African electricity price hike fuels renewables opportunity

From the newsletter

Nigeria is planning for a 66% increase in electricity tariffs to make them "cost-reflective," a trend mirrored by many other utility companies across Africa. Last week, Eskom, South Africa's power utility, implemented a 24% tariff hike, with repercussions extending beyond its borders to neighbouring countries reliant on its electricity supply.

• Eswatini, a country in southern Africa, sources a large portion of its power from Eskom and the Southern African Power Pool (SAPP). With the increase in tariffs in South Africa, Eswatini is also seeking to increase its tariffs by 25.51% for the 2025/26 financial year and 27.06% for 2026/27.

• Many African utility companies are experiencing losses and are reviewing their tariffs with a view to increasing them to ensure profitability. This has a ripple effect considering some countries rely on supply from other countries. Any price change is transferred.

More details

• Fossil fuels account for over 70% of Africa's electricity generation. These fuels are often imported and paid for in foreign currencies. Currency volatility makes this an expensive undertaking, as utility companies incur significant currency exchange costs. These costs are ultimately passed on to consumers through tariff adjustments, making electricity more expensive.

• Many African utility companies are trapped in a perpetual cycle of financial losses, leaving them with limited resources to invest in new generation capacity and infrastructure upgrades. Transmission and distribution losses are high; across 36 countries, these losses range from 11% to 48%. Only Botswana, Lesotho, and Mauritius have losses at or below 10%.

• Tariff increases are implemented at varying frequencies across the continent. For example, South Africa adjusts tariffs annually, Kenya every three years, and Ghana on a quarterly basis. However, tariffs remain volatile due to the impact of foreign currency fluctuations on the tariff calculation.

• Heavy consumers are the most impacted by rising energy costs. Commercial and industrial customers, particularly those in the mining sector, bear the brunt of these expenses. Energy costs typically account for between 5% and 15% of their total production costs. However, in highly energy-intensive sectors like steel, cement, and aluminium production, this figure can reach 30% or even higher.

• To cushion themselves from high grid costs, many of these customers have opted to switch to self-generation. Last year, approximately 700 MW of solar energy was installed in the commercial and industrial (C&I) segment in Africa. Kenya installed about 17 MW, South Africa 490 MW, Ghana 26 MW, and Nigeria 62 MW.

• Renewables have proven to be a cheaper alternative, with solar panel prices declining by more than 80% in the last decade. The technology is now more mature and reliable, and most African countries have sufficient solar and wind resources to meet their energy needs.

Our take

• Energy consumers are generally price-sensitive. Commercial and industrial customers, who are better positioned to adopt renewable energy, are often the first to do so. This represents a significant market opportunity, considering they are the primary consumers of expensive grid electricity. Targeting these customers offers several advantages. They typically have a better credit history and pose less risk for financing, which is crucial if they require assistance to install renewable energy generation systems.

• Grid electricity prices will continue to increase as fuel prices increase. Renewables offer reliable and stable electricity prices. More is needed to encourage greater investment in renewable energy. Clear and supportive policies can help. South Africa, Kenya, and Ghana have made strides in simplifying regulations for the self-generation of electricity, but more action is needed. Firstly, access to financing must be improved, even for those who lack the upfront capital to invest in renewable energy systems. This could involve government-backed loan schemes, tax incentives, or innovative financing models specifically designed for renewable energy projects.

• Secondly, policies should enable individuals and businesses generating excess electricity to sell it back to the national grid. This "net metering" system creates an additional revenue stream for investors, making renewable energy more financially attractive. This allows producers to offset their energy costs or even earn income from their surplus and strengthens the economic case for renewable energy adoption.