Private equity investors need skills for optimising opportunities in Africa’s electric industry’

Private equity investors need new set of rules and skills for appraising and optimising the emerging opportunities in Africa’s electricity industry, according to Johnson Chukwu, managing director, Cowry Asset Management Limited.

This is as the increasing gap between demand and supply of electricity in Africa and the realisation by governments of their inability to finance the required investment. This has led to the full or partial deregulation of the electricity sector in many African countries, and has created a huge opportunity for private equity investment in the sector.

Speaking on the topic: ‘Private Equity As Tool For Building The Electricity Sector of The Future’ at the 19^th Annual Power and Electricity World Africa 2016, in South Africa, Chukwu said the current electricity infrastructure in Africa was dominated by large generation units mostly from fossil fuel, coal and hydro with attendant expensive transmission grids and elaborate distribution infrastructure.

According to Chukwu, due to the integrated nature of current electricity architecture in Africa, the operational costs tend to be quite high. The system is also prone to disruption/several failure points from generation to transmission and distribution, leading to the frequent blackout experienced by many African countries.

He pointed out that the rapid improvement in renewable energy technology and consequent reduction in cost was creating viable alternatives for providing electricity to the underserved African countries.

“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/fundable transactions for Private Equity Firms,” he said.

To meet its growing demand, he said Africa had an urgent need to raise the level of investment in its power sector, noting that to make electricity sector attractive to private capital, a number of legal, structural and fiscal framework had to be addressed, including the issue of government ownership and monopoly law, which must to be repealed, the issue of integrated systems that had to be unbundled, corporatised and privatised.

The third leg of the reform, he said, is to allow for cost reflective tariffs and eliminate subsidies but for the absolutely needy consumers.

To take advantage of the emerging opportunities in the African electricity industry, Private Equity firms need to evolve a new set of criteria for appraising investment opportunities in the sector beyond the normal commercial viability of each project. Such criteria would include the legal and regulatory framework governing the Power sector in each specific country, the reliability of fuel supply, advancement in alternative supply sources and government policy on social power sales/supply to commercially unviable consumers, he said.