Brighter Africa: the growth potential of the sub-Saharan electricity sector

August 3rd, 2015, Published in Articles: EE Publishers, Articles: Energize

 

Sub-Saharan Africa is starved for electricity. The region’s power sector is significantly underdeveloped, whether we look at energy access, installed capacity, or overall consumption. The fact that sub-Saharan Africa’s residential and industrial sectors suffer electricity shortages means that countries struggle to sustain GDP growth. The stakes are enormous. Indeed, fulfilling the economic and social promise of the region, and Africa in general, depends on the ability of government and investors to develop the continent’s huge electricity capacity.

This executive summary is published with permission.
The full report may be downloaded here

Countries with electrification rates of less than 80% of the population consistently suffer from reduced GDP per capita. The only countries that have electrification rates of less than 80% with GDP per capita greater than US$3500 are those with significant wealth in natural resources, such as Angola, Botswana, and Gabon. But even they fall well short of economic prosperity.

Whether people can obtain electricity (access), and if so, how much they are able to consume (consumption) are the two most important metrics that can indicate the degree to which the power sector is supporting national development. From an electricity-access point of view, sub-Saharan Africa’s situation is the world’s worst. It has 13% of the world’s population, but 48% of the share of the global population without access to electricity. The only other region with a similar imbalance is South Asia, with 23% of the world’s population and 34% of the people without access to electricity.

This means that almost 600-million people in sub-Saharan Africa lack access to electricity. Only seven countries — Cameroon, Côte d’Ivoire, Gabon, Ghana, Namibia, Senegal and South Africa — have electricity access rates exceeding 50%. The rest of the region has an average grid access rate of just 20%. Moreover, even when there is access to electricity, there may not be enough to go around.

Regarding consumption, Africa’s rates are far below other emerging markets. Average electricity consumption in sub-Saharan Africa, excluding South Africa, is only about 150 kWh per capita. This is a fraction of consumption rates in Brazil, India, and South Africa.

In this report, we explore how power demand will evolve in the region, along with the associated supply requirements; how much it will cost to supply the needed power, plus the options available to manage the expense; and what is required to ensure that the new capacity gets built. In brief, sub-Saharan Africa has an extraordinary opportunity but will have to do a lot of work to take advantage of it.

We took a demand-driven approach to better understand the likely evolution of the sub-Saharan African power sector and the resulting opportunity for the players who will help propel it. We project that sub-Saharan Africa will consume nearly 1600 TWh by 2040, four times what was used in 2010. We based that forecast on a number of important factors, including a fivefold increase in GDP, a doubling of population, electricity-access levels reaching more than 70% by 2040, and increased urbanisation. By 2040, sub-Saharan Africa will consume as much electricity as India and Latin America combined did in 2010 (Fig. 1). Nevertheless, we forecast that electrification levels will only reach 70 to 80% by 2040 given the challenges associated with getting the power to where it needs to go. It takes on average 25 years to progress from a 20% electrification rate to an 80% rate, our research found.

 

Brighter Africa Fig 1

Fig. 1: By 2040 Sub-Saharan Africa’s electricity demand will reach a level equal to today’s consumption in Latin America and India combined.

 

We know there will be demand. What about supply? Sub-Saharan Africa is incredibly rich in potential power-generation capacity. Excluding solar, we estimate there is 1,2 TW of capacity (Fig. 2); including solar, there is a staggering 10 TW of potential capacity or more. There is potential for about 400 GW of gas-generated power, with Mozambique, Nigeria, and Tanzania alone representing 60% of the total capacity; about 350 GW of hydro, with the Democratic Republic of the Congo (DRC) accounting for 50%; about 300 GW of coal capacity, with Botswana, Mozambique, and South Africa representing 95% of this; and 109 GW of wind capacity, although it is relatively expensive compared with other sources. The proven geothermal resource potential is only 15 GW, but this is an important technology for Ethiopia and Kenya, which hold 80% of it.

 

Brighter Africa Fig 2

Fig. 2: Sub-Saharan Africa can install 1,2 TW of power capacity from a range of different technology options, excluding solar.

 

Gas would account for more than 40% of the electricity generated from 2020 onward, with hydro remaining a very important technology. Solar would take off significantly after 2030, representing 8% of the generation mix by 2040 and more than 30% of capacity additions between 2030 and 2040. Even in the absence of active incentives, more than 25% of total energy in 2040 would come from clean sources — geothermal, hydro, solar, and wind — compared with 21% today, almost all of which is from hydroelectric sources (Fig. 3).

Southern Africa will continue to build coal capacity, but its overall importance in the continent’s fuel mix will diminish from 51 to 23%. We found that the average levelised cost of energy (LCOE) generated would be about $70/MWh with relative emissions of 0,48 t1 of CO2 per MWh in 2030, dropping to 0,43 t of CO2 per MWh in 2040.

 

Brighter Africa Fig 3

Fig. 3: If every country builds enough to meet its domestic needs, gas and coal will be the dominant technologies by 2040.

 

If every country builds what it needs, we estimate that the region would require about $490-billion of capital for new generating capacity, plus another $345-billion for transmission and distribution.

Also, we studied ways to facilitate the development of the sector and the trade-offs they entail. Regional integration, such as power pools, and promotion of renewable generation are game changers that could shape the energy landscape in sub-Saharan Africa over the next 25 years. We found that significantly increasing regional integration could save more than $40-billion in capital spending, and save the African consumer nearly $10-billion per year by 2040, as the LCOE falls from $70/MWh to $64/MWh. Higher levels of integration would result in larger regional gas options being favoured over some of the smaller in-country solar and wind additions, leading to an increase in carbon emissions.

If sub-Saharan Africa aggressively promotes renewables, it could obtain a 27% reduction in CO2 emissions; this would result in a 35% higher installed capacity base and 31% higher capital spending (or an additional $153-billion).

There are also a series of shocks which could fundamentally change the sector in Africa. For one, the massive Grand Inga Dam hydroelectric project could help save $32-billion in capital spending as well as 63 Mt in carbon emissions annually. In addition, Africa is significantly underexplored from a gas perspective, so there is the real possibility of further gas discoveries on the east or west coasts. Tapping such sources could result in a much cheaper LCOE.

To move ahead on development of the sector, national governments should take the initiative in a number of areas. For one, they could focus on ensuring the financial viability of the power sector. Four points matter here: electricity tariffs should reflect the true cost of electricity, costs should be transparent, the country should make the most of what it already has in the sector, and officials should pursue least cost options in investments.

A second imperative involves creating an environment which will attract a broad range of funding mechanisms. Private-sector involvement is critical and central to effectively delivering new capacity. To attract the private sector, it is necessary to provide clear, consistent regulations; allocate risks to the parties best suited to carry them; ensure that a credible buyer (off-taker) exists; and seek support from external institutions to guarantee the risks.

Finally, it is important for governments to demonstrate political will. To do this, they can prioritise efforts, keep an eye on the long term, and focus on the regulations and capabilities needed for the sector to thrive, not just on the plants and associated infrastructure.

While the sub-Saharan power sector faces many challenges, there is real momentum for change. For example, the UN program on Sustainable Energy for All (SE4All) is sparking private-sector activity in many different parts of the value chain. The region has the ability to take development of the sector to the next level. Success will propel economic growth of the continent and greatly enhance the lives of hundreds of millions of people, as well as potentially create a thriving electricity-supply industry and an associated 2,5-million jobs across the continent.

Acknowledgement

This executive summary is published with permission.
The full report may be downloaded here

Contact Tarryn Swemmers, McKinsey, Tel 011 506-8214, tarry_swemmer@mckinsey.com

 

 

 

 

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