The importance of energy regulatory reforms

In this episode, Njeri Wagacha is joined by a panel of experts to discuss the importance of energy regulatory reforms, following the Africa Energy Forum in Nairobi, which took place in June.

6 Jul 2023 55:08 Minutes Podcast

At a glance

Industry leaders such as Mpho Mokwele, Head: Project Finance at DBSA, Mpho Modise, Business Development Executive at Power X, Ali Mnisi, Senior Deal Maker - Energy/Power SBU at the IDC, and CDH's Mashudu Mphafudi deep-dive into unlocking energy infrastructure investments across Africa. They delve into some of the secrets behind making energy utilities bankable, the transformative power of deregulating electricity, the rise of energy traders, and crucial considerations for investors eyeing energy projects. 

The importance of energy regulatory reforms

The importance of energy regulatory reforms


The importance of energy regulatory reforms


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Njeri Wagacha: Hi, everyone, and welcome to this month's podcast. I'm so honored to be joined by a panel of guests who are so distinguished. I'm honored to be with them today, including my partner Mashudu from the CDH South Africa office. So this month we're talking about the importance of energy regulatory reforms in unlocking energy infrastructure investments on the African continent. And the reason for that is because, currently, Nairobi is hosting the AEF (African Energy Forum) conference. And we thought it would be a very relevant topic to discuss, as our distinguished guests are here. Mashudu is also here. And so why not have this conversation? So thank you very much, everyone, for joining this afternoon!

So just to get everyone to introduce themselves. We have Ali Mnisi, who is a senior investment advisor at IDC. Could you tell us a bit about yourself?

Ali Mnisi: Okay, so my name is Ali Mnisi. So I'm a senior dealmaker at the IDC and I've been with the IDC for 13 years.

Njeri Wagacha: Amazing. Thank you. Thank you very much for joining us. We have Mpho Mokwele. I'm sorry if I butchered that name. He is the head of Project Finance at the Southern African Development Bank, DBSA. Okay. Tell us a bit about yourself.

Mpho Mokwele: Yeah, thank you. Thank you for having us, all the way from South Africa to Nairobi, and enjoying the Africa Energy Forum. So I'm Mpho Mokwele, head of Project Finance, at the Development Bank of Southern Africa. Been there for the longest time, executing a number of transactions across infrastructure transactions, for that matter, across the entire African continent, including in Kenya. We've got a number of projects that we are funding here. Since the team here is about energy, we are looking at a number of transactions in Kenya, with your utility here. And we want to do more, plus the entire continent, to develop the continent of course. So that's what we do. We are development finance institutions.

Njeri Wagacha: I mean, brilliant, that's exactly what we want to hear. And it's positive that you are looking at more investments in Africa. And then we're joined also by Mpho Modise, who is the Business Development Executive at Power X. So tell us a bit about yourself, go.

Mpho Modise: Thanks, Njeri. So my name is Mpho Modise. I'm from a company called Power X. Power X is an energy trader, currently trading power in SA. It has been operating for over 10 years. It is a first license energy trader in South Africa, and has been the only one for the longest of time. And basically, our business model is to buy and sell electrodes. We are looking forward to bringing Power X into the rest of the continent. 

Njeri Wagacha: Is this your first time in Kenya?

Mpho Modise: No, definitely not. My first time I've been in Nairobi, I've done some transactions in Nairobi in my summer job. And the IDC I remember was actually my colleague. I've actually done a power plant in Kenya, Nairobi. Yeah.

Njeri Wagacha: So these are the perfect people to speak to on this subject. And then, of course, Head of Banking and Finance for CDH, who is Mashudu. Mashudu, please, don't ask me to say your surname! 

Mashudu Mphafudi: [Laughs] Thank you, Njeri, for the platform. Nice to be here in Kenya. My first time. I'm enjoying it. I'm also enjoying the conference as well. I'm Mashudu Mphafudi, Head of Finance and Banking, based in Johannesburg office. And I've been involved in finance projects for a number of years, and particularly in the energy space, transport space and auto sector. And it's my pleasure and privilege to be here. Thank you.

Energy regulatory reforms

Njeri Wagacha: Thank you so much. So let's get straight into it. And obviously, this is a conversation, so anyone jump in at any time if you feel like you want to. We're talking about energy regulatory reforms. And we're talking about whether or not there is a potential to unlock energy infrastructure for this continent. So the first question that we have to talk about is our energy infrastructure in the continent, are they and un-bankable, and why do they struggle so much?

Mpho Mokwele: Hmm. Quite a loaded question. I'm assuming you're asking about energy utilities?

Njeri Wagacha: Correct. Infrastructure itself.

Mpho Mokwele: Yeah. So I think part of the problem with lack of energy access is precisely because a lot of the utilities on the African continent aren't bankable, right, which is exactly what we are speaking about today. And what can we do just to make sure that they can attract funding in order to be able to implement transactions, infrastructure projects, and then by so doing, then, lead to increased energy access.

So the key issues we speak into is a lot of the utilities are debt burdened, which means they cannot borrow. 

So the manager cannot borrow. It means you cannot implement some of the plans that you have, power stations that you want to put on the ground. To provide electricity to your citizens. So that's precisely where the issue is. And coupled with not being able to borrow, and all those capacity constraints from a governance point of view, within the utility, where utilities are not able to, you know, from an administration point of view, you don't have a solid management team. So you've got some utilities that have not transformed. They don't they have governance issues, for example. So those are some of the aspects that need to be addressed for your utilities on the continent to be able to transform. 

That, coupled with the fact that you need some of the utilities to, you know, harness technology. So we've got issues of energy demand versus supply, where your demand is outstripping supply. And because of that, some of it can be resolved via technology. All right. So I'm speaking here about load matching, that type of technology. So if you're able to then harness technology, you'll find that there is a CT somewhere in Kenya, that does not need as much energy as lateral. So what you can then do, we can do what they call load matching and load shifting, you are then able with technology to move some of those electrons, as Mpho has mentioned, to Nairobi which is a populated city, right, the most populated. So technology is quite important for our energy utilities to harness that technology to be able to transform.

So business models need to transform just because of, you know, I think we're still stuck in the past, where utilities are vertical integrated with transmission, it's got generation, we've got distribution on and so how do we then unbundle that in all those different segments within utilities, just to make sure that the model speaks to what's happening currently, elsewhere globally? Looking at utilities in California, they're geared up for the future. Right. So we need to make sure that utilities in Africa are also geared up, harnessing technology, how they're structured, so that the debt bearing issues that I spoke about, are relieved. So that's quite important. That we can unpack as we go.

Njeri Wagacha: Because it seems like a lot to be done. And, you know, debt burdened technology, even the structure of how the companies are organised themselves. That seems like, you know, unbeatable. How do we overcome that, especially in the face of regulation?

Mpho Mokwele: Yeah, look, I mean, coming to the regulation part, and my colleagues are going to add about regulation. Right. So there's the energy trading part of it. Right, which is quite important. In South Africa, for example, from a regulatory point of view, we've allowed the private sector to play quite a prominent role. Remember, I spoke about being debt burdened. And because you're debt burdened, and you cannot borrow money, why don't you allow someone else to borrow money, which is the private sector.

So bring in the private sector into the mix. You don't have to do all of this by yourself as a state owned utility.

So put in place various regulations, and my colleagues are probably much better informed than me to speak to some of the regulatory reforms that are needed, right, as we go along during the conversation, so deregulating some of the energy sector, in most of these African countries is quite important to bring in to catalyze the private sector to come in and also provide some of the capital. So we're talking about independent power producers. So your utilities that are state owned don't have to provide access to electricity by themselves.

Njeri Wagacha: Yeah. I mean, who can speak to that, then? Can you speak to, you know, privatization of energy in utilities? Anybody?

Ali Mnisi: Look, I mean, I think when it comes to privatisation, if we can use an example of SA. So there's a very well established public procurement program, which imports renewable energy, you know, in SA. So, the government will go and tender and invite independent power producers, you know, to beat their projects to supply energy into their grid. It's been a very, you know, successful program, having gone through five iterations. Now we are in iteration number six. And through that period, the country has managed to add about, it's about 14 gigawatts of energy into the grid from, you know, from independent property. So there is a very well established regulated space, and many parties that we see here at the energy forum as IPTs predominantly developed those projects. So you've got the banks, who  understand the risk.

Obviously, initially the government had to provide a lot of support in order to make it work. So we've got a very well established ecosystems of buyers. Banks are now playing a bigger role. DFIs, like the [unintelligeble], and the IDC, you know, are in there. And we're also seeing benefits of the country, in the sense that the cost of electricity generated by these technologies, predominantly renewable, has been going down, competing with your base load, you know, coal-based or fossil-based technologies that has been provided for, for the longest time.

Njeri Wagacha: I mean, that's very positive to hear, given that, you know, South Africa, when we go there, we suffer from a lot of loadshedding. How can the model that you are talking about be developed within wider Africa? Because I think that's what that's where we need to go, isn't it?  

Mpho Mokwele: So I can add my two cents worth. So yeah, I mean, what Ali was speaking to is your renewable IPP program, quite a successful program, right, for renewable energy.

And when we speak to renewable energy the Just Transition comes into the mix, because you know, we need to decarbonize, move away slowly, but surely, from fossil fuels on the African continent. As much as there is a need to provide energy access, there's also a need to decarbonize globally in terms of the Just Transition.

But coming back to your question around, how do we replicate that model. So Kenya has done quite a good job, you know, in terms of unbundling. So you're able to bring, you know, unbundling your generation side, you've got the likes of KenGen, that are able to catalize the private sector. So there's a lot of IPPs in Kenya, right. So there's different models in Morocco as well. So it's not South Africa law. Remember? Right. So it's about bringing in advisors. CDH is here, of course, so you bring those advisors on board in those African countries in order to share some of the knowledge on how to do it. 

The knowledge sharing aspect of it is quite important. But over and above the renewable IPP program, I think then it's about a what we call embedded generation, as well. This is private sector to private sector and it's where the regulations are quite important, to deregulate, right. So now you're letting a private sector player, whether it's a mining house or a commercial and industrial companyto buy directly now from a private sector company. So you've got those types of models. Ghana is doing it quite well. There are projects that we funded where that model is working successfully.

What government is now doing, by deregulating, they're letting the private sector, just play, right. Play within the market without them interfering. So creating an enabling environment is key.

Ali Mnisi: What I was going to add is that, what is very key is the government support. I don't think that it would have developed in the extent that it has had the government not necessarily led the development of that space, precisely because the state utility would be the buyer of electricity. And the government would provide guarantees. And given that we've gone through the different rounds, where parties were invited to provide their own generation capacity into the grid, that allowed the industry to mature, so everyone can understand the there is an opportunity, and actually believe that that opportunity can be attained. And as a result, the private sector started growing from that, and many other, you know, programs.

Njeri Wagacha: I mean, that's excellent. As we are in a very special podcast this month, Mashudu is also my fellow panelist for this. So I'll hand over to you, Mashudu.  

Mashudu Mphafudi: Just to add to what Mpho was speaking about, particularly in relation to deregulation. In the context of the South African market, we have Eskom the state entity that basically is the main supplier of power. And it's in the process right now, of unbundling, such that, you know, you have distribution, transmission and generation. Currently, Eskom does the whole grid. And currently, the government is going is to basically establish a separate independent transmission entity, and a generation entity. That's where we're going in order to make sure that, you know, you don't have a utility that's providing all of those, because that model is proven to be not working and problematic in a number of ways. Hence, we find ourselves, you know, experiencing loadshedding, from time to time.

Energy trading

Njeri Wagacha: So, let's talk about energy trading, then. What has the ability for energy traders to come into the market done for the potential to unlock energy infrastructure in the continent?  

Mpho Modise: I think, just to give a little bit of background on what energy trading is in the African continent right now, because it's not the same as energy trading in Europe. So currently, in the continent, we've got two types of energy trading, the first one is sort of a sovereign-to-sovereign energy trading, either through a bilateral agreement between two countries or through regional contracts like the SAP or the RAP or the EA app or the CAP. When you have a private sector energy trading, where companies like Power X, where I work, is a private energy trader, we will basically buy electrons from an IPP and also those electrons from a portfolio of customers.  

Njeri Wagacha: Those customers are private customers, or would it be like a country or, you know, a particular region in the country?

Mpho Modise: So currently, the framework is such that it is to private customers. So it's a public private partnership, because the IPP that are producing the power still need to connect to a utility, the infrastructure, the power will then be wheeled to the different customers within that country. So the different levels of work facilitate the generation and consumption of renewable energy, because all of a sudden, we are not looking to just the utility alone, to provide power to companies in a country. We are we are looking at IPPs also providing that power. So that provides some form of fast tracking, some form of access to power faster than if we were just looking to utility to provide that power.

Njeri Wagacha: And also diversification in the market. That's excellent. And so is that model being replicated across Africa, and where have you guys seen it being successful?

Mpho Modise: So currently, I think South Africa is leading in trading. We have had GreenCo for a while, which started trading power, but I think they've been focusing on Zambia, and one of the reasons why they've been focusing there is because trading needs some of the regulatory framework by the utility. The utility need to describe in advance how trading is going to work in its country. What are going to be the willing charges of trading in that country? How are you going to connect? And where are the credits in the metering going to be? So because of the lack of that framework in some countries, we have not seen a lot of trading happening in South Africa.

Power X, as I've said, has been doing it for 10 years now. We've got four other traders that have joined that are starting to trade. We have also been, I think, in consultation with the Namibia Regulator, who are now saying, this is a new model. It's new. In South Africa, it's operating, what lessons can we learn from this model? And how can we establish our own framework, so that we can start even trading in our own country?

Njeri Wagacha: I mean, that's amazing. And are there challenges with that kind of model? I mean, aside from, perhaps, you know, a price issue, what are the issues that there could be?

Mpho Modise: Look, there are a lot of challenges right now. Because although in South Africa, it has been happening for 10 years, there were some regulatory hamstrings that caused the model not to increase capacity.

So, in South Africa, you were only allowed to build one megawatts of renewable energy power, unless you were going through the government procurement program. And if you wanted to build anything more than that you needed to go through some regulatory processes, get approvals and that is discouraging to a lot of IPPs.

So the focus has been building utility scale, power generation, power generation, basically to sell to the utility. But the challenge that has come is that because of the government procurement program came with a teasury guarantee. Now the lender community like Mpho and Ali are used to building a power plant with 100% backup guarantee. And they're struggling to move from that model, when it comes to building a power plant for a trader. So that is one of the biggest challenges, we basically need a mental shift from that community from looking for 100% 20 year back-to-back guarantee, where they were basically taking more risk in project. 

Another challenge is that we speak with the SAP, we speak off the RAP, we speak of the CAP.

But the countries are not sitting down in one table and saying, what is the energy plan of SADC? For example, where is the energy plan? How can we build infrastructure that is going to allow us to export power from one country to the next? So that is a challenge.

If right now, as a trader, I have a client, let's say I have a mining client, that is mining operations in SA and in Mozambique. In order for me to trade power into that country, I need to get a trading license in SA. I must go get another one in Mozambique. I must go get another one in Zambia or Tanzania.

If we had a coordinated plan, we had a unified framework, it means I could have one trading license that can allow you to trade in the entire SADC region, for example.

Njeri Wagacha: Yeah, that would be very helpful and coordinate your activities obviously. Has this been kind of a discussion that you've been having at the AEF? Is anyone talking about it In this conference? 

Mpho Modise: At the Mining Indaba, for example, which was held in South Africa, in Cape Town, and the Africa Energy Week there were some some meetings about SADC, or West Africa, or East Africa. That's where the discussions have been happening. Even for the African Free Trade Continental Agreement, those discussions have happened. But you know, how Africa is "talk talk talk and no show".

Energy projects and their bankability 

Njeri Wagacha: Well, I hope that has not been your experience in this conference. But anyway, let's talk about energy projects and their bankability. Are they still bankable? Like Mpho said, banks are looking for back-to-back guarantees for the length of the project. That might not be the case going forward? Are they still bankable and are you still interested?

Ali Mnisi: I mean, these projects are still very bankable. But we're seeing changes in how they are being structured. Initially, in the initial stages, the government would provide a guarantee, and that made the projects very bankable. But now we're starting to see shorter tenders, or as you know, it used to be 20 years. Now, we're starting to see tenders being reduced about 15 years. When you go to the CNI space, the power purchase agreement, they're actually now customized. So each one is not necessarily the same. But we're finding that even in the renewable space, more and more are being closed. And another indicator, how big would they become, is that you have more and more banks that are going into an area that would have been considered as, you know, higher risk, like the government procurement programme.  

Mpho Mokwele: Coming back to Mpho, who is saying we need to, as bankers, we need to change our minds, well shift our minds. There's a number of solutions. We need to talk, we need to be creative, and innovative. Right. So it's all about that. There's always, especially in Africa, there's always challenges. But question is, how do you structure around those challenges? What solutions do you come up with? I presented a couple of solutions.

I'll mention a couple. An energy trade is basically a buyer and seller of electricity, sitting in the middle. To the point that Mpho made, they're shells, they don't have balance sheets. That's where the issue is. Now when a lender comes in, they'll say, who's underwriting? Who's under P in this PPA, this power purchase agreement, right? They're used to power purchase agreements with government guarantees. But now you've got this shell that has nothing in it. So how do you get around those issues? So how you get around it is, where are your ultimate customers?

So if a customer is bankable, then that's half the problem solved. 

Right? So that's one solution. The other solution is, can you capitalize the power trader, the energy trader?

But we're not looking for a 20 year guarantee here, to the point Mpho made, so we're looking for a diversified pool of customers. We're looking for a 9 months / 12 months guarantee, just enough for me to be able to meet my obligations under the power purchase agreement. Because there's so much demand for energy. I can always be able to sell it to someone else, if Power X goes under. So that's how you become creative. That's how we've already changed / shifted our minds. So there are solutions on the table. So we've got to be creative, and we are already creative as development financing institutions.

Insuring energy projects

Njeri Wagacha: And is there insurance available, insurance products, for that kind of thing, or not yet?  

Mpho Mokwele: That's what I was talking about. Guarantees. Some form of guarantees.

Ali Mnisi: So in the energy projects, the beauty about it is that, you know, you basically have a developer who's highly experienced in developing projects. And in project finance, you find that the risks are shared and they are allocated upfront. And the allocation is such that it's the patches that can manage that risk that then gets allocated that trace. So in agreements or project agreements such as your EPC, so the developer are ordinarily is the one that is tasked with building the plant, to make sure that it works. But then they will delegate that responsibility, often to an EPC contractor. It basically then provides a guarantee to the buyer that the plant will perform. 

Behind the EPC agreements, then you will also then get insurers, who will insure the ability that has been carried by the contractors. So behind each and every agreement, like the project agreement, you will find that there are insurers that are delegated the responsibility to manage that risk. And those are the elements that don't make these projects bankable. That's why you see, they are funded predominantly with debt. And that is important to appreciate because commercial banks are generally risk averse. If you see a project that is funded 70% by debt, already it says to you that the risk mitigation regime in the project, including insurance, is very strong. It's very sound. It gives, basically, everyone comfort. So, yes, there are insurers behind it. And it's precisely so that the parties that can manage the risk best are allocated that risk. And that is the you know, the beauty of it.

Njeri Wagacha: Thank you for that explanation.

Mpho Modise: I think the point that I wanted to highlight is that the sovereign guarantees that have been offered by sovereigns have been babysitting the lender community for a long time. And we were to do away with them, because they have resulted in high contingent liabilities for the sovereign. I think the risk of funding renewable energy plants in South Africa, in Africa actually, has been magnified. The reason why I'm saying that is because it is estimated that only 28% of Africans have access to power. If you build a renewable energy power plant in South Africa, what are the chances that that power is not going to be taken by someone? Especially in a mature market, like South Africa, the need for guarantees and insurances are increasing the cost of doing business. 

Of course, we can't run before we walk. I think we need them, but we need that to also tamper down because that market is so developed, the PPAs are changing such that we are structured to move from one client to another, should the client be liquidated. So the risk is not as high as we are making it. Yes, it's there.

It's not risk free. But it's like waking up and making shoes without knowing if someone is going to buy them or not. But we know people need shoes, they're going to buy them. We know people need power. We have a high power deficiency, someone who's willing to buy that power.

Njeri Wagacha: I mean, we were talking about the fact that the infrastructure is already encumbered, largely. Isn't that because when the original agreements were being agreed there wasn't a consideration for that risk? And also, it was being backed by the sovereign who didn't necessarily take a commercial approach. It was more, "let's just guarantee it".

Mpho Mokwele: Look, I think it's the rationale for what Mpho was talking about, providing the government guarantees. Backstopping. To open up the market initially. And as the market matures, what you then do is, and we can speak about what happens in America, you know, developed countries. So, initially in African countries, those sovereign guarantees are quiet, but as the market matures, and the risk ratio comes down, then it should be, you know, the market needs to regulate itself, should be able, as private sector parties, private sector to private sector, business to business, we should be able to do transactions on our own infrastructure, whether it's energy, transport, whatever it is. Contrast that with developed countries, like America, you've got matching power trading, which is quite developed. 

Njeri Wagacha: Can you tell us about that? 

Alternative energy frameworks in developed countries

Mpho Mokwele: So, basically, I mean, this is a more sophisticated form of energy trading, where you basically sell your power on the market without even knowing who your ultimate customer is. No power purchase agreement is even signed. You put it to the market, you don't even know what tariff you're going to sell you're power at. So it is regulated on a daily basis, depending on energy demand, like what happens on a stock exchange. So it's that sophisticated. So we need to move over time in that direction. 

So we assessed that a bit in the past where some African countries were still demanding guarantees, because investors are risk averse, as you put it. But you might get Kenya, which is quite developed in terms of, you know, the various energy type of structures that have been put up. South Africa, similarly. A mature market. So we need to start over time letting go of those backstops, those guarantees. And then next phase, according to me, is the energy trading part of it, where you still need some PPAs. But not so much backstopping or guarantees, and then ultimately go to the merchant power trading market, which we need to get to over time, because demand is high, as Mpho is putting it.

Shifts in legal framework

Njeri Wagacha: From a legal perspective, Mashudu, what what shifts have you seen to encourage us to think that we are, you know, going in the right direction? Either from a guarantee perspective, from a diversification perspective, from a bankability perspective, what shifts have you seen?

Mashudu Mphafudi: A shift I've seen over the years talks to, for example, the shift in bankability. Some of the considerations that lenders have taken into account when they consider a particular project in the renewable energy market is the technology that is being used, for example, solar, hydrogen, and wind. In the past, historically, particularly in the context of a South African market, we are not really used to those kind of technologies, we would actually rely on European companies to basically assist in terms of providing, you know, services like the O&M, the EPC, because those guys, you know, they've done it for a number of years.

Njeri Wagacha: You mean the template documentation?

Mashudu Mphafudi: The template documentation, and actually, the technical aspect of it, because we had never done it before, about 15 years ago. So the Germans, you know, the Spanish would have done it, and then we would contract them to come here and basically, you know, cooperate with some of our South African entities in order to deliver on those particular projects. 

But over the years, we've become comfortable, we have learned the technology, and we are now doing it. That's an important aspect that has developed over the years from a bankability point of view.

From a security point of view, you know, as colleagues have mentioned, lenders are risk adverse, because these projects, they are long term projects. A huge amount of capital is deployed. And one thing that, you know, particularly when you fund this kind of project, is that you don't want to lose the money. You want to make sure that, you know, when you put the money, the project works.

That is why you see even on the facility agreements, the list of conditions are long, simply because the lenders want to make sure from an environmental point of view, tick a box, you know, from a legal point of view, tick a box, and from a financial point of view, because there are a number of components that are taken into account before lenders release the money. You know, and that is why the need to show that, you know, before the money is moved from the bank, those aspects are taken care of.

Mpho Modise: Just add to that, I think the lenders, although the shift is obviously not as fast as I'm expecting it to be, they will also have seen a shift in that we've seen some very, very robust models, where in the previous rounds, the lenders will do a debt-to-equity ratio of maybe 60/40 and 70/30. And now they're getting more and more comfortable. They're even able to do 85/15, which speaks to the confidence that they have. We're seeing some very stretched tenders, some are even doing 19 years in a 20 year PPA, whereas before by year 15, they wanted to be out. So I think it's positive. It's moving in the right direction. And hopefully we can really see an improvement from here.

Speaker: I was just gonna say the point you made it's not the lenders that put those conditions, precedent etc. It's the delayers. [General laughts]

Ensuring energy security for the African continent

Njeri Wagacha: We focused a lot on South Africa and we talked about Kenya. How are we making sure that the rest of the African continent is catching up with more developed countries? 

Mpho Modise: If I can start on that, from a trader's point of view, what I would really want to see, or what I think will improve the energy market in the African continent, is for countries to stop thinking in silos.

What I really want to see is for countries to stop thinking in silos. We need to generate power for the continent, because we don't have the same level of consumption.

I'll give you an example. East Africa, for example. They've got a high resource in geothermal, in hydro. But most of them are not high energy users, for example, like countries that have mining resources. But we all need peak power. So if they can produce hydropower, that they all use and for export, then we'll be able to improve access to power in the continent. And I mean, it's not like they're producing it for free. They'll be selling it to the next country.

Njeri Wagacha: An extra source of income for any producer. Mpho, on your end, are you going out to other countries in Africa and saying, "the bank is here"?

Mpho Mokwele: We've done hydropower projects in the likes of Gabon. I think we are in the process of finding the next one as well. So, to Mpho's point, it's all about what resource is abundant in that country.

Njeri Wagacha: In that country, where they can leverage on that, yes.

Mpho Mokwele: Be its solar radiation. Be it wind, right. So countries, such as Gabon, is all about hydro. So we've done lots of projects there. And, by the way, we'll take those projects from the start. And I'll expand on that. You know, when I say the start, I mean, preparing the projects, from a project preparation phase, where you're developing, you're putting money on the ground, from a concept phase, and you know, the feasibility studies.

How do I ensure that something happens on the ground? Maybe this country is struggling. There is high energy demand in this country. But no one is coming to the party, in terms of making sure that projects happen within the country, right? The government is willing, but they just don't know how to do it. So we'll come in, with our advisory hats on, with a bit of seed capital. And we'll find some of those projects. So we've done quite a lot. 

And some of those projects, I mean, these are projects that have reached financial close. So projects such as [unintelligeble] have reached financial close in Gabon that we've done as TBSA, right. And they have provided a lot of energy access in those types of countries. And at the same time, as you do in hydro, you're reducing carbon emissions at the same time. I know there's an argument around a large scale hydro, whether it's part of the Just Transition or you know, reducing carbon offsetting.

But yeah, we are prevalent in a lot of countries. In Senegal, we are there as well. So the rest of the entire continent, we are in all of those countries. Of course, some of the issues we spoke about, the energy utilities being debt burdened, some of the sovereigns are debt burdened as well, so they cannot borrow themselves. So that's why you need concessional funding to come into the mix to be able to catalyze those projects to happen.

So project preparation is important. Concessional funding is important, in order for the regulatory reforms, in order for the government to create an enabling environment in those countries, otherwise investment will not happen. Because we talk about investors / lenders being risk averse. Who will want to put their money where you cannot get it back?

Ali Mnisi: We at the DBSA, but maybe to a slightly lesser extent, we have funded projects also on the continent. Our main mandate is mainly to establish and to retain industrial capacity. So the approach that we followed previously is to fund energy projects, you know, in industrial, rich countries, so we've got power plants in Zambia, in Ghana, and I think there is one in the DRC, if I'm not mistaken.

But increasingly, as you said earlier, SA is bedeviled with loadshedding. So the opportunity that we are seeing, and we do export a lot of our energy to the neighboring countries.

So the opportunity that we want to explore now, is to go and invest in power plants in the neighboring countries. And just like Mpho is saying, we need to look at it as an aggregated block.

So, we are looking increasingly to the neighboring countries, such Botswana, such as Namibia, Mozambique, and then further up into, you know, the industrial intensive areas such as the DRC. So that's what we're looking to do, going forward.

When you do that, we know that the whole area, with the whole block, energy security would have been assured.

The impact of technology on industry

Njeri Wagacha: Just on that, on that point, specifically on industrial, does industrial and technology mix? Can you say that? Because you're very much focused on industry?

Ali Mnisi: Look, I mean, Mpho did mention it earlier. So technology unlocks or enables industry.

Njeri Wagacha: In fact, the question is, how are you harnessing that?

Ali Mnisi: I mean, I can speak about SA in particular, because in terms of the continent, I'm not certain that we have funded many technology ventures. But in SA, even though our mandate is mainly industrial, we do find entities that are in the technology space. I think when you look at telecoms as well, the backbone of telecoms is technology, enabling technologies. So we do fund infrastructure in that space, but then we also fund entities that develop technology, that enables this industry. So we do unlock.  

Mpho Modise: If I can just add, I think energy is only a seed impetus to economic growth.

Energy is only a seed impetus to economic growth.

And we've seen the impact of loadshedding in the South African manufacturing industry. Energy can help. And therefore unlock the manufacturing sector. It can help you have a consistent WiFi connection.

It can help us reach the dream of Cape to Cairo transport, if we knew we have sustainable energy throughout the continent.
In the absence of that, we are not going to have infrastructure that is going to move people within the continent, move goods within the continent, because ideally, you want someone to wake up in Sudan, make shoes, put them on a train and the shoes can be sold same day in Mozambique, Kenya, or something.

Without energy, that dream is going to remain a dream. So that's how, for me, energy is going to unlock the industries that he was talking about.

Njeri Wagacha: I mean, that is a dream, and also the dream of the Africa Free Trade Agreement. I guess without, you know, real impetus by governments, and as well as working together with the independent producers and entity traders, that really cannot come to life.

Takeaways from the Africa Energy Forum

Njeri Wagacha: So let's talk about lessons from the AEF since we're here. What have you learned from being in Nairobi over the course of the conference?

Ali Mnisi: Yeah, look, for me, the first thing that I think is worth mentioning is the Africa Energy Forum. I think it's in its 25th year. And for me, you know, it's a milestone that it is now held in in Africa. So, you know, the interactions that we've had, luckily, in SA, many participate in the ecosystem are present in SA. So, we've basically just been carrying on, you know, establishing relationships.

But I think it's also important that it remains here so that all these parties understand exactly the challenges that Africa faces. It's not always easy to come up with a solution for Africa, sitting wherever you are. Mashudu mentioned earlier that there is a growing acceptance of parties that are local, no longer international. So this will lead to the development of that sector and having those parties either is as EPC or as IPPs developing solutions for Africa, from Africa's vantage point.

Njeri Wagacha: Excellent. Mpho?

Mpho Modise: I think from my side, I'm very encouraged by the level of skills transfer that is currently happening. In previous years, in a conference like this, there would just be global IPPs everywhere. Today, we've got a number of African IPPs that are either partnering with international IPPs, or that are doing their own small energy projects. Which means, over the years, we've been able to transfer those skills.

Africa is able to start coming up with solutions to solve its own problems. For me, that is that is the biggest milestone I've seen us achieving.

Njeri Wagacha: Amazing. Mpho?

Mpho Mokwele: It will be possible, to go a day without loadshedding. [General laughs]

It's possible. And the fact that we can host conferences of this magnitude. I have attended previous AEFs. London is so cold. AEFs all over the world, right? Over the past 10 years, I've attended AEFs, but never in Africa. So this is the first time. And I must say, Kenya has done a good job!

But, I mean, AEF it's is all about networking. It's not so much about the conference, going in and listening to the sessions. It's about meeting like-minded people. And whether it's advisors at CDH, where it's technical advisors, whether it's lenders, you've got access to all of those people, right, investors. So you've got high power delegations, ministers, presidents attending this in order to make something happen. So it's all about that.  

Njeri Wagacha: Let's hope it happens. Because all of the ideas that you've talked about here are things that can be done, especially in an environment where there isn't a civil war anymore, you know, where countries are looking to develop economically, all of these things can and should be done. Mashudu, your lessons from the conference?

Mashudu Mphafudi: Thank you, Njeri. I think the key takeaway point for me is the fact that, you know, there are projects. I have interacted with a number of sponsors at the AEF. And what is clear is that there is a funding gap. And that developed countries must actually, play their roles in terms of assisting the struggling countries to make sure that, you know, there's access to energy. And equally, the private sector must also play their role in terms of coming to the party to make sure that, you know, the funding gap is actually closed to enable projects to move from the ground to operation. That's quite an important thing. It's clear to me that, you know, there are a number of projects in a number of sectors, and also, in particular, on the energy side. It's just the ability and the willingness of lenders to fund, both from a debt perspective, and from an equity perspective. 

Njeri Wagacha: Okay. Well, it's been a wonderful conversation. Thank you so much for joining me on this podcast. I don't know what to say in conclusion. I think it's where we can go from here, right, and taking the bold steps of making sure that infrastructure projects are bankable, and that they have the backing of African banks as well as, you know, African energy traders.

So thank you very much. It's been a pleasure. 

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