Africa emerging as a new frontier for renewable energy

Africa emerging as a new frontier for renewable energy

Renewable energy is an undeniable growth industry in the United States. The nation is rapidly building a large and newly profitable renewable sector, based largely on wind and solar power. But renewables have not made as much progress in international markets. Many regions of the world are still behind the curve when it comes to moving away from fossil fuels, toward cleaner sources of energy. Some of this is inevitable; higher use of fossil fuels is to be expected among under-developed nations, that need to use higher amounts of energy to propel their growing economies.

But now that costs are coming down across the renewables space, it makes more economic sense than ever before to employ renewable energy, even in the emerging markets. And, since many international regions enjoy an abundance of sunlight and wind, these markets are fertile territory for renewables.

One such market is Africa, a rapidly developing economy with a large population and a rising middle class.

Africa: In transition

These are exciting times for the African economy. According to the World Bank, sub-Saharan Africa had gross domestic product (GDP) of $1.573 trillion last year. Consider that in 2005, sub-Saharan Africa had GDP of $685 billion. The fact that Africa’s GDP more than doubled in the span of a decade is a truly impressive accomplishment, especially because this period encompassed the global recession of 2008-2009.

But not all is well for Africa. Economic growth last year was the lowest for Africa in 15 years. GDP growth is expected to decline once again to 3 percent this year. While its GDP growth is still likely to be above that of more developed economies like the U.S., Africa is nevertheless experiencing a significant slowdown. A lot of this is because Africa is a major oil exporter. The price of Brent crude, the international benchmark for oil prices, has fallen from above $110 per barrel two years ago to its current level of $42 per barrel. This has specifically caused a great deal of economic contraction in Africa; approximately half of nations in sub-Saharan Africa are net oil exporters.

Making matters worse is that these nations have become more reliant on oil exports to fuel their economic growth over the past three decades. For example, the International Monetary Fund states that net commodity exports as a percentage of Africa’s GDP rose from 2 percent in the 1980s, to 6 percent by 2010. Furthermore, from 2010-2014, commodity exports represented half of Africa’s total exports, up from 25 percent of exports 30 years ago.

And yet, the fruits of Africa’s abundant natural resources have not been enjoyed by the people who live there. According to the U.S. government, two out of every three people in sub-Saharan Africa live without electricity.

This results in a pressing need for Africa to diversify its energy economy, so that it can become less reliant on oil exports, particularly because oil is a finite commodity and the low price of oil is causing a great strain on the continent.

The next renewables powerhouse

Going forward, in order to reinvigorate its economy, African nations will need to reap continued economic growth from new sources, none of which has more potential than renewable energy. Data compiled by the International Renewable Energy Agency confirms just how much potential there is in Africa for renewable energy. According to the report, renewable energy as a percentage of the total energy mix could more than quadruple by 2030 to 22 percent, compared to about 5 percent right now.

The most obvious solution to this would be to significantly accelerate the use of solar, as sunlight is abundant in Africa. For example, consultancy firm McKinsey & Company finds that Africa holds a potential resource base of 10 terawatts of energy, thanks in no small degree to solar energy. And, such large supply allows energy producers to build solar facilities at competitive cost structures. The IREA report states that a major solar facility currently in production in South Africa has a generation cost of just $0.075 per kilowatt hour, which is a relatively low cost in comparison to solar projects in other parts of the world.

Companies to watch

There are many energy companies that have significant operations in Africa, and they also have significant renewable energy assets in their portfolios. This presents a natural fit for the following companies:

In 2014, Total (NYSE: TOT), launched the $16 billion ultra-deep water Kaombo project in Angola. This is a major project with huge potential. Kaombo itself has a total production capacity of 230,000 barrels per day, with a total of 650 million barrels of estimated reserves. Total has made huge commitments to Africa. It has several oil-producing fields in Africa which cumulatively produce more than 700,000 barrels of oil per day. Africa now accounts for Total's biggest geography in terms of gross capital expenditure and oil and gas production, as well as its second-biggest in terms of number of service stations. It's clear how important Africa is to Total, which means it makes perfect sense to consider developing renewable energy there as well.

Meanwhile, Anadarko (NYSE: APC) and Eni NYSE: E) have set their sights on Africa’s massive deposits of liquefied natural gas, or LNG. Anadarko has drilled more than 20 deep-water wells in Mozambique and has discovered an estimated 45 million-70 trillion cubic feet of recoverable natural gas. Anadarko has secured long-term supply agreements for its Mozambique LNG, which is expected to begin first shipments in 2018.

For its part, Eni has major LNG projects of its own in Nigeria, Angola, and Mozambique. Its Mozambique LNG field is especially promising. One individual location in Mozambique, Area 4, has approximately 85 trillion cubic feet of gas potential, which is expected to begin producing by 2020.

With significant operations in place in Africa, these energy majors would be wise to consider tapping into Africa’s renewable energy potential.

Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.

Originally published on August 1, 2016