This week at the US Africa business forum held in Washington, D.C. there has been significant focus on energy. Africa’s energy infrastructure needs a $300 billion upgrade due to decades of focus on the export of commodities wherein the necessity of power domestically has been neglected.
“The energy deficit is one of the major constraining factors to growth in Africa,” said President John Dramani Mahama of Ghana. “Providing sufficient power at affordable rates as efficiently as possible is going to be the key driver for growth.” General Electric announced a $2 billion investment toward infrastructure, skills training and supply-chain development. GE says Africa is its “most promising growth region.” The company generated $5.2 billion in revenue on the continent in 2013. “What you have is huge demand and actual supply, and what’s in the middle is gaps in financing and technology and localization,” GE CEO Jeffrey Immelt said. He also cited political volatility as a risk, but stated that the rewards outweighed the risks.
Around 70% of sub-Saharan Africa lacks access to electricity, where many believe that “hardened and centralized infrastructure of the 20th century power grid” will be unnecessary in developing countries, where solar micro grids will power communities. The UN Secretary General Ban Ki Moon argued in the New York Times last year that “developing countries can leapfrog conventional options in favour of cleaner energy solutions.” If Africa is to leapfrog over coal, it will likely move toward more hydroelectric dams and natural gas, not solar or nuclear.
Africa plans to develop almost 100 gigawatts of large dams – five times the capacity of China’s Three Gorges Dam – throughout the continent, compared to 22 gigawatts of existing hydro capacity in Africa. Shale gas will play a prevalent role for Africa. US expertise in this field will be essential for Africa to develop its rich oil and gas reserves. Natural gas reserves in Africa have grown even faster than North America’s in the midst of the US shale revolution.
Africa’s natural gas production doubled from under 100 billion cubic meters (bcm) in 1992 to over 200 billion in 2008. Where the US has 700 bcm in proved natural gas reserves, sub-Saharan African nations have over 900. But where North America produces 15 bcm per year, African nations produce less than 4 bcm.
Financial institutions are now taking significant steps to capitalise on this growth. Blackstone Group, one of the largest private equity firms in the world, will commit half of a $5 billion fund in energy investments. “It’s probably the biggest inhibition to economic growth in Africa,” Steve Schwarzman, Blackstone’s chief executive officer, said of the lack of electricity. “We can change people’s way of life, increase economic growth, and I think we’ll do very well for our investors too.”
The other half will come from Aliko Dangote, Africa’s wealthiest man. Dangote, whose cement and commodities businesses built him a $24.4 billion fortune, said he struck separate agreements with the private-equity firms, attracting new capital to help address Africa’s energy demands. He committed to invest $2.5 billion by 2019 which will be channeled into power generation, transmission and distribution, as well as gas pipelines. The key risk used to be demand, which is now rising exponentially with population and economic growth. As such they will be taking a regional approach rather than investing on a country by country basis.