The solar revolution in Africa
Climate change headlines in the US – where Donald Trump has sent clear signals on his view – may dominate news, but we believe progress and opportunity elsewhere will ultimately prove more important.
In particular, emerging economies may be the swing factor in cutting global greenhouse gas (GHG) emissions. China’s decoupling from coal is becoming clearer; 2016 marked the third year of falling coal demand.
African countries have received little attention but offer huge potential for change. Based on the policies countries currently have in place, the Institute of Economic Affairs (IEA) expects Africa’s CO2 emissions to almost double to 2.5 billion tonnes by 2040, versus the US' reduction from 5.4 to 5.1 billion tonnes.
Whereas power use has plateaued in more developed countries, half of Africa’s 1.2 billion population is without electricity. With economic growth in Africa set to outpace every other major region, that usage gap is set to close quickly, making Africa’s energy choices far more important than its currently limited emissions contribution.
Africa is well situated for most forms of renewable energy, but possibilities for solar stand out given its proximity to the equator and dry sunny days (and therefore high irradiation levels). The German Aerospace Centre, an authority on engineering relating to renewables, has estimated that a solar farm covering just 0.3% of North Africa could supply the entire European Union’s power demand, which is twice that of Africa.
As figure 1 shows, power consumption per capita varies greatly between African countries. The IEA estimates electricity demand in Africa will double from 600 TWh in 2012 to 1200 TWh in 2030. Countries where potential for growth is highest typically have the highest solar potential (figure 2). Ethiopia and Tanzania have 70 and 36 million people, respectively, with no access to electricity. Both have irradiation levels that are twice those of Germany.
High irradiation makes solar cells more efficient and therefore more economically attractive. Dubai has set the global cost record two years running - at $0.06/kWh in 2016 and $0.03/ kWh in 2017 - with irradiation levels of around 2300 kWh/m2; below the highest levels in Africa.
About half of Africa’s energy currently comes from inefficient biofuel and waste systems, with less than 2% of electricity coming from renewables. Solar power is coming from a small base of 2.2GW in Africa, but has dramatically increased from under 0.25GW in 2010.
Continued rapid growth is likely given rising demand, compelling economics, and the absence of widespread energy infrastructure.
Stuck in the middle with you
Despite strong natural conditions for solar across Africa, capacity has been limited by insufficient distribution grids, systems to match variable output with demand, and finance to scale projects.
Grid systems and large, utility-scale solar is essential to drive costs down to international levels and below. Governments in the region are showing growing appetite to develop cross-border grid systems, similar to those that have become common in Northern Europe. However, grid integration is unlikely before national grids are built out. Large infrastructure projects are unlikely to be a solution in the near term.
The majority of solar in Africa is based on micro-grid systems, such as those applied to residential or commercial buildings. This is unlikely to change and we expect that segment to offer the fastest growth.
Pay-as-you go solar is indicative of the business model fuelling this development, having achieved 500,000 new users in East Africa alone since 2015. Better energy storage increasingly balances power supply in micro grids at lower costs. This backdrop creates a growth platform for companies operating in small-scale residential solar or storage markets, although translating that growth into profitability in challenging markets may be more difficult.
Barriers down, costs down
Solar costs in Africa are falling. Currently on-grid commissioned and planned utility-scale solar PV projects (2014 – 2018) range from $1.2 to $4.9/W in Africa, down from between $3.4 and $ 6.9/W in 2012.That cost advantage over other energy sources is likely to grow as technologies develop and local infrastructure improves.
The growth of African solar provides a real-time case study of the technology’s economic attractions as well as its environmental benefits.
Emerging economies in Africa and elsewhere have the benefit of a blank energy infrastructure slate. They have fewer sunk costs in fossil fuel power plants and therefore can leapfrog inefficiencies that hamper developed economies. As a result, the potential for growth in the region and global solar industry is huge. IRENA REmap estimates African solar capacity could reach 70GW by 2030, equal to one-third of the current global total.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.