Over 600 million Africans do not have access to electricity. This energy deficit will need to be urgently addressed if the continent is to fully reap the benefits of industrialisation and technological innovation. However, Africa also has huge energy potential. The continent boasts some of the best solar radiation levels in the world and these remain largely unexploited. With the second longest river in Africa, the DRC alone has the capacity to produce 300 gigawatts of hydroelectric energy while Nigeria and Tanzania between them could add another 400 gigawatts of gas-generated power. Botswana, Mozambique and South Africa possess 300 gigawatts of coal capacity and the continent as a whole could produce 109 gigawatts of wind power.
With this wide array of opportunities, it’s no wonder that private equity firms have been turning to African energy markets. One such firm is Denham Capital, a global energy and resources private equity firm. We spoke to Denham’s Managing Partner, Scott Mackin, about their African investments and the role that private equity can play in addressing Africa’s energy funding gap.
Denham Capital is a global firm that invests in Europe, Australasia, North America, Latin America and Africa. Why have you turned to investing in emerging markets?
For our clean power investing, the emerging markets offer a compelling intersection of being able to profitably invest while reducing the cost of energy to the consumer, that is, making money by solving people’s problems. This dynamic is a result of the relatively high marginal costs of existing power today in these markets and the decreasing costs of cleaner energy sources. It results generally in the ability to have long-term offtake arrangements for the clean electricity generated, which makes the investment shed commodity risks. Finally, there is a clearer path to fulfilling many UN Sustainable Development Goals in through clean energy in emerging markets.
Can you tell us about Denham’s Africa Power Investment Platform? How can private investment initiatives such as this address Africa’s energy gap?
Denham has had three portfolio companies developing power projects in Africa. Our first was predominantly South Africa focused, BioTherm Energy, a leading developer of wind and solar projects. BioTherm has differentiated itself in that market by, among other things, the track record of its locally-derived (and female-led) management team as compared with other IPP’s in the market. Our second platform has been Endeavor Energy, focusing on gas-fired projects in Ghana and Guinea. To our knowledge, Endeavor has managed to close more megawatts of power deals in Sub-Saharan Africa than competing firms in these past couple of years. Our third platform is Themis Energy, whose senior management has years of African power experience both at the AfDB and elsewhere. Themis has closed on the Singrobo hydro project in Côte d’Ivoire recently and has a significant pipeline of projects across the continent that should reach financial close by 2020.
Denham has published an impact report addressing the firm’s contribution to the SDGs. Why do you measure your impact and how do you ensure that your investments are sustainable?
We believe that it is important to measure the impact of our investments to show how each investment is contributing towards global goals, such as the UN SDGs. By tracking metrics, we can provide meaningful data and we see investors increasingly asking for such non-financial data points. For each investment, our portfolio companies use third-party consultants to assess impacts and implement management plans to ensure that an investment is being developed sustainably. We require projects to be developed to international sustainability standards such as the IFC Performance Standards and the European Investment Bank’s Environmental and Social Standards. Finally, we have a reporting framework in place to track the implementation of these standards.