AFRICAN ENERGY
However , the financial requirements of increasing renewable energy generation far exceed most countries ’ public finances . Therefore , greater volumes of private investment will be critical to the effort to expand and improve electricity supply . The primary vehicle for such private investment is the independent power project ( IPP ) structure , which is , and will likely continue to be , the principal investment structure for privately financed power projects .
The challenge Activity in the private equity space highlights the opportunities presented by Africa . The number of private equity houses investing in Africa has grown to more than 140 from a dozen or so in the 1990s 6 and remains strong today . According to the African Private Equity and Venture Capital association , US $ 1bn of funds were raised in H1 2020 with 81 PE deals reported during the same period totaling US $ 0.7bn . 7
Notwithstanding the relatively high and promising levels of activity in the PE space in Africa over the past couple of decades , generally speaking , the level of activity remains low as a percentage of GDP . 8 Further , the proportion of private equity activity attributable to renewable energy investment , while promising , is relatively small . Therefore , a case may be made that the full potential of renewable energy private equity activity in Africa has yet to be realised .
One of the key challenges faced by PE houses looking to realise the full investment potential of Africa is that ready-made deals , ie those that are acquired at scale , are rare in the region . This is particularly pertinent in the renewable energy space , where the interplay between relatively small projects , increased competition for new capacity driving down the power purchase prices and the currency risk associated with the fragmented nature of the markets on the continent contributes to the relative scarcity of such “ ready-made ” deals .
Generally , individual renewable energy projects are small . For example , the typical range of African wind power projects is smaller than 150MW and of the 350 African solar PV projects reviewed by Global Data in 2015 , a majority only have production capacity of between 10MW and 100MW , with capacity factors from as low as 11 % to as high as 33 %. 9
As the largest IPP programme of any African country , the South African REIPPP programme demonstrates the downward pressure on power prices over the course of a decade . In the three rounds since the first round in 2011 , average bid prices have fallen relative to the previous round by 21.5 %, 26.9 % and 20.9 % for wind ; 40.4 %, 46.4 % and 25.2 % for PV ; and 6.5 %, 41.9 % and 16.2 % for CSP respectively . 10
In addition , although depreciation assumptions are typically priced into a deal , sudden currency devaluations such as those in major African economies over the last few years can devastate returns , usually denominated in US dollars , from otherwise profitable investment . For example , the local currency in Nigeria depreciated as much as 16 %, against the US dollar , in 2017 – 18 . A further concern for investors is that many governments in Africa place restrictions on foreign exchange movements and withholding taxes add additional cost to cross-border currency movements . This can be seen in countries such as Zimbabwe , where dollars are both scarce in the market and difficult to repatriate .
The combination of these factors poses a real challenge for private equity houses looking to deploy capital in Africa ’ s renewable energy sector to achieve the scale required in order to deliver the desired return levels , usually denominated in US dollars , for their investors . This is further compounded by the fact that track records matter – private equity houses active in the region with a strong track record of generating investment returns are best positioned to attract investor capital .
The solution This challenge may be successfully overcome by aggregating energy assets into scalable regional or multi-jurisdictional platforms . This approach enables private equity houses to package a series of relatively small individual renewable energy projects into a single platform with considerably larger combined generation capacity and thereby , higher revenues . Further , by building a diverse portfolio of projects in such platforms , private equity houses are also able to address the currency risk by , for example , offsetting profits in one operating or project company with foreign exchange losses in another to optimise tax exposure .
This model also combines flexibility with strong return outcomes for investors . It is flexible in that it enables not only traditional project finance to be obtained but also a range of additional finance solutions such as holdco financing and portfolio financing that can be tailored for each type of technology and the platform as a whole to optimise the cost of capital , leverage levels and support the recycling of capital in order to deliver a successful exit .
In addition , with such platforms , private equity houses have the flexibility to deliver an exit in any manner considered desirable – eg , whether partial or full , at any level , whether project level , holding company , platform or
This challenge may be successfully overcome by aggregating energy assets into scalable regional or multi-jurisdictional platforms
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