment in global fossil-fuels

Evidence of decoupling between carbon emissions and economic growth

COP21 is expected to result in global voluntary

commitments, and increased flow of capital for developing economies

Africa Renewable Energy Trends

$ 21 billion invested over last 10 years – 90% concentrated in six countries

$ 6.0 billion invested in 2014 compared to $ 350 billion in overall Africa Infrastructure

600 million people without access to modern energy

In over 18 countries, industry pays over international rates for infirm power, and households in these countries pay

more than 33% of their household income for basic power

electricity usage per capita in Sub-Saharan Africa

(excluding South Africa) is 5% of global average

2x rate of investment is required to invest in clean energy

to keep pace with population growth and economic growth

3

GDP vs. kWh Increasing electricity consumption in productive uses leads to increased GDP

and Increasing GDP results in higher levels of electricity consumption

An estimated 180 – 350 GW of overall power generation capacity could be added in Africa by 2030 depending on rate of GDP and population growth

350 GW of power addition

seems challenging ….

But it is not!

N.Af

SSA S.AsiaSSAxSA

-50%

Angola

Botswana

Burundi

CaboVerde

CameroonChad

Rep.ofCongo

Coted'Ivoire

DjibouI

Ethiopia

Gambia

Ghana

Guinea

Kenya

LiberiaMalawi

Mauritania

Mozambique

Niger

Nigeria

Rwanda

Senegal

Somalia

SouthSudan

Sudan

Swaziland

TanzaniaTogo

Uganda

Zambia

Zimbabwe

Algeria

EgyptMorocco

Tunisia

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

- 400 800 1,200 1,600

GDP

/Cap

ita(U

S$)

kWh/capita

Regions

(SSA)Sub-SaharanAfrica

Africa

(N.Af)N.Africa

Average(LOBF)

140GW@2013

6.0%p.a.GDPgrowth=320GW@2030

8.5%p.a.GDPgrowth=490GW@2030

4

Off-Grid Proposition

600 million without access to modern

energy

= 60 billion kWh = 35,000 MW

@ 100 kWh p.p. per year

Carbon mitigation,

Health, Education, Long term

employment

20-50% of household income or

$100–120 billion p.a. @ $1.7-2.1/kWh

$140/8-10 W unit 12 – 18 months finance

5

GDP vs. kWh $2.0-6.0 GDP/kWh across the development spectrum

Why is GDP/kWh in SSA 2.0 – 6.0x of the world constant of $ 4.0 GDP/kWh?

Non-energy driven GDP activity or unaccounted for self-generation of power? Off-grid and back-up power is estimated at 120-150 GW = 40% of kWh used from the grid. This represents 25 billion liters p.a. of diesel fuel purchases in Africa at an estimated cost of $25 billion p.a. = 2x of required investment rate in renewables

N.Am

ECAME

EAPN.Af

LAC

SSA WORLD

LACxBRA&MEX

EAPxJP&CH

S.Asia

SSAxSA

-50%+50%

Angola

Benin

BurkinaFaso

Burundi

CaboVerde

Cameroon

CentralAfricanRepublic

Comoros

Dem.RepofCongo

Rep.ofCongo

Coted'Ivoire

DjibouI

Eritrea

Ethiopia

Gabon

Gambia

Ghana

Guinea

Guinea-Bissau

Kenya

Lesotho

Liberia

Madagascar

Malawi

Mali

Mozambique

Namibia

Niger

NigeriaRwanda

SenegalSomalia

SouthAfrica

SouthSudan

Sudan

Tanzania

Togo

Uganda

Zambia

Zimbabwe

Algeria

Egypt

Libya

Morocco

Tunisia

Afghanistan

Bangladesh

Bhutan

India

Maldives

NepalPakistan

SriLanka

Bermuda

Canada

UnitedStates

Australia

Cambodia

China

FrenchPolynesia

HongKong

IndonesiaJapan

S.Korea

Macao

Myanmar

NewZealandPhilippines

Singapore

SolomonIslands

Tonga

Vanuatu

-

4

8

12

16

20

24

28

10 100 1,000 10,000 100,000

GDP

/kWh(2013US$)

kWh/capita(logscale)

Regions

(SSA)Sub-SaharanAfrica

(N.Af)N.Africa

(SA)SouthAsia

(N.Am)NorthAmerica

(ME)-MiddleEast

(LAC)-LaInAmerica&Caribbean

(ECA)-Europe&CentralAsia

(EAP)-EastAsia&Pacific

Lineofbestfit

6

Affordability of Energy

0

10

20

30

40

50

60

Libe

ria

Gambia

BurkinaFaso

Madagascar

Sene

gal

Mali

Chad

Coted'Ivoire

Gabo

n

Benin

Togo

Ghana

Rwanda

Cameroo

n

Ethiop

ia

Guinea

Morocco

CentralA

fricanRep

ublic

Burund

i

Malaw

i

DRC

Nam

ibia

Tunisia

Niger

Tanzania

Mozam

biqu

e

Nigeria

Rep.ofC

ongo

Kenya

Algeria

Sudan

Zambia

Ugand

a

Egypt

Angola

Lesotho

SouthAfrica

Libya

Zimbabw

e

Commercial–ResidenJalTariffs

Industrial

0

10

20

30

40

50

60

HydroLarge

HydroSm

all

Geothe

rmal

Bio-mass

Onsho

reW

ind

SolarP

VLarge

SolarP

VSm

all

CSP

DieselFire

dBa

ck-up

LevelisedCostofEnergy

IRENA “REMAP 2030”, June 2014

7

RES is within grid

parity for most

African countries

Clean Energy Investments

- 2,000 4,000 6,000 8,000 10,00012,000

BotswanaGhana

MozambiqueCameroonTanzaniaNigeria

Coted'IvoireDRC

RwandaSenegalZambiaUganda

SierraLeoneZimbabwe

AlgeriaMorocco

EgyptEthiopiaKenya

SouthAfrica

CleanEnergyInvestment($m)

8

ůĞĂŶŶĞƌŐLJ/ŶǀĞƐƚŵĞŶƚƐ

Ͳ ϮϬϬϬ ϰϬϬϬ ϲϬϬϬ ϴϬϬϬ ϭϬϬϬϬ ϭϮϬϬϬ

ŽƚƐǁĂŶĂ'ŚĂŶĂ

DŽnjĂŵďŝƋƵĞĂŵĞƌŽŽŶdĂŶnjĂŶŝĂEŝŐĞƌŝĂ

ŽƚĞĚΖ/ǀŽŝƌĞZ

ZǁĂŶĚĂ^ĞŶĞŐĂůĂŵďŝĂhŐĂŶĚĂ

^ŝĞƌƌĂ>ĞŽŶĞŝŵďĂďǁĞ

ůŐĞƌŝĂDŽƌŽĐĐŽ

ŐLJƉƚƚŚŝŽƉŝĂ<ĞŶLJĂ

^ŽƵƚŚĨƌŝĐĂ

ůĞĂŶŶĞƌŐLJ/ŶǀĞƐƚŵĞŶƚ;ΨŵͿ

$OJHULD

/LE\D

0DOL6XGDQ&KDG

1LJHU

$QJROD

(J\SW

(WKLRSLD

1LJHULD

&RQJR'HP5HS

6RXWK$IULFD

1DPLELD

0DXULWDQLD

7DQ]DQLD

=DPELD

.HQ\D

0RURFFR

6RPDOLD

%RWVZDQD

6RXWK6XGDQ

=LPEDEZH

*DERQ

*XLQHD

0R]DPELTXH0DGDJDVFDU

&DPHURRQ

*KDQD

8JDQGD

&RQJR5HS

7XQLVLD

&HQWUDO$IULFDQ5HSXEOLF

&RWHG,YRLUH

6HQHJDO

%XUNLQD)DVR

%HQLQ

(ULWUHD

0DODZL

/LEHULD

7RJR6LHUUD/HRQH

/HVRWKR

%XUXQGL

5ZDQGD

'MLERXWL*XLQHD%LVVDX

6ZD]LODQG

(TXDWRULDO*XLQHD

0DXULWLXV

&RPRURV

&DER9HUGH

6DR7RPHDQG3ULQFLSH

6H\FKHOOHV

!

$FFHVV$IIRUGDELOLW\

Six countries with the highest

tariffs and poorest affordability

account for 45% of African

population without energy

access

RES Investment is concentrated in

six countries with the best mix of

policy and commodity certainty

ICA Survey: Investment Consideration

0 1 2 3 4 5

BuildingPermit

Equipmentsupply&construcIonservices

Transporttosite

Skilledstaffandlabour

InformaIononpolicies,procedures,targets,etc.

LandAcquisiIon

ConstrucIonequity

ConstrucIondebt

GridAccess

Developmentcapital

Credit-worthyoff-takerarrangements(PPA)

RelaJveDifficultyofDevelopment(5=VeryDifficult)0 1 2 3 4 5

ReducingthecostofequipmentandconstrucIon

InformaIongatheringanddisemminaIon

Projectdevelopmentassistance

Energyaccess

CurrencystabilityandconverIbility

Availabilityofskillsstaffandlabour

Credit-worthyuIliIes

Accesstotransmissioncapacity

PoliIcalstability

Energyaffordability

Availabilityofdevelopmentcapital

Certaintyofregulatoryframekworks

Clarityofregulatoryframeworks

TargetEnablers(5=VeryImportant)

9

Off-Take Risk: Regulatory Clarity & Certainty

10

Reliability

Cost

Resilience

Old Customer

New Customer

Off-Grid

Impact of Risk on Capital The difference in Life-cycle Levelised Costs of Project in South Africa vs. Sub-Saharan Africa is most likely to arise from

the capital structure and cost of capital

A perception of higher risk drives lower debt tenor and this lowers leverage and increases the need for more equity funding.

Sub-Saharan projects is in itself attract

equity with a 4-5% premium to South African projects.

This overall higher cost of capital drives

a need for tariffs to 50% higher for Sub-Saharan Projects.

We need to find a path to attracting

lower risk premium for Sub-Saharan projects

11

2.8 2.7

1.6 0.8

2.7 3.1

0.8

4.9

0.4

1.3

0

2

4

6

8

10

12

14

S. Africa Sub Saharan Africa

Levelized Costs (USD cents/kWh)

Tax

Equity Return

Interest

O&M

Capex

Conclusions

q  300+ GW of demand today in Africa vs. 140 GW on the Grid. Substituting off-grid and back-up

demand of 150 – 180 MW and adding a further 150-200 GW to match GDP growth by 2030 is well achievable.

q  $ 12-15 billion p.a. investment in renewables required to meet RES targets by 2030 are 50% of

approx. $25 billion p.a. spend on diesel/HFO back-up and off-grid

ü  A focus on “Affordability” must be central to achieving energy for all.

ü  Policy should encourage “Multiple bottom line impact” from energy investment – to enable growth in food, health, water, ICT and jobs.

q  $ 4.0 US cents/kWh is the tariff differential attributable to Cost of Capital between a project in South Africa and a project elsewhere in Sub-Saharan Africa.

ü  Policies should aspire to the needs of low cost capital, which requires - Scale, Clarity (Transparency) and Certainty (Long Term)

12

This presentation is based on the finding of an independent report funded by the BMZ (German Government) on behalf of the Infrastructure Consortium of Africa (ICA), which is a joint G7 and African Development Bank Initiative. The full report can be found at;

http://www.icafrica.org/fileadmin/documents/2015/Annual_Meeting/ICA_Plenary_-_Background_Paper__FINAL_2_.pdf

Vivek Mittal vivek.mital@gmail.com

+44.7718.976361

Thank you!

13