Investing in Africa's Solar Energy Dawn

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

Investing in Africa's Solar Energy Dawn

by David Fessler, Investment U Senior Analyst

Thursday, December 15, 2011

Barring any hurricanes, windstorms, or heavy, wet, fall snowstorms, this week my 10-kilowatt (kW) solar array should go live. It will be fun to watch my electrical meter run backwards. It will do that at varying speeds, depending how much sun is shining on any given day.

My installer tells me my system will produce power even on cloudy days, just not as much. Given my current electrical load, it will pay for itself in about eight to 10 years.

If I can get my family to stop leaving lights, computers, TVs and other power-sucking appliances on, the payback will be even quicker.

My decision to install solar was a personal one. It's not entirely based on the economics of the payback. My personal views have nothing to do with the viability of the solar market as a whole. Nor are they a reflection of the investment opportunities that may or may not be represented in the sector, which is what I'm writing about here.

Slow Out of the Starting Gate

It's no secret that photovoltaic solar generation had a rocky start in the United States. Controversial subsidies have many critics raising their eyebrows. Like Europe, we are besieged by political and economic uncertainty.

Over the past couple of years, plummeting panel prices were the death knell for many would-be panel makers. In addition, cheap natural gas kept solar looking expensive. Not exactly great news for solar panel makers and installers.

Unlike this we-don't-have-a-national-energy-policy country, many emerging market countries do. For them, building solar into their grids makes a lot of sense. Particularly with panel prices dropping 40 percent in the last year alone.

For the solar market to reach financial viability, there's one continent that's going to drive the bulk of the demand that will make it happen.

This place has some great things going for it:

  • Perfect geographical location for solar power generation (lots of sun, all the time)

  • Energy poverty: scarcity of energy production of any kind

  • 587 million of the one billion who live there have little or no electricity

  • A woefully underdeveloped - and in some places non-existent - power grid

This is also a place where payback on solar-generated electricity can come within months or even weeks. There are several reasons for this.

According to the International Energy Agency (IEA), about 85 percent of those 587 million people without electricity live in rural areas. To them, solar - despite its premium costs in developed countries - looks very cost-competitive when compared to other sources of generation.

Where is This Place, Anyway?

I'm talking about Africa. Solar energy developers are tilling fertile ground in Africa's vast sunbelts. The reason is that most of what little electricity is produced in Africa comes from coal, oil and natural gas.

Much of the power that's generated is incredibly expensive: about $1 per kilowatt-hour for decentralized diesel generators operating off-grid. This compares to just $0.20 per kilowatt-hour for solar.

No wonder solar companies are flocking there in droves. On the sunny, southwest coast, Namibia is very interested in solar. With a population of just two million, Namibia currently relies almost totally on coal imported from South Africa to meet its energy needs.

Right now, Namibia has inked an agreement with an American-based investment group to build a 500-megawatt (mW) solar photovoltaic power plant near the capital city of Windhoek. The project is expected to cost between $1.6 and $2 billion dollars. Africa Energy Corporation was created to specifically to finance the project.

In Morocco, the World Bank approved a $297-million loan for the country's first concentrated solar power plant at Ouarzazate. Its initial design capacity is 500 mW, with the capability to grow to 2,000 mW by 2020.

Ouarzazate is being viewed as the proving ground for the much larger Desertec Industrial Initiative. Desertec, if implemented in its full design, will supply all of the power needs of North Africa and much of Southern Europe by 2050.

Finally, in South Africa, Spanish solar developer Abengoa was awarded the rights to build two concentrated solar power (CSP) farms in the country. With investments totaling $1.3 billion, the two CSP farms will be the first of their kind in the country.

How to Play Africa's Solar Dawn

With a lot of the money – and ultimately the equipment – coming out of the United States, it's almost a sure bet that American solar panel makers like First Solar, Inc. (Nasdaq: FSLR) and SunPower Corporation (Nasdaq: SPWR) will benefit on the photovoltaic side.

BrightSource Energy, Inc., currently a private company, might also be contracted to provide similar CSP plants (similar to its 370-mW Ivanpah project in the United States) in Africa.

While no specific panel manufacturers have been named, it's a good bet that the two mentioned above will play a part in Africa's sunny solar future. That could be the saving grace for an industry that just can't seem to get firmly on the road to profitability.

Good Investing,

David Fessler

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