Increasing cost-competitiveness of renewable energy heralds a new era for African energy markets

New evidence released today, suggests that in some markets in Sub-Saharan Africa, increasingly affordable renewable energy sources may leapfrog fossil fuel technology and help drive Africa’s economic development. A new study published by Linklaters shows that the levelised costs of power (LCOE*) for some renewables are forecast to halve over the next ten years. This is driven by factors such as economies of scale, technological advancement, improving operational and project experience, and better access to finance.

The research, which included contributions from the Overseas Development Institute (ODI), shows that, at least in the lower end of the range, on-shore wind, solar PV, biomass, hydropower and geothermal are all cost-competitive with fossil fuels, based on today’s costs and taking into account future cost decreases.

The figures also project a substantial decline between 2014 and 2025 in the cost of solar PV and Concentrated Solar Power (CSP), and on-shore and off-shore wind. Solar has already decreased dramatically, with solar photovoltaic (PV) module costs falling 75% between 2009-2014 and the cost of electricity from utility-scale solar PV falling 50% between 2010-2014[1]. The striking increase in cost competitiveness of solar technology should encourage significant uptake of this opportunity in its various forms.

Figure 1. Global LCOE Ranges by Renewable Power Generation Technology, 2014 and 2025[2]

Melanie Shanker, Environment managing associate at Linklaters, says: “A surprising aspect of the analysis is the rate at which the cost of renewables is approaching parity with fossil fuels. This means that economic development and environmental objectives do not necessarily conflict; they actually work together.”

While the costs in the chart  above reflect the global LCOEs, similar trends have been noted in Africa, especially given the abundance of renewable energy sources. For example, last year South Africa’s utility Eskom contracted privately generated wind power at prices 17% lower than those projected for the country’s two new coal-fired power plants, Medupi and Kiseli[3]. South Africa’s Renewable Energy Independent Power Producer Procurement (REIPPP) programme has also enabled grid-connected renewable energy at highly competitive prices.

John Pickett, Projects partner at Linklaters, says “Renewables in Africa has the potential to leapfrog a whole generation of technologies that have served the West and Asia very well but perhaps don’t need to be deployed to the same extent in Africa. Coal clearly has a role to play in Africa but there is scope to do a whole lot more with renewables in the new phase of power generation. Renewables are quick to deploy, manageable, bite-sized.  Building an 8 GW coal-fired power station is a challenge; building 100 MW of solar is much more achievable.”

The LCOEs of some renewables technologies in Africa are already cost competitive with fossil fuels, as shown in Figure 2 below and the African costs are generally lower than the global average for each technology. 

Figure 2. LCOE for Renewables and Fossil Fuels[4]

 

Chris Staples, Environment partner at Linklaters, says that this development could have a positive impact on the ongoing global climate change negotiations in Paris. “Policy makers have the opportunity to nudge the dial on renewable energy through addressing some of the barriers to renewable energy generation in Africa and to favour renewables as a significant proportion of the overall energy mix. There is still a need to persuade governments that renewables are often a viable route versus fossil fuels.”

But despite the forecast in decreasing costs of renewables, the research shows that there are still numerous risks and barriers to investment in renewables in Africa which need to be overcome to fully enable investment. Andrew Jones, head of the Africa group at Linklaters, says “the renewable energy market in Africa is still relatively new - historically, financing costs and hurdle rates have been higher in Africa than developed countries due to perceived and actual political, regulatory, financial and administrative barriers and risks. To encourage investment in the short to medium term, the introduction of government policies that decrease the cost of developing renewables are an important policy tool to help move things forward.”

Linklaters’ report, ‘Renewable Energy in Africa:  Trending rapidly towards cost competitiveness with fossil fuels’ points to the steps governments can take to encourage further investment. This includes introducing de-risking policies to remove underlying barriers such as support for policy design, institutional capacity-building, skills development for local operations and maintenance and resource assessments but also at the finance level to incentivise investors to justify taking the actual or perceived risk.

For more information, contact Surinder Sian on +020 7456 4842


[1]    IRENA Renewable Power Generation Costs in 2014

[2]    Interpretation of figures from IRENA, “Renewable Power Generation Costs in 2014”

[3]    Africa Progress Panel, 2015

[4]    Interpreted by ODI from IRENA Renewable Power Generation Costs in 2014. Africa-specific data also was not available for geothermal, Offshore Wind and CSP. Relatively few projects being built and relatively poor data is available to analyse the LCOE for fossil fuel generation in Africa in more detail.