An investor’s guide to hydropower in Africa3 December 2021
To help meet the needs of a rapidly growing population, and as the world moves towards net zero carbon, African nations will become increasingly reliant on hydropower, which is the continent's main source of renewable energy. However, to fully realise its potential, the African hydropower sector needs to see significant investment over the coming decades. A new investor guide to hydropower is hoping to pave the way across the continent for host governments, private investors and funding parties.
Bin el Ouidane Dam in Morocco
Africa is a continent with an acute need for electricity. Almost 580 million Africans have no access to electricity. By 2040 electricity demand is expected to triple and by 2050 its population will double. Improved access to reliable, clean and safe power is viewed as an essential step for African countries to meet UN Sustainable Development Goals.
From a hydropower perspective, Africa is described as being interesting. Hydro is the main renewable resource with over 37GW of installed capacity which currently amounts to 17% of electricity generation (projected to increase to 23% by 2040). Africa also has the highest untapped hydropower potential in the world with only 11% being utilised.
However, according to a new report by law firm Addleshaw Goddard, Africa has seen relatively low levels of power sector investment when compared with North America, Asia and Europe. As the report states: “The low level of privately funded power sector investment is in part driven by the perceived risk of investing in African electricity markets due to a range of commercial and legal risk matters such as customary land rights, resettlement, political risk and market structures. However, whereas many of these risks can be mitigated at an acceptable cost, the challenges of transacting with often poorly performing state-owned entities, institutionally weak host government counterparts and very shallow local capital markets still pose significant challenges.”
Hydropower, particularly larger scale projects, are complex and capital intensive, the report acknowledges. However, with power sector investment needs exceeding US$100 billion per annum until 2040, “mobilisation of a greater proportion of private capital into transitional energy projects in Africa must be a key influencer for policy decisions”.
“This is not a new matter,” says Rory Connor, Partner at Addleshaw Goddard, “but it is as important now as it has ever been.”
Connor goes on to explain how Addleshaw Goddard has collaborated with ten other law firms in Africa to produce a new report, called An Investor’s Guide to Hydropower in Africa, which attempts to highlight the legal issues associated with hydro development across the region.
“Legal issues with projects and investment tend to fall into two broad categories,” Connor says. “Commercial legal issues are concerned with putting economics and engineering into words and looking at how commercial and legal issues are managed and allocated through contracts, companies, treaties and other legal instruments. While there are also the mandatory legal issues of the relevant host country such as economic regulations, public procurement, permitting, licensing, and environmental water rights etc.”
The report focuses on these two particular limbs of hydropower development and helps host governments, private investors, funding parties and in-country procuring entities gain a better understanding of the legal bankability issues which are relevant to the development of certain hydropower projects in Africa. It also provides an overview of the legal systems and laws relevant to the hydropower sector of the ten countries featured in the report.
“We would have loved to do a report featuring the 54 countries of Africa but it wasn’t practical so we selected ten countries based on a range of factors including size of economy, investment activity, policy development, existing hydropower and untapped hydro resources,” Connor explained.
The ten featured countries are:
- Cameroon –With 792MW of installed hydropower capacity, Cameroon is among one of the countries with the largest hydropower potential at over 12,000MW. Currently six out of ten Cameroonians have access to electricity. The country’s five operating hydropower plants are the only renewable energy sources on the grid and account for 56% of total installed capacity.
- Ethiopia – With over 4000MW of installed hydro capacity, and 45,000MW of estimated potential, half of the population has access to electricity. By 2030 the government is aiming to increase total generating capacity by 25,000MW which includes an additional 22,000MW of hydropower. Currently hydro already accounts for 90% of the country’s installed capacity.
- Ghana – Hydropower is the single largest contributor to annual generation and, with 1584MW of installed capacity, accounts for 40%. Over 80% of the population has access to electricity while there is an estimated hydropower potential of 2480MW.
- Malawi – This is among one of the least developed countries in the world and only 12% of the population has access to electricity. With 371MW of installed hydropower capacity, hydro accounts for 77% of the country’s total installed capacity. There is an estimated potential for 2000MW of hydropower.
- Morocco – With 1770MW of installed hydropower capacity and 100% access to electricity, the country is looking to hydropower to strengthen grid flexibility. There is an estimated 2000MW of hydropower potential.
- Mozambique – Just under a third of the population has access to electricity and this is considered a national priority for the country’s development agenda. Although there is 2216MW of installed hydropower capacity, the country has an estimated potential of 6600MW to fulfil.
- Nigeria – Although this is Africa’s largest economy, with a population expected to double to 400 million by 2050, power capacity continues to be a handbrake on the country’s growth prospects. With 56% of the population having access to electricity and 2110MW of installed capacity, there is an estimated hydropower potential of 14,000MW.
- Rwanda – Hydropower currently accounts for 50% of grid connected electricity and just under 60% of the population has access to electricity. The country has an installed capacity of over 110MW.
- Uganda – Despite being rich in hydro resources only 43% of Ugandans have access to electricity. The country has 1040MW of installed hydropower capacity and 2200MW of estimated potential.
- Zambia – With 2400MW of installed capacity hydropower accounts for 85% of the country’s total installed capacity. Just 40% of the population has access to electricity but there is an estimated potential of 6000MW of hydropower.
A virtuous circle
Addleshaw Goddard conclude that Africa has a unique opportunity to circumvent many of the challenges associated with the energy transition (such as stranded asset risk, decommissioning and skills-transfer) and develop its power systems with renewable energy at its core.
As the report states: “Identifying and mitigating risks should be a virtuous circle for investors and non-investment stakeholders - higher quality mitigation and management of risk leads to a higher quality asset which will appeal to be a broader pool of investors - making it more valuable. For sophisticated investments like hydropower, risk mitigation is never a purely legal job. But having the investment structures, transaction documents and other legal matters carefully implemented to anticipate and mitigate hydropower-specific risks will go a long way to improve the overall quality of hydropower investments and projects.”
The full report can be downloaded at www.addleshawgoddard.com/globalassets/insights/energy/investors-guide-to-hydropower-in-africa.pdf
Katse Dam in Lesotho
According to Anton Louis Oliver, Senior Advisor of the REH Group in Africa, there is still a lot of good, efficient, low cost, environmentally and socially sustainable projects that can be developed. However, he cautions, the average age of the hydropower fleet which is keeping the lights on in Africa is now 30 years.
“So not only do we have the need to add on new hydropower but also look at keeping the existing fleet going,” he says. “If the existing fleet is neglected it will have a serious impact on availability and affordability of power in the region.”
Henry Paul Batchi Baldeh is the Director of Power Systems Development at the African Development Bank. When asked about how it is possible to bridge the gap between investment needs and the dire need for power in Africa, he said that one of the key things the bank is looking for is “a very robust and bankable feasibility study done by quality advisors looking at all the risk areas”.
“There’s not a shortage of money as long as your project is bankable, and that’s the problem,” he said. “The most important thing is for your project to have a market, be competitive over its economic asset life and to factor in climate change. We notice that many of the older projects do not factor in climate change.
“It’s also extremely important that the utility must be credit worthy. Out of 80 or so utilities on the continent probably only a handful are profitable. So, we are in a role of what we call a sustainability transformation agenda with partners like the World Bank to make sure that we have a path to credit worthiness.”
For more information see the International Hydropower Association’s webinar at www.hydropower.org/events/hydropower-investment-in-africa-opportunities-and-risks