The risks of investing in Africa


June 26, 2017

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If you invest in Africa, you have to be comfortable with political risk. It is a truism with which all investors in the continent will be aware, and wind is no exception.

And we have seen developments in some key African markets this month that might give investors cause to reconsider their plans for the continent. Africa has strong resources for both wind and solar, but this month we have seen that even the strongest markets and most high-profile schemes can fall foul of regional instability.

The biggest of these is South Africa where, last week, the government said it did not expect a solution to long-standing problems with state utility Eskom until at least February 2018.

Eskom’s refusal to sign power purchase agreements for 37 wind and solar projects awarded government support in April 2015 has brought the South African renewables development market to a standstill, and there is no end in sight.

This is not a new problem. Eskom was obliged to sign the PPAs in April 2016, but this hasn’t happened as the utility warned that the projects produce electricity that is too expensive; put the country at risk of electricity over-supply; and threaten the position of its own coal power stations. President Jacob Zuma said in February that Eskom would sign these PPAs, but there is little evidence it will.

It is a well-known issue – but the announcement by government last week is a gut punch for investors. They now need to wait for the government to finish a review of the country’s electricity needs before the PPAs can be signed, which is likely to be done by February 2018 (or, conceivably, in August 2017). Eskom controls 95% of the South African electricity market, and wind will face a tough battle to prevail in the face of this vested interest.

This month, we have also seen a state-run firm causing problems in Kenya. While the consortium behind the 310MW Lake Turkana wind farm managed to complete the scheme early, the same cannot be said for its grid operator. The project now cannot be connected to the grid until at least early 2018 because the Kenya Electricity Transmission Company has not completed its 428km transmission line. This is due to delays caused by land disputes.

This is a different situation to Eskom, of course. We see no indication that Ketraco is dragging its heels to complete the transmission line. But what this does show is that inexperienced local players can delay the commissioning of schemes if they are not able to complete transmission lines on time.

For long transmission lines that can be subject to land disputes with many landowners, these problems are multiplied.

And, in Egypt, the wind market is being hamstrung by the bureaucracy facing foreign investors, and uncertainty over how much protection overseas companies face when things go wrong.

The government is set to introduce laws to attract investors in the next week, but an estimate from BMI Research is only 3GW of renewables projects are set to be completed in the country by 2026, out of a pipeline totalling 5.6GW.

Vested interests in South Africa. Difficulties with local expertise in Kenya. Legal problems in Egypt. These three challenges may not have much in common, but they should all remind investors and developers that doing business in countries in Africa is not simple
even when governments are in favour of renewables.

Wind has great potential in Africa – we said so in our Emerging Markets report – but the market is a long way from established.

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