The development of Independent Power Producers (IPPs) in sub-Saharan Africa is essential for expanding access to electricity and fostering economic growth. However, several barriers hinder the progress of IPPs in the region. Drawing insights from the South African Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) and Kenya’s evolving IPP landscape, we can better understand how to overcome these challenges and unlock the full potential of renewable energy in Africa.
The Success of Competitive Tenders: Lessons from South Africa:Â The South African REIPPPP offers compelling evidence that competitive tenders can deliver superior results compared to other policy instruments. The program's success highlights the importance of designing tenders to achieve two key goals: increasing competition among bidders to reduce price outcomes and ensuring participation only by bidders with the capacity to implement their projects within the contracted bid tariff and timeframe. By adhering to these principles, South Africa has demonstrated that well-designed tenders can attract high-quality bidders and drive down costs, leading to successful IPP projects.
Kenya’s Evolving IPP Landscape: Kenya’s policy and regulatory environment is relatively advanced, with a significant and growing IPP presence, partial privatization of national utilities, and cost-reflective tariffs. As of 2021, Kenya had 2,984 MW of installed on-grid capacity across 45 power plants, with an additional 11.5 MW in 19 off-grid stations in remote areas. Independent power producers own and operate around 30% of this capacity across 15 plants, while the national utility, KenGen, manages the remaining 70%. One of the most notable IPP projects in Kenya is the Lake Turkana Wind Power project. This project stands out because it is entirely financed by the private sector, with investments primarily provided as equity. The project demonstrates the potential for large-scale renewable energy projects to succeed in Kenya's market.
Kenya has also seen significant growth in solar IPP projects. For example, the USD 69 million Malindi solar PV project, located about 120 kilometers northeast of Mombasa, is one of the first IPP-owned utility-scale solar power plants in the country. Developed by Globeleq in partnership with the Africa Energy Development Corporation (AEDC), the project began generating and selling power in January 2022 under a 20-year Power Purchase Agreement (PPA) with Kenya Power, the national distribution company.
In March 2019, InfraCo Africa committed USD 2.2 million to develop the Samburu Solar and Transmara Solar projects, each with a capacity of 10 MW. These projects will generate clean, reliable electricity in some of Kenya's poorest counties, demonstrating the commercial viability of strategically sited small-scale solar plants. The Samburu and Transmara projects are also exploring the potential to participate in a local currency PPA pilot, which would make them among the first in sub-Saharan Africa (outside of South Africa) to negotiate local currency renewable energy PPAs.
Inadequate Investment Climate:Â Despite the progress in countries like South Africa and Kenya, an inadequate investment climate remains a significant barrier to IPP development across sub-Saharan Africa. Limited access to local currency financing and a lack of fiscal policy support, such as tax incentives, create hurdles for developers. While some IPP projects have benefited from tax exemptions during project development and construction, improving the investment climate across the region would attract more investors and facilitate the growth of the IPP sector.
Counterparty Risk and Off-Taker Credit Risk:Â Counterparty risk, particularly off-taker credit risk, poses another challenge for IPP developers. Many national utility companies in Africa are in weak financial positions, raising concerns about their ability to meet payment obligations under PPAs. Addressing this risk is crucial for securing financing and ensuring the viability of IPP projects.
Unclear Policy and Regulatory Framework for IPPs:Â A supportive policy and regulatory framework is essential for attracting investment in the power sector. Although several African countries have allowed private sector participation in electricity generation and retail, the policy framework for procuring IPPs remains underdeveloped. Independent regulatory authorities can enhance transparency in power sector regulation, including tariff-setting procedures and the management of public and private grid assets.
Electricity Transmission and Distribution Challenges:Â The underdeveloped transmission and distribution (T&D) network in many African countries is a major barrier to nationwide electricity access. IPP projects located far from the national grid may not be financially viable due to the high cost of constructing transmission lines to connect the generation site to the grid. This issue is particularly relevant for renewable energy projects in remote areas with high resource potential.
Poor Condition of Electricity Grid Infrastructure:Â The poor condition of electricity grid infrastructure and the intermittent nature of renewable energy (RE) capacity present additional challenges. High technical losses due to inadequate maintenance are common in many sub-Saharan African countries, limiting the ability of national power utilities to manage multiple power stations simultaneously. Utilities often restrict the share of RE power generation feeding into the grid because they cannot quickly respond to fluctuations in RE supply. Addressing this issue requires technical upgrades, including the introduction of modern dispatch centers.
Lack of Reliable Data for Power Sector Planning:Â Reliable data is crucial for effective power sector planning. Although most national power utilities in sub-Saharan Africa have set ambitious generation growth targets through 2030, many have yet to develop comprehensive master plans based on least-cost electrification studies, demand forecasting, and renewable energy potential assessments. Without reliable data, planning and implementing the necessary infrastructure to meet future energy demands is difficult.
Limited Energy Demand:Â In some countries, the availability of power resources, particularly from hydropower and other clean energy sources, exceeds the local energy demand. This mismatch can limit the number and capacity of IPP projects. Regional power pools, such as the Southern African Power Pool (SAPP), are helping to address this issue by facilitating electricity trading across countries with varying levels of generation capacity.
Conclusion:Â The experiences of South Africa and Kenya provide valuable lessons for overcoming the barriers to IPP development in sub-Saharan Africa. By improving the investment climate, clarifying policy frameworks, enhancing grid infrastructure, and ensuring reliable data for planning, the region can unlock its renewable energy potential and provide sustainable electricity access to millions of people.