Powering Africa: The on-grid challenge
Second in a series looking at OPIC’s work supporting President Obama’s Power Africa Initiative See also: Powering Africa: The off-grid challenge
President Obama’s Power Africa initiative has increased awareness of the challenge of extreme energy poverty in Sub-Saharan Africa and in doing so, has also highlighted the need for off-grid power solutions to reach a large share of Africa’s rural population that is not currently, and may never be connected to a grid.
The flipside of the off-grid challenge is the equally important on-grid challenge. On a continent where more than two-thirds of the population lacks electricity, Africa’s rural residents are not the only people living without power. Power also runs in short supply in large cities where outages are frequent, limiting not only basic household functions, but also business and manufacturing capacity.
World Bank data shows that, excluding South Africa, the entire generation capacity of Sub-Saharan Africa is just 28 gigawatts, about the same as the capacity of Argentina, even though the population is almost 20 times as large. This same report shows that African manufacturing enterprises experience an average of 56 days of power outages each year and firms lose six percent of sales revenues, or even more when backup generation is not available.
And this need for more on-grid power is increasing, as Africa’s urban population grows rapidly. In itsWorld Urbanization Prospects report, the U.N. shows that the world’s urban population overtook the rural population in 2010 and continues to accelerate, especially in Africa and Asia. Countries including Burundi, Ethiopia, Malawi, Niger, South Sudan and Uganda still have low levels of urbanization, but are expected to become significantly more urbanized by 2050.
Off-grid power solutions such as home solar kits are necessary to reach targeted rural populations, but in order to address widespread energy poverty in the Continent’s growing urban centers, Africa will also need more large power plants.
OPIC has a long history of supporting major infrastructure projects in developing countries, and even before the Power Africa initiative was formally launched, it had supported multiple major power plants, from the expansion of a geothermal plant in Kenya, to a large solar plant in South Africa, and in Togo, one of the most energy deprived countries in the world, a major 100 megawatt tri-fuel power plant that tripled the installed generation capacity.
OPIC is strongly positioned to support the sort of large scale power projects that require large investments of time and money and significantly add to a country’s installed capacity. In addition to providing financing with long tenors that may be required to complete these complex projects, OPIC’s model of leveraging private sector investment helps bring the necessary, often substantial resources to the table.
In addition to its core products, OPIC has also innovated to support investment in the power sector. One key innovation OPIC helped develop to encourage more power projects is 10 Elements of a Bankable Power Purchase Agreement (PPA), a collaboration of OPIC, the U.S. Trade and Development Agency, U.S. Agency for International Development, and the U.S. Department of Commerce, along with several international development finance institutions to help give both power producers and offtakers confidence in a project from the outset. A PPA is a long-term agreement between a power producer – such as a privately-funded power plant – and an offtaker – such as a country’s government – that distributes electricity to the population. In any market, but especially emerging ones, these agreements are needed to ensure fair and viable pricing for these large-scale projects. The “10 Elements” document outlines what every bankable PPA must have to satisfy both the producer and the offtaker, offering private investors the confidence to commit large amounts of funding to these projects while helping African governments ensure that the contracts they enter are written in a way that bring value to the African people.
OPIC has approved financing for two large-scale power plants since the June, 2013 announcement of the Power Africa initiative: the 310-megawatt Lake Turkana wind power plant in Kenya, and the first phase of the 459-megawatt Azura-Edo gas-fired plant in Nigeria, a plant which has the potential to eventually deliver 1,000 megawatts of power. The game-changing scale of both of these projects illustrates how large plants generating power for the grid will be a vital part of the effort to alleviate Africa’s energy poverty.