Private Equity Can Bridge Funding Gap For Electricity Sector | Independent Newspapers Limited
Newsletter subscribe


Private Equity Can Bridge Funding Gap For Electricity Sector

Posted: Mar 23, 2016 at 7:57 am   /   by   /   comments (0)


Private equity funds could help to bridge Africa’s electricity funding gap through creative financial solutions that ensure that the continent can leverage on public-private partnership to ensure availability of stable and affordable electricity across the continent.

Managing director, Cowry Asset Management Limited, Mr. Johnson Chukwu, said in order to meet its growing demand, Africa has an urgent need to raise the level of investment in its power sector.

Chukwu, who spoke on “Private Equity as Tool for Building the Electricity Sector of the Future”,  was the keynote speaker at the 19th Annual Power and Electricity World Africa 2016 held at the Sandton Convention Centre, Johannesburg, South Africa.

According to him, with Africa currently having 147GW of installed electricity capacity; the continent needs to add 250GW of capacity between now and 2030 and the magnitude of investment required is such that governments will need public-private partnership in order to scale up investment.

He pointed out that the realisation that governments do not and would not have the financial resources to fund electricity supply to meet the demands of households and industries as well as provide power to the 600 million Africans currently without access to electricity by 2030 has compelled a number of African countries to invite private capital into the ownership and management of their respective electricity infrastructure.

“The increasing gap between demand and supply of electricity in Africa and the realization by governments of their inability to finance the required investment leading to the full or partial deregulation of the electricity sector in many African countries have created a huge opportunity for private equity investment in the sector,” Chukwu said.

He noted that the absence of cost reflective tariffs, integrated natures of national grid systems, regulatory framework which vested the entire value chain from generation to distribution on government were some of the factors that deterred private capital from investing in the sector until recently.

He said the vertical and horizontal unbundling of the previously concentric electricity systems have reduced both the capital requirement for investment and risks, noting that advancement in renewable energy is creating another set of opportunities for investment with the prospects of disrupting the current industry architecture.

He pointed out that private equity investors might need new set of rules and skills for appraising and optimizing the emerging opportunities in Africa’s electricity industry.

According to him, while the rapid improvement in renewable energy technology and consequent reduction in cost is creating viable alternatives for providing electricity to the underserved African communities, the off-grid nature of most renewable energy supply architecture, which in many instances eliminate long and expensive transmission grid could be likened to the sea-change in telephone services and has enhanced the attractiveness of the electricity sector to private equity funds.

“With defined risks, improved economics and better technology, the viability of the electricity sector as investment outlet for private equity firms is better enhanced. Aside from renewable energy, the adoption of embedded generation from gas fired plants to provide electricity to consumers in ring-fenced districts with capacity to pay commercial tariffs is creating a pipeline of bankable and fundable transactions for private equity firms,” Chukwu said.

He said while it is a truism that the poverty level in Africa is pervasive and makes affordability of commercial electricity tariffs difficult, the fact that industrial outlets and a reasonable number of households generate their own electricity through diesel powered power plants is a proof of pockets of effective demand for cost efficient electricity supply, which could be served by embedded off-grid generation and distribution.

He added that it is also inevitable for consumers to re-order consumption priorities upon the advent of relatively indispensible new consumer items as demonstrated when GSM services were rolled out in Africa, where without any actual increase in income, household expenditure shifted to airtime consumption.

Chukwu, a leading financier, called for reforms in legal, structural and fiscal frameworks to attract private equity funds. These reforms, according to him, included the issue of government ownership and monopoly law, which must be repealed, the issue of integrated systems that have to be unbundled, corporatized and privatized and a mechanism that allows for cost reflective tariffs and eliminates subsidies but for the absolutely needy consumers.