Solar PV Powering The C&I Sector In Africa

With a considerable energy deficit, Africa is on the path to become a fertile ground for solar projects. Last mile grid connectivity, grid outages, and an unreliable power supply add to the woes of the energy supply in many of the African nations. This paper touches upon the solar project implementation models and overview, opportunities and challenges that apply to C&I Solar sector in Africa.

Africa’s Commercial and Industrial (C&I) solar sector encompasses a wide variety of customer types, solar designs, and project sizes. Common customer types include businesses of different sizes – from large corporations to local small businesses – government offices, schools, and universities.

C&I solar projects can take the form of rooftop arrays on buildings or ground mounts, and can range widely in size from kilowatts to megawatts.

 

The solar photovoltaic (PV) industry primarily uses two distinct implementation models globally.
1. Captive Solar:

Energy is generated onsite from PV cells, which are locally installed. Captive solutions may be implemented and installed on any unutilized space including:

  • Rooftops;
  • Car parks; and
  • Open ground.

The captive solar model can be further segregated based on connectivity to the grid:

a. On-grid captive: On-grid captive solar refers to solar PV systems installed in parallel with the utility grid. Power may be drawn from the grid or fed to it from the captive unit at appropriate times. This solution typically reduces the pressure on state or regional governments to set up additional power plants to meet energy demands, which presents a potential upside.

Figure 1: Representative illustration of an on-grid system

b. Off-grid captive: Off-grid installations are standalone solutions through which solar PV systems act as the primary source of energy in conjunction with existing power sources. These existing sources act as secondary sources of energy, as required. This solution is economically beneficial for entities with their own internal grid, i.e. those who use Diesel Generators (DG) or other off-grid solutions for production of electricity near or at the site.

Figure 2: Representative illustration of an off-grid system

In addition to contribution to the regional renewable energy growth, some of the key benefits of using captive solar solutions are:

  • Tariff certainty;
  • Monetization of unutilized space;
  • Potentially reduced electricity costs;
  • Quick installation;
  • Secured energy supply; and
  • Reduced carbon footprint.
2. Utility Scale Solar:

Utility scale refers to large scale, ground-mounted solar projects backed by respective governments, with the state utility company acting as the off-taker under a power purchase agreement (PPA). Project structures under PPAs usually address bankability concerns and attract private sector investments by using:

a. A non-recourse/limited recourse financing structure; and
b. Standardization of structure with country specific customizations to mitigate residual risks.

The table below highlights the comparison of the two solar PV implementation models based on multiple parameters:

Table 1: Comparison of two solar PV installation models

S. No. Parameter Utility scale solar Captive solar
1 Size •    Recent precedents exceed 50 MW •    Few hundred kilowatts up to a few megawatts
2 Tariffs •    Highly competitive tariffs on account of economies of scale •    May be higher than that of utility scale projects
3 Space requirements •    Installations require large amounts of unused lands

•    No additional space requirements

•    Installed on unutilized rooftops/carports or available ground

4 Procurement process •    Generally competitive bid process is followed •    Competitive bid process or on a negotiated basis
5 Grid connection •    Mandatory •    May or may not be connected to the grid
6 Offtake entity •    Mostly government owned utilities •    Producer of the energy or owner of the captive space
7 Ease of implementation •    Large amount of groundwork required •    Minor refurbishments
8 Time to implementation •    12-18 months •    6-9 months
9 Opportunity Pipeline •    Confined to developers with sufficient capital reserves, technical expertise •    Multiple development opportunities for all entities in the solar space
10 Financing Package •    Proven model; more amenable to financing •    Nascent stage

Opportunities for a C&I Solar Market in Africa

Africa suffers from a considerable energy infrastructure gap, hallmarked by shortcomings in conventional power sector large-scale developments, centralized generation, and long-distance transmission infrastructure.

C&I-scale solar power projects have an opportunity to fill this gap:

  • Almost three-fourths of Africa’s power demand is generated by the C&I sector, which suffers from intermittent or expensive power.
  • The C&I solar sector has faster development cycles and fewer regulatory hurdles compared to utility-scale projects.
  • Loss-making utilities are shifting to cost-reflective tariffs, pushing Africa’s grid-connected end user tariffs upwards. A recent study published by world bank group indicates that only two countries’ utilities (Uganda & the Seychelles) have tariffs sufficient to cover their operational and capital expenditures. In the long run, it can be inferred that utilities would increase their end user tariffs to achieve profitability. This can have a significant impact on C&I market players as because of increased costs, they will be incentivized to shift to cheaper & direct power sources like solar.

Figure 3: Net Revenue per Unit (USD per kWh billed)

Source 1: Africa’s Pulse Report’18

  • Many African countries are shifting towards industrial activity, which could drive long-term economic development.

C&I power demand:

The C&I sector in Africa drives the bulk of generation-related economic activity and employment, more sustainably than any other market segment. It also faces numerous challenges including:

  • Lack of grid connectivity: Based on Africa Energy Outlook’19, about half of the sub-Saharan African population without access to electricity live in five countries: Nigeria, DR Congo, Ethiopia, Tanzania, and Uganda. The share of population without access to electricity in select countries is as given below:

Table 2: Share of population without access to electricity

S.NO Country Population (Million) Share of population without access to electricity
1 Ghana 5 <25%
2 South Africa 3
3 Egypt <1
4 Nigeria 78 25%-49%
5 Kenya 13
6 Namibia 1
7 Ethiopia 59 50% – 75%
8 Tanzania 37
9 Sudan 22
10 Mozambique 22
11 Angola 17
12 Zambia 11
13 Zimbabwe 11
14 Rwanda 6
15 Democratic Republic of the Congo 77 >75%
16 Uganda 34
17 Madagascar 20
18 Niger 19
19 Burkina Faso 16
20 Malawi 16
21 Chad

14

Source: Africa Energy Outlook’19

  • Grid outages and an unreliable power supply: Vast majority of firms in sub-Saharan Africa experience electricity outages on a regular basis. In many countries, outages average 200 to 700 hours each year. In some countries the situation can be much worse: for example, a typical Nigerian firm experienced more than 32 electrical outages in 2018. [1]
  • Expensive grid tariffs; and
  • Diesel price fluctuations (impacting the cost of power from secondary sources like diesel gensets).

By 2030, the electricity demand in Africa’s C&I sector is expected to grow by more than 270% compared to 2013 levels.

Source: IRENA

Captive Solar Market

The captive solar market can be sub-divided into:

  • Off-grid customers –
    • Customers who do not have grid access
  • On-grid Customers –
    • Customers who lack consistent supply of power and hence need to rely on back-up power
    • Customers who want to shift to captive as a primary supply and grid as backup to reduce power procurement cost

Need for Captive Solar in Africa’s C&I Sector

  • Solar is more reliable than diesel supply;
  • Generators break down;
  • Diesel prices fluctuate;
  • Rising grid tariffs;
  • Grid outages;
  • Solar is the lowest cost solution in many areas of Africa. The IPP Tariff for solar projects has been significantly decreasing over the years across Africa,

Figure 4: Solar Tariff – Africa (USc/kWh)

Solar Tariff - Africa (USc/kWh)
  • Solar allows companies to have less external operational risk, while enhancing their energy security;
  • Distributed power generation catalyzes growth potential for African businesses by providing a stable power supply; and
  • Captive solar contributes to a business’s long-term viability, security, and environmental responsibility.

Business case for on-grid customers:

  • State utilities in Africa generally have high end consumer tariffs and have persistent high transmission, distribution, and collection losses. As of 2018, Technical electricity losses in Africa (~16%) were almost seven percentage points higher than the average losses in other developing countries (~9.3%);

Figure 5: Average Electricity Losses

Average Electricity Losses

Source: Africa Energy Outlook

  • The Transmission & Distribution (T&D) losses contribute to about 30% hidden utility costs of Sub-Saharan Africa (Excluding South Africa) and the other significant contributor being under-pricing (40%)[2];
  • Utilities are under pressure to increase tariffs to cost-reflective rates, potentially prompting private customers to seek cheaper sources of electricity;
  • On-grid customers suffer from weak grids (faults, load shedding) and intermittent supply; and
  • Solar and battery systems can assist in stabilizing power supply, providing backup during black outs and counteracting the effects of grid power tariff inflation.

Business case for off-grid customers:

  • For off-grid customers who already have diesel genset solutions in place, energy tariff plus logistics costs are not competitive compared to solar plus battery. For instance, the average tariff in case of financed solar PV installation for the size of captive solar lies in the range of $ 0.08-0.12/kWh, which is at least 60-70% cheaper than the back-up diesel generation costs that lies around $ 0.35-0.40/kWh;
  • Solar models remove the pricing risk surrounding diesel prices, diesel theft, and logistics, and allow for the fixing of power costs;
  • High power costs from DG sets; and
  • Off-grid applications are also highly likely to have an abundance of unutilized land on which to build solar and battery facilities.

Government & Private Sector Initiatives

Several initiatives and transactions by regional governments and the private sector have led the growth of solar in Africa’s C&I sector.

  • Tanzania’s initiative to support small scale producers:
    • Tanzania is promoting the development of small power projects through local and foreign private investors.
    • The government’s policy allows small power producers to supply electricity from both grid-connected and off-grid systems.
    • Producers with less than 1MW generation capacity are exempted from obtaining a license.
    • Moreover, the framework introduces a standard PPA and tariff methodology applicable for the developer and the buyer, which is expected to reduce negotiation time and costs. (Source: IRENA)
  • Tunisia’s PROSOL funding mechanism:
    • Tunisia’s Programme Solaire (PROSOL) funding mechanism started in 2005 to promote the uptake of solar water heaters.
    • With PROSOL, installed capacity rose from around 7,000m² in 2004 to more than 80,000m² in 2010. (Source: IRENA)
  • Djibouti IPP Law:
    • Recently the Government of Djibouti, with support from USAID’s Power Africa, passed an Independent Power Producer (IPP) law that set out legislation for private sector participation in the power sector.
    • The use of captive solar and other renewable power supplies has been embraced through the self-production clause of the IPP law. (Source: USAID)
  • The Swedish International Development Agency (SIDA) has invested $50 million towards off-grid energy access in Africa.
  • Beyond the Grid Fund for Zambia (BGFZ) is a SIDA-funded initiative for renewable energy investments outside the national power grid in Zambia.
    • Following the successful implementation of BGFZ, the concept is now being expanded to Burkina Faso, Liberia, and Mozambique. (Source: SIDA)
  • A 40MW C&I pipeline in Southern Africa being funded by Sola Group, AIIM, Nedbank
    • The project is expected to bring industrial customers 20% lower tariffs compared to the rates by state utility Eskom or municipal providers. (Source: Sola Africa)
  • A $100 million off-grid energy access fund managed by African development bank
    • The off-grid energy access fund is part of clean technology fund, aimed at supporting the growth of energy access for companies across Africa and develop their capacity to sustainably access capital at scale
  • UK’s CDC Group is due to launch a new company called Gridworks
    • Gridworks aim to invest at least $300 million, which would be used to invest and develop in transmission, distribution, and off-grid electricity infrastructure

Challenges and Considerations for Africa’s C&I Solar Market

The C&I solar market in Africa faces various challenges which are briefly covered below:

Commercial

Project developers may not see incentive in solar installations in markets where grid tariffs are diminishing and captive solar tariffs are not competitive enough compared to grid tariffs.

Technical

The absence of official industrial standards, paired with low technical awareness, could result in equipment-related challenges during project design and installation.

Debt financing

Debt financing to the sector will play an important role in development of the C&I solar market. However, debt financing has been a major challenge in the growth of C&I solar market. Apart from the project contractual structure and risk profile, the challenge is further exacerbated by the credit profile of the project developer.

Lenders should take comfort in the standardization of contract structures and financial performance metrics that allow the bundling of multiple projects into a larger financial structure.

Customer awareness

The lack of awareness of alternative solar solutions in the C&I sector dramatically slows the market’s growth. There is lack of knowledge on the technical and economic viability, as well as capability issues at the enterprise level.

However, perceptions are likely to change, as C&I solar has successful precedents in Africa. Initiatives by local state governments are also likely to boost the acceptability and viability of such projects.

Regulation

The C&I solar market in Africa has largely developed without regulatory support, buoyed by competitive economics and unreliable electricity grids. However, local jurisdiction laws may affect the nature of concession agreed for the projects and the agreements required for project execution. Grid codes and regulations which define the provisions to feed power safely back to the grid may not be updated in many countries.

Future Outlook of C&I Solar in Africa

The utility-scale solar market in Africa has picked up pace in recent years, with most African nations targeting renewables as a significant contributor to their energy mix. However, time and again the targeted growth has been stalled by various challenges like administrative delays and bankable project agreements.

Within a short span of time, developers hoping for fewer administrative delays and stronger off-take agreements have started to pitch to C&I customers directly. Developers are offering C&I customers a low-cost off-grid solution and a hedge against future price fluctuations.

Despite challenges, multiple projects have achieved commercial and financial close, have completed installation, and are now operating successfully.

With a healthy pipeline of projects, the C&I solar sector is growing and is starting to play a key role in catering to the power demand in Africa.

Synergy Consulting Infrastructure and Financial Advisory Services Inc.

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Suite 500 Reston, Va. 20190

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Written On – May 2020

[1] Quoted figures are as per the Africa Energy Outlook’19
[2] As per Africa’s Pulse report 2018