Sub-Saharan Africa needs more ‘investor friendly’ energy sector to boost infrastructure, says report

Out-Law News | 20 Oct 2014 | 12:29 pm | 2 min. read

A “severe shortage of essential electricity infrastructure” is undermining efforts to achieve more rapid social and economic development across sub-Saharan Africa (SSA), according to a new report from the International Energy Agency (IEA).

The ‘Africa Energy Outlook’ report (242-page / 6.90 MB) said an additional $450 billion in power sector investment could help boost the economy in SSA by around 30% in 2040.

However, reform programmes “are starting to improve efficiency and to bring in new capital, including from private investors”, the report said. Under the report’s ‘main scenario’ to 2040, grid-based generation capacity is projected to quadruple, “albeit from a very low base of 90 gigawatts today, half of which is in South Africa.”

“A reduction in the risks facing investors... makes oil and gas projects more competitive with production in other parts of the world,” the report said. This will enable more projects to move ahead and see “a higher share of the resulting fiscal revenue” used to “reverse deficiencies in essential infrastructure”.

Under the main scenario, SSA is starting to “unlock” its vast renewable energy resources, with almost half of the growth in electricity generation to 2040 coming from renewables. “Hydropower accounts for one-fifth of today’s power supply, but less than 10% of the estimated technical potential has been utilised,” the report said.

“Political instability and limited access to finance” for renewable sources of energy such as hydropower, in countries such as the Democratic Republic of Congo, has “held back” the development of hydropower, the report said. However, these constraints “are gradually being lifted, not least because of greater regional cooperation and the emergence of China, alongside the traditional lenders, as a major funder of large infrastructure projects”.

According to the report other sources of renewable energy, “led by solar”, are set to make a growing contribution to supply, “with a successful auction-based procurement programme in South Africa showing how this can be achieved cost effectively. Geothermal is also set to become “the second-largest source of power supply in East Africa, mainly in Kenya and Ethiopia”, the report said.

Natural gas resource-holders “can power domestic economic development and boost export revenues, but only if the right regulation, prices and infrastructure are in place”, the report said. Incentives to use gas within SSA are expected to grow as power sector reforms and gas infrastructure projects move ahead, but the report said that, “for the moment, as much gas is flared as is consumed within the region”.

More than one trillion cubic metres of gas “has been wasted through flaring over the years, a volume that, if used to provide power, would be enough to meet current SSA electricity needs for more than a decade”, the report said.

The report said a “lack of suitable railway and port infrastructure” is hindering the development of new coal resources in SSA, a situation that is also affecting the outlook for South Africa “as the existing mining areas close to Johannesburg start to deplete”. Coal production is projected to “spread gradually” beyond South Africa under the report’s main scenario, “but coal is overtaken by oil as the second-largest fuel” in SSA’s energy mix.

The report said that investment in SSA energy supply has been growing, but that two-thirds of the total since 2000 “has been aimed at developing resources for export”.

IEA chief economist Fatih Birol said: “Economic and social development in SSA hinges critically on fixing the energy sector. The payoff can be huge, with each additional dollar invested in the power sector boosting the overall economy by $15.”

IEA executive director Maria van der Hoeven said: “The outlook for providing access to electricity (in SSA) is bittersweet. Nearly one billion people are expected to gain access to electricity by 2040 but, because of very rapid population growth in the region, more than half a billion are still expected to be without electricity at that time.”

Van der Hoeven said: “Policy makers need to focus on building human capacity within the energy sector, strengthening policy and regulatory frameworks so that well-functioning energy markets emerge, opening up energy markets to new players and new sources of finance and, where it is not already the case, moving towards pricing that reflects market fundamentals.”