An Emerging Market    

Africa has seen increasing uptake of solar, especially in the northern part of the continent. In fact, solar power is becoming a popular alternative to fossil fuel-based energy generation and it is supplementing hydropower in countries where water resources are scarce. It is gaining traction across the utility scale, commercial and industrial as well as micro- and mini-grid segments.

Several countries across Africa, which are rich in solar resource, have taken policy initiatives, set targets and developed regulatory frameworks to promote solar projects. While some early movers initially introduced feed-in tariffs for project allocation, many are moving towards auctions. Some countries have even introduced net metering schemes, although mostly for small-scale electricity generation only, with a cap on eligible project capacity. Further, various financial incentives such as exemptions on tax and import duties on solar equipment are being provided to promote the solar segment. Apart from country-level policies, various international multi-country initiatives are under way in Africa including Scaling Solar and GET FiT. However, as the continent moves towards realising its solar potential, it will have to deal with a number of challenges.

Based on discussions from a recent conference on “Solar Power in Africa”, organised by REGlobal and Renewable Watch, we present a snapshot of the current scenario, opportunities and challenges for solar power across various countries in the African continent.

Segment-wise uptake

Utility-scale solar

The utility-scale solar market is concentrated in a few countries in Africa. South Africa represents the biggest market and is planning to auction about 6,800 MW of renewable energy in 2021. The second-largest market is North Africa with countries such as Egypt and Morocco boasting large-scale solar development. Among other markets of interest is Nigeria, especially with the privatisation of its power sector. However, there are still issues in grid connectivity and government financing, much like most countries of the continent.

Efforts to promote the utility-scale solar market in Africa must be directed towards improving the bankability of projects. Lessons can be learned from South Africa where banks have a say in the drafting of power purchase agreements (PPAs) so that investors have assured returns. Further, once projects have been developed, there needs to be a pipeline to feed the subsectors that are created. Above all, large-scale grid development must be carried out so that power can be exported across borders.

With large-scale solar power development, it is also important to ensure that its benefits accrue to the local population. This can be done by setting aside a certain percentage of revenues from the project for the local population. There must also be an initiative to involve local companies in operations and maintenance activities. Given that the growth of the solar market in Africa is relatively slower than in many parts of the globe, it is important to make the most of the capacities already developed by ensuring quality and reliability.

C&I and rooftop solar

Commercial and industrial (C&I) as well as rooftop solar projects are viable and low-cost options for deploying solar power in the continent. Almost 90 per cent of such solar power projects in South Africa are set up through PPAs, as these offer savings for the consumer and are easier to source funding for. From a technical standpoint, the clients can have more comfort and the Engineering, procurement and construction contractors can make profits upfront. Other viable models such as lease agreements can also be adopted. These decisions must be taken based on the current liabilities of the client.

However, there are concerns with smaller C&I and rooftop projects in Africa. The high upfront costs that come with developing the projects deter developers from following proper standards as it takes more money to meet the regulatory requirements. There must be some consideration when a regulation is put in place; if the costs are prohibitive, developers will try to work their way around them. Net metering is a good option for larger clients with multiple sites; however, a bigger challenge is around grid stability, with increased amounts of intermittent renewable energy being added.

Solar power in Africa is at a nascent stage, especially in the western region, as its development has been curtailed by inadequate grid infrastructure and lack of financing. There is still heavy dependence on polluting diesel generators just like a lot of countries, hence, projects fail to attract enough investment. Despite there being articulated policies, there are difficulties in implementation and access to financing. A management challenge is to coordinate developments across hundreds of sites and deal with space constraints that consumers complain about. However, products that save space and cost of shipping are coming up in the market. Technology providers are also improving efficiency of individual panels.

Solar microgrids and mini-grids

Africa’s critical need for development requires rapid and effective solutions. Given the issue of limited access to energy, minigrids and off-grid power solutions are ideal for the region. However, there are many challenges to scaling up the adoption of microgrids and mini-grids across the continent.

Mini-grids can be developed under the build-operate-transfer or build-own-operate-transfer model, leasing agreements as well as direct sales. Irrespective of the ownership approach adopted, efficient operations and management of mini-grids coupled with cost-reflective tariffs is key to long-term sustainability. There is also a need for effective monitoring and evaluation in mini-grid financing, especially with matching grants. The growth in the minigrid segment has been slow primarily due to two reasons. First, the cost of finance is very high, especially if developers are only financing one or a handful of villages at a time. Second, lack of product standardisation causes problems. Fund flow into the sector is also limited as investors still prefer proven commercial models. Mini-grid systems are typically in the range of 15 kW to about 200 kW. However, many such systems may be developed together by a developer to minimise cost per connection.

Balancing the demand is also an important factor to consider while developing micro- or mini-grids. First-time users of electricity have limited use because they don’t have many appliances. In such cases microfinancing programmes are helpful. Regulatory issues are yet another obstacle. While regulatory frameworks are evolving and improving, the pace is slow. Other areas of improvement are the need for more capex subsidies and integration with utilities. Moreover, countries should come forward and work together, especially in areas of duty and tax exemptions, in turn, making it easier to develop more projects in a standardised way.

Country-level experience

Algeria: Algeria is the largest African country and about 66 per cent of its geographical area is covered by deserts.  As of today, well over 90 per cent of the country’s energy needs are met from natural gas. However, with growing demand for electricity, the country will need to shift to sustainable alternatives. Algeria has the potential to generate 170,000 TWh per year from solar energy. It currently has 23 solar plants with a cumulative capacity of 343 MW and there is a vision to expand this capacity over the next decade. However, the country still faces challenges, with very poor responses for large-scale solar project tenders in the past 10 years. This can be attributed to the inexperience of stakeholders as well as a lacklustre regulatory and financial environment. The challenges were made worse with political tensions in the country, low oil and gas prices, and the Covid-19 pandemic – which have all pushed renewable energy slightly down on the government’s priority list. Nevertheless, it is expected that there will be big developments in renewable energy in the coming years – 1,000 MW by end 2021 and about 16,000 MW by 2030.

Egypt: The Ministry of Electricity and Renewable Energy of Egypt has set goals to optimally use renewable energy resources, expand the use of new and renewable energy for village electrification, and achieve complete electrification of urban areas and regions with low population density. The country has immense solar power potential with direct vertical solar radiation ranging from 2,000 kWh per metre to 3,200 kWh per metre. In 2016, the countries took a huge stride forward in promoting green energy by announcing the Egyptian Energy Strategy 2035. As per the strategy,  by 2035, 42 per cent of the energy requirement would be met by renewable energy. In the five years since the announcement of the policy, the country has built one of the largest single-site solar projects in the world, the Benban Solar Park. The park was developed with an estimated investment of $653 million. It consists of about 32 projects and has a cumulative capacity of 1,435 MW, representing almost 83 per cent of Egypt’s total solar capacity. The country looks set to expand its solar capacity with about 700 MW in the pipeline and about $750 million raised through its first green bond issue.

Kenya: Due to its geographical location, Kenya receives high solar radiation. However, the percentage of solar energy harnessed at present is insignificant compared to the potential. Kenya has just 53 MW of contracted solar power capacity, which is less than 2 per cent of the total contracted demand of 2,668 MW. In energy generation terms as well the contribution of solar has remained less. However, the commissioning of the 50 MW Garissa solar PV plant in 2018 has raised the share of solar energy in the total generation mix by a small degree. Further, there are extensive plans for increasing the use of solar power by way of mini-grids and solar home systems. The Energy Act, 2019, is an important policy intervention as it allows the installation of captive solar plants of up to 1 MW without the need for a licence. According to the Least Cost Power Development Plan 2020-2040 Report, solar power capacity will increase from 53 MW in 2020 to 454 MW in 2030 in Kenya.

Technology trends and quality concerns

There have been developments in module manufacturing, especially to ensure higher module string power output and reduce costs associated with balance of systems. In the coming years, a trend of progressively larger modules is expected for utility-scale plants. These will lead to lower installation costs, better optimisation of container usage and better utilisation of space. The return on equity can also be increased with larger modules due to capex reduction, more competitive prices and greater power density per square metre. Such modules will be better suited for 1P trackers and have a lower terrain risk. They also require less maintenance and can be installed more quickly.

In terms of cell technology, the industry will be dominated by monocrystalline technology in the near future. Meanwhile, for solar trackers, single-axis trackers will continue to be more popular compared to the more complicated dual-axis trackers.

The contribution of solar power to the energy mix is expected to increase in Africa in the coming years. However, grid availability and load shedding continue to be key issues. The solar industry is relatively new and is still growing, thus there needs to be more focus on quality, which is currently lagging compared to more developed markets.

Power quality solutions have mostly been used in the utility-scale segment but these could be adopted in the rooftop solar segment as installed capacity increases. As renewable energy demand increases in Africa, there will be a need for grid codes. Further, modern equipment is more sensitive to power quality variations than that used earlier and should be increasingly used. Underperformance has a significant impact on financial returns and not all systems perform well over time. Areas of concern for solar systems include glass cracks, soiling and tracker issues. Issues such as micro cracks can lead to excessive power loss over time. These risks can be handled more carefully through accelerated stress testing for module reliability, automated defect detection, solar resource assessment and pre-feasibility studies, and PV plant performance monitoring. Another major technological challenge facing the industry is the recycling of solar panels. However, there are initiatives under way to help manage solar modules at the end of their life cycle.

Solar plus storage

There are several benefits of integrating solar with an energy storage component to be able to effectively meet demand. Energy storage can charge at low demand with cheap renewable energy and discharge at high demand periods when energy cost is high. Currently, energy storage technologies are at early stages of achieving economies of scale. As the costs come down, markets will expand, thus providing more opportunities to scale up. Various energy storage technologies has been seeing significant performance improvements and cost reduction trends over the past decade and this is expected to continue over the next decade. In the context of microgrids, there is an opportunity to achieve the right business models through bottom-of-the-pyramid innovation, such as integration of storage. Energy storage is increasingly being integrated with micro- and mini-grid set-ups across projects in Africa. Renewable energy with storage has already started competing with existing peaker plants in various grids around the globe. With further cost reductions, we anticipate they can also provide potentially cleaner baseload generation.

Investment needs and emerging sources of finance

Access to finance for renewable energy development in Africa continues to be a massive challenge to meet climate commitments. While there is an increasing shift towards C&I and rooftop solar projects due to technical efficiency and from a bankability point of view, there are again uncertainties in obtaining finance. Despite a lot of efforts by international agencies in recent years, there is no clear distinction between effort for financing utility-scale and distributed solar projects.

If Africa is to achieve universal electricity access by 2030, more than 50 per cent of new connections must come from decentralised electricity solutions, in particular, mini-grids. Despite the mini-grid segment garnering a lot of attention, there exist bottlenecks in attracting sufficient commercial interest. The main roadblock is the lack of a robust understanding of opportunities in the mini-grid market and identifying locations where mini-grid development makes sense. The continent can take lessons from the Democratic Republic of Congo where the government, with help from the AfDB, has floated a tender for three large mini-grid systems, which are designed to power cities with 100,000 inhabitants each.

On the finance front, there is a lack of certainty of returns for private investors. As of now, there are too many doubts on whether there will be adequate grid infrastructure or a provision for compensation mechanisms and tariff policies. A good starting point would be the development of a local financial market that will help developers in the continent. Currently, there are no subsidies to ensure that private sector investors can generate sufficient revenue. At the same time, there must be efforts towards decreasing the upfront costs of adoption as well. Clear targets have to be set for the renewable energy sector as part of national development plans; and these include nationally determined contributions to achieve climate goals. These targets need to be backed by clear plans that encompass the dimensions of solar power. There needs to be utility reform, addressing the financial sustainability of state utilities, and governments must approach agencies that can carry out this task.

Having investment platforms can help create the right environment and attract investment. There is also scope to scale up investment through facilitating the development of bankable projects. Clean energy investment deal-making is an essential element in the market. Under clear targets and regulatory frameworks, there is a need to match project sponsors with the right investors. Another area of importance is financial de-risking. There is increased access to risk transfer instruments that ensure the bankability of clean energy investment opportunities and crowd-in private sector capital.

One of the notable initiatives for facilitating investment in this area includes the Climate Investment Platform, an initiative of UNDP, SE4All and IRENA, in coordination with the Green Climate Fund. Another effort is the International Solar Alliance’s (ISA) partnership with the AfDB to take forward its New Deal on Energy for Africa, which aims to achieve universal access to energy in Africa by 2025. The AfDB’s transformative “Desert to Power” initiative in Africa’s Sahel and Sahara regions envisages 10 GW of solar power generation and providing clean energy to 90 million people. Together with the ISA, it would like to work on the mobilisation of concessional financing.

Future outlook

There are many growth drivers for increasing the penetration of solar power in Africa. These include high solar potential, socio-economic factors, government initiatives, the cost viability of solar and a growing ecosystem. The northern region has the highest projected solar capacity due to its high solar radiation. Countries such as Algeria, Egypt, South Africa and Nigeria are projected to have large solar power installed capacities in the next few years owing to their massive targets. However, further growth can only be ensured with a supportive policy framework and sufficient fund flow.

Although regulatory improvements are taking place, a crucial area to address is financing. Access to low-cost funding for solar projects is a critical requirement to accelerate the uptake of solar power. Further, there is a need to improve the bankability of projects. Going forward, solar power is expected to play a pivotal role in facilitating the achievement of universal access to electricity. With the right policies and regulatory frameworks, African countries have the scope to create an enabling environment for development as well as a good appetite for private, including foreign, investment.

By Meghaa Gangahar and Rithvik Kumar

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