The demand to fund renewable energy developments in Africa is bubbling over, reports Mercatus.

Approximately half of the 1.2 billion population without access to electricity are in sub-Saharan Africa. Thus, the need to upgrade the ageing infrastructure in the region is greater than ever, and renewable energies offer a viable solution – and big money is lining up to support it.

In an interview with Engerati, Haresh Patel, CEO of solutions developer Mercatus, said that the renewables companies they are working with – Enel Green Power, Building Energy, Conergy and GE among others – are all looking to Africa and other developing countries to enhance their pipeline of projects.

“With ‘new’ money coming through impact-based organisations such as the World Bank, IMF and Exim Bank, there is a real opportunity to bring connections to a new generation of people, and to drive the interconnectedness brought through the Internet,” says Patel. “This money is optimised and targeted to regions such as sub-Saharan Africa, and so we will be seeing growth in renewables there.”

The emerging market opportunity for renewables

In data presented in its recent Global Advanced Energy Insights Report, Mercatus found a definite shift in energy investment towards developing countries, and a shift away from the traditional (developed) markets of North America and Europe. [See The Emerging Market Opportunity for Renewables]

Patel says 2015 was a record year for clean energy, with about US$329 billion in global investment. For the first time, investment in developing countries matched that in the developed markets.

Also worth noting, the renewable projects in these developing markets are now larger on average than in Europe and North America, and yielding the greatest returns with 28% greater IRRs.

“For example, in Africa the typical IRR for renewables is running at just under 16%, about double that of North America or Europe,” he comments, pointing out that South Africa ranked 8th among countries with its US$4.5 billion clean energy investment in 2015.

“When there are good returns more investors will be attracted, and the markets will benefit as they are in need of capital. Based on what we are seeing, we expect this growth to continue in the years ahead.”

Mercatus consolidates data on energy projects in various stages of development in its Energy Investment Management (EIM) platform, which is used to support project development from conception all the way to completion.

The renewables advantage

Patel explains that the main driver for renewables from the investment perspective is the incentives that governments provide. In South Africa, for example, doubling of the tax rebate was a clear contributor to the massive growth.

Another point he mentions as an “underlying phenomenon that is not well understood” is that in much of the developing world, energy from renewables would replace the use of diesel or kerosene. Both of these energy sources are expensive – especially for those on low incomes, whose use often requires a significant proportion of that income – and are ‘dirty’.

“In the developed markets, renewables compete with coal and nuclear, which are relatively inexpensive. In developing countries, solar and wind are already cheaper than the traditional options, even without any incentives.”

On top of these is the need for electrification for those without access. Particularly in rural and remote areas, renewables and technologies such as microgrids offer the opportunity to leapfrog to cleaner sources of energy.

“Just as mobile telephony leapfrogged traditional landlines in the developing countries to a high degree of quality, there is a very similar opportunity for renewables to do likewise. We are seeing the emergence of off-grid, smart grid type projects, which offer a cleaner energy source at a lower cost, and with greater reliability – and that’s a pretty good combination!”

Overall, the total clean energy investment requirement globally is estimated by Bloomberg at US$12 trillion by 2040.

The renewables market in Africa

Notwithstanding this optimistic outlook, Patel cautions that in the developing markets there needs to be some greater stability in terms of transparency and compliance for projects.

“Even though the private sector is going to be funding these projects, they will be backstopped by the large international organizations. Once there is more regularity, significant sums of money should start flowing into them.”

He adds that even greater returns on investment can be expected, due to the current high energy costs that the project will supplement or replace.

“With this and with the new money coming in, we expect to see growth across a multitude of regions across Africa.”