Opinion
By Terje Osmundsen
The Coronavirus pandemic has left Africa’s economies bleeding. After 25 years of uninterrupted growth, gross domestic product in sub-Saharan Africa is expected to contract this year, forcing millions into unemployment and poverty. The need for a post-pandemic recovery plan for Africa is becoming ever more urgent.
There will be no sustainable growth in Africa unless the recovery efforts address the Achilles heel of most African economies, which is the lack of manufacturing and technology-related jobs. Despite overall growth in manufacturing production in the last two decades, the share of manufacturing in the gross domestic product (GDP) of the countries of sub-Saharan Africa declined from 18% in 1975 to 11% in 2018. Similarly, the share of manufacturing in the countries’ total employment fell in the same period.
Businesses in Africa suffer from the world’s highest costs of electricity. Solar PV on the user’s site can slash energy costs, improve competitiveness and create hundreds of thousands of jobs, but government regulations are holding investments back.
High cost of electricity
Businesses of Africa are penalized twice in terms of electricity, firstly by paying more for grid electricity from the grid than businesses elsewhere, and secondly for having to pay for diesel back-up power when the grid is not working.
Starting with the first, I was surprised to discover how much Africa’s businesses pay for the electricity from the grid. As shown in the table below, businesses in nine of the selected ten East and West Africa countries pay 25-100% more for the electricity they get from the grid than businesses in other parts of the world. The world average end-user tariff for businesses in 2019 was $0.12 per kWh. The same year businesses in Kenya paid $0.18 per kWh, and those in Uganda $0.16 per kWh. As for West-Africa, a recent comparative study by ECOWAS[1] reports that the tariffs paid by businesses there ranged from $0.16 per kWh in Nigeria to $0.24 in Senegal and Guinea respectively. The business tariff in Ghana was $0.19 and in Ivory coast $0.17 per kWh[2].
Adding to this the second handicap: As a result of regular power outages, businesses across Africa – and in particular in West Africa – have become heavily reliant on diesel back-up generators. A recent World Bank study[3] estimates that energy users in sub-Saharan Africa spend on average more than 30 % of total energy cost on fuel for back-up generators, although gensets only account for 7% of the total electricity supplied. In parts of sub-Saharan Africa, the spending on fuel for back-up generators account for more than 50% that of spending on the grid, at a cost of 0,40 $ per kWh or more depending on local conditions and logistics.
Electricity prices worldwide and 10 countries in sub-Saharan Africa
| World average |
Ghana | Nigeria | Ivory Coast | Guinea | Sierra Leone | Benin | Senegal | Kenya | Uganda | Tanzania | Back-up power Africa | |
| $/kWh | 0.12 | 0.19 | 0.16 | 0.17 | 0.25 | 0.20 | 0.20 | 0.24 | 0.18 | 0.16 | 0.10 | 0,40 |
These numbers highlight a serious and overlooked handicap of doing business in Africa: how can you expect entrepreneurs and businesses in Sub-Saharan Africa to be competitive, if they, in addition to having to suffer frequent power outages, have to pay 30 to 100% more for electricity than their competitors in the US, China or Europe?
Solar for business: Highly competitive, but investments suppressed
Installing solar PV on-site, rooftop or ground-mounted, can reduce the electricity costs for the users with 30-60 % on their daytime consumption. subject to variations in local conditions, costs, and execution models.[4] However, the on-site market has so far been very slow to develop in Sub-Saharan Africa. Only 74MW of installed capacity was recorded with commercial and industrial users by January 2019, according to a report by Bloomberg NEF.[5]
Most of the Commercial & Industrial installations in sub-Saharan Africa built so far have been financed by the end-user as an outright purchase, and not by third-party investors or financial partners as is most common in other parts of the world. In the Bloomberg report cited above, access to third-party financing is referenced as the main barrier to rapid deployment of on-site solar in Africa.
It is pleasing to note that there are now investment funds focusing on medium-sized renewables in Africa, including the impact equity fund managed by our team in Empower. Availability of finance should no longer be considered a major hurdle but in order to convert the opportunities to investable projects, government regulations play a vital role:
- Net-metering: In most markets except sub-Saharan Africa, energy-users are allowed to inject surplus electricity to the grid and receive a regulated tariff paid by the receiving utility company. As many companies may not operate 24/7, allowing for unused electricity to be sold back to the grid could help on-site solar to become financially viable. However, net-metering is not introduced in any of the nine countries cited above. Kenya and Ghana have both introduced legislation to enable net-metering, but not yet implemented. The absence of net-metering makes investments in on-site solar PV much less attractive.
- Long-term contracts: In most parts of the world, the reference business model for on-site solar PV is so-called private Power Purchase Agreements (PPAs). PPAs typically come with a with 15-25-year tenor. The advantage for the buyer under this model is that it enables significant savings on the energy bill from day one, with no up-front payment. With the PPA, the buyer is only obliged to pay for electricity that is actually generated and delivered, without having to worry about operation, maintenance, or asset management. Finally, financing on-site solar via a private a PPA creates no liability on the off-taker’s balance sheet; the monthly energy payments are treated as an operational cost.Of the nine countries listed above, Kenya, Ghana and Nigeria have entrenched into local legislation the use of PPAs for certain categories of projects. In Ghana, for example, PPAs can be used for relatively large users of energy, or so-called bulk customers. In the majority of the Sub-Saharan African countries, however, private PPAs are still not legal[6].
Of course, it is possible to raise third-party financing without a PPA, for example via longer-term rental or lease-to-own contracts. However, with such contracts, the buyer assumes more responsibility and risk for the performance of the plant. Additionally, the obligation to purchase the plant creates a liability on the buyer’s balance sheet, increasing the buyer’s total cost of finance and potentially limiting business expansion through debt financing.
To conclude, the regulatory environment across sub-Saharan Africa punishes companies who seek to replace polluting fossil fuel with solar, and awards companies who continue to rely on polluting diesel back-up power. Governments can boost the competitiveness of their industry and accelerate electrification by opening their energy markets to allow for on-site solar PV generation.
Scaling local solar generation is furthermore a cost-efficient roadmap for addressing several UN Sustainable Development Goals. For every million dollars invested in on-site solar generation in Sub-Saharan Africa, 15-30 000 tons of CO2 will be saved over the next 30 years, and 50-100 jobs created.[7] The Corona-pandemic is a crisis, but it is also a unique opportunity for Africa to put competitiveness and sustainable industrialisation at the top of the agenda.
Author: Terje Osmundsen, Founder and CEO of Empower New Energy, is a seasoned entrepreneur and thought leader in the renewable energy industry. He is also a regular speaker at African Utility Week and POWERGEN Africa and Future Energy Nigeria.
Sources and notes:
[1] Comparative Analysis of Electricity Tariffs in ECOWAS Member Countries
[2]. All numbers are exclusive of VAT, but include government levies and taxes.
[3] “The Dirty Footprint of the Broken Grid”,
[4] Source: Estimate, Empower New Energy www.empowernewenergy.com
[5] “Solar for Businesses in Sub-Saharan Africa”, Bloomberg 2019
[6] In Senegal, for example, PPAs can only be entered into with the Senegalese National Electricity Corporation, Senelec.
[7] Source: Estimate, Empower New Energy www.empowernewenergy.com
This article was originally published on ESI Africa and is republished with permission with minor editorial changes.
