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Africa Energy Forum Preview

By Philip Lindop

Increased electricity generation is central to Africa’s future prosperity. The continent needs to increase power production if it is to realise the sustained economic growth required to provide jobs, increase investment and lift millions out of poverty.

The challenge before us is significant. In its inaugural report on the Africa Energy Outlook in 2014, the International Energy Agency estimated that in subSaharan Africa as a whole, only 290 million of 915 million people have access to electricity.

The total number without access is rising as electrification efforts are outpaced by population growth. This is indeed a crisis that must be addressed.

The good news is that the IEA’s most likely future scenario shows that electrification programmes, mini-grids and a huge boost in renewable energy production could see the total number without access in Africa start to decline in the 2020s. By 2040, nearly a billion people could have gained access to electricity.

In the accompanying preview, Barclays Africa offers the perspective of our mining and banking experts on potential developments in 2016 as well as the factors affecting those developments. What is clear, is that mining is a long-term business and the key to managing the downcycles is collaboration and partnership.That is a goal worth working towards, though it will still leave the continent short of universal access to electricity. If we are to turn that optimistic scenario into reality, we will have to continue and accelerate the projects and programmes already underway and extend those efforts to areas where large numbers of people do not have the benefits of electricity.

Success can only be achieved through partnerships between the public and private sectors and by cooperation in and across regions. We must build on the progress being made in a number of countries as Africa’s electrification efforts gain momentum. That progress may sometimes be slow, but it is steady, and it involves both old and new technologies.

Renewable energy and natural gas are set to change the nature of electricity production in Africa. These two resources complement each other – gas generation can be turned on when wind or solar power is not available – and together they can help alleviate power shortages in many parts of Africa.

Large renewable energy projects are underway in South Africa and Egypt, and smaller programmes are happening or are planned in a number of other countries. This is only the start of a renewable energy revolution as Africa unlocks its abundant natural resources. The IEA projection is that by 2040, half of Africa’s new power generation will come from renewable energy. This is good news on many levels.

Natural gas is the other potential game changer. Gas finds off Africa’s west and east coasts hold major potential for gas-to-power programmes; the first projects are already underway and more will happen as these resources are developed.

Coal and hydro-electricity will remain important for Africa, although both are facing headwinds. Stricter emissioncontrol regulations increase the costs and lessen the appeal of coal-fired generation, while severe drought has affected the output of some hydro schemes.

With that said, all of these technologies – as well as investment by both the public and private sectors – are needed as the wave of electrification in Africa gathers momentum.

Barclays Africa, in partnership with its clients, is committed to helping drive the ongoing electrification of the continent. As a leading participant in power transactions across Africa, we have seen the direct link between the additional power brought online and the improvement in the quality of life in countries and communities.

We take a long-term view because these are long-term projects. Less vigorous growth in African economies following the slowdown in China and the sharp drop in commodity prices are having some effect on investment. However, new power plants will keep on producing electricity for decades to come, and a number of commodity cycles could play out over the lifetime of these projects.

In addition to helping to address today’s power deficits, we are building capacity for the future. Our experts advise governments, utilities and investors on electrification projects, power purchase agreements and financing structures. This is contributing to the expansion of the power industry across the continent, as outlined on the next few pages.

Together with our clients, we are helping to energise Africa’s development, deepen the continent’s financial markets and support projects that enable more inclusive growth.

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The two factors set to transform Africa’s energy challenge

Africa’s power generation capability is increasing slowly but steadily. The continent’s energy shortages are a long way from being resolved, but in country after country, they are being addressed.

The two factors set to transform Africa's energy challenge

New power stations are being built in many parts of the continent, with a strong focus on renewable wind and solar power. Transmission and distribution lines are being upgraded, and regional interconnections are giving countries more energy security.

In its Africa Energy Outlook last year, the International Energy Agency (IEA) estimated that in sub-Saharan Africa as a whole, only 290 million out of 915 million people had access to electricity and that the total number without access was rising. While efforts to promote electrification are gaining momentum, they are outpaced by rapid population growth.

However, the same report shows what can be achieved. In its main scenario for 2040, the IEA says that power generation in Africa can quadruple over the next 25 years from the current 90GW, bringing electricity to an additional 950 million people as reform programmes improve efficiency and bring in new capital, including from private investors.

A number of factors are behind the drive to increase electricity generation. Rapid economic growth – sub-Saharan Africa has been one of the fastest growing regions of the world – and rising population numbers have increased the demand for energy. On the supply side, huge oil and gas finds, as well as the declining costs of renewable energy, are leading to an increased focus on power generation from wind, solar and natural gas.

While governments are also looking at new power from coal, hydroelectricity and nuclear, there are two significant factors that are set to transform Africa’s power supply prospects. The first is renewable energy, which has been the big development in Africa recently. The second is natural gas, which may become the game changer that provides the electricity for economic growth and job creation in decades to come. These two forces, in combination, could go a long way to relieving Africa’s energy woes.

South Africa’s drive to increase power from renewable energy has been a remarkable success, and the lessons being learned are helping other African countries that are looking at or implementing similar programmes.

The first contracts in the South African Renewable Energy Independent Power Producer (REIPP) programme were awarded in 2012, and there have so far been four bidding rounds as developers vie for contracts. At least two more rounds are anticipated in 2016 and 2017. More than 90 projects have been approved, and many of the early ones are already completed and feeding power into the South African grid.

The programme initially aimed to procure 3 725MW of power from renewable energy but this has grown because of the success of the programme and the interest shown by local and foreign investors. The programme has attracted huge amounts of foreign investment from private sector developers and, more recently, electricity utilities in France and Italy.

In May 2016, the South African energy minister said the country remained on track to procure 17 800MW of renewable energy by 2030. By December 2015, 6 377 MW of renewable energy had been procured. This is expected to grow to more than 7 000 MW with some 90 renewable energy independent power producers fully operational by the end of 2016. Private investment in the programme already exceeds R194 billion and will increase to R255 billion by the fourth bid window.

The fifth bid window will be initiated later this year. Other new developments include a 1 500MW solar park to stimulate investment in new and expanding industrial and manufacturing facilities, and plans for a 600MW additional gas-to-power programme in partnership with state-owned entities.

The tariffs at which developers were offering to sell electricity dropped substantially after the first bidding round, with wind generation tariffs now about half of what they were at the start of the programme, and solar PV tariffs about three times lower. The reasons included rising investor confidence in the process, increased competition for project contracts, and the falling price of generation equipment such as wind turbines and solar panels.

As a result, it is cheaper now to procure power from wind and solar in South Africa than from a new coal-fired power plant, and that is without any of the built-in subsidies that are common in Europe or elsewhere.

Another outcome, seen in South Africa and hopefully in other African countries in future, is increasing interest in renewable energy investments from pension funds and the insurance industry. Renewable energy has become a whole new asset class for the investor community with a successful track record. Barclays has been involved in funding nearly 45% of the projects approved in South Africa, and we have not seen one failed project. All those completed have been on time and within budget.

Renewable energy is becoming an African success story, and the IEA estimates that renewables will account for almost half of Africa’s new power generation between now and 2040.

Natural gas is the other new frontier for power generation in Africa. It will be years, and probably decades, before gas-to-power projects are developed at scale, but gas projects planned in Nigeria, and in countries down the east coast of Africa following massive offshore gas discoveries, can produce enough power to transform national and regional economies.

Among the other countries planning gas infrastructure projects are Ghana, seeking to exploit its own offshore gas fields; Tanzania, which plans to convert power stations to gas, and Mozambique, which is looking at a huge liquefied natural gas (LNG) export industry. South Africa is about to launch a gas IPP programme with natural gas available from Mozambique, and its own offshore and possibly onshore deposits.

The other sources for new power generation in Africa are hydro, coal and nuclear. Hydro power has been a success in several African countries, though drought is now affecting the efficiency of some hydro-electric plants. Long transmission lines can also affect the financial viability of remote hydro power stations.

South Africa has the only nuclear power station in Africa and is planning to expand its nuclear fleet.

Coal is going remain an important, though diminishing, part of Africa’s power equation. In many parts of the continent, coal is plentiful and cheap. Kenya, Mozambique, South Africa and Botswana are among those planning new coal-fired power stations. However, environmental concerns are resulting in an increased focus on cleaner options like renewable energy and natural gas.

Together with increased power generation comes the need to strengthen national and regional grids. Africa’s five regional power pools – in east, west, central, northern and southern Africa – aim to increase regional interconnectivity and thus energy security.

Where all countries in a region are interconnected, a shortage in just one of those countries can quickly be managed by importing power from a neighbour. Governments throughout the continent are spending significant amounts on new and upgraded transmission lines to achieve this objective.

Africa is addressing its power shortages, slowly but surely, with success stories from current initiatives and massive potential for future projects to light up the continent.


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Electricity projects are energising Africa’s development

Increased electricity generation is central to Africa’s future prosperity. The continent needs to increase power production if it is to realise the sustained economic growth required to provide jobs, increase investment and lift millions out of poverty.

This is the backdrop to the 2016 Africa Energy Forum, which takes place in London next week. At that conference, we will be looking at far more than projects, technologies or even country-specific issues. We will be looking at the future well-being of a continent and how energy projects will benefit people, communities and economies.

The challenge before us is significant. In its inaugural report on the Africa Energy Outlook in 2014, the International Energy Agency estimated that in sub-Saharan Africa as a whole, only 290 million of 915 million people have access to electricity. The total number without access is rising as electrification efforts are outpaced by population growth. This is indeed a crisis that must be addressed.

The good news is that the IEA’s most likely future scenario shows that electrification programmes, mini-grids and a huge boost in renewable energy production could see the total number without access in Africa start to decline in the 2020s. By 2040, nearly a billion people could have gained access to electricity.

That is a goal worth working towards, though it will still leave the continent short of universal access to electricity. If we are to turn that optimistic scenario into reality, we will have to continue to accelerate the projects and programmes already underway and extend those efforts to areas where large numbers of people do not have the benefits of electricity.

Success can only be achieved through partnerships between the public and private sectors and by co-operation in and across regions. We must build on the progress being made in a number of countries as Africa’s electrification efforts gain momentum. That progress may sometimes be slow, but it is steady, and it involves both old and new technologies.

Renewable energy and natural gas are set to change the nature of electricity production in Africa. These two resources complement each other – gas generation can be turned on when wind or solar power is not available – and together they can help alleviate power shortages in many parts of Africa.

Large renewable energy projects are underway in South Africa and Egypt, and smaller programmes are happening or are planned in a number of other countries. This is only the start of a renewable energy revolution as Africa unlocks its abundant natural resources. The IEA projection is that by 2040, half of Africa’s new power generation will come from renewable energy. This is good news on many levels.

Natural gas is the other potential game changer. Gas finds off Africa’s west and east coasts hold major potential for gas-to-power programmes; the first projects are already underway and more will happen as these resources are developed.

Coal and hydroelectricity will remain important for Africa, although both are facing headwinds. Stricter emission-control regulations increase the costs and lessen the appeal of coal-fired generation, while severe drought has affected the output of some hydro schemes.

With that said, all of these technologies – as well as investment by both the public and private sectors – are needed as the wave of electrification in Africa gathers momentum.

Barclays Africa, in partnership with our clients, is committed to helping drive the ongoing electrification of our continent. As a leading participant in power transactions across Africa, we have seen the direct link between the additional power brought online and the improvement in the quality of life in countries and communities.

We take a long-term view because these are long-term projects. Less vigorous growth in African economies following the slowdown in China and the sharp drop in commodity prices are having some effect on investment. However, new power plants will keep on producing electricity for decades to come, and a number of commodity cycles could play out over the lifetime of these projects.

Together with our clients, we are helping to energise Africa’s development, deepen the continent’s financial markets and support projects that enable more inclusive growth.


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Private sector finance can lighten government’s load on energy

In his 2016 budget speech, South Africa’s Finance Minister, Pravin Gordhan, stressed the need for more private sector involvement in infrastructure projects. He also cited South Africa’s renewable energy programme as an example to be followed as government seeks to accelerate infrastructure investment.

There are certainly valuable lessons to be learned, for both the public and private sectors, from the success of the renewable energy programme. In less than five years, 6 377 MW of electricity has been allocated to preferred bidders across technologies – more than the projected output of the Medupi coal-fired power station. Some 44 projects accounting for 2021 MW are already connected to the national grid with many more renewable energy projects currently under construction.

More is to come through additions to the programme, including the fifth round of bids, which will likely be announced later this year or early next year. According to Government’s current energy road-map (the Integrated Resources Plan), the aim is to have 17,800 MW of renewable energy by 2030.

All of this is being financed by the private sector. While Eskom is involved in coal, wind, solar and hydro-electric projects, the private sector has ploughed R194 billion into renewable energy projects approved in the first four rounds of the renewable energy programme in SA, with most projects having an international developer contributing foreign investment to the country.

This shows that despite difficult times for the South African and global economies, investors have a keen interest in well-structured infrastructure projects in this country.

The conditions need to be right, and this is what Minister Gordhan is looking at as he seeks to broaden the range and scope of co-funding partnerships with private sector investors. He wants the public and private sectors to study the lessons learned in funding renewable energy projects and, in so doing, promote the funding of broadband telecommunications, among others.

The renewable energy programme has not only attracted billions in private sector investment, it has resulted in IPPs (Independent Power Producers) contracting to sell electricity at ever lower tariffs as the bidding rounds have progressed. This is a benefit to Eskom, which buys the electricity, and to the end-consumers in the country, who ultimately pay for it.

The highest tariffs guaranteed to developers were in the first bidding round. In subsequent rounds the contracted tariffs dropped markedly due, among other things, to the falling cost of technology on wind turbines and solar modules and to increased competition as international utilities or utility-scale developers became more prolific in the SA market.

Although one would expect competition to remain intense, with the weakened rand it is questionable how much further the tariffs can fall (if at all) in the next round. It is for this reason that equipment suppliers are looking to set up local assembly and manufacturing facilities to keep costs down and also to comply with increasing local content requirements. As an emerging market, South Africa will need to tread carefully to ensure that the returns to developers compensate for an ‘emerging market premium’. If returns continue to fall, the result may in fact stifle the renewable energy market in SA.

The Department of Energy will also be seeking bids to build coal-fired power stations. While the government’s energy plan is focused on gradually diversifying its power generation energy mix away from coal, it does include an additional 2 500 MW of coal-fired power to be procured under the coal Baseload IPP programme (“BIPPP”). A total of 900 MW across two projects was bid in November 2015; preferred bidders have yet to be announced. There will be further bidding rounds under the coal BIPPP with the next round expected towards the end of 2016. A ministerial determination for cross-border procurement of coal-to-power for 3 750 MW has been promulgated with power to be on-stream between 2025 and 2030.

The plan to create the Northern Cape Solar Park in the Upington area for 1 500 MW of solar energy is part of Government’s plan to create Renewable Energy Development Zones in a clustered fashion, sharing common infrastructure and services such as access to land, water supply, feeder lines to the transmission system, roads and support industries.

Gas-to-power and hydroelectric power projects are also part of government’s planned energy mix. While power generation from wind and solar is intermittent, coal, gas and hydro power provide base-load power – i.e. they can generate electricity at far higher ‘capacity factors’. The government is looking for 3 126 MW of new gas-fired power generation. There has also been an announcement for a further 600 MW of gas-to-power for involvement with State-owned Enterprises in SA. The Gas Utilisation Master Plan (“GUMP”) is expected later this year, which will be our roadmap for the development of a gas sector in SA.

The first gas projects are likely to be fuelled by imported liquefied natural gas (LNG) to supply gas-fired power stations, which could be built within two to three years. In the medium term, SA could be looking at importing more gas from Mozambique and possibly beyond. (SA currently imports some gas through the Sasol ROMPCO pipeline from Mozambique).

There is also the plan to procure baseload hydroelectric generation capacity from neighbouring countries, which could include Zambia, Mozambique and DRC. This will more than likely be a medium- to long-term initiative.

All of this can be achieved with private sector funding.

The gas-to-power programme will likely be along similar competitive lines to the Renewable Energy and coal IPP programmes. These programmes hold valuable lessons not only for gas, but for other infrastructure projects the government wishes to implement.

As the Treasury is constrained by lower revenues and multiple spending priorities, including education, social grants and drought relief, an opportunity has emerged for the private sector. What the renewable energy programme has shown is how much can be achieved without government money. A well-structured programme will attract local and international investors, and commercial banks and development finance institutions will fund these projects.

Notwithstanding tough economic conditions, funding remains available for the right project, which is properly structured with the proper risk allocation, be it debt or equity.

More private sector involvement, and particularly more private sector financing, will deliver critical South African infrastructure projects while freeing up funds that the Finance Minister can allocate to other development priorities. There are opportunities here that the private and public sectors should find very attractive.


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Oil price drop creates winners and losers in African economies

By Camillo Atampugre

The sharp drop in the oil price has hammered Africa’s oil producers, while oil importers have benefited from cheaper oil. Among both the winners and losers there are countries that have made the best use of recent developments in the oil market.

Over the past two years oil has dropped precipitously, from $120 a barrel to $30, and is now hovering around $50 a barrel. The oil price is likely to stay at this level for 2016, rising slightly in 2017, and the prospect is that the price will remain below the $100 a barrel mark for years to come.

The impact on oil producing countries has been severe. Among the hardest hit in Africa have been its two biggest oil producers, Nigeria and Angola, both of which have economies heavily dependent on oil revenues. Other countries suffering from lower oil revenues include Equatorial Guinea, Gabon, Cameroon, Sudan, Ghana and Congo Brazzaville as well as key producers in North Africa, including Algeria.

The oil-price winners in Africa are all of the countries now paying less than half for imported oil than they were two years ago. This has enabled them to spend more on services such as education and health care as well as much needed infrastructure projects and, most importantly, encourages domestic spending. For some, however, the oil price windfall is lessened because they export commodities whose prices have also slumped over the past two years.

Those saving money on their imports of crude oil and oil products include Ethiopia, Kenya, Rwanda, South Africa and Tanzania, to name only a few. Consumers in these countries are also benefiting when they buy products with an oil element – when it costs less to fill up a car with petrol or diesel, they have more disposable income to spend on other goods and services.

There have been different economic outcomes among these oil-price winners. Ethiopia is faring best of all, and is doing fantastically well, with a GDP growth rate above 9% in 2015. Another clear winner is Kenya, with growth of nearly 6%.

Ethiopia has been channelling a lot of its spending, as well as attracting foreign investment, into developing a manufacturing base and creating the right environment for companies to start and flourish. While Kenya has discovered its own oil, it is not yet a producer. The Kenyan economy is more diversified, including growing financial technology (fintech) and mobile telephony sectors.

There have also been differences in the responses of the oil producing countries. Both Nigeria and Angola, the most heavily dependent on oil revenues, are restructuring and seeking greater efficiencies from their national oil companies which in each case are the dominant companies in their economies. However, their strategies differ.

While Angola is drawing its national oil company closer to the ruling family, Nigeria is not only opening out its oil company, but it is seeking to lessen the country’s dependence on oil.

For Nigeria the oil price fall has been both a curse and a gift. The curse is the economic impact and a sudden shortage of foreign exchange. Nigeria is not a big manufacturing country, and relies on imports. Sharply lower revenues from oil sales have led to a lack of foreign currency, and particularly US dollars, with which to buy or import foreign goods.

Companies seeking to import capital goods and everyday items like cars or TV sets into Nigeria cannot get dollars necessary at the official rate and are often forced to turn to the black market, where high rates can make importing uneconomic. With less money in circulation, the result has been inflation, lower consumer spending and the failure of some businesses. In Nigeria, the man in the street is feeling the pinch of lower oil prices. The Central Bank of Nigeria has signalled a move to a flexible exchange rate which should alleviate the shortage of hard currency going forward—a move much welcomed by the market.

The gift for Nigeria is the opportunity to restructure the economy and diversify away from its over-reliance on one commodity. It is also an opportunity to act against corruption, which had been fuelled by the huge amounts of money generated by oil proceeds. Austerity has enabled the new government to tighten up on revenue streams.

Nigerian ministers recently visited London, emphasising to investors and bankers that Nigeria is determined to diversify away from the oil sector. The country is seeking investment into other areas of the economy, offering opportunities to develop its infrastructure, as well as for manufacturers and consumer companies to develop the parts of the economy neglected when oil was the easy option for the government to follow.

Nigeria is also among the African countries pushing gas to power projects in order to end chronic electricity shortages that are slowing economic growth. While many gas projects are being delayed because gas prices have dropped as oil has fallen, the gas to power drive is focused on gas for development in the domestic economy rather than for export.

Ghana and Tanzania are other countries with gas projects specifically designed for power generation. While Mozambique plans substantial gas exports, it is also reviewing plans to utilise some of its offshore resources for onshore projects. South Africa is planning a gas import terminal to feed gas to power projects to meet the growing demands on its power sector.

These imperatives are likely to drive African economies for a while yet. The key players in the oil market, led by Saudi Arabia, are pumping as much oil as they can. The slight rise in the oil price is encouraging some United States shale oil producers back into the market, and new projects which will increase supply can take five to seven years to bring into production.

Chinese economic growth has slowed, and growth in European economies is lacklustre. While the US economy is more robust, it is not near the growth levels people had expected.

In these circumstances, the expectation is that oil prices will stay low. Goldman Sachs recently predicted prices would stay at current levels for 12 to 18 months. Barclays expects oil to average about $44 a barrel this year, with a slight recovery next year taking it to around $60 a barrel.

This will increase Africa’s mindset shift away from oil dominance, and sharpen the focus on gas production for power generation with its multiplier effect on economic growth and job creation. There is good news for both oil price winners and losers in Africa.

Camillo Atampugre, Vice President, Head of oil and gas for Africa at Barclays based in London. Barclays partners governments and businesses in oil and gas developments across Africa, particularly in exploration and production transactions.

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  • Gas is the perfect complement to renewables. Gas generation can be turned on when wind and solar are not available.
    - Philip Lindop
    Head of Investment Banking, Barclays Africa
  • We have seen a direct link between additional power supply and an improvement in the quality of life for families and communities.
    - Philip Lindop
    Head of Investment Banking, Barclays Africa
Copyright 2013 Corporate and Investment Banking, Absa, member of Barclays. All rights Reserved. Corporate and Investment Banking is a division of Absa Bank Limited, Reg No. 1986/004794/06. Authorised Financial Services Provider. Registered Credit Provider Reg No NCRCP7