Tiny hydro power plants represent a promising avenue for Africa’s energy future
Not so long ago African renewables were one of the continent's brightest spots for infrastructure investors. Generous subsidy regimes in Europe had allowed the industry to reach scale, bringing costs down for components of wind turbines and solar panels all over the globe. The increasing acceptance of independent power producers (IPPs), and the lack of economically viable generation alternatives, also created space for clean energy to flourish.
The outlook is now looking dimmer. The most established markets, such as South Africa, are witnessing strong competition for renewable assets; progress on power purchase regimes is on the way but slow and patchy elsewhere. For sure, there’s been some remarkable successes, mainly at the very large end of the scale: mammoth projects like the 400MW Kpone IPP in Ghana and the 450MW Azura IPP in Nigeria seem to be on the right track.
But other ambitious schemes, such as Lake Turkana’s planned 310MW wind farm in Kenya or Congo’s 39GW Grand Inga dam project, have been plagued with difficulties and delays. Building a pipeline of smaller deals, meanwhile, seems to demand more time and effort than many investors can afford. And many governments are keener to focus on high-profile, prestigious projects than a string of tiny assets.
It’s tempting to think that only big chunks of money from public and private entities can help Africa catch up with its incredible renewable energy potential. Better to make a few big strides towards the end goal, surely, than progress tediously through small incremental steps.
The problem is that big projects tend to come with their lot of environmental and social issues. Procurement is always complex and vulnerable to political meddling, and reaching financial close, in Africa’s fledging debt and capital markets, often requires heroic nous and coordination. Development finance institutions (DFIs) almost invariably have to be part of the creditor mix so as to provide cornerstone liquidity and entice commercial lenders.
Such projects still have a crucial part to play. But they should be complemented with smaller initiative driven by private companies and their financial backers. One such move, announced this week, was the signing of a $500 million partnership between African Infrastructure Investment Managers (AIIM), a Cape Town-based fund manager jointly owned by Australia’s Macquarie and South Africa’s Old Mutual, and French developer MECAMIDI to develop up to 200MW of hydro power in parts of Africa.
Alliances between managers and developers are not a new feature on the continent, as precedents by Actis or AIIM demonstrate. But this time there is a new angle: MECAMIDI is a specialist in small and medium-sized hydro plants, and indeed the tie-up will focus on building run-of-river power stations of up to 50MW.
Less environmentally and socially damaging, small plants are also quicker to develop and more flexible than their larger cousins. Additionally, they can be aggregated in an attractive, diversified portfolio that’s likely to interest other financial buyers further down the line. As such they may represent a promising template for rolling out renewable technologies in emerging markets, as the starting point of a food chain that could eventually involve domestic and overseas institutional investors. Independently from DFI and government money, this could in time channel vast amounts of capital towards Africa’s clean energy sector.
Hydro power is but one technology to which the argument applies. In Europe and the US, strong institutional appetite exists for portfolios of wind and solar assets – many of which have been formed by specialist investment companies through aggregating a handful of small projects. By putting more emphasis on small-scale renewable generation, Africa wouldn’t be swimming against the current.