With thousands of miles of waterways and enormous untapped potential, the African continent is poised for an explosion of hydropower growth. Navigating the challenges of development in this diverse environment can be well worth the large return, especially with small hydro.
By Seline van der Wat
The economy of the continent of Africa is growing rapidly, but one significant problem persists — a shortage in electrical capacity. This capacity shortfall, which hinders the growth and development of the continent, is ironic because Africa holds great untapped hydropower potential. Due in part to the substantial improvement of the African economy as a whole, previous shortcomings are being addressed, allowing for better infrastructure development and the attraction of foreign trade.
Investment into the hydropower sector in Africa has been on the rise in recent years, with many more cross-border projects being anticipated. Foreign investment is, however, important for the development of the hydro sector, seeing as the funds are simply not available from within African governments to build the projects internally. It would seem that now is the best time to invest in small hydro (classified in this article as 3 to 30 MW) in Africa and to set up a platform for expansion into bigger projects.
Africa in perspective
Throughout Africa, electrification rates are extremely low (see Figure 1 ). Africa houses 13% of the world’s population but only produces 3% of its electricity.6 On average, fewer than three out of 10 Africans have access to electricity. Africa also has the world’s lowest annual per capita electricity consumption: 450 kWh. Despite this, there is a large capacity shortfall within the continent. This low level of electrification not only affects the citizens’ way of life, but it starves industries of development or growth.3
Nonetheless, the economy of Africa as a whole is growing. Reports reflect positive growth of Africa’s gross domestic product, which is expected to reach $2.6 trillion in 2020, up from $1.9 trillion in 2008.2
The population of Africa is expected to grow fast too, with projections indicating it will reach 3 billion by 2050 (as compared to 1 billion in 2010).9 At the same time, per capita income levels are rising and Africa is urbanizing. The urbanization rate ranges from 18% in Ethiopia to 50% in Nigeria, but it is well above 70% in some north African countries.9 These three trends will drive energy demand growth and consumption in the coming decades. It is estimated that by 2030 about 50% of all Africans will reside in cities, increasing the demand for electricity and security of supply.2
Again, there is a vast generation capacity shortage in Africa. Demand cannot be met, and governments are urging consumers to reduce consumption. As the region’s economy grows, more citizens will have jobs and disposable income, which will increase migration to electrically-powered houses. A higher family income will result in a desire for a higher standard of living that includes the purchase of new appliances. This will increase the demand for electricity even more.
With the development and construction of power stations taking many years, it is advisable that governments initiate capacity increase plans immediately. This has become a trend in Africa and fortunately, governments have expressed desire that this increase comes from renewable sources. Addressing energy security and supply through the use of hydropower will help attain the Millennium Development Goals of the continent.3
We do not wish to ignore the serious problems in the region. For example, poverty and access to healthcare, education and water are not at internationally accepted levels. However, Africa is one of the world’s most rapidly growing regions, and the power generated will help improve the infrastructure in the region. At the very least, it will create jobs and provide a possibility for people to have a better quality of life.
Could small hydropower be a solution for Africa?
Reports indicate that Africa is only using 5% to 10% of its hydropower potential.3 Compared to the rest of the world, Africa has been slow in taking advantage of its electricity generation potential (see Figure 2).
Data show that the undeveloped hydropower potential in Africa may be as high as 95%.10 Small hydropower would be a holistic solution to Africa’s generation capacity gaps because:
— It will use bountiful available, yet untapped, resources;
— It provides clean, renewable energy, as opposed to the old norm of increasing capacity by building coal-fired stations;
— It could generate additional income for projects should they qualify under the Clean Development Mechanism (CDM);
— It contributes to a diversified energy system, which leads to increased reliability in the region; and
— Many smaller African economies consume less than 500 MW of electricity per year, a figure that precludes the development of large dams,6 making small hydropower attractive.
Investment in the hydropower sector in southern Africa is on the rise, with many more cross-border and joint venture projects being anticipated. Unfortunately, the number of projects anticipated and those actually realized differs due to various reasons, including the obtaining of licenses by dormant parties on speculative grounds and the complexity of procuring the government land for construction.
Probably the most promising factor is that Africa is not waiting for foreigners to develop the continent. Africans themselves are leading the growth in investment and display an overwhelming optimism about the growth prospects and investment potential of the continent. This optimism and self-belief is underlined by a 21% compound growth rate in Africans investing in other African countries from 2003 to 2010 (and in a diverse range of sectors).1
The status of hydro and IPPs in Africa
Independent power producers (IPPs) could be the future of small hydro in Africa as the sizes of the projects envisioned (3 to 30 MW) are not always substantial enough to interest national utilities. Although the term IPP often infers the project is privately owned, this is not the case in southern Africa, where many state parties hold equity in IPP projects. In some cases, the government holds talks to decide whether to take an equity share in the project or charge a tariff to benefit from the project instead. Luckily, the private sector has also invested in IPPs. There has been competition for the market, but not ongoing competition in the market in terms of customer choice.4 In effect, what have emerged across Africa are hybrid power markets. It is inescapable that the state-owned utility continues to play a key role in the energy sector, but IPPs are gradually being introduced because of inefficiencies and inadequate investment resources.4
There are about 200 IPP projects larger than 40 MW with long-term power purchase agreements in Africa. The total contribution of IPPs to the continent’s power sector is 4 GW, with the largest portion being made up by small projects.4 The current expected tariffs per megawatt-hour range extensively throughout the continent, from US$104 to $126 in Zimbabwe and €130 (US$224) in South Africa to $67 to $160 in Rwanda.
Current trends in African investment
In spite of the growth trends, Africa attracts less than 5% of global foreign direct investment projects.1 This does not fully reflect the attractiveness of the region, high returns on investment or strong progress toward political reform, macroeconomic stability and social development.
Investment from developed economies has maintained the same growth rate over time due to the belief that the hydro market in Africa still needs to develop, but emerging economies appear to regard Africa as critical to sustaining their own growth. Emerging economies/countries invested at a greater rate since 2003, with their investment growing by 13% per annum. As a result, the emerging economies decreased the economies’ share of the African market from 70% to 62% in just seven years. Economists expect the emerging markets to surpass the developed economies’ share by 2023, assuming a linear growth rate.1
African leaders are aware their economies are lagging behind in terms of hydropower development and exploitation and are in a rush to get projects off the ground. This has helped open the door for outside investors to enter the hydropower market. The cost of meeting Africa’s power needs is estimated to amount to 6.35% of Africa’s GDP ($40 billion per year), of which 67% would be used for capital investment and the balance for maintenance and operation of existing plants.4 These funds are not available within Africa, which leaves the door open for foreign investors. In addition, in many African countries, a general legal framework for renewable energy deployment is in place. The opening up of electricity markets to IPPs has been a step.5
Challenges and risks of investing in African hydropower
The slow rate of hydro development shows there are still many barriers hampering the propagation of this technology. The issues blocking private company investment into the region include the lack of supportive policies, funding and payment.
If we look at the value chain of a hydropower project, we can identify four major parties that have a role to play in project development:
— Developer. Because the party is involved early, there are many things that can go wrong before financial closure, thus providing high risk for two to four years during the development phase. For a foreign party to eliminate some of this risk, it would be advisable to enter into a joint venture with a local partner.
— Equipment supplier. Payments are made in parts, with the majority being payable on delivery, thus putting the equipment supplier at a relatively low risk because it is protected through its contracts and agreements. If the money is not available, then the equipment can be withheld. For a foreign party to eliminate some of this risk, the equipment supplier can request letters of credit from the project developer.
— Owners and investors. Owners and investors are exposed to moderate risk for five to eight years after engaging with the project at financial closure. At financial closure, it is known what the project will cost and what the risks and returns are. To reduce the risk, foreign owners and investors can get local shareholders, even if just for a minimal share. In addition, receiving finances from a development finance institution will eliminate some of the risk. The owners and investors can also request more detailed and regular reports from the developers and operating company.
— Engineers and consultants. This group is exposed to virtually no risk for two to four years during the development phase, as they invoice and are paid on a monthly basis. If a payment certificate is not paid, the consultant can choose to withhold further services or reports until payments continue.
For a local, inexperienced hydro project developer, risks exist due to the potential cost and cost overruns from major technical, financial and environmental challenges that need to be overcome for the development of hydro resources.3 Experienced local developers and foreign investors face the same challenges and risks.
A strategy to overcome the challenges
Leslie Rance from British American Tobbaco once said, “So the point really is not whether you should be doing business in Africa, but rather how.”1 The advantages and risks are now known, so we can now look at ways to overcome these challenges and develop hydro projects in Africa.
Some important issues to consider, when developing small hydropower schemes in this region:
— Get your feet on the ground as soon as possible, experience in Africa and especially in the region is priceless. Olaf Meier from the African Development Corporation said, “One of the specific advantages of operating in Africa is that it is still possible to gain access to attractive investment targets with relatively low capital input due to the infancy of the industry.”1 Investors should take advantage of this situation.
— Consider starting with a smaller project size to minimize the developer’s exposure. Starting with a smaller project will also allow one to acquaint oneself with the legislation and procedures in the region.
— Get a local partner, even if for a minor share of the company. This shows commitment to the region and makes doing business in that country easier because the local partner can act as mediator.
— Build relationships with local government officials and stakeholders. Allowing the locals to put a face to the name and the development will open a line of communication, which will permit issues to be addressed out of the spotlight and at a lesser cost to the developer.
— Secure rights to the project before spending money on it. This may vary from purchasing the land to applying for the generation license from the government.
— Consider ways to allow the community to benefit from the project. This can be through small shareholding in a community trust or through job creation and skills development.
— Prepare to adapt your usual business model. Companies with a set way of doing business that are not willing to deviate from the norm are more likely to fail at bringing hydro projects to fruition in Africa.
— Take the time to research. Considering that in certain regions information is scattered, incomplete and sometimes even inconsistent, developers should allow enough time for research and data collection before choosing to implement the project.
— For political risk mitigation, it is suggested that political risk insurance be taken out.
Countries best suited for development
At present, 75% of Africa’s generation capacity comes from South Africa, Morocco, Egypt, Libya and Algeria. Interestingly enough, this capacity is not generated by means of hydropower, as these countries are in areas not well suited to hydro.
Africa has 588 small hydropower plants of less than 10 MW in operation,8 with an average size of 2.5 MW (a total of about 1.5 GW). Total hydropower capacity in Africa in early 2011 was about 26 GW.
According to estimations, 12% of the world’s hydro potential is found in Africa — and due to geographical conditions, most of it is located in the sub-Saharan part.5 There are multiple reasons why sub-Saharan Africa is suggested as prime hydropower development territory. First, the majority of rainfall falls within basins in sub-Saharan Africa. This is important to track in order to ensure future water supply. Second, the majority of sub-Saharan countries are English-speaking.
The following countries are the highest potential hydropower players:
— Democratic Republic of Congo: Total potential estimated at 100,000 MW but only 2,400 MW developed. Projects currently under development include 40,000 MW Grand Inga, which will cost about $80 billion, with an interconnection cost of $10 billion. Construction of this facility is to be completed by 2025.
— Ethiopia: Estimated potential of 37,000 MW by 2037. Projects in development include 1,870 MW Gibe III, expected to be on line in 2013, and a facility at Grand Millennium Dam of about 5,250 MW.
— Cameroon: Estimated 23,000 MW of exploitable hydropower resources, of which only 3% is developed.
— Uganda: Large hydropower potential, with the 250 MW Bujagali project completed in 2012 as the largest private sector investment in the country’s history. As a result of Bujagali, Uganda’s supply exceeds its demand for the first time ever. Daily power outages are rare and the industrial operations can run freely, no longer compromising the country’s progress.
It is probable that since the implementation of South Africa’s Renewable Energy IPP Programme, the slightly more developed countries in the region are likely to start adopting a similar model to source international investment based on a feed-in tariff. Feed-in tariffs have been enacted in multiple countries, including South Africa, Algeria, Kenya and Tanzania.7
Within sub-Saharan Africa, some countries have been more likely to assist in the development of projects. There seems to be a definite correlation between the number of hydropower facilities developed in a given country and their respective government’s attitude toward investment by the private sector.
Challenges still arise, in terms of cultivating the necessary capacity to plan, develop and accelerate much-needed energy schemes. However, Africa’s renewable energy investment is expected to grow from $3.6 billion in 2012 to $57 billion in 2020, and a large portion of this money is expected to be spent in sub-Saharan Africa.
The African economy is on a steady growth path that sees the demand for electricity soar in the next decade. Hydropower IPPs would be a beneficial way to reach this demand because hydroelectricity is a clean energy resource and will allow for healthy competition within the sector.
There are risks involved in dealing within certain countries in southern Africa, but these risks can be effectively managed and mitigated, allowing the developer to benefit from one of the highest return rates in the world.
It would seem that now is the best time to invest in small hydropower in sub-Saharan Africa and to set up a platform from which to launch into bigger and better projects.
1. “It’s Time for Africa – Africa Attractiveness Survey,” Ernst and Young, 2011.
2. “Lions on the Move: the Progress and Potential of African Economies,” McKinsey Global Institute, 2010.
3. Sirte, L.A.J., “Hydropower Resource Assess-ment of Africa,” Ministerial Conference on Water for Agriculture and Energy in Africa: The Challenges of Climate Change, December 2008.
4. Eberhard, A., and K.N. Gratwick, “IPPs in Sub-Saharan Africa: Determinants of Success,” Energy Policy, 39-9, P. 5541-5549, September 2011.
5. Policy and Regulatory Framework Conditions for Small Hydro Power in Sub-saharan Africa: Discussion Paper, GTZ, EUEI, 2010.
6. Janneh, Abdoulie, UN Under Secretary General of ECA, Speech, 2011.
7. “Navigating Power Purchase Agreements for the African Continent,” Africa Legal Brief Series, November 2012.
8. “Prospects for the African Power Sector,” International Renewable Energy Agency, Abu Dhabi, United Arab Emirates, 2012.
9. United Nations Population Division, www.un.org/en/development/desa/population.
10. Working Group III of the Intergovernmental Panel on Climate Change, “IPCC, 2011: IPCC Special Report on Renewable Energy Sources and Climate Change Mitigation,” Cambridge University Press, Cambridge, United Kingdom.
Seline van der Wat is a project manager at NuPlanet Project Development.