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Journal of African Business Issue 5

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Welcome to The Journal of African Business - a unique guide to business and investment in Africa. Every edition carries editorial copy covering the following general topics, with a wide range of subjects within each broader economic sector: energy; mining and exploration; trade; finance; technology and tourism. In addition to this, special features on topical matters will be published periodically, along with country profiles. In this edition, the in-depth interview with Aggreko Head of Sales, Southern East Africa, Max Schiff, makes clear how important captive power is for the future viability of a wide variety of projects in Africa. As Schiff points out, the extractives industry has long been a leader in the application of captive power, given the remote location of many mining operations, but the flexibility and ESG advantages that captive power using renewables offers is making it an ever-more attractive option for many different sectors.

The extractives industry

The extractives industry has been a leader in the captive power space for decades Battery storage systems are a vital component of any captive power solution, enabling hybridisation with grid or renewable sources. Getting batteries up to the scale where they can support large-scale industrial operations is the next technological challenge. Credit: Aggreko the risk of production losses, especially if mine shafts are prone to flooding. In many locations, such as Tanzania and Zambia, where the national grids have extended successfully in recent years, mines still require onsite generation as a backup for these critical applications. In the case of oil and gas, where production values are high, and producers are held accountable for production targets by their shareholders and, often, regulators, captive power is necessary to ensure reliability. Even highercost diesel applications are preferable to losses resulting from grid instability causing failure or damage to equipment used for artificial lift. We see extensive examples of this in Egypt’s Western Desert, where government mandates are now driving producers to move away from diesel by using flared gas to power site operations, resulting in significant carbon off-sets without risking production. Equally, across the African continent, we see an increase in the application of captive power technologies on agricultural and commercial sites, where solar is proliferating as evidenced by the growth of solar power providers offering industrial-scale solar PPAs. In many of them, PV is integrated with other local sources of power such as hydro or wind. In such cases, off-takers can benefit from gains in all drivers, environmental, reliability and cost, while reducing capital investments through executing PPAs with companies offering financed solutions. Kenya’s tea industry is a great example of this, despite the country’s competitive grid tariffs and high penetration of renewables in its national supply. As South African utility Eskom continues to implement the reliability maintenance recovery programme to achieve operational sustainability, many electricity generating units are taken offline for planned maintenance which leaves the national power system constrained. The Embedded Generation Investment Programme (EGIP) is critical for South Africa to achieve its climate targets and reduce excess demand on Eskom. What are the reasons for the increased interest in captive power? There are several advantages. In the most basic example, captive solutions deliver power where the grid does not exist. 8 In grid-connected scenarios, captive solutions allow for the reduction of the cost of power, both economically and environmentally. Finally, reliability gains can have a significant knock-on effect on production, or assist in avoiding production losses, by overcoming intermittency and instability. Where grid voltage and frequency stability are a challenge, the same is true, and off-takers can also avoid damage to costly machinery. This last point is especially true of sensitive processes such as smelting, clinker production and high-value mineral extraction and processing, where equipment values and operational costs are high, and downtime is therefore very costly. The ESG agenda is, of course, driving the captive power industry as corporates, financiers, regulators, households and individuals look for avenues to not only reduce their energy bills but also their environmental footprint. Household-level solar and battery walls that allow their stored energy to be returned to the grid if unused are a great example of this. We see growth in these applications in the US, albeit not at a significant scale yet. Finally, in areas facing challenges of energy access, capital investment in large-scale transmission systems to connect remote areas presents a hurdle that more local captive power solutions can overcome. Mini-grids and captive solutions avoid large-scale transmission investment and the associated losses while ensuring that locally available resources, such as solar, wind, tidal, biogas, etc, can be used to meet local demand. Is the regulatory (or legislative) environment ready for captive power in Africa? Regulation in Africa varies from one jurisdiction to another. In Uganda, distributed energy is regulated as part of a broader isolated-grid system approach administered by the government. Nigeria’s focused captive power regulation offers clarity to consumers, operators and developers. In Kenya captive power systems are regulated through a number of separate regulations, arguably making a more complex environment for these actors. South Africa has begun an intense programme of creating Special Economic Zones: is this something you are seeing in other African countries, and why is captive power so particularly suitable for such areas? According to the United Nations Conference on Trade and Development (UNCTAD) 2021 report, there are over 200 Special Economic Zones (SEZs) in Africa. Around 60 new SEZs are under construction, and others are being developed or planned. The report highlights Kenya, Nigeria, Ethiopia and Egypt as the locations with the highest number of SEZs. Morocco, Mauritius, South Africa, Zanzibar and Rwanda are all looking to further leverage SEZs to attain economic development. Captive power offers power autonomy and reliability to SEZs that may not be available from the existing utility infrastructure. For SEZs are also designed to create job opportunities in remote locations, captive power remains the only viable source of electricity.

ENERGY Would mining be another sector that lends itself to captive power? The key factor affecting the operation of mines in South Africa is the availability of a reliable, uninterrupted supply of power. South Africa’s well-publicised energy challenges mean that mines are not guaranteed to receive a reliable supply from the national power utility. In the recent months, loadshedding has reached a point where mining processes can no longer be organised to mitigate production losses due to power intermittency. Indeed, the current narrative is one that is characterised by such losses and pose a major challenge for the wider industry. Captive power options, particularly those with cost-effective hybrid elements, present for mines a great opportunity, especially mines with longer life spans. What are the cost implications of captive power? The real question is what value can captive power solutions offer to businesses? This is to ask not only what the implications are for operating costs, but what benefits will be derived from a more reliable or a cleaner energy source? Where production and environmental gains outweigh operating costs, we can determine the value that underpins a return on investment. The parameters of this ROI vary significantly depending on the cost and quality of the existing supply, the fuel/energy available to be used to generate power onsite (be these from fossil or renewable sources), the cost of capital available to the investor and the duration of the power requirement, not to mention the value of the service, material or goods being produced. What sort of solutions does Aggreko have within this market? Aggreko’s capabilities speak directly to the captive power space, particularly for larger industries. The energy transition is a global mandate for governments, companies and individuals alike. While the end goal is net zero, the process must be economically viable for stakeholders, including off-takers, investors and developers, for the transmission to progress and be successful. Within this context, the key question of captive power is, “How to maximise reliability while minimising cost and environmental impacts?” For now, the trade-off between these drivers remains a challenge. It will continue to do so until battery technologies can cost-effectively and seamlessly match large and complex loads to renewable power sources such that the agility and reliability of fossil-based thermal solutions are no longer required to perform this function. At present, it’s not possible to run a factory, mine, oil and gas site on intermittent class one renewable, such as wind and solar, without significantly curtailing production, in most cases to the point of the facility being economically unviable. Battery storage technologies are often not yet cost-effective enough to overcome this intermittency at such a scale. Historically, thermal power solutions, including diesel, gas and HFO, have been used due to two simple reasons: they are technically capable of powering complex industrial loads 24 hours a day, seven days a week, and fuels are widely available and easily transportable, especially in the case of diesel and increasingly gas. This is to say that the supply chains for the required technology and fuel are well developed and reliable. Aggreko’s role in the transition is aligned with that of the off-takers in this regard. We recognise that fossil-based thermal power is necessary to ensure the economic and technical viability of captive solutions for many industries. This said, thermal generation must be as efficient as possible through investment in low-emission fuels and engines and application of load-sharing techniques that ensure efficient loading. Beyond this, Aggreko continues to invest in battery storage solutions that sit alongside our gas, diesel and HFO offerings to enable hybridisation with grid or renewable sources. Our in-house control systems enable us to prioritise energy sources based on financial or environmental drivers specified by our customers and to match these to the relevant loads, ensuring continuity at the site. If the sun is shining or the wind is blowing, on-site renewable energy sources integrated by Aggreko can be employed and matched to the site loads. If the energy source drops, then stored energy can be deployed until a grid supply or onsite thermal generation is dispatched as a last resort. We see this as the essence of the transition as we continue our efforts and strive for greater and greater renewable energy penetration wherever possible. Aggreko will continue to invest in thermal, storage and controls solutions to enable this while working with renewable technology providers to ensure we offer customers the greatest inflexion point between reliability and environmental protection. 9 Africa has more than 200 Special Economic Zones (SEZs), such as the Saldanha Bay Industrial Development Zone in South Africa’s Western Cape Province. Captive power can provide such important industrial and commercial areas with power autonomy and reliability. Credit: SBIDZ Mini-grids not only avoid large-scale transmission investment but also avoid the associated losses

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