Solar for Business in Sub-Saharan Africa

A new report commissioned by responsAbility highlights the potential of commercial and industrial (C&I) solar opportunities in the region and the key challenges that must be overcome to fully unlock solar’s potential.

With an immense energy deficit and crumbling infrastructure, Sub-Saharan Africa could be fertile ground for solar. However, despite high hopes and years of effort, the region’s PV market has struggled to grow outside of South Africa and a few small countries, held back by administrative delays, unbankable power purchase agreements (PPAs) and difficulties securing land. 

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Key findings:

• High electricity tariffs, falling PV prices and unreliable electricity supplies are spurring sales of on-site solar to business customers in Sub-Saharan Africa

• The market is still small but offers immense potential

• The study assesses 15 markets based on the three key criteria of economics, momentum/market and laws/regulations

• Three markets – Kenya, Ghana and Nigeria – are analysed in detail

• On-site solar is cheaper than the electricity tariffs paid by C&I clients in 7 out of 15 markets

• Most businesses in the region still rely mostly on electricity bought from the grid

• An investment in on-site solar can yield substantial savings for businesses

• It also ensures a more reliable power supply in a region plagued by frequent electricity outages

• The primary bottleneck is debt financing: As the financial sector has been largely absent from this market, most businesses have bought systems for cash so far

PITCHING TO BUSINESSES DIRECTLY

Developers hoping for fewer administrative delays and stronger off-take agreements have started to pitch to businesses directly. In 2018, they built a record number of projects serving business customers directly, offering them cheaper power than the grid, a hedge against future price fluctuations and an alternative source of power during outages.

Teaming up with Bloomberg New Energy Finance (BNEF), a strong partner with advanced knowledge in the C&I space, responsAbility has launched a study on the C&I solar solution opportunity in Sub-Saharan Africa to evaluate, map and help develop this market. Following an initial assessment of 15 markets based on the three key criteria of economics, momentum/market and laws/regulations, the three most attractive markets – Kenya, Ghana and Nigeria – were analysed in more detail.

Economics top regulatory support

Encouragingly, the report titled “Solar for Businesses in Sub-Saharan Africa” finds that the C&I solar sector in Sub-Saharan Africa is growing not because of regulatory support – as has been the case in many developed economies – but because of economics. 

“The C&I market in Sub-Saharan Africa represents a major opportunity for responsAbility given the strong local demand for debt financing.”

Antoine Prédour, Head of Energy Debt

In fact, an investment in on-site solar can yield substantial savings for businesses while ensuring a more reliable power supply in a region plagued by frequent electricity outages lasting up to several hours. According to World Bank data, businesses in Nigeria face more than one outage a day, forcing them to either shoulder high opportunity costs from lost sales or manufacturing output, or resort to much costlier backup power, usually from diesel. 

Interested in the investment opportunity? OFFERING

As voltage fluctuations can cause serious damage to sensitive equipment, companies often rely heavily on uninterrupted power supply (UPS) systems or run diesel generators even when grid power is available. As a result, the Nigerian government estimates that about half of available power currently comes from diesel. As such, solar installations can contribute to climate change mitigation by replacing fossil fuel.

SAVING POTENTIAL VARIES

How much money a business can save with on-site solar depends on the energy source it currently uses. Most businesses in the region still rely mostly on electricity bought from the grid and the report finds that on-site solar is cheaper than the electricity tariffs paid by C&I clients in seven out of 15 markets covered by the study. Since on-site solar does not require any fuel, it also allows businesses to lock in a fixed or predictable tariff for years or decades while the cost of grid electricity can rise or fall.

In Kenya, Nigeria and Ghana, solar electricity for C&I customers can be generated for USD 0.10-0.14/kWh, with local vendors reporting even lower prices. At such rates, an industrial facility in Ghana operating seven days a week could buy on-site solar power for 29% less than the grid, while tapping the grid when the sun does not shine. BNEF projections suggest that the cost of on-site solar will decline to about USD 0.05/kWh by 2030. Such declines will strengthen the local solar industry in the long run.

Interest in obtaining financing? Offering

Unlike in many developed markets, it is practically impossible for a C&I solar plant to sell excess power to the grid in Sub-Saharan Africa. As a result, facilities that operate seven days a week with high day-time power demand are more profitable. BNEF estimates that about 83% of the installed capacity serves such sites, mostly in mining, manufacturing and infrastructure such as petrol stations. The remainder serves commercial facilities or offices, where electricity demand is likely to be lower during weekends. This suggests that solar is competitive despite the need to consume the power on-site.

Financing bottleneck

Alongside the undeniably favourable economics, BENF identifies a number of challenges that have prevented an accelerated development of the C&I solar market in Sub-Saharan Africa so far. One of them is regulatory transparency, another a lack of awareness of C&I solar. But while many potential customers and lenders remain sceptical about the reliability and economics of using a new technology like solar, developers report that the sales cycle for convincing customers is shortening fast. For now, the primary bottleneck seems to be debt financing. As the financial sector has been largely absent from this market, most businesses have bought systems for cash so far, without using third-party finance. This is creating major opportunities for specialised financiers in the region.

“The market is still small, but has great potential” 

Takehiro Kawahara, Lead Frontier Power Analyst at BloombergNEF

“The market is still small, but has great potential,” concludes Takehiro Kawahara, lead frontier power analyst at BNEF and co-author of the report. “An immense energy deficit and crumbling infrastructure make Sub-Saharan Africa fertile ground for solar.” 

In 2018, developers built solar projects totalling a record 74MW, and the 23 developers interviewed for the BNEF study are working on a pipeline of 91MW for execution in 2019 and early 2020 in Kenya, Ghana and Nigeria alone. That is almost twice as much as the capacity they have installed so far. Developers are optimistic about the future and expect 2019 to be a record year for the industry.

Debt financing provided through responsability

responsAbility-managed funds have been providing financing for the off-grid solar sector in Sub-Saharan Africa for five years, focusing primarily on residential customers. “We expect solar to be increasingly deployed on C&I sites, where it often complements diesel power generation,” says Antoine Prédour, Head of Energy Debt at responsAbility. “The C&I market in Sub-Saharan Africa represents a major opportunity for responsAbility given the strong local demand for debt financing. It fits well with the mandates of the responsAbility-managed GCPF and DEA/ACPF funds; there is little competition from other financiers, and the margins are interesting.” responsAbility will use the findings of its report to design innovative debt facilities and target the key opportunities in the region.

“Solar installations can contribute to climate change mitigation by replacing fossil fuel.”

Antoine Prédour, Head of Energy Debt