East Africa can be a difficult market, but the region offers significant opportunities for companies that take the time to understand the terrain, writes Daniel Marks.
Political and economic risks may add to the complications of implementing major projects in some of East Africa’s big markets, but the region has also proven a Launchpad for the expanding off-grid sector, and with a number of strategic transmission schemes coming online, a more inter-connected electricity supply industry (ESI) is slowly emerging.
African Energy Live Data’s listing of generation schemes (www.africa-energy. com/live-data), shows power projects with combined capacity of 11,424 MW are under construction in East Africa, including Ethiopia’s huge 6 GW Grand Renaissance Dam (Gerd). Some 2,844 MW of those projects recorded by Live Data as under construction are expected online by 2020. Many more projects are planned for construction over the period but have yet to get off the ground, reflecting the complexities of developing independent power projects (IPPs) and other schemes.
There have already been important changes in the region. Installed capacity increased from 9.8 GW in 2010 to more than 16 GW in 2017. Overreliance on hydroelectric power (HEP), which can offer copious renewable energy but becomes problematic during periods of drought, reduced over the period from 55% to 50%. The use of fuel oils fell only marginally in 2010–17, from 28.6% of the mix to 28.1%. Solar and wind remain peripheral on the grid, with the percentage of capacity accounted for by solar increasing from nothing to 1.3% and wind from 0.1% to 2.3%.
Geothermal increased from 1.7% of regional installed capacity in 2010 to 4.1% in 2017. But this important resource from the Rift Valley has much greater potential, and as a source of base load power, geothermal already contributes a higher percentage of energy to consumers than the percentage of installed capacity suggests.
The region has been at the heart of one of the most important trends in African power over the past couple of years: the promotion of off-grid solar power. Kenya and Tanzania in particular have incubated most of the largest off-grid solar companies operating on the continent and continue to offer the softest landing for companies looking to become involved in the sector.
Relaxed regulation, reasonable infrastructure, better access to mobile money and congenial demographics have all contributed to this. Kenya and Tanzania have attracted early movers like M-Kopa and Jumeme respectively. Smaller neighbours like Rwanda and Uganda have benefited from their proximity to Kenya and Tanzania, with companies choosing to build on their existing supply chains for their first forays into new markets. An off-grid market is gradually emerging in Ethiopia, where Mobisol signed a distribution partnership with the local Sun-Transfer Tech in December.
East Africa continues to play an important role as a testing ground for off-grid. US-based Renewvia Energy announced that it was close to bringing online its first three African mini-grids in Kenya earlier this year and has identified 10 more sites, as well as sites in Uganda and Nigeria. Germany’s Redavia began operating its first two mini-grids with sup-port from InfraCo Africa in Tanzania in 2017. Jumeme and PowerHive have been building operations in Tanzania and Kenya respectively for several years.
The sums being raised by off-grid companies whose primary business is based in East Africa is testament to the region’s importance as a hub. London-based private equity firm Helios Investment Partners led a $55m funding round in January for Off Grid Electric, also investing in Nigeria’s Starsight Power Utility Ltd alongside African Infrastructure Investment Man-agers. Stanbic Bank arranged a $55m debt funding for M-Kopa last year to expand the company’s product range and grow its operating base in East Africa, particularly Tanzania and Uganda.
However, the region cannot rest on its laurels. Recently, off-grid solar companies have been increasingly focused on West Africa (where power demand per customer tends to be higher) and on developing new products. Much of the money being raised is for expansion into new markets; building infrastructure, training staff, manufacturing products.
Added to this, the business environment in some core East African markets has seen a marked deterioration over the past year. Issues around legislation have made financing more difficult in Kenya, while perceived country risk is alarming investors in Tanzania.
Macroeconomic problems can also impact. Although inflation has declined to levels last seen in 2013 in Kenya, a little over 4%, the exchange rate against the dollar has deteriorated by about 20% over the same period. Most worrying is a trend in government debt-to-GDP, which was brought under control after the glob-al financial crisis, at 38.2% in 2012, only to rise to 57.1% in 2017.
In Tanzania, inflation has also come down to less than 4%, but the dollar exchange rate has depreciated by nearly 40% since 2014 and debt has risen to the equivalent of 37% of GDP in 2017 from around 31% in 2013 and 22% in 2008.
But established infrastructure and market fundamentals in East Africa mean that off-grid solar companies are likely to continue growing their businesses in the region for some time to come.
Not keeping promises
For utility-scale power plant developers, the region has proven more frustrating. Recent years have seen fewer projects in Kenya and Tanzania, while newer markets in Ethiopia, Rwanda, and to an ex-tent Uganda have become more prominent. Investors are also taking an interest in Madagascar as an upcoming frontier market. Utility-scale developers are more susceptible to macroeconomic, regulatory, and structural challenges, as well as tending to attract more attention from vested and political interests.
In several countries, power sector policy has swung back towards state-led development and increasing interference in private sector projects. Uganda has followed up the success of its KfW-sponsored Global Energy Transfer Feed-in Tariff (GET FiT) programme with a fo-cus on the state-led and Chinese funded 600 MW Karuma and 180 MW Isimba hydropower plants. In Tanzania, state utility Tanesco’s 240 MW Kinyerezi II gas power plant began operating on 3 April, but large private sector initiatives have stalled.
Power sector investors have been very wary of Tanzania during the presidency of John Magufuli. Despite apparent progress dealing with corruption, legislation seen as damaging to investors and high-profile spats with private companies have made many developers reluctant to invest. A number of arbitration cases are under way between the government and Symbion Power, which claims that the government is in breach of a 15-year power purchase agreement (PPA) signed in 2016. The Symbion cases alone could result in arbitration awards of more than $500m.
Kenya has failed to maintain momentum achieved by its power sector earlier in the decade. The controversial 1,050 MW Lamu coal power plant remains stalled and has contributed to the belief that Kenya has too much power, despite the continued use of diesel for generation. While four solar power plants which signed PPAs last year are expected to reach financial close in mid-2018, their $0.12 per kilowatt hour (kWh) tariff has been widely questioned and there is considerable confusion about tariff policy for subsequent projects, which are being told the government will no longer accept more than $0.08/kWh.
Geothermal remains promising but is dominated by national utility Kenya Electricity Generating Company (Ken- Gen). Development work has continued at the giant Olkaria geothermal complex, where KenGen is planning to bring online 140 MW Olkaria V and 70 MW Ol-karia I Unit VI in 2019. By 2020 KenGen hopes to have built Olkaria VI and VII, both 140 MW, as well as uprating Olkaria I and IV, adding a further 60 MW.
Progress has been much slower for three 35 MW IPPs at the Menengai geothermal prospect which signed PPAs in 2014. Quantum Power and Sosian Menengai Geothermal Power finally received letters of support from the government in October 2017 and subsequently gave notice of their intention to proceed with the project. Kenya’s state Geothermal Development Company secured a lease for the project site from Kenya Forest Service earlier this year.
To the surprise of many commentators, Ethiopia has proven the most immediate prospect for private power developers in the region. The World Bank Group’s Scaling Solar programme is under way in the country, with bidders prequalified for two 125 MW projects and a number of tenders issued in 2017 for a mix of private and publicly owned plants. Geothermal IPP Corbetti, which has the potential to supply more than 500 MW power, has seen significant progress, finalising key documents late in 2017 alongside Tulu Moye, another 500 MW geothermal IPP.
Regional transmission interconnections will play an increasingly important role in shaping the region’s ESI. Groundwork laid early in the decade will start to pay off over the next few years as major transmission lines come into operation. 220 kV connections between Kenya, Rwanda and Uganda were completed in 2017 and the giant 500 kV Ethiopia-Kenya transmission line should be up and running over the coming 12 months. Work on the Zambia–Tanzania–Kenya interconnection is well advanced, if patchy, with construction under way in Kenya but funding gaps remaining for the strategically important line’s Zambian portion. Ethiopia has already signed agreements to export hydropower to Djibouti, Kenya, Tanzania, and Sudan.
These interconnections could play a critical role managing hydro assets in the region and beyond. Development finance institutions have long hoped that geo-thermal base load from Kenya could be used to manage hydropower in Ethiopia, which would be exported back at peak demand times. Wind from Kenya may be used for a similar purpose in Uganda, or so developers hope. With power from East Africa set to reach the Southern African Power Pool in the not too distant future, there will be new possibilities for managing water levels across the region, whether using coal and solar from the south or wind and geothermal from the east and north.
Daniel Marks is a senior researcher and power sector reporter with African Energy (email@example.com)