Governments and utilities in sub-Saharan Africa are sending a clear message in recent meetings that what really interests them is solar projects with battery storage.
Solar works for relieving pressure on hydropower during the day but, without batteries, it does not do enough to address evening peak demand. Hydropower is the main source of electricity in most sub-Saharan countries outside of South Africa.
The dramatic fall in the cost of solar has affected — for good and bad — the sub-Saharan Africa renewables sector in the last three years. Similar cost reductions in energy storage and wider deployment of batteries will have an increasingly strong effect on the renewables landscape in sub-Saharan Africa as projects that were uneconomic before become viable.
This year marks the start of a global roll out of solar-plus-storage projects. From a financing perspective, such hybrid solar projects are more likely to be financed on a project-finance basis in Africa before a standalone battery installation. This is because the revenue streams of the solar project support a conservative banking base case, independent of the performance of the battery. This is a common lender risk mitigation strategy when a developer has an assortment of assets with different credit profiles. Lenders will run a sensitivity analysis to determine the cash flow available for debt service if the projected revenues from the battery fall away.
Energy storage deployments in emerging markets globally are expected to grow at more than 40% annually in the next decade, according to a report on “Energy Storage Trends and Opportunities in Emerging Markets” by the International Finance Corporation, the private-sector investment arm of the World Bank.
Grid connected hybrid solar projects with battery storage are in the early development stages in Africa. Those in the public domain are the 25-megawatt Madagascar project tendered as part of the International Finance Corporation’s scaling solar program, which attracted six pre-qualified bidders in February 2018, and the 30-megawatt solar-plus-battery storage project that is being developed by SB Energy Corp and Mara Corporation Limited in Rwanda.
In developed markets, battery storage is being introduced retrospectively as flexible capacity, smoothing an already-high penetration of renewables and enabling the injection of more intermittent renewable generation in future.
In sub-Saharan Africa, we have seen grid-connected renewables deployed at a far slower speed than in developed markets, as a result of challenges such as government support, grid stability, political risk, appetite for intermittent renewables, supply - demand dynamics and offtaker creditworthiness.
At the same time, we have seen solar-plus-battery installations advance rapidly at an off-grid and mini-grid level, meaning that battery storage is not a novel technology in Africa.
However, for battery storage to displace the conventional African forms of baseload generation — particularly distributed diesel generation, large hydro and thermal power — there are key challenges to overcome.
Spreading the word
As power sector stakeholders in sub-Saharan Africa gain awareness of the advantages of battery storage, interest in battery storage will cause more deployment, creating a positive feed-back loop that will lead ultimately to further battery cost reductions.
Battery storage is quick to be deployed and capable of responding in milliseconds to grid demands, and it improves the quality of the grid. When combined with solar PV, it is capable of smoothing the electricity output from the solar project (maintaining the output curve on a daily basis and mitigating against forecasting errors) and providing solar time shifting (storing and releasing solar electricity during the evening peak hours), alongside the pure battery storage ancillary services such as frequency regulation, voltage support, black-start capacity, energy arbitrage and ramp-rate control. Installing more batteries also helps to ease grid congestion, which is a key obstacle to trading in the Southern African Power Pool.
Improvement of grid quality and reliability leads to fewer unplanned grid outages.
This has two key economic effects on the typical state utility in sub-Saharan Africa. First, the likelihood of a grid-related “take-or-pay” event triggering an obligation for the state utility to provide revenue relief in the form of deemed electricity charges under its power purchase agreements would be reduced. Second, the propensity for large commercial and industrial customers to install on-site self-generation or captive sources of power could be mitigated.
In markets such as Ethiopia and Tanzania where generating capacity is being scaled up to drive industrial growth, but constraints remain around a fragile grid system, there is a clear role for energy storage.
Outside of Africa, there are emerging markets and island state examples that show the benefits of batteries and that are relevant in an African context. In Hawaii, some islands require developers to couple any new generating facilities with batteries in order to stabilize the local grid. The Dominican Republic recently proved that battery storage assists in the event of an emergency response. Its grid remained operational during two hurricanes in 2017 due to 20 megawatts of lithium-ion battery arrays that remained online while most of its power plants suffered forced outages.
Africa is similarly prone to climate-change-related severe weather — such as the widespread flooding seen in East Africa this year — and consequential grid outages. Batteries can help to mitigate the adverse effects of such weather.
The Inter-American Development Bank has shown in a study in Latin America that, where renewable energy is combined with energy storage in markets with high-cost of conventional generation, the cost savings of using more renewable energy are higher than the additional cost to install storage. Sub-Saharan Africa is renowned for its high fuel costs, particularly as a result of installing emergency power plants and poorly procured conventional power plants, so the same savings are possible here.
Finally, batteries may prove critical as African countries try to reach the emissions mitigation targets set under the Paris climate accord. Batteries have the potential to reduce net greenhouse gas emissions by increasing the proportion of renewable energy injected into the grid, thereby displacing more conventional sources of power.
Ancillary services such as frequency regulation and voltage support are increasingly seen as high-value services, and certainly in developed markets it is in the provision of these ancillary services that allow flexible baseload plants to be highly remunerated.
In African independent power projects, the expected revenue stream from a solar-plus-battery project will usually be specified in the power purchase agreement, and not by reference to a market index or regulatory formula. We have seen various means of documenting the advantages of battery storage in offtake agreements in developed markets, with differing approaches to remunerating the battery storage services.
The challenge in Africa is to find a middle way between the generator being fully remunerated for the services that the battery provides and adopting a relatively simple revenue model that is more easily understood by both generator and offtaker. This applies to the structure of how the battery is charged (purely from the solar panels or also overnight from the grid) to how the output is measured (whether the output of the battery is differentiated from the output of the solar project and subject to separate interconnection and metering points) and to the tariff structure (whether the tariff is split between battery output and solar plant output). More complex and potentially lucrative tariff structures are likely to follow once familiarity is gained with the technology.
The revenue model will also be looked at closely by lenders. If the PPA remunerates the ancillary services that the battery is capable of providing, a conflict may arise between the developer’s preference to stack multiple revenue streams that may be earned from the solar-plus-battery project and maximize the return on investment (including relying on different income sources at different times of day or seasons) and the desire by lenders to have a reliable long-term revenue stream to cover debt service (particularly important on earlier-stage projects in new jurisdictions).
Because battery storage technology is still seen as an early-stage technology, the lenders in the first wave of projects in sub-Saharan Africa will be development finance institutions, multilaterals and export credit agencies that are likely to take a conservative view. Innovations in the software supporting energy storage will also assist in maintaining a balance between profitability and predictability of revenue for solar-plus-battery projects.
Potential relatively simple structures could involve treating the project as a plant that is subject to dispatch by the offtaker by splitting the tariff between a capacity charge and an energy charge. This is a familiar structure on African large hydro or thermal power plants, although the structure has some negative connotations in jurisdictions where state utilities have incurred substantial losses as a result of high capacity payments.
This structure is a departure from the traditional PPA single-tariff structure for solar projects in Africa as capacity payments are usually not appropriate for intermittent energy. The fundamental premise of a capacity payment is that it compensates a project for the ability to generate when dispatched. The creation of “dispatchable solar” through co-location of storage can qualify a solar project for a revenue stream that was once the exclusive purview of conventional plants.
Alternatively, a “time-of-use” pricing structure could be used, whereby the single energy charge of a solar plant could be maintained, with a higher tariff for output exported in the evening peak hours than the daytime hours.
Missing regulatory framework
In developed markets, the deployment of battery storage has often outpaced policy and regulation, creating a “new frontier” environment. For instance, the US Federal Energy Regulatory Commission has been uncertain whether to classify storage as a generating asset, transmission asset or hybrid of the two. Consequently, battery storage parameters have often been incorporated in project documentation.
This is not new to Africa, where an absent or uncertain regulatory framework is the norm and often leads to key risks and structures being documented contractually and in contemplation of a change in law in the future.
We have seen this in jurisdictions where the grid code does not encompass renewables. In such instances, derogations from the grid code are documented so as to establish a day-one compliant position, with subsequent changes to the grid code or other electricity regulations that affect the power project being governed by a change-in-law provision in the PPA or government support agreement.
The current regulatory view in Africa is that licensing is strictly split among generation, supply, transmission and distribution, similar to the way in which vertically integrated state utilities are being progressively unbundled. Therefore, a conundrum will also arise as to how to regulate and license battery storage — either by adjusting the existing framework or by creating a new battery-storage-specific framework or a combination of the two.
Therefore, there is a risk of retrospective regulation of battery storage in Africa as utilities and regulators grapple with this new technology and as early-stage solar-plus-battery projects come online before energy policy fully encompasses battery storage.
We have seen this, to some extent, in the off-grid and mini-grid sector where regulation has applied retrospectively to issues such as the main grid subsequently connecting to the mini-grid, the permitting of very small mini-grid projects or a retrospective requirement to register diesel generators. Provided that time and resource are addressed to this issue at the project documents stage, the change-in-law clause is well drafted, and the regulator and ministry of energy are fully engaged with from a regulatory and licensing perspective, the impact of retrospective regulatory changes on grid-connected solar-plus-battery projects should be mitigated.
Aside from the contractual provisions, key to ensuring that regulators and state utilities are informed about battery storage is sharing knowledge. In this regard, larger initiatives, like the US Trade Development Agency Kenya solar-power-and-energy-storage reverse trade mission last year, and technical workshops on specific projects play an important role in ensuring that the key business divisions are aligned as to how the solar-plus-battery project will operate.
Mitigation of technology risk
Most grid-scale energy storage systems are less than five years old. As with any new technologies, all stakeholders must get comfortable with the technology.
Battery risk is increasingly being mitigated in a number of ways, including the increasing availability of extended contractual warranties running up to 10 years, creditworthy suppliers and the specialization of firms in battery storage asset management to which battery performance risk may be passed through under robust operation and maintenance contracts. The strength of the operation and maintenance contract is important given expectations that batteries require replacing approximately 10 years after the commercial operation date.
If the solar-plus-battery project will be dispatched by the state utility, then the power purchase agreement must contain clear parameters around dispatch so as to ensure that the depth of charge or other performance parameters of the battery are not adversely affected by the method of dispatch with a consequential risk that the warranty is invalidated.
Ultimately, the sizing and usage of the battery and the solar plant — both together and separately — must be driven by grid requirements and patterns. If grid studies and consequential plant sizing and modelling are exhaustively carried out on the early-stage solar-plus-battery projects, then this will enhance the replicability of these projects and the trust in this technology.