Investors and Entrepreneurs in Africa Take Note: Price of Solar’s Dropping While Demand’s Increasing
Editor’s note: Throughout 2017, NextBillion is organizing content around a monthly theme, dedicating special attention to a specific sector alongside our broader coverage. This post is part of our focus on technology for the month of May.
Last year, the U.S. Energy Information Administration’s International Energy Outlook 2016 projected significant growth in worldwide energy demand over the 28-year period from 2012 to 2040; the study shows that energy use in non-OECD countries is expected to rise by 71 percent. In contrast, during the same period, total energy use is projected to rise only 18 percent in more mature energy-consuming and slower-growing OECD economies. Meanwhile, the cost of renewable energy is projected to decline rapidly. The International Renewable Energy Agency (IRENA) estimates that the average cost of electricity generated by solar photovoltaic systems (solar PV) could decrease by as much as 59 percent by 2025 in comparison to 2015 prices, while the World Energy Council predicts a 70 percent reduction in the price of energy storage by 2030.
Consequently, increased demand for energy combined with declining prices in renewable energy is expected to create strong investment opportunities in emerging markets.
Bloomberg’s Climatescope Report shows that in 2015, $154.1 billion was invested in cleantech, with financial institutions based in OECD countries playing a larger role in financing renewables in emerging markets. The accelerated growth in foreign capital financing renewable energy projects has started to shift global investment trends, with emerging markets now attracting more capital and deploying more renewables than developed nations. In Africa, a key factor luring investment has been the emergence of decentralised off-grid energy systems, which have turned out to be viable solutions in meeting the demand for energy across rural regions. Bloomberg New Energy Finance forecasts that the market for these products will grow by 34 percent year-on-year, reaching close to 500 million people by 2020.
At the Bloomberg New Energy Finance Conference in New York, I interviewed venture capitalist Nancy Pfund, the founder of DBL Partners (which has supported some of the most successful modern clean energy companies, including Off Grid Electric, Tesla, SolarCity, PowerLight, BrightSource and NexTracker). She mentioned that declining costs and technological improvements are creating a favourable environment for decentralized clean energy systems.
“The landscape is very fertile for decentralized, clean-energy systems. Costs are coming down and making decentralized options extremely competitive with traditional approaches. Technology is improving functionality both at the electric system level and at the appliance level, and financing is becoming more widely available,” Pfund said.
Back in 2015, the 2030 Agenda for Sustainable Development was adopted by world leaders with a goal of universal energy access by 2030. Pfund notes that decentralized solutions could be the most efficient way to meet these targets and provide electricity to 100 million households.
“A decentralized grid is preferable to a centralized grid because it can be ramped up more quickly, provides immediate quality-of-life improvements to its customers, avoids protracted political and financial review processes, and will be less expensive and less vulnerable to malfunction,” she said.
East Africa has been the leader in solar energy uptake across Africa and has attracted a growing interest from private investors. Local governments have implemented a number of policies and incentives to adopt solar and renewable technologies. For instance, the East African Community (EAC) has an import duty exemption, which reduces import duties to zero for technologies like photovoltaic cells and modules. Jake Cusack, the managing partner at CrossBoundary, an investment fund for commercial and industrial solar in Africa, told me at the New York conference that the business-friendly environment in East Africa is not only helpful in attracting private-sector investment but also for enabling these markets to grow their economies and move toward a low-carbon path.
“We’ve found these markets to be welcoming towards private-sector investment, have a light regulatory touch, and are motivated to grow their economies on a cleaner, low-carbon path,” said Cusack, adding that along with strong government policies, market conditions are helping renewables become more viable in Africa.
“The great thing about working in Africa is that we can provide cheaper and cleaner energy to our business customers without needing any subsidies or specific tax incentives. We are able to offer Power Purchase Agreements to businesses that give them a lower per-kilowatt-hour price than their existing grid connection and substantially cheaper than their diesel costs. Even grid-connected customers typically rely on backup diesel 10 to 20 percent of the time,” he said.
Improved technological efficiency and reduced costs for solar power are also having a positive impact on Africa’s agriculture sector. Farming is the primary source of food and income for Africans and provides up to 60 percent of all jobs on the continent. The World Economic Forum points out that in sub-Saharan Africa, growth generated by agriculture is estimated to be 11 times more effective in reducing poverty than GDP growth in other sectors. Samir Ibrahim, CEO of SunCulture, a solar-powered irrigation solutions startup, told me in New York that he agrees that cost reductions in solar PV are helping low-income farmers access affordable irrigation solutions.
“The reduction in the cost of solar PV has definitely made an impact on our customers. Our customers are smallholder farmers who live on less than two U.S. dollars a day, meaning cost for them is absolutely crucial, and they have been able to enjoy the reduction in solar PV costs that we pass on to them,” said Ibrahim. He added that local communities also benefit because SunCulture’s ecofriendly irrigation system reduces labour requirements and helps improve crop yields and quality.
“Communities’ food security and general health is improved as farmers can grow high-value crops that have a greater nutritional value than more traditional crops. They have the opportunity to send their children to school due to reduced labor requirements and increased income,” Ibrahim said.
Ankit Mishra is a growth analyst at Premise Data, where he manages network operations in Africa.