The following article was published in Electric Light & Power Executive Insights (Nov 27th 2018)
The missing middle: Bringing electricity to Africa’s underserved firms.
By Ida Richter Gade, ISI Consultants & Sandra Collazo, U.S. Commercial Service
If your company is keeping an eye on African energy markets, you may have noticed activity stirring in the so-called C&I space, or the missing middle.
The missing middle refers to the gap in electrification between very small and very large consumers. This group of consumers is made up of commercial and industrial firms, often referred to as C&I users. C&I users are single businesses or clusters, for example breweries or other medium production facilities, malls, hospitals, schools and universities. Typically, their energy requirements fall in the 1-5MW range but can go as large as 20MW.
Within C&I users lies the missing middle. These are companies whose energy requirements have outgrown household-sized units but have not reached those of industrial complexes large enough to have and maintain their own installed capacity. Entities of this size and type are the backbone of virtually all economies. Yet, they are chronically underserved in key services such as energy provision. Surveys conducted in recent years indicate that reliable electricity is one of the biggest constraints to firm growth across most African countries. In Ghana alone, close to 90% of firms experience eight electricity outages per month on average, and in Cameroon outages last an average of 8.7 hours.
With energy demand outpacing supply in most geographies, there is a rapidly growing need for innovative, reliable options to cater to the C&I customer. If you are reading this on a computer or otherwise rely on electricity in your business, you intrinsically understand the value of reliable electricity for any firm and can mentally calculate the cost of not having it. For businesses in Ghana, Cameroon and all other African markets, this issue is pressing.
Crowding-in the private sector
African governments are increasingly aware of the need to increase access to energy and move towards more and cleaner options. This is a popular campaign promise any day, but in reality, establishing transmission takes time; existing plants often lack proper maintenance and are not functioning at full capacity; and, the capital for upkeep and new construction is often lacking. These issues have been driving up tariffs in many countries – in South Africa they have quadrupled in just a few years – making cheaper off-grid options even more enticing for the C&I consumer.
Most major policy plans published these days in Africa include plans to restructure electricity supply in order to crowd-in the private sector. In other words, governments are purposefully designing policies that allow for private sector participation. One of ISI’s partners in Nigeria who supplies and operates LPG and natural gas fueled power systems for the C&I market recently told ISI that “The Nigerian government has gotten out of the way, and we are delivering services faster than ever.”
Filling the gap will require investors, operators and service providers of all kinds and sizes. In recent years, a number of factors have aligned to form a beneficial climate for third parties, including US based companies, to seek opportunities in the C&I space.
One key driver is the falling lifetime cost of advanced technologies versus utility determined tariffs. This makes captive energy a possibility for the C&I consumer. For example, in Kenya, Tanzania, South Africa and a handful of other countries, mini solar options have been available to households for a long time but are only now becoming commercially viable at scale for the C&I market.
The fundamentals of grid operation have not changed materially in recent decades, but the demands placed on the grid have substantially increased with modernization and deindustrialization. New, locally installed technologies in gas, hydro, solar, wind and more have proved adaptable to these changes in a way that conventional energy supply has not.
South Africa and Nigeria are poised to lead C&I growth in the coming decade. Nigeria is also the world’s largest importer of diesel generators, and more than 80% of businesses rely on these for power. The country has an estimated installed capacity of 8,000MW to 14,000MW of de-centralized diesel generation. However, as diesel prices continue to rise in the country, more C&I users are expected to pivot to more efficient generators and/or other options entirely.
The variance in technologies required to meet the current C&I energy needs across the 54 countries that make up the African continent is high. And such a multitude of varied and dispersed opportunity can often muddy the bigger picture: one of the most common questions from ISI’s clients, operators and investors alike, is how to locate specific opportunities within the right markets for their business. Understanding the political and business environments on the ground is central to success, whether operating in your neighboring state or on a new continent, and there are a host of regulatory, political and commercial factors to consider.
Preparation is key
There is significant risk involved in venturing abroad, and the most obvious opportunity isn’t always the healthiest from a financial or legal standpoint. A successful strategy includes staying up to date on project opportunities across a variety of sectors and nurturing solid business and government networks throughout Africa, as well as leveraging the many services and programs available from US government agencies, key among them the US Department of Commerce (USDOC). In addition to its network of Trade Specialists spread across 106 US cities, the Department has 50 staff based in 12 countries across Africa offering a variety of services to assist US companies in exporting their products and services.
ISI’s Managing Director, Ross Ensor, sees incredible value in the USDOC’s International Buyer Program (IBP), which brings overseas delegations of pre-screened companies to meet with exhibitors at US trade shows. “It’s a great opportunity for American companies to meet face to face with hundreds of potential international customers and partners as well as industry experts from the US embassies at no cost. I don’t know of a better way to get insights on an international market and make local connections without having to take an international flight.”
POWER-GEN International has participated in the IBP for the past 10 years and will be doing so again in Orlando, Florida this December. Over 800 delegates from more than 30 countries will be in attendance, with African delegations making up one third of the total. The program will facilitate one-to-one meetings between exhibitors and delegates, as well as meetings with Department of Commerce and US Embassy representatives.
The C&I market is often overlooked as an opportunity by US based companies, partly because it is an up-and-coming market with a lack of information and reporting thus far. However, in recent months, a variety of American companies working with ISI have seen the growing demand for C&I as a good business opportunity and have been able to create valuable relationships in Africa to explore and capitalize on that opportunity. POWER-GEN International and the IBP program is yet another timely opportunity to build more relationships which will be key to closing the missing middle gap.
For additional information on U.S. Department of Commerce – Commercial Services programs, go to: http://www.export.gov
ISI Consultants assists U.S. companies to enter or further expand their business in Middle East and African markets. From small projects to longer-term engagements, we put our knowledge and experience to work for you, saving you time and money and minimizing your risk. And our results-oriented approach means we don’t just advise you on what to do to be successful – we work with you to get it done.
As part of our commitment to the U.S. Government's efforts to promote exports, ISI Consultants offer a limited number of COMPLIMENTARY STRATEGY SESSIONS each month to qualified U.S. companies.