At least $560-billion would be required over the next two decades for sub-Saharan Africa's electricity industry to be in a position to match supply and demand, as well as support economic growth, says Frost & Sullivan energy industry analyst Jeannot Boussougouth.
He says that this will be driven by a yearly demand growth of about 4,4% over the next 25 years, which would require capacity expansions of about 270 GW by 2030.
"Because of the scale of the investment, Frost & Sullivan believes that the private sector must be the catalyst of the capacity expansions. The level of their interest would, however, depend heavily on sub-Saharan African governments' ability to introduce several power sector reforms," explains Boussougouth.
He adds that the total estimated cost is likely to continue escalating owing to the increasing cost of equipment and new technologies, the uncertainty in the commodity market and the unavailability of funds worldwide.
Boussougouth says that the majority of sub-Saharan African countries require additional investments in generation capabilities, as blackouts are routine owing to the lack of funding and maintenance, and aging infrastructure.
Factors, such as the demand for electricity, the state of electricity sector reform, the model applied in the electricity sector, the role of government, the level of electricity tariffs, and the scale of the investment required, dictate how suitable a sub-Saharan Africa region is for power generation projects, says Boussougouth.
In East Africa, which includes Kenya, Ethiopia, Uganda and Tanzania, there is a need for an additional generation capacity of at least 5 000 MW to adequately meet the growing power demand by 2010.
Boussougouth says that there is a huge generation capacity deficit in East Africa caused by factors such as the unreliability of hydropower, a lack of government investment in new capacity and high technical skills losses.
"East Africa can be seen as an attractive investment destination, owing to an estimated medium-to-long term growth in demand for electricity of 10%, the availability of significant natural resources that can be used to generate electricity, and increasing government will," says Boussougouth.
In Uganda, the power generation and distribution functions have been liberalised and the tariff structures are being adjusted to reflect the cost of power production.
East African governments have identified several energy projects that could add an estimated 7 870 MW in the foreseeable future. Boussougouth says that Tanzania's Stiegler Gorge project will represent an estimated 25,4% of the total additional generation capacity.
He comments that a lack of funding is likely to slow down the construction of projects and this will be compounded by the absence of a wholesale electricity industry, which prevents private developers from accessing the lucrative industrial power consumers.
"The current depressed economic climate is also likely to affect the pursuit of the build programme, because it has dried out the market in terms of loan availability," says Boussougouth.
About 10 000 MW of additional capacity will be required in West Africa by 2020 to meet the demand for power, says Boussougouth.
In West Africa, a high return on investment (ROI) of 20%, owing to the region's perceived high risk, the availability of massive natural resources such as Nigeria's proven gas reserves of 4 000-billion m3, and an expected 20% growth in electricity demand, indicate that the region has much potential for investment to be explored.
Frost & Sullivan identifies that West Africa requires additional generation capacity to the cost of about $10-billion. Boussougouth says that 75% of the 20 planned projects in West Africa are expected to be hydro-based.
Nigeria's Mambila project alone will represent 36,8% of the new capacity. However, he comments that the issue of tariff levels and structures is expected to remain a significant challenge as the majority of these are not cost reflective, especially for power producers using oil as a feedstock.
Boussougouth says that southern Africa is also a region with many natural resources and large potential for energy generation. He says that the region hosts the largest public utilities on the African continent, with a large build programme of over $35,5-billion by 2013.
Frost & Sullivan identifies South Africa and Botswana as the most active countries, based on the number of projects that are ongoing and in the pipeline. South Africa's power utility Eskom is expected to add just over 16 000 MW of additional generation capacity to its electricity grid by 2017.
"As the economic locomotive of southern Africa, it is imperative that South Africa sorts out its electricity crisis. The recommissioning of Eskom's three mothballed coal-fired stations will help achieve this," comments Boussougouth.
He says the ongoing refurbishment and expansion of the Morupule power station will add 400 MW of generation capacity by 2012.
Electricity Sector Reform
Boussougouth says that in many sub-Saharan African countries, power purchase agreements are negotiated between the project developer, the off-taker, or State utility, and the government. For this to work, he says that governments and public utilities must be able to offer attractive ROI or provide guarantees, as most utilities have very low-credit ratings and unstable financial bases.
He adds that governments should also pursue a diversification of their energy mix, as overdependence on a single source of electricity is too risky a strategy to be encouraged.
"Governments should offer increased support for an energy-independent private sector. This would put less pressure on national grids, as willing energy-intensive users could be investing in generation capabilities for their own use," says Boussougouth.
"Frost & Sullivan believes that governments need to pursue the reform of the electricity sector. This would allow the sector to be more competitive, translating into improved service offerings. However, this might prove difficult to achieve owing to social and political issues. As a result, negotiating a mutually beneficial power purchase agreement will prove even more critical," he adds.
Boussougouth states that it should be noted that renewable energies are still highly under-used in most sub-Saharan African countries. This is owing to a combination of the limited number of countries with specific policies or legislation to stimulate increased renewable energy use, the absence of realistic feed-in-tariffs, and the high costs of these projects.
He says that despite this, there are several sub-Saharan African countries that have an adequate environment in which renewable energy technologies could be implemented. The combined geothermal potential of Kenya, Ethiopia, Djibouti, and Uganda is estimated at about 6 000 MW, which is just over a third of Eskom's additional generation capacity to be delivered by 2017.
"The uptake of renewable energy products in South Africa can be considered as disappointingly low. The country's plan to develop an estimated 10 000 GWh of renewable energy capacity by 2013 is unlikely to be achieved, since only about 3% of this has been generated so far," comments Boussougouth.
He comments that this can be blamed on the lack of renewable energy-specific policies and the low electricity tariffs, but that this rend can be observed in most countries.
"Government knows what it needs to do to help increase investors' appetite in the renewable energy market. However, Frost & Sullivan believes that initiatives to quicken this process could be slowed down further in the foreseeable future owing to the depressed financial environment," says Boussougouth.
Boussougouth says that, despite the current challenges faced by sub-Saharan Africa, among them the global economic downturn, the increasing number of projects planned across the continent suggests that the sub-Saharan African electricity sector is bound to continue to grow in the foreseeable future.
"The strength of sub-Saharan Africa's fundamentals, robust demand for electricity, ongoing power sector reform, increasing government will, high return on investment, and the availability of significant natural resources, indicates that it is likely to withstand the effect of the global economic downturn, thereby helping attract direct private capital," he concludes.