October 4, 2017//-“Honestly, I’m surprised this place even runs,” says the technical director of a multinational consumer goods company, with a large factory on the outskirts of Lagos, Nigeria, as he gestures at the flickering lights above his head.
“Besides the high cost of our diesel power, we have at least six power outages from the grid everyday,” he explains.
This frustration is shared by businesses across west Africa, including in major economies like Ghana, Nigeria, Senegal, and Cameroon.
Distributed solar generation – where households or businesses generate and consume their own solar power rather than obtaining it from centralised power plants – is being touted as a solution to the region’s power problems.
However, so far it has had disappointing traction. Solar currently accounts for less than 1 percent of the generation capacity in west Africa, with no solar generation contracts signed by any businesses prior to late 2016.
A key challenge for solar is that it is impossible to control when the sun will shine. This leads to mismatches between the amount of power produced by a solar plant and the power needed by the consumer.
Also, unlike more developed markets, most African governments do not offer tax credits for solar or net metering credits, which would allow excess power to be sold profitably back to the national power grid.
However, the tide is turning. Solar is finally beginning to deliver on its promise. Three trends have driven the rise of commercial and industrial scale solar in west Africa.
First, affordability has improved dramatically. The price of solar panels have dropped 80 percent over the last eight years.
Second, electricity prices in the region remain at historic highs. The cost of power for large businesses in west Africa typically ranges between 0.14-0.25 $/kWh, compared to a range of 0.09-0.14 $/kWh in Kenya, Tanzania and Uganda.
In places such as Ghana and Nigeria, tariffs have dramatically increased in recent years as cash-strapped governments and utility companies have been forced to reduce legacy subsidies. In countries where the grid is cheaper, reliability of supply remains an issue. This causes companies to turn to diesel generators, which produce electricity at approximately twice the cost of the grid.
Third, the introduction of innovative financing for solar, chiefly in the form of a Power Purchase Agreement (PPA), has allowed businesses to source cheaper power, while eliminating the need for an upfront investment. Under a PPA, companies pay for each unit of power produced rather than paying cash upfront for the equipment.
In almost all major cities modelled in west Africa, solar PPAs provide a discount to the grid (>30 percent in some geographies)
Kasapreko, a Ghana-owned, multi-national beverage producer with operations across the region, is the first major company in west Africa to go solar using a PPA through solar investment fund, CrossBoundary Energy.
Deals of similar scope are being executed in west Africa, including a 10MWp solar plant for the University of Ibadan in Nigeria and a 15-year solar PPA for the Iamgold Esakaane in Burkina Faso.
Other consumer-facing multinationals are setting even more ambitious goals. According to Unilever’s CEO Paul Polman, “achieving a zero emissions economy is the greatest business opportunity of the century”. Unilever aims to source 100 percent of its electricity from renewable energy by 2020.
Nestlé, the Equatorial Coca Cola Bottling Company, Heineken, Diageo and Google are all targeting aggressive increases in their use of renewable energy for their local factories in the coming decade.
Solar or status quo?
The renewable energy landscape in Africa is shifts rapidly. Why are some companies drawn to solar PPAs while others are sticking with the status quo?
First, companies in industries like consumer goods, beverages and mining – which require a quick payback on their investments, usually in five years or less – find solar PPAs attractive because they provide savings without an upfront investment.
A 1MWp solar solution, which can power more than 2,000 homes in the region, costs anywhere between $1.2-2m to build in Africa depending on the system specifications and geography. The investment will break even after six to 10 years.
This may seem brief compared to the 25- to 35-year lifetime of the solar plant, but falls short of the payback period needed by most businesses.
Second, many companies want to outsource the operations and maintenance burden of solar system to the supplier. A key feature of the PPA contract model is that customers only pay for the power that is produced.
The result is that solar providers are incentivised to procure high-quality equipment and ensure consistent system performance to maximise their return on investment. It is not unusual for suppliers to allocate tens of thousands of dollars each year on system upkeep and repairs.
Third, the business case must be positive. A discount of roughly 5 percent in savings from solar is usually the minimum needed for a serious commercial discussion.This can be greater for businesses contending with high grid prices or diesel reliance.
Finally, companies must have confidence that the risks associated with a solar PPA contract are well understood and well mitigated.
This means solar suppliers need be able to demonstrate a track record of delivering and financing solar PPAs in Africa. Companies also want to know that the solar solution is sized to ensure that all (or most) of the power being produced is consumed.
Currency risk exposure may need to be mitigated. Suppliers should have the expertise to manage those risks. A final decision is the duration of the PPA contract. Longer PPAs result in cheaper tariffs, but they also tie the company into a longer contract.
With the tide turning on the economics of renewable energy, now is the time for businesses in Africa to join the solar revolution – if not for the environment, then for their bottom line.
Femi Fadugba is senior associate at CrossBoundary
This is Africa
