South Africa: The Changing Face Of Power In Africa (Energy Update)

Last Updated: 6 August 2012
Article by Greg Nott

No longer the dark continent, Africa is shedding light on investors' quest for new sources of energy. Recent oil and gas finds, coupled with renewable energy progress and power project successes, have switched attention from the problems of the past to the promise of the present.

While oil and gas are still being discovered in a few other parts of the world, including the Eastern Mediterranean, Northern Europe and Gulf of Mexico, it is the finds in Africa that are arguably fuelling the most investor excitement.

To quote the chief executive of a European energy giant, as reported in the New York Times of 10 April 2012, "Africa will be the backbone of our production and growth in the next 10 years".

His words have been echoed by other major players in the international energy industry, hailing natural gas finds off the coast of Mozambique and Tanzania as the most signifi cant gas discoveries in a decade.

According to media reports, the fi rst two major finds in Mozambique rival the entire reserves of Kuwait, and expectations are rising that there is much more to come since this part of the world has been virtually untapped.

Adding to the buzz about Africa are new oil finds in Uganda, natural gas fi elds off Namibia, and exploration being undertaken in East African countries such as Kenya and Tanzania, previously overlooked in favour of oil-rich West Africa.

These headline-making events are not the only reason for investors' high hopes for Africa as the new energy frontier. Other developments that are sparking optimism are the continent's recent successes in achieving power project closure, along with regulatory reform in the energy sector and the progress being made in renewable energy.

Power deals signed and sealed

In the past, Africa earned an unfortunate reputation as a continent with a poor track record for achieving closure in infrastructure projects in various sectors, including energy.

A lack of transparent procurement processes, low tariffs and a lack of investment in the power sector all ensured that this vital sector became a perennial underperformer.

There are positive trends emerging however which indicate that change is certainly in the wind. Recently, several major projects have reached closure which seem to indicate that a brisker pace has now been set, suggesting a different momentum to the painfully slow implementation of projects which seemed to be Africa's fate.

Although beset by many years of delays Uganda can pride itself in the development of the Bujagali Hydropower project which came on stream earlier this year.

The Hydropower Project in Uganda is a 250-megawatt power-generating facility built on the Victoria Nile River. This project is surely one of the most rigorously reviewed, carefully planned and painstakingly executed projects in the energy sector in Africa.

Some years ago Bujagali Energy Limited (BEL), was chosen as the preferred bidder in an international competitive bidding process, run by the government of Uganda with support from the World Bank.

Stakeholder management and good governance emphasised

One of the requirements BEL had to meet was the filing of a social and environmental assessment, the aim being to ensure the hydropower project would deliver maximum benefits while complying with strict environmental and other regulatory obligations, both during construction and operation.

Among other things, the project company committed to providing alternative water supplied for villagers whose access to the river would be restricted as a result of the project. It also undertook to plant indigenous vegetation on islands and riverbanks around the Bujagali reservoir, to monitor fish stocks and restock if necessary, to provide alternative facilities for white water rafting enterprises, and to minimise the effect of construction through traffic management and environmental management programmes.

Another important facet of the project has been an extensive public consultation and disclosure programme to increase community awareness and provide opportunities for community involvement.

On its website, BEL notes that because of the severe shortage of electricity in Uganda, electricity consumers regularly experience rotating blackouts of between 12 and 24 hours a day. It also notes that the Bujagali Hydropower project, while going a long way towards alleviating Uganda's energy poverty, will not cause greenhouse gas emissions, in contrast to most electricity generated in Uganda (much of it by diesel and oil generators).

Talking of minimising greenhouse gases, another major power project that is setting the pace for the transformation of the African energy landscape - and investors' perceptions of it - is South Africa's Renewable Energy Independent Power Producers Programme (REIPP).

Renewable energy set to become reality

Through the REIPP, the Department of Energy aims to procure a total of 3 725 Megawatts of energy from renewable sources such as wind, solar, biomass, biogas and landfill gas, among others. The programme consists of five bidding phases or 'windows', the first two of which have already passed (in November 2011 and March 2012 respectively).

The Department has drawn widespread praise for its capable handling of an extremely complex bidding process. So far, the REIPP programme has been immaculately executed, with industry watchers noting the comprehensive bid specifications, inclusive consultation process and disciplined approach to deadlines, as well as the integrity of the process of selecting preferred bidders.

Administrative efficiency has gone hand in hand with high-level political support, and this has not been lost on investors, advisors and other players, who have flocked to take part in the programme.

At the time of writing, details were awaited as to the outcome of the financial close stage for bidders who participated in the first bidding window. This has caused some consternation amongst developers. This milestone is critical as the bidders concerned will be making concrete financial arrangements that will enable them to start construction as soon as they receive the go-ahead from government.

The South African REIPP, a flagship project, hailed universally as a success, is a project which has managed to capture the imagination and excitement of the market as did the development of renewable projects in North Africa, particularly in Morocco.

Political will is paramount

Government should always be the champion in setting the scene for private sector participation and it seems that this is a lesson Africa is taking to heart. As with Uganda's hydropower project, the REIPP in South Africa has enjoyed top-level political support from its inception. If South Africa is to succeed in introducing independent power production - and in so doing blaze trails for other African countries - it will be critical to continue setting the tone from the top.

Up to now, the country's energy sector has been dominated by a state-owned monopoly which, understandably, will be reluctant to lose its grip on the market. Investors, on the other hand, will need the assurance that fair competition will prevail and that new entrants will be protected from potential market abuse. They will also want clarity on how they will be expected to interact with the incumbent.

In this regard, government is not only making the right noises but following up with appropriate action by preparing to establish the Independent System and Market Operator (ISMO). Briefly, ISMO's role will be to procure power from the independent power producers so as to level the playing field and eliminate conflict of interest between the buyer and seller of electricity.

According to the ISMO Bill that the Minister of Energy has issued, ISMO is to be created as a separate juristic person with a nine-member board of directors, whose chairperson will be appointed by the Minister. It appears that ISMO, like Eskom, will be regulated by the National Energy Regulator of South Africa (Nersa).

The Parliamentary Portfolio Committee on Energy has already held two public hearings on the ISMO Bill, which has been well received by a cross-section of energy industry stakeholders, including business, trade unions, academia and interest groups such as the Heavy Energy Users Group.

The latest round of public hearings, held in May 2012, attracted as many as 148 submissions. Some key issues that stakeholders raised in their submissions include the need for independent transmission lines to minimise connection risk, bulk electricity supply and network tariffs, and transparency in the allocation of megawatts between Eskom and independent power producers.

The Department of Energy has said it will consider the proposals submitted about ISMO when developing the policy guidelines and regulations that will pave the way for the creation of ISMO, which will no doubt further enhance the attractiveness of the sector to investors.

Africa-friendly investment

Africa's energy landscape is changing rapidly, in more ways than one. New gas and oil discoveries in countries outside the traditional resources footprint in North and West Africa have fuelled a flurry of activity among energy investors from Europe, China and India. For the most part, Africa is welcoming the intense interest being shown in its power resources, the development of which is critical for the eradication of poverty.

There is widespread understanding that investors not only need to know the rules by which they will be playing but also that these rules will be fairly and transparently applied. Africa is responding by introducing regulatory reforms, such as in South Africa where independent power producers are set to enter the market imminently. The continent is also showing itself capable of managing major power projects efficiently and transparently, sending positive signals to citizens and investors that Africa has the power to deliver on its promise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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