Innovative Business Models Will Power Africa

The need for power in Africa is creating a very entrepreneurial and innovative market which is highly unique.
Published: Wed 13 Aug 2014

Aggreko recently carried out research on Africa’s Independent Power Producing market and they discovered some “messy trends” which are creating a highly innovative and entrepreneurial environment.

David Taylor-Smith (MBE) Regional Managing Director, EMEA, Aggreko, describes these trends as “different solutions of varying sizes, and with different success rates.”

Power gap drives innovation

Speaking to Engerati at the Africa Energy Forum, Taylor-Smith points out that the drive for this innovation is due to the huge power gap in Africa and the high failure rate between licensing and commissioning of Independent Power Producer projects. According to the research, of the 120 projects that are licensed, only 60 are commissioned.

The inability to finance projects, as well as political and regulatory change and uncertainty are the obvious reasons for failure but often it comes down to simple economics. The average tariff rate in Africa is 4 cents per kilowatt hour under cost of production which means there is no incentive to generate power if costs cannot be covered, explains Taylor-Smith. He adds, “Subsidies are mostly to blame as economics in a free market do not apply when there is subsidized power.”

Fast-track power fills the gap

The market for fast-track power generation is strong. If projects fail, there is a residual need or gap which must be filled quickly, explains Taylor-Smith.

There is also a growing interest in smaller-scale projects in a multitude of consortiums. Some interesting business models are being created as old and new industry players and technologies merge. “This blended power mix in the industry is creating a number of opportunities as power is connected quicker, power can be sculpted according to needs and finance is easier to attain as there is a perception of reduced risk.” The disorganized demand and supply side is creating many different models. For instance, shorter contracts (5 years) are becoming a major trend. These contracts are more bankable than pose less risk than 20-year contracts, for example. The smaller fast-track projects are being fused with the larger projects to create a more reliable power supply.

According to Taylor-Smith, demand side in Africa is somewhat chaotic and many markets fail to function coherently. He explains, “Different people are asking for different things in different ways and the market has responded by integrating traditional players with entrepreneurs. The fusion of different technologies and solutions from various entrepreneurs is creating a very innovative environment. He says that this odd fusion of technology is unique to Africa. He says, “Those who are agile and have the finance will be faced with some interesting opportunities.”

“The need for power is creating a very innovative market for entrepreneurs There is so much more happening on the continent in comparison to other western countries.”