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In brief

The renewable energy sector is shining a bright light on the African continent’s M&A sector, with growing investment in the sector expected in the next few years. To improve direly needed access to power for all Africans and to fulfill net-zero commitments, public and private investment and the sourcing of innovative, alternative financing for the energy transition are ramping up in countries across the continent.


Contents

  1. In more detail 
    1. Opportunities
    2. South Africa
    3. Funding the transition
    4. Powering Africa 

In more detail 

The renewable energy sector is lighting up Africa’s mergers and acquisitions (M&A) market and is expected to be one of the major contributors to the market’s recovery in the next few years. 

According to a report by the Boston Consulting Group (BCG), there has been an increase in investors seeking green energy projects in Africa. BCG notes that in 2022, the sector attracted USD 118 billion in foreign direct investment, 60% of the FDI inflows into the continent. The minerals sector also defied the general downward trend in M&A, with the demand for Africa’s critical minerals contributing to a growth in investment in the sector over the last few years.

BCG noted that investors have recognized the urgent requirement to close energy infrastructure gaps across the continent. There is growing investment in electric grids, renewable energy power plants, energy facilities and transport infrastructure. Further, investment in supply chains is expected to increase as the world’s major players look to Africa to source the critical minerals needed for their own energy transition programs. The creation of corridors such as the Lobito corridor in Angola points to increasing collaboration amongst stakeholders to optimize regional supply chains, share knowledge and facilitate access to electricity across the continent.

Legislation encouraging investment in renewable energy, as well as renewable energy incentives and improved country guidance, is expected to further drive renewable energy investment in Africa going forward. Scale is also critical for renewable energy projects, as geographic diversification can mitigate currency fluctuations, political instability and regulatory risks for renewable energy companies. 

Ample available dry powder in the private equity ecosystem in Africa is also expected to boost investment in the renewable energy sector in Africa, with the BCG report noting that major industry players are looking to leverage regional platforms to extend their African footprints. PE investors are focusing on Senegal and Morocco, which have currencies pegged to the euro, as well as Egypt, which is close to Europe, to supply renewable power to the region. In addition, South Africa’s energy infrastructure and logistics challenges are seen as an opportunity for investors with an appetite for risk.

Opportunities

To enable energy transition in Africa, capital expenditure valued at USD 2.9 trillion is needed between 2022 and 2050, mostly dedicated to green energy sources and infrastructure investment.

McKinsey noted in a recent report that the development of midstream infrastructure in the energy space alone requires an investment of around USD 400 billion by 2050, with the biggest opportunities found in Egypt, Morocco, Nigeria and Senegal. By 2030, McKinsey notes that these countries will increase their transition and distribution networks by 120.000 kilometers collectively, with some projects already under construction. 

Renewable energy is expected to account for 65% of installed capacity in Africa by 2035 and 95% by 2050. Solar and wind power will grow faster than hydropower, with 70% of capacity sourced from solar, 20% from wind, and 10% from hydropower by 2050. There is, however, huge potential for hydropower in terms of the creation of natural battery systems for Africa’s energy transition, but this requires investment in energy infrastructure.  

McKinsey outlines how green hydrogen will play a key role in the global push to net zero, and African countries in the north and southwest of the continent in particular, with plenty of wind and solar resources, will be highly competitive in the supply of green hydrogen for both global and local markets. McKinsey notes that by 2050, the continent could supply its own full domestic demand potential of between 10 and 18 megatons of hydrogen, and hydrogen exports could amount to 40 megatons.

South Africa

In 2022, South Africa, alongside Egypt, Kenya, Morocco, Mauritania and Namibia, launched the Africa Green Hydrogen Alliance with the intention of fostering collaboration and ensuring the continent could lead in the development of green hydrogen for energy transition. South Africa could become a major global player in the green hydrogen market, thanks to its renewable energy sources and existing infrastructure, which is currently being used to transport fossil fuels.

South Africa’s new draft Integrated Resource Plan (IRP) was published in January 2024 and sets out numerous scenarios to address the country’s electricity generation capacity with two timelines: the period up to 2030, which addresses prevailing capacity constraints and supply requirements, and 2031–2050, addressing long-term planning and pathways to net zero by 2050, including combinations of nuclear, clean coal and gas, and renewable energy, as well as system requirements for a long-term decarbonization trajectory. 

In 2022, South Africa also launched its Just Energy Transition Investment Plan (JET IP), a five-year investment plan for the USD 8.5 billion financing package in partnership with France, Germany, the United Kingdom, the United States (US), and the European Union. The JET IP outlines the investments required to achieve the country’s decarbonization commitments while promoting sustainable development and ensuring a just transition for affected workers and communities. If successful, it could be used as a blueprint for other African countries.

At the same time, private sector financing of renewables has grown in South Africa. The National Energy Regulator of South Africa pointed out that South Africa’s private sector registered 4.490 MW in renewable energy projects in 2023, three times more than in 2022. The growth of private renewable energy capacity is attributed to a recent regulatory reform that removed the requirement for generation facilities to obtain a license.

Funding the transition

Achieving a low-carbon future has resulted in increased demand for working capital in African countries that traditional lenders are often unable to provide. This has opened the market to new financing options, such as the increased availability and competitiveness of Export Credit Agency (ECA)-supported funding. The role of ECAs in facilitating deals in Africa is evolving, with an expanding number of ECA programs and products covering projects related to the trade in renewables, raw materials and critical minerals in Africa.

Further, development finance institutions are increasingly anchoring the infrastructure ecosystem in Africa because they can shoulder political risk, access government protections and facilitate long-term lending. The amount of capital needed is significant, however, and private equity, debt finance and specialist infrastructure funds are also entering the market, with multi-finance and blended solutions growing in popularity.

Transition finance, in the form of green, social and sustainability-linked bonds, has become another method of financing the energy transition, leading to a rise in demand for sustainability-linked loans that incentivize borrowers to achieve pre-determined environmental, social and governance targets. 

Powering Africa 

At the G7 Summit in 2022, a USD 600 billion lending initiative, the Partnership for Global Infrastructure and Investment (PGII) was launched to fund infrastructure projects in the developing world, with a particular focus on Africa. The aim was to address the infrastructure gap in developing countries, with a focus on sustainability. The US announced at the time that it would mobilize USD 200 billion for developing countries over the next five years as part of the PGII. One of the priority pillars of this funding is “tackling the climate crisis and bolstering global energy security through investments in climate resilient infrastructure, transformational energy technologies, and developing clean energy supply chains across the full integrated lifecycle.”

Power Africa, a US government-led program that focuses on addressing Africa’s access to electrical power, has also provided significant support for the African energy transition. This partnership between the US, Ethiopia, Ghana, Kenya, Liberia, Nigeria, Tanzania, and the private sector has resulted in investment loans, reforms, advisory services and guarantees with a commitment of at least USD 3 billion in the six priority countries.

With decarbonization, the dire need to improve access to power for all Africans and the race to net zero firmly on the African agenda, attracting both public and private investment and sourcing alternative financing for energy transition is becoming increasingly urgent, leading to a plethora of opportunities for investors with their eye on the continent’s bright future.

Author

Angela Simpson is a partner in Baker McKenzie's Corporate M&A Practice Group in Johannesburg.
Angela has extensive experience in public and private corporate transactions and mergers and acquisitions, with a focus on the private equity and venture capital industry.
She was one of four finalists nominated for DealMakers 2010 "Dealmaker of the Year" award for her role in Nippon Telegraph and Telephone Corporation's ZAR 24 billion acquisition of Dimension Data Holdings plc. Her expertise has consistently been recognised by Chambers Global, Legal 500, IFLR1000 (where she has been listed as a leading lawyer in the IFLR1000 Women Leaders Guide since 2018) and Best Lawyers.

Author

Matthew Martin is a partner in Baker McKenzie's Projects group. Matt serves as counsel on complex construction and project development projects across a range of sectors. He is admitted in Illinois, New York and England & Wales.
Matthew has been recognized in the Legal 500 as someone who ‘combines being hands on’ and ‘into the legal detail’, with ‘a deep commercial understanding of projects’.

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