LNG Gas-to-Power Option for Africa
Current LNG gas-to-power projects could successfully pave the way for other African countries.
We are pleased to introduce the third edition of Africa Focus. We are thrilled with this edition, which features six different topics that go to the heart of existing challenges and opportunities on the African continent.
Continuing a theme we began in previous issues of Africa Focus reviewing alternative ways to finance projects, we discuss "Islamic Finance in Africa" as an increasingly popular option for investors. "Powering Africa: The LNG gas-to-power option" looks specifically at the energy sector and the appeal of LNG gas-to-power projects in Africa, while "Renewable energy in Africa in the era of climate change" examines the enormous potential for renewable energy on the continent. In "Mozambique: Beyond mining," our team covers economic diversification through resource-based infrastructure by exploring progress to date in Mozambique and how the country is opening up its mining logistics infrastructure to drive diversification of its economy. "Business and human rights in Africa" presents the hugely important topic of the need for investors in African countries to be conscious of a growing focus on human rights. In addition, "The long arm of the law: Bribery and corruption enforcement investigations" discusses challenges that both individuals and companies doing business in Africa face in the form of the risks around bribery and corruption.
Many of these topics were highlighted during UK Prime Minister Theresa May's recent trip to Africa. White & Case was proud to have our partner Josh Siaw accompany the Prime Minister on this week-long trip, which included visits to South Africa, Nigeria and Kenya. Josh was the only representative from a law firm to be a part of the Prime Minister's traveling party, and allowed us to gain useful insights into key political and business issues raised during the trip's discussions. Linking to some of the themes we cover in this third edition of Africa Focus, strong topics that emerged during the trip included partnerships, how collaboration is essential for successful investment opportunities and the deep interest among investors in exploring different ways to finance projects on the continent. Josh also reported back on the strong link—repeatedly discussed through the week—between aid and trade, as well as the importance of achieving a healthy balance that brings benefits to all. Josh will expand on some of the themes from the visit in our next issue.
We hope you enjoy reading Africa Focus, and please let us know if there are topics or issues you would like us to cover in future editions.
Current LNG gas-to-power projects could successfully pave the way for other African countries.
Shari.ah-compliant financial products are needed to enhance financial inclusion in Africa.
Companies and investors in African countries need to be conscious of the growing focus on human rights.
Economic diversification through resource-based infrastructure.
The bribery and corruption risks facing individuals and companies in Africa.
Africa offers great potential for renewable energy deployment and investment.
Africa offers great potential for renewable energy deployment and investment
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Concerns about carbon emissions from traditional coal-fired power stations coupled with a projected tripling in African energy demand by 20301 make renewable energy essential to power generation on the continent. Lack of access to electricity is only one challenge that Africa faces, but it is one of the most significant obstacles to socio-economic development.
Africa currently accounts for one-sixth of the world's population. However, it generates only 4 percent of the world's electricity. Furthermore, South Africa and the countries north of the Sahara account for three-quarters of the continent's energy consumption. Close to 600 million Africans have no access to electricity, and 780 million rely on traditional solid biomass for cooking (mainly fuelwood and agricultural waste). Nearly 80 percent of those lacking access to power across sub-Saharan Africa live in rural areas.2
With its good supply of wind, sunshine, hydropower and even geothermal resources, Africa offers great potential for renewable energy deployment and investment.
Enhancing access to power generally across the continent is a core objective of both the African Union's Agenda 2063 and the national development plans of nearly all African nations. Clearly, renewable energy technology has a crucial role to play in achieving these objectives.
A study by the University of California, Berkeley mapping out the location and energy potential of renewable energy sources in eastern and southern Africa shows that, although the energy generation resources are vast, they are not evenly distributed. The study indicates significant possibilities for wind, solar PV and solar CSP technology.
Hydro-electricity offers viable solutions for up to one-third of the African nations. In a continent where many regions are plagued by frequent and severe drought, though, the use of rivers for power generation can be controversial. Environmental and socio-economic impacts of inundating large catchment areas also mitigate against large hydropower projects where other viable options exist. As with other models of centralized power generation, distribution networks associated with large hydropower projects are expensive to construct and maintain. They also represent security risks in parts of the continent where social unrest exists.
Smaller, micro-hydro projects and other regional and local renewable power generation projects—including wind, solar and geothermal—present alternatives that may become more prominent in African power generation planning in the future.
Climate change is now at the forefront of discussions globally and widely recognized as a problem demanding coordinated global action. Concern has mounted as its effects have become more evident across the northern hemisphere, with parts of Europe and North America experiencing some of the warmest summers on record and traditionally cold regions like Siberia experiencing unprecedented heatwaves. In many parts of the world, including Africa, movements promoting environmental sustainability and environmental consciousness are gaining momentum.
With many parts of the continent already arid, the implications of global warming for Africa are especially dire. The gradual yet dramatic disappearance of the glaciers on Mount Kilimanjaro is a highly visible, symbolic manifestation of climate change in Africa. According to the United Nation's Intergovernmental Panel on Climate Change,3 an estimated 82 percent of the ice that capped Mount Kilimanjaro when first recorded in 1912 had already disappeared by the year 2000.
Africa, as a continent, clearly needs to contribute to mitigating the impact of climate change, too. Key to this is switching, wherever possible, from coal-fired generation to renewable energy generation.
As of July 2018, all but three African countries (Algeria, Angola and South Sudan) had ratified the Paris Agreement within the United Nations Framework Convention on Climate Change (UNFCCC).
The Paris Agreement deals with greenhouse-gas-emissions mitigation, adaptation and finance, starting in the year 2020. It requires that each country determine, plan and regularly report on the contribution that it will make to mitigate global warming. Although no mechanism exists to compel nations to set specific targets by a particular date, the expectation is that targets should exceed those previously established.
Driven by the Paris Agreement and also general concern about the impact of climate change on the continent, African renewable energy initiatives are gaining momentum.
South Africa's Renewable Energy Independent Power Program (REIPPP), viewed as a major success for renewable energy procurement globally, has been an influencing and guiding factor for other African countries in their development of similar renewable energy programs.
Ninety-five projects have been initiated by independent power producers (IPPs) since the commencement of the REIPPP. Existing projects concluded under the earlier bid rounds are now fully operational, with a new tranche of projects under Round 4 now heading toward financial closure. A report by the South African National Energy Regulator indicates that these projects will have an achieved capacity of 3271.25 MWs when they are fully operational.4
In Uganda, the GET FiT Uganda initiative aims to achieve an installed capacity of 158 MWs of clean renewable energy added to their national grid through the implementation of 17 projects under this initiative. To date, Uganda has commissioned six of the 17 projects, three of which are hydro-power plants with a total installed capacity of 18.1 MWs, two grid-connected solar PV projects totaling 20 MWs and a 20 MW Kakira co-generation plant.5
The main objective of the GET FiT Program is to assist East African nations in pursuing a climate-resilient low-carbon development path to promote growth, reduce poverty and assist in the best way possible with climate change mitigation. GET FiT Zambia was adopted by the Zambian government in October 2017 with the aim of procuring 200 MWs of renewable energy projects within the next three years. The Interim Renewable Energy Feed-In Tariff Program was introduced in Nambia in 2015 and has attracted investment mainly in solar generation rather than other sources of renewable energy.
The Batoka Gorge hydroelectric power project is just one way in which partnerships by African states are emerging in the renewables space. This US$4.5 billion hydroelectric project on the Zambezi River that borders Zambia and Zimbabwe is expected to generate 1,600 MWs of electricity, to be shared in equal portions among both states.6 The Zimbabwe Electricity Supply Authority's (ZESA) generation capacity was measured in February 2016 as producing at only 845 MWs, against a projected national demand of 2,200 MWs and an installed capacity of approximately 1,940 MWs.7 Projects like the US$1.5 billion Hwange Power Station and the Kariba South expansion venture will add around 900 MWs to the Zimbabwean national grid.8 Once Batoka Gorge comes online, Zimbabwe is optimistic that sufficient generation capacity will exist to sell power to neighboring countries, too.
Ethiopia's main source of electricity generation is from hydroelectric power stations. Once completed, The Grand Ethiopian Renaissance Dam will be able to generate 6,450 MWs, being one of the largest hydropower dams in Africa.9
Botswana imports a large percentage of its energy from the Southern African Power Pool. With the Southern African region now experiencing a power deficit, the initiative to get Botswana to internally generate its own electricity is now more prominent. Private sector participation in electricity generation was enabled by the amendment to the Electricity Supply Act during 2016. Conversely, Mozambique has an installed generation capacity of around 2,905.45 MWs from a combination of hydro, solar, gas, wind, geothermal and coal sources, though only a quarter of the population has access to electricity.10
Morocco has targeted increasing electricity generation from renewable energy sources to 52 percent of total generation capacity by 2030. Kenya's renewable energy sector is well established and accounts for about 77 percent of the electricity purchased. Geothermal and hydro-power contribute the bulk of Kenya's renewable energy production.11
As recently as June 2018, Gigawatt Global Cooperatief signed a deal with the 15-nation Economic Community of West African States to build US$1 billion worth of renewable energy projects in the region, with installation of 800 MWs of solar and wind farms in West Africa beginning with Burkina Faso, Senegal, Mali, Nigeria and the Gambia.
Aligning with the 2030 vision to energize and "light up" Africa and the African Union's Agenda 2063, more renewable energy sources are being actively explored. Driven by their own concerns of corporate governance as well as the proven economic viability of renewable resources, funders are proving less inclined to finance coal-fired power stations.
Consequently, Africa's adoption of renewable energy projects is accelerating.
The World Bank has estimated that US$43 billion per year of investment is required for infrastructure in the power sector,12 while the African Development Bank and the United Nations Environment Programme (UNEP) estimate a need for a package of US$41 billion per year to finance the development of the energy sector in Africa.13
So how does Africa secure these funds?
Development finance institutions have expressed great interest in addressing the renewed urgency to light up and power the continent. Energy is at the core of the African Development Bank's economic transformation agenda, and the Bank has more than US$12 billion worth of investment commitments to the sector between 2016 and 2020.14 The World Bank's implementation of the Africa Climate Business Plan includes a plan to apply US$16 billion towards renewable energy projects in Africa.15
Angola's 2025 goal is to provide modern electricity to about 60 percent of its population and the country has about US$18 billion of renewable energy investments underway as part of that strategy.16 The new Angolan government is taking steps to enhance the country's attractiveness for foreign direct investment, including reform of the legislative framework to attract funding from the International Monetary Fund and other multilateral investment organizations. Mapping studies completed by the Ministry of Energy and Water in June 2014 identified potential for 55 GWs of solar power, 3 GWs of wind power and 18 GWs in hydropower throughout the country.17
Coupled with current legislative reforms under way, potential exists for investors to invest in renewable energy technologies in Angola.
Morocco is another example of an African country that is taking active steps to enhance investment in renewable energy projects. Morocco is liberalizing its renewables sector, including by increasing the minimum threshold for hydro-power plants from 12 MWs to 30 MWs and by establishing the Moroccan Agency for Solar Energy to carry out programs for solar energy generation for up to 2,000 MWs.
Investor confidence is recovering in Zimbabwe, with the new administration under President Mnangagwa. Opportunities exist in many industry sectors for both developers and financiers, particularly in renewable energy. Care needs to be taken to minimize investment risks, especially where regulatory reform is at an early stage. And more attention to marketing investment opportunities in African renewable energy is key to mobilizing these projects.
African governments also need to continue to improve their ability to attract financing for these crucial projects by improving their regulatory and political frameworks, affording funding institutions and investors a stable environment to undertake projects, and becoming more environmentally sustainable in the long run.
Despite the number of projects being commissioned around the African continent and the number of project initiatives that are currently underway across Africa, the continent is still nowhere near bridging its generation deficit. As current demands are met, demand for electricity across the continent continues to grow.
With African states recognizing their renewable energy generation capacity, and in so doing taking action to implement the necessary reforms to make foreign investment possible, opportunities for investment in Africa will continue to expand. Progressive regulatory reform, especially around the establishment of independent power producer (IPP) programs, would accelerate that momentum. Attractive returns on investment, coupled with steadily improving risk, suggest that Africa will continue to attract investment into its renewable energy sector in the coming years.
1 Wu, G.C., Deshmukh, R., Ndhlukula, K., Radojicic, T., Reilly-Moman, J., Phadke, A. Kammen, D.M. and Callaway, D.S. (2017). Strategic siting and regional grid interconnections key to low-carbon futures in African countries. PNAS April 11, 2017. 114 (15) E3004-E3012; published ahead of print March 27, 2017.
2 International Energy Agency (2017). Energy Access Outlook 2017. Accessed at https://www.iea.org/access2017/ on 17 August 2018.
3 Boko, M., I. Niang, A. Nyong, C. Vogel, A. Githeko, M. Medany, B. Osman-Elasha, R. Tabo and P. Yanda, (2007). Africa: Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, M.L. Parry, O.F. Canziani, J.P. Palutikof, P.J. van der Linden and C.E. Hanson, Eds., Cambridge University Press, Cambridge UK, 433-467.
4 National Energy Regulator of South Africa (2017). Monitoring renewable energy performance of power plants. Progress in the first half of 2017 (Issue 10) September 2017. Accessed at http://www.nersa.org.za/Admin/Document/Editor/file/Electricity/SustainableEnergy/Monitoring%20Report%20Oct2017_No2.pdf on 17 August 2018.
5 GET FiT Uganda (2016) Annual Report: Kakira Cogeneration. Accessed at https://www.getfit-reports.com/2016/projects/kakira/ on 17 August 2018.
6 AfrElec - Africa Power Monitor (2018). Zimbabwe To Push Ahead With Batoka Gorge HPP. 18 July 2018, Week 28, Issue 163. Accessed at https://newsbase.com/topstories/zimbabwe-push-ahead-batoka-gorge-hpp on 17 August 2018.
7 Africa-EU Renewable Energy Cooperation Programme (2017) Zimbabwe Energy Sector. Accessed at https://www.africa-eu-renewables.org/market-information/zimbabwe/energy-sector/ on 17 August 2018.
8 Kazunga, O. (2018) Hwange power station expansion contractor on site. Chronicle, Zimbabwe, May 1, 2018. Accessed at http://www.chronicle.co.zw/hwange-power-station-expansion-contractor-on-site/ on 17 August 2018.
9 International Hydropower Association (Undated) Ethiopia - Grand Ethiopian Renaissance Dam (GERD) Accessed at https://www.hydropower.org/case-studies/ethiopia-grand-ethiopian-renaissance-dam-gerd on 17 August 2018.
10 Africa EU Renewable Energy Cooperation Porgramme (2017). Renewables in Mozambique – National Status Report / October 2017. Second Edition.
11 Aglionby, J. (2017). Kenya shows renewables scope to plug Africa's power supply gaps. Financial Times, 23 may 2017. Accessed at https://www.ft.com/content/aa11cc7e-3567-11e7-99bd-13beb0903fa3 on 17 August 2018.
12 Kaluba, D.C. (2018). Financing Renewable Energy in Africa in the SDG Era. International Centre for Trade and Sustainable Development. 24 April 2018. Accessed at https://www.ictsd.org/bridges-news/bridges-africa/news/financing-renewable-energy-in-africa-in-the-sdg-era on 17 August 2018.
13 World Bank (2017) Africa Infrastructure Country Diagnostic. Accessed at http://siteresources.worldbank.org/INTAFRICA/Resources/aicd_factsheet_energy.pdf on 17 August 2018.
14 African Development Bank (2018). T he New Deal on Energy for Africa: A transformative partnership to light up and power Africa by 2025.
15 World Bank (2015). A Plan to Spur Climate Resilient Infrastructure in Africa. Accessed at http://www.worldbank.org/en/news/feature/2015/12/09/a-plan-to-spur-climate-resilient-infrastructure-in-africa on 17 August 2018.
16 Sector briefing: Doing business in Angola 2018. Accessed at http://www.angola.doingbusinessguide.co.uk/the-guide/sector-briefings/ on 18 August 2018.
17 Export.gov (2017). Angola Country Commercial Guide: Energy. Accessed at https://www.export.gov/article?id=Angola-Electric-Power-Generation on 18 August 2018.
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