Power to the people: why most of Africa is still in darkness
It's time for a new focus on creating and funding rural electrification programmes
Energy and telecommunications have dominated infrastructure financing for Africa for the past decade. However, the large-scale power development market requires a rethink. In East Africa, for instance, the sector is fairly quiet at the moment, pointing to a mismatch between the kinds of projects that have been funded versus what’s most needed.
Several countries in the region will attest to excess capacity. New projects in development often will aim to sell some of their extra capacity to their neighbours, even though neighbouring states are in a similar position.
So on face value, no power is required. But if you look at an image taken from space of the Earth lit up at night, Africa is still darker than anywhere else. So surely power is required? Yes, of course, but where exactly is the problem?
Most rural African communities are still without power and will probably have no access to the grid anytime soon. Large generation projects supplying hundreds of megawatts of power are of no value to them. For instance, Grand Inga, the hydro-electric project in the Democratic Republic of Congo that aims to generate an additional 40,000MW, will be of no use to the people in a rural village in the DRC or its neighbours unless connections are made to their homes.
This is where the public-private partnership model becomes tricky. The private sector can develop, finance and build multi-megawatt independent power projects, but rural electrification has traditionally been the responsibility of the public sector. And delivery has been slow on this front.
Governments at national level generally focus on large-scale power procurement programmes. The private sector and development finance institutions (DFIs) all rush in to finance these, driving down the costs of power while boosting the energy and related industries. But many of these power projects lack “last mile” connectivity and never get to the rural homes that really need it.
Municipalities and provincial administrations need to roll out the distribution networks drive electrification, yet they often lack the ability to do so, resulting in bottlenecks while people are still unable to access the grid.
The answer is to involve the private sector. In cold terms, this offers a capitalistic opportunity: there is demand but the problem is making the opportunity attractive to the private sector as a secure investment. The options are already available – distributed networks; isolated and portable energy systems, that are generally renewable; and mini-grids. Mini-grids are perhaps the best option because projects can be large enough to attract commercial funding and solutions can be easily replicated.
Mini-grids can operate autonomously without being connected to a central government-owned and operated grid, making these viable for an isolated community. But they can still be designed to connect into the central grid when the grid becomes available. Importantly, they can also be disconnected if the national grid fails.
The funding still needs to be refined for wide adoption by financiers, which could be a ripe opportunity for DFIs and commercial banks to work together. A co-funding package with DFI first-loss options coupled with more secure commercial bank senior debt portions could offer a workable solution. It is likely that users will not be very bankable. But when combined in a portfolio, this could offer commercial banks the comfort of knowing that their portion of the repayment requirements will always be covered. DFIs could therefore facilitate the creation of the portfolio and recycle their contribution to attract more commercial debt.
For Africa to really be lit up at night, more capital should be targeted towards rural electrification programmes, not only through grants (which will always remain small) but also as replicable and attractive funding opportunities for private parties.
When it comes to power production, going big may not be the answer. It may be time to go small – but in a big way.
For more information, visit the Rand Merchant Bank website.
This article was paid for by Rand Merchant Bank.
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