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The new scramble for Africa: turning the energy crisis into opportunity

The new scramble for Africa: turning the energy crisis into opportunity
Alessandra Pardini and Alexandra Clüver
By Alessandra Pardini and Alexandra Clüver
13 Nov 2022
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With its abundant sun and wind, Africa can play a critical role in helping the world meet many of its 2030 energy transition targets. But it will be a balancing act for African governments between investment and exploitation.

History is marked by tipping points — and we are at the cusp of a pivotal moment for the just energy transition. The next year is a rare window of opportunity for South Africa and the world’s energy transition.

There is a great opportunity to continue promoting the use of all forms of renewable energy and to explore other forms of clean technologies to boost Africa’s ailing electricity sector. The continent can play a critical role in helping the world meet many of its 2030 energy transition targets. 

This all comes into clear focus this week as global leaders gather at the COP27 conference in Egypt to make sense of the war-fuelled global energy crisis in the context of undeniable climate change. Other factors driving us towards an accelerated green transition are the global community’s 2030 net zero targets as well as pressures on the private sector to embrace environmental, social and governance (ESG) standards. 

Then there is the simultaneous reality that the majority of African countries still lack sufficient installed capacity to accelerate economic growth.

There are, however, amazing opportunities we should make use of right now. Having been involved in some of the biggest green projects in Africa to date, we have some insights on what we believe needs to happen.

Renewable energy’s key role 


We’re seeing a very encouraging shift by many large industries towards producing their own clean power. It’s not simply a case of having to take care of themselves because the power utilities can’t keep up. In many cases, multinational companies are motivated by global imperatives and pressure from financiers to clean up their act. 

In the past two-and-a-half years in South Africa, for instance, a range of mining companies and manufacturers, including Anglo American, Tronox Mineral Sands, Impala Platinum, Rio Tinto, Samancor, Sasol and Glencore, have made massive investments into large-scale renewable energy projects.

Titanium miner Tronox recently closed the largest private solar deal on the continent to date, a 200MW project. This will soon be surpassed by deals from Sasol, Air Liquide and others. 

It’s a huge change from five years ago when legislation dictated that any project bigger than 1MW had to apply for a generation licence — something which was very hard to get. Now the cap has been lifted to 100MW, and the government plans to remove the cap altogether in the near future (with draft legislation in this regard being published). 

All the while, Eskom is getting more and more unreliable, leaving many of our heavy electricity users with no choice but to go out and procure renewables alongside their grid connection.

Currently, private power is only being produced for dedicated offtakers, like big mining companies or heavy industrial users, and their dependent communities. The sooner we can allow the private sector to more readily trade in electricity, the sooner we can take significant pressure off our irreparably broken state utility. 

Opportunities in SA’s energy value chain 


We have seen trading licences issued in the recent past. Smart money is definitely thinking about trading, aggregating and the future energy landscape. We expect private equity-backed energy and infrastructure funds to take a more bullish approach to smaller projects and create merchant-type risk markets.

In addition, one of the most recently touted solutions is for Eskom to acquire the excess power produced by these independents, an idea that has been articulated recently as part of the overall response to the energy crisis. 

This “captive power” model is an approach that can also be used more widely in the rest of Africa. Captive power, however, will serve a different purpose in other parts of Africa, where state utilities are often worse off than Eskom or no national grid is operational. In those instances, it will be the primary source of power rather than supplementary.

If you look at sub-Saharan Africa and remove South Africa’s installed power-generating capacity from the equation, then you are left with 48 countries having roughly the same total installed capacity as Germany. That equates to about one billion people having the same access to energy as 83 million in Germany — a stark contrast.

In South Africa, we do have a national grid, so a wind farm in one region can supply a mine at the other end of the country. This grid — if boosted by much more significant independent power — can create many opportunities that might not be possible in other countries.

First, however, we need to ensure that we fix South Africa’s key problems: the need for more green generation to supplement the transmission bottlenecks, and, in the absence of being in a position to fix the state utility, to permit the private sector to generate in a free market. Without this change, we will see further economic contraction and more unemployment. 

Africa’s fossil fuel abundance 


Although renewable power has a vital role to play, it cannot solve Africa’s energy woes on its own. Africa has very rich fossil fuel resources: Mozambique has significant amounts of gas; West Africa has huge oil reserves; and South Africa has coal. Given global sustainability and carbon-reduction targets, these fuels are perceived as problematic.

The development of these industries has long been envisaged in Africa, but no one will pay for it now and Africa is once again being left to stand in the already congested queue for LNG and other interim solutions.

Since Russia invaded Ukraine, however, there has been a shift. Europe is supplementing its energy mix by turning on its old coal-fired power stations as well as procuring more LNG. People in Africa have been left wondering why they may not use such fossil fuels in their own energy plans.

Worse still, the price of coal has shot up from roughly $100 to $450 a tonne and Europe is buying up a lot of South Africa’s premium coal. This means South Africa is struggling with more limited supplies, further exacerbating rolling blackouts. Meanwhile, Africa is buying diesel at great expense to run its back-up generators. This is a situation that does not make a whole lot of sense. 

To provide enough power for everyone, potential interim solutions that should be considered are the development of clean coal-fired power stations with carbon capture technology or the implementation of the long-awaited gas-to-power programme.

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The Russia-Ukraine war is opening up this small window of opportunity for Africa. Considering that Africa represents just 2% of emissions globally, we cannot ignore the potential place for clean thermal coal in our energy mix, especially as the continent still lags behind on electrification that is critical to human and economic prosperity. 

That said, it is a problem not so easily solved. 

The variable power production from wind and solar is still problematic in providing a baseload source of energy. Batteries could solve the problem, but they are still very expensive, and diesel generators are a last resort.

This is why there might be a role for thermal power in electrifying urban areas if plants could be built that generate in the cleanest way possible, using renewables to plug the gaps. The cost of carbon capture utilisation and storage (CCUS) is still an issue, but this may change if energy prices and inflation continue to rise. 

The South African government wants to build renewables as quickly as possible because it is behind on its clean energy targets, but procuring gas is also part of its integrated resource plan.

Harnessing technology 


Crises always present opportunities. For Africa, embracing and adapting cutting-edge technologies has long been the way to solve hard problems. The way it leapfrogged Europe on mobile communications and payment innovations is a case in point. Now is the time to get creative in solving Africa’s electrification issues, considering that it really is a baseline for all other forms of economic development.

In that sense, we need to accept that renewables on their own won’t be able to provide millions of people access to electricity, but hybrid technologies could fill this void.

In Africa, building large grids to connect huge power plants to users in rural communities, often huge distances apart, is less efficient. It might work in urban areas, while elsewhere mini-grids with smaller renewable resources might make sense. We need to be innovative. 

The green hydrogen opportunity


One of the most exciting prospects for Africa is the growth of the green hydrogen industry, with Europe investing in Africa to develop hydrogen resources. It’s a phenomenal opportunity for the continent. It will create new industries and more jobs and boost economic growth. 

Our hope for COP27 is that Egypt will signal that it is going to develop some of the projects it has signed memoranda of understanding (MoUs) on. Hydrogen is promising because Africa generally, and in the north and south in particular, has phenomenal wind and solar resources needed for the production of green hydrogen. 

Hydrogen is touted as a key solution to achieving net zero and it’s going to be used extensively in a series of industries, such as transport and manufacturing. Europe will be one of the main users and the biggest investors in the region because it doesn’t have the huge renewable energy resources to produce it.

Countries are signing MoUs with developers and investors, but these need to be turned into real projects very quickly. These projects are usually several gigawatts large and take a huge amount of investment to get off the ground. In Africa, especially, there are many governmental, regulatory and financing hurdles to overcome.

A new scramble for Africa


Because of all these opportunities, we now face a situation in which our natural resources (in this case, the sun and wind) are exploited to produce hydrogen to supply Europe — but will we be left with anything for ourselves? African governments need to think carefully.

Green hydrogen requires massive amounts of renewable power that South Africa can produce in abundance. We just need to ensure that we don’t use it all to produce hydrogen products (including ammonia and fuels) that will be shipped offshore.

Export-only hydrogen from a continent that desperately needs its own electrification solutions is a hard sell, yet domestic-use-only will make it impossible to get these projects financed.

There must be a compromise utilising an approach that revolves around domestic to supplement export. We need to make sure that the countries hosting these production facilities get the right to capitalise on green hydrogen as well.

Joint financing


The users of clean energy will be in the saddle at first. Big transport and petrochemical companies, for example, will want to use hydrogen to meet their own net zero targets. Heavy industry users will use renewables to supplement their energy uses. Anglo American, for instance, has run a pilot project producing green hydrogen to power its heavy mining trucks and it is now rolling this out more widely. 

In the end, it is likely to be investors joining up with companies that have a real need for hydrogen — whether that’s big steel, shipping or aviation operators — who will drive this forward. Joint financing is needed, because green hydrogen is very expensive to produce compared with blue or grey hydrogen, which is produced from cheaper fossil fuels.

Given what’s happening to global energy prices, and the fact that the price of gas and coal are so out of kilter, we will probably get to price parity sooner. That, and Egypt opening the world’s eyes to green hydrogen at COP27, will hopefully encourage the world to invest in green hydrogen quicker. In addition, clean technologies coupled with more traditional sources of baseload power could provide for a more sustainable energy mix for Africa. 

Yes, we are facing disaster — but this is opening up new opportunities that we need to grab with both hands. Many solutions are presenting themselves so let’s embrace them together, right now. OBP/DM

Alessandra Pardini and Alexandra Clüver are partners in global renewable energy law firm Allen & Overy’s Johannesburg office.

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