Power Dynamics: Electricity after COVID-19

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Ian Lewis

The COVID-19 epidemic has delayed power projects and thrown future spending plans into doubt across Africa.

But those working in the sector say continuing to pursue electricity access goals and the transition to cleaner energy are not just essential to reach climate change goals, they will also make the continent more resilient to similar shocks in the future.   

The economic impact will be severe across the continent and will continue to be felt for years. The severe impact of COVID-19 on developed countries means the supply chains feeding material and staff to African projects have been severely interrupted.

Meanwhile, financial resources that had been destined for major infrastructure developments may now be redirected towards healthcare or shoring up black holes in government budgets. 

Cash-strapped foreign investors may become more risk averse and the cost of borrowing at the state level may go up. Credit ratings agencies have already downgraded the debt of some of the countries most affected by the pandemic, such as South Africa. 

The view from those involved in the energy sector is that the goal of providing electricity access to all Africans as fast as possible should not be sacrificed in the aftermath of the pandemic.

Indeed, they argue, greater electricity access should be regarded not as a cost, but as a major part of the solution, by making African communities more resilient, more financially secure and better able to take advantage of modern healthcare services in the future.

 

Market Resilience

Grid-scale power projects have also felt the effects of the pandemic, with many essentially being mothballed if they were dependent on imported materials and skilled workers to make headway.

However, those investing in the energy sector are optimistic that the power sector is resilient enough to bounce back, even if project delays and reduced order books are likely to remain challenges over the next few months.

Chris Antonopoulos, chief executive of Lekela Power, the Africa-focused grid-scale wind farm builder, is cautiously optimistic over the speed of recovery.

“There is one school of thought that says projects could be delayed because priorities have changed, so money will go elsewhere, leading to a shortage of capital. However, in Africa, there has always been money available for good renewable projects. It was the quality of the projects that delayed them or made them unfinanceable, not the capital available,” he says.

Vangelis Kamaris, chief executive of power project developer METKA West Africa, also sounded a positive note.

“There will inevitably be some disruption, but not long-term disruption. We see African economies rebounding in 2021. I think most of the interest in the region – and there is a lot of interest – will be back in place, and prospects remain positive in the long run,” he said

Nick O’Donohoe, chief executive of CDC, the UK development finance institution that invests in power projects, warned of potential payment problems for generating companies reliant on income from government-owned grid operators that in turn are experiencing a drop in revenues from consumers.

“Some countries already had an issue with this ‘circular’ debt, and that is only going to get worse with Covid-19, partly because power consumers will find it more difficult to pay and partly because governments will have other priorities in terms of health and so on,” he said.

 

Rationale for Renewables

It remains to be seen whether optimism over what follows the pandemic is justified, but there seems little reason for African nations to back down on efforts to improve their energy independence, while seeking to switch to clean energy at the same time. 

This is highlighted by one knock-on effect of the pandemic: global oil price volatility.

Psychic powers would be an asset in predicting what the oil price will be in a year’s time, so the perennial challenges faced by African countries in financing fuel imports, or in calculating their likely impact on spending are not going to get any easier.

Oil products, nearly all imported, account for 15 percent of Sub-Saharan electricity generation, either in oil-fired power generation or in diesel back-up generators.

In particular, the region’s reliance on diesel generators to keep the lights on remains an acute problem.

Around 40TWh of the region’s power, or eight percent of total generation, came from 40GW of back-up generators in 2018, according to the International Energy Agency (IEA).

Nigeria accounted for 18TWh of that from some 9GW of generator capacity.

This underscores the rationale for African governments to fully invest in an energy transition towards a power mix based on renewable energy, backed up, where necessary by natural gas, the cleanest of the fossil fuels.

Renewable energy provides a clean and increasingly cheap way to cut down on fossil fuel imports – or for African oil and gas producers to garner extra revenue by allowing them to export hydrocarbons at global prices, rather burning them at home.

As the IEA said in its special report on Africa, published last November: “Africa stands on the cusp of a unique opportunity: the possibility of becoming the first continent to develop its economy primarily by using energy efficiency, renewables and natural gas – all of which offer huge untapped potential and economic benefits.”

 

Untapped Potential

That “untapped potential” is why investors still believe the African power sector can thrive.

The IEA estimates that if the continent adopts “policies needed to develop the continent’s energy sector in a way that allows economies to grow strongly, sustainably and inclusively” – its so-called Africa Case scenario – electricity demand could rise more than threefold by 2040.

Much of that demand increase is likely to come from less mature energy markets beyond the North Africa region and South Africa, which between them accounted for more than 70 percent of an estimated 700TWh of demand in 2019.

Even if governments proceed on the basis of what they have already said they will do, demand is set to more than double in the next two decades.

Solar energy is Africa’s ubiquitous power source and is already playing a key part in the transition. Africa’s installed solar photovoltaic capacity grew to 6,37GW in 2019, more than double the figure for 2016, according to International Renewable Energy Agency data.

But that still only amounts to less than two percent of global capacity, so with costs falling, the sector is ripe for expansion.

The IEA reckons an average 15GW a year of new solar PV capacity could come online between now and 2040.

Wind capacity is also likely to increase in regions where there are enough wind resources – there is room for substantial growth in South Africa, as well as the East and West Africa regions.    

 

Foot on the Gas

Africa is also well positioned to provide its own gas feedstock for the thermal power stations likely to be needed to provide baseload power until large-scale energy storage to complement renewables becomes more widely affordable.

North Africa is already doing that, with more than half of its energy needs coming from natural gas, according to the IEA. 

By contrast, gas accounts for only five percent of the Sub-Saharan African energy mix.

However, the region is in a position to boost that share from its own resources. Africa as a whole  played host to more than 40 percent of global gas discoveries in 2011-18 – mainly in Mozambique, Tanzania, Egypt, Senegal, Mauritania and South Africa.

However, the extent to which those gas reserves can be converted into production and then domestic power generation remains to be seen and will depend as much on global market forces as the will of African governments.

Mozambique, Senegal and Mauritania have already made significant headway in exploiting their offshore gas reserves, some of which will go to their local markets.

However, they will be exporting most of the gas to lucrative international markets when production starts within the next couple of years, because that’s the only way the developers of these multi-billion-dollar projects can recoup their upfront expenditure in a short enough time to keep their investors happy. 

The impact of the Covid-19 pandemic on project timetables and world hydrocarbons prices – which sank in early 2020 due to global over-supply due the drop in demand – means there is now a question mark over investment in future gas development in Africa (and the rest of the world), which could put a cap on home-produced African supply. – African Business

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