Current power crisis in West Africa creates a lucrative market

West Africa urgently needs additional power generation capacities to meet its rising and suppressed demand for power. The region has abundant natural resources, which power producers can easily transform into energy.
New analysis from Frost & Sullivan entitled “Investment Opportunities for Independent Power Producers in West Africa”, finds that perceptive independent power producers (IPPs) can identify countries with secure sources of fuel and lower political risks that offer lucrative opportunities.
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“The ongoing power sector reform programmes in West Africa have opened up the power industry to private participation,” notes Cape Town-based Frost & Sullivan Research Analyst Moses Duma. “The reforms have created an environment conducive for power producers to compete in power generation and or distribution.”

A sizeable generation capacity deficit and the rising demand for power have opened up a profitable market for IPPs in West Africa. The region is experiencing acute power shortages owing to inadequate power generation capacities.

Booming economic growth, driven by a growing oil industry, has resulted in power demand outstripping supply. State utilities lack the resources, both financial and human, to develop the required generation capacities to meet this demand. As a result, governments have turned to private power operators for additional capacities.
“The power sector in most West African countries is characterised by rolling black outs and high technical losses,” says Duma. “Electricity access rates range between 10-to-40% of the population. However, governments lack the financial resources required to develop meaningful power projects.”

As a result, power sector reforms have been instituted to reduce the monopolies of state utilities. By 2007, over 30 IPPs had been licensed to produce power in West Africa. The region requires an additional capacity of at least 10 000MW to meet the power demand by 2020.

Despite this potential for growth, the West African IPPs market is significantly hampered by the prevailing low tariffs and the high political risk attached to this market.
“The interference of a majority of governments in the tariff setting process has resulted in sub economical electricity tariffs, which significantly discourage private investors,” explains Duma. “IPPs in West Africa demand a high return on investment to cushion themselves from the high level of political risk attached to this market. West Africa`s political history has been characterised by a high incidence of politically motivated violence and civil wars.”

Private project developers need to target specific countries, which have a secure source of fuel (or feedstock) and cost-reflective tariffs. Moreover, mutually agreed, long-term power purchase agreements in West Africa seem to bring an acceptable return on investment, ranging between 15-to-20%.
“Perceptive power sector investors need to ensure that they acquire a strong insurance against political risk,” concludes Duma. “This could be through government guarantees, and/or multilateral political risk guarantees.”