Embedding distributed energy in new property

development: strategies for a localised, low-

carbon energy transition Matthew Ulterino, Principal, Rodin Consulting, UK

with support from Guy Briggs, Associate Director, dhk Architects, South Africa

Abstract: In mature and emerging markets worldwide, there is growing recognition of the

ways in which the property sector can meaningfully contribute to city-level carbon reductions

and climate resilience. This includes coupling energy efficient building design with low-

carbon energy generation, back-up storage, and advanced local control and distribution. The

result can be low- to even net-zero energy/carbon developments with enhanced energy

security that deliver multiple asset yield benefits to owners and clear advantages for

occupiers. While only a limited number of projects globally have delivered on this potential,

the remarkable level of innovation in renewable energy technology and finance suggests that

much wider deployment is clearly possible.

Linking property asset and localised energy development is both feasible and imminently

practical for Africa. The high rates of urbanisation; the significant capital inflow to new

property development; rising retail electricity rates; strong continental experience with urban

and rural distributed generation (fossil and renewable); and grid reliability and capacity

constraints are compelling factors for localised energy investment. Fortunately, a distributed

energy paradigm is emerging that can turn what had been a sunk cost for property energy

infrastructure and back-up supply into a distinct asset and with multiple value streams. In

effect, large property projects can provide a platform for additional, value-added investment

in localised renewable energy that creates both internal and external (wider network) benefits.

The property sector will need to be a leading stakeholder in this, yet tend to be risk-averse

toward new technologies and changes to tested design, financing and construction pathways.

To help overcome this risk aversion, it is possible for the property and the energy assets to be

separated into parallel development tracks tied via power purchase and lease agreements.

Localised energy delivery thus gets vested with specialists who bring their own expertise and

financing to the project, allowing the lead property developer to focus solely on its core asset.

This paper will explore the rationale for such a co-development approach, and market and

regulatory features that can unlock this significant potential in urban renewable systems.

1. Distributed Energy Innovation

The energy supply and distribution landscape is rapidly changing, driven by the carbon

mitigation imperative and reinforcing innovations in technology and finance. Renewable

energy markets – principally electric but also thermal – have displayed advances over the past

five years that could have scarcely been imagined a decade ago. Solar photovoltaics (PV)

give the starkest example of this: globally, module costs have fallen 75% since the end of

2009 and the cost of electricity from utility-scale solar PV has fallen 50% since 2010.i The

graphic below shows the changes in levelised cost of electricity for residential solar systems

in several countries from 2010 through 2014.

Source: IRENA Renewable Power Generation Costs 2014

Other complementary cost and technology disruptions to that seen in solar energy are also at

play. Advances in distributed network hardware and software mean that single or networked

buildings can act as energy hubs where demands and flows are actively managed and

balanced. Battery storage that allows intermittent renewable generation to be utilised at times

of highest demand and/or when grid supply is at its most expensive (or unreliable) will make

maintaining baseload supply at the local scale increasingly cost-effective and desirable1. In

fact, battery storage is now on a similar downward cost trajectory shown by the PV sector

over the past five years.

Range of predicted cost/price points for various battery technologies

Source: Nykvist and Nillson, Nature Climate Change, March 25th 2015

That a dynamic is emerging where demand for distributed renewables and localised

distribution and management technologies creates improved costs structures, leading to

1 Navigant Research projects that global installed capacity of residential and commercial energy storage will

grow from less than 250 MW in 2015 to roughly 10,500 MW by 2024.

accelerated take-up and progress toward threshold points for market saturation, cannot be

overstated. Trends over the past 15 years show that every time PV infrastructure (i.e.

production and installed capacity) doubles, prices drop by 22%. And this trend may be

accelerating. The result has been a globalised compound annual growth rate for PV of 43%

since 2010.ii Contrast this with the demand for fossil fuel energy: when demand goes up,

price rises follow. So for widely deployed diesel back-up generation, it is possible to see

equipment costs go down, but operating costs can rarely be expected to. The fundamentals of

the supply inputs – technology innovation and manufacturing production efficiencies, versus

finite resource extraction – make these opposing cost curves irreversible once set in motion.

Experience in Australia gives evidence to just how quickly markets can change. In the course

of five years, it went from having remarkably small levels of installed solar capacity to the

point where it passed the threshold of one million solar homes in 2012 – a national residential

penetration rate of 11%. In some sub-markets the change was even more pronounced: for

example, South Australia hit 20%.iii

Cumulative installed capacity of solar PV, Australia

Source: Australia Clean-energy Council

To better understand the disruptive potential for localised energy infrastructure, some

analogies to past technology transitions can be useful. Research into the transportation sector2

shows how new technologies first gain traction for reasons other than price. Gaining share

initially in less price-sensitive markets gives new technologies an opening to improve costs

while supportive institutional and financial arrangements relevant to its diffusion can take

shape. The diffusion time for an emerging technology to go from early stage (circa 10%) to

market saturation was shown to be remarkably consistent, across a range of technologies

(water-based, rail, road, air) and in both early adopter or a laggard countries3. Moreover for

the incumbent, being the lowest cost system or producing in-system technological innovation

was not sufficient to maintain primacy. In Europe and North America, railways continued to

have lower passenger mile costs than the autos well into the 1970s, but this could not arrest

the loss of market share as railways reached saturation in the 1930s.

2 The paragraph summarises findings from The Rise and Fall of Infrastructures: Dynamics of Evolution and

Technological Change in Transport (A. Grubler, 1990) 3 If 10% is taken as a threshold point where the push of new technologies forces old technologies to recede,

the renewables tipping-point (distributed and centralised) has been secured in several countries already and highlights the importance of the Australian achievement cited above.

This transportation analogy serves renewable energy well. However, there is a key point of

departure to be noted, particularly for decentralised energy. That is, diffusion time may very

likely accelerate (rather than hold constant as described above) in certain second-wave

countries. Quite simply, the distributed nature of the technology and ways in which it can

support financial innovation and learning-by-doing cost changes can secure penetration levels

more quickly where complex centralised systems have yet to become fully entrenched. This

is particularly true if the end-service creates a more compelling value proposition, such as in

mobile telephony. The use of mobiles, and particularly smart phones, was not simply a

replacement for a landline telephone. It was a significant functional and value upgrade,

supported by multiple market participants and a new financial model – i.e. handset and

service packages on a low-upfront but long repayment basis. Third-party finance for

distributed renewables tied to power purchase agreements (PPAs) is essentially no different.

2. The Property Sector’s Role in the Energy Transition

Renewable distributed energy creates convergence with other important features of urban

growth management and urban design: spatial planning that optimises densities and mix of

uses also suit local energy networks’ ability to lessen transmission losses and spread demand

profiles; building design standards for better thermal comfort and reduced energy

consumption are complements to maximising output from on-site energy generation;

minimising travel distances supports vehicle electrification which also offer local energy

balancing and storage options; and tighter linkages between built areas and natural

hinterlands can build supply chains for locally and regionally sourced bio-energy supplies.

Together, these elements can feed single development and/or wider community aspirations

for partial or full energy autonomy – generating and controlling sufficient renewable energy

resources in lieu of traditional centralised or diesel back-up supplies with their inexorable

price volatility. Thus how the existing building stock is managed and new building stock

brought forward is highly relevant to the energy transition.

In general, the market for renewable distributed energy systems in Africa has focused on

rural electrification. This is altogether appropriate given the very low rates of access to

modern energy services and the cost-prohibitive nature of extending centralised energy

networks to sparsely populated areas. While urban electrification rates are high by

comparison, very wide divergence in urban access rates4 and measures of grid performance

and reliability remain. Meanwhile, levels of urban growth suggest that access and reliability

challenges will only compound. The average urbanisation rate is 3.5% across Africa, and the

African urban population is projected to triple over the next 40 years.iv

This is creating

unprecedented additions to the building stock: compound annual growth rate projections in

excess of 4.5% through 2023 have been made for 13 countries including Angola,

Mozambique, Namibia, Nigeria, Tanzania, and Zambia.v

In practical terms, urban distributed energy is already widely in use in the form of diesel

back-up. There are over 9 million privately owned diesel generators in Nigeria with a

combined capacity four to five times greater than the grid connected capacity - an estimated

14-20GW.vi

In Kenya, 57% of businesses own generators, and the number is above 40% in

Tanzania and Ethiopia.vii

Taken together – the continental experience with rural microgrids

and the urban reliance on local back-up – the step to urban, renewably-powered microgrids is

4 Figures for the 15 ECOWAS (Economic Community Of West African States) countries show urban electricity

connection rates ranging from 19% (Guinea) to 98% (Cabo Verde). Nigeria, the largest African economy, shows only a 61% rate.

a small one. A base of technical skills for localised renewable generation and distribution

networks already exists, as does experience and broad regulatory assent to self-generate

power at the local scale.

It is clear that substantial investment in urban energy services is required and that distributed

energy can play a significant role in meeting this expansion. Coupling this investment with

capital flows to property can bring economies of scale and shared project development costs

between the property and the energy assets. Deploying large-scale localised energy systems

can help lower the Balance of System costs – the range of soft (design and permitting) and

ancillary hard (inverters, racking systems, etc.) elements that are significant factors in total

costs and vary greatly by location. The fact that so much new land is being opened for

development – areas that are largely free of infrastructure and existing connections – makes

the synergy between land/property and energy asset development all the more beneficial.

There are several large property developments internationally that have integrated large

shares of local supply - some more fossil than renewable, and many supported by public

agencies or utilities as special demonstration projects. The number is growing, but the overall

penetration is still low5. More effort is needed to build the nascent capacity on the demand-

side (the pull from the property sector) and the supply-side (the push of project developers,

project finance, and technology/asset maintenance support), woven together through effective

public strategic and regulatory support.

3. New Opportunities for Property and Energy Sector Collaboration

Developers of large, master planned property projects – involving land subdivision and

delivery of scores to hundreds of housing units, and/or additional tens of thousands of square

meters of commercial office and retail, warehousing and distribution, tourism and leisure, and

community facilities - have the design tools and virtuous cost-technology improvements and

scaling effects at their disposal to guide decisions for low-energy design and on-site

renewable energy infrastructure provision. Local generation, distribution, and demand

management can clearly provide multiple benefits for property owners and occupiers. This

includes near-term product differentiation and long-term asset value maintenance; controlling

energy price variability and peak demand charges for building owners and occupiers; and

improved supply security and reliability.

For most developers though, localised energy is seen as entailing greater risk and cost than

conventional property design and delivery pathways that simply tie into existing centralised

power grids and provide back-up supply via diesel generators. To be fair to the industry, large

master planned projects are complex, involving several layers of regulatory approvals,

multiple and concurrent site and building design and engineering decisions, extensive market

testing, financial modelling and finance raising, and land and property (pre-)letting or sales

within a compressed timeframe. Adding new technologies and processes to the equation can

indeed seem daunting, particularly when they are not explicitly ‘market-modelled’ (i.e.,

lacking sales or letting uplift associations based on previous valuations).

Against this background, an approach that separates the property and the energy assets and

attracts a co/secondary developer to execute the design, finance and delivery of the energy

infrastructure could greatly assist. This can help de-risk the technology and execution

5 Some prominent examples, either built or in construction, include: Schlierberg Solar Settlement, Frieburg

Germany; One Brighton, Brighton UK; Kings Cross Central, London UK; Hudson Yards, New York City USA; Whisper Valley, Austin TX USA; and Higashimatsushima City, Japan.

strategy for the property developer, and even bring capital expenditure relief as the capex for

the energy infrastructure is moved to this additional party. What has historically been a sunk

infrastructure cost – energy pipes and wires – can be turned into its own investable asset with

distinct value and returns. Bringing this energy delivery party will vest this process with

agents who are far more conversant with the technologies and the available financing

resources. To embark on this path, the property sector will need assurances that

complementary public-sector strategic and regulatory efforts, and private-sector finance and

supply chain maturity ranging across technology vendors to O&M providers, are in place.

4. Public Sector Strategic and Regulatory Support

For the public sector, there is a strong case for using the extensive property development

activity as leverage to promote market-led investments in local, renewable energy

infrastructure that may not have otherwise occurred. At minimum, these new energy assets

decrease the strain that will be placed on existing centralised energy networks when large-

scale property assets come online. Moreover, where diesel back-up is displaced by PV and

back-up storage, the local area air and noise quality impacts can be tangible. And ideally,

localised systems can provide the starting architecture of a distributed energy backbone that

can be linked in the future within a broader decentralised city energy network. The graphic

below describes a process focused on heat networks, where smaller systems (some oversized

against their base demand) become building blocks for a larger network. The technologies

may differ but the same process can be promoted for electric supply or cooling networks.

As nodal networks expand, they may be interconnected to create greater economies of scale through

transmission backbones

Source: UNEP: District Energy in Cities, Unlocking the Potential of Energy Efficiency and Renewable Energy (2015)

The nature of distributed energy means there is scope within local authorities to shape the

market through building regulations and design standards, and in some instances, local

control over energy distribution. As demonstrated in the graphic above, city and regional

governments could use their strategic land/development planning authority to promote

distributed energy networks that can seed larger and more complex local systems. This can be

applied to fast-growing urban growth zones subject to overall development plans and

frameworks and where there is strong private sector development activity.

Most energy regulations do remain at the national scale, and it is fair to say this landscape for

distributed energy is still forming. For example, feed-in Tariffs (FiT) and net-metering6 have

extensive international track-records in creating long-term certainty and production cost

enhancements to generate a satisfactory rate of return for renewables investors. There are

several examples across the continent of where these instruments have been trialled and

deployed7, though their utilisation and market impact has been modest to date. A new FiT

scheme in Egypt for wind and solar is probably the most aggressive on the continent. For the

first regulatory period, the target for PV is 2,000 MW of larger projects (500 kW up to 50

MW), and 300 MW below 500 kW.viii

Other important public roles for creating a vibrant market for localised energy include:

approving interconnection agreements to add decentralised generation assets to the

grid, and creating the legal and governance structure for generation licenses that

allows distributed energy to be produced by non-utility entities and sold to individual

buyers (off-takers);

running procurement and auction mechanisms where independent power providers

(IPPs) bid and develop renewable generation assets at agreed long-term prices; and

establishing long-term renewable generation targets.

More effort is needed in each of these areas, though progress is discernable. In South Africa,

the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP),

initiated in 2011 and now in its fourth round, is proving to be a world-leading auction and is

creating a vastly improved cost basis and investment climate for renewables (albeit at the

centralised rather than distributed scale). The latest bids for Solar PV generation will cost on

average R786/MWh ($65-70USD), 29% cheaper in real terms than round three projects.

Similarly, wind dropped about 25% between the rounds. This followed the trend of rounds

two and three where prices already fell by between 30% and 40% for both PV and wind.

Recent research that compared the PV results in South Africa with the early 2015 auction in

Dubai that set a world-record price floor of 5.84US₵/kWh in a 200 MW solar project. It

showed that the variances between the markets are based almost exclusively on differing cost

of capital and the tenor of the principal financing.ix

In other words, technology experience

and project deployment skills in South Africa may now have reached global best-practice

benchmarks for larger scale systems. This is surely creating investor confidence and that can

spur deployment momentum toward the smaller commercial-scale side of the market (e.g., 1-

10 MW, suited for large property projects). Coincidentally, NERSA (National Energy

Regulator of South Africa) is presently addressing the regulatory gap that exists for

interconnection and energy sales rules for systems between 100 kW and 1 MW. This will

complement another South African energy procurement programme for 1-5 MW assets.

6 FiTs pay power producers (from the single rooftop PV to larger scale distributed and centralised system) a

long-term preferential rate to produce energy and feed the energy to the grid. This is typically above the retail electricity rate. Most African FiTs are being set at the levelised avoided cost to bring new generation capacity to the network – a figure generally higher than retail electricity rates and at which most renewables can ably compete. Net-metering is a support mechanism whereby any energy generated by a distributed asset in excess of consumption is credited to the generator’s utility bill at the rate charged for the retail electricity. 7 Net metering is in place in Cabo Verde, Mauritius and Namibia, and being trialled in certain South African

cities. For FiTs, Ghana was the first ECOWAS member state to establish one in 2011. Nigeria has since followed and others are currently being developed in the Gambia and Senegal. In East Africa, Rwanda, Kenya, and Tanzania all have feed-in tariffs, though they tend to favour small hydro over other technologies.

Lastly, setting renewable energy targets has proven to be an important signal to investors and

an effective non-fiscal measure that government can use to grow the market8. The graphic

below from United Nations Environment Programme research (2012) suggests an outsized

role for targets. Given the continued significant cost reductions for renewables since 2012,

the emphasis on targets over cost support could be even more pronounced today9.

Survey response: which types of incentive mechanisms are “most powerful” in mobilising private finance for

renewable energy deployment in developing countries?

Source: UNEP: Financing renewable energy in developing countries Drivers and barriers for private finance in sub-Saharan Africa

5. Scaling Property-tied Localised Energy

Property projects that are best suited to attracting an energy co-developer will likely need to

fit a certain scale that ultimately creates power generation in the 1-10 MW range. Mixed-use

developments that include many different building types and uses can create energy balance

benefits for maximising on-site electric and thermal energy supply and storage options.

Designed-in energy efficiency features of the building stock are imperative to maximise the

value of the energy output.

For typology, low- to mid-rise buildings offer a roof area to floor space ratio so that PV

generation creates a reasonable supply vis-à-vis overall demand. Other technologies, such as

micro or central combined heat and power units and ground-source heat pumps, can be used

in combination to increase supply for higher density developments. Projects that include land

areas unsuited to building but which could host photovoltaics can further optimise the

generating capacity. This can include car parking/car shading structures. Lastly, single long-

term owners/equity investors offer an inherent advantage in minimising the number of

counterparties to any energy asset leasing and off-take agreements.

Fortunately, there many hundreds of urban, suburban, and tourism market developments

across the continent that fit this profile and for which localised energy solutions should be

8 According to REN21, 35 of 54 countries had adopted a renewable energy policy by early 2014, while 37 had

adopted one or more renewable energy targets. This is a significant change: as recently as 2005, there were no national policies or targets for renewable energy anywhere in Africa. 9 In fact, for localised energy solutions tied to large property projects, net-metering in particular may be of

limited value. The density sought in urban and many suburban schemes will limit the generation capacity vis-à-vis total demand and make surplus generation less likely. Thus when most or all energy generated will be used and/or stored on site, it may be preferable to run in-parallel to the grid rather than in a two-way configuration.

particularly attractive10

. Utilising energy storage and integrated energy management across

the site (effectively, a local-area microgrid) can lead to complete energy self-sufficiency in

certain circumstances, and at minimum ‘islanding’ capability to maintain baseload power

during times of grid disruption. Irrespective of whether complete energy autonomy is a goal

or technically feasible, the proximity between generation and consumption is inherently

efficient and has been shown to propel energy efficiency awareness amongst consumers.

A handful of new development projects presently under construction in key markets offer

examples of present or planned renewables integration.

In Nairobi, Garden City, a mixed-use residential and retail complex is an example of a

third-party energy asset developer collaborating with the property developer for

localised energy. Phase 1 of the project is nearing completion and contains 330,000m2

of retail space plus 76 apartment and townhouse units. The project developer, Actis,

was seeking to improve the security of the energy supply, achieve a LEED11

Gold or

Silver rating for the project, and to shade the carpark area. This combination of needs

led to an 850 kW solar electric array mounted on a car shading structure. Garden City

provided a secure power purchase agreement (PPA) at a commercially attractive rate

for the retail tenants and entered into a 10 year build/maintain agreement with the

energy developer NVI Energy. After 10 years system ownership transfers to Garden

City. The system is designed such that the PV supply is drawn first as the cheapest

electricity source, followed by grid electricity, and then back-up diesel as needed.

Menlyn Maine in Pretoria is one of a handful of projects globally working toward net-

zero carbon emissions under a special Clinton Foundation and C40 Cities Climate

Leadership Group Initiative. It is creating a new mid- to high-rise town centre in

central Pretoria comprising of 350 apartments, two hotels, and 315,000m2 of office

space built around a large, central open space. The intent is to reduce the emissions

from the development to the greatest extent that is commercially viable and then

offset the remaining balance by removing emissions from adjacent communities. The

developers are experienced in creating ‘PV-ready’ buildings12

in their other projects,

and are assessing a range of investor/3rd

-party developer options for the renewable

power supply at Menlyn Maine.

Garden City

source: www.solarcentury.com/uk/media-centre/usaid-south-

africa/

Menlyn Maine

Source: http://www.menlynmaine.co.za/

10

A simple extrapolation between this volume of projects and cumulative generating potential suggests at minimum a gigawatt or more of new clean-energy capacity could result. 11

LEED (Leadership in Energy and Environmental Design) is a ‘green’ building rating system used globally which measures design and operation impacts of buildings across multiple categories. 12

Projects where design and engineering decisions have been made to optimise solar orientation and structural capacity for PV, and pre-cabling for PV and inverter connections. Once the economics are more favourable and/or owner or tenant demand for PV increases, it can added at minimal cost and disruption.

In Johannesburg, the 130,000m2 Mall of Africa at Waterfall Estate presently nearing

completion has been designed as PV ready. Black River Park in Cape Town, a mid-

rise commercial office precinct, has achieved some of highest Green Star13

ratings in

South Africa and recently added a 1.2MW rooftop PV array post-construction. It is

largest rooftop system in Southern Africa.

Mall of Africa

source: http://waterfall-estate.co.za/developments/mall-of-africa/

Black River Park

source: http://www.blackriverpark.co.za/gallery

A few other very large projects, i.e., new town scale, still in early planning stages also

include concepts for local renewable infrastructure. In Johannesburg, Modderfontein City

will create up to 12 million m2 of floor space over the next 30 years. It is intended to be a low

to zero carbon development, with energy provision from a mix of sources including PV, a

centralised waste to energy plant, and gas/biogas tri-generation. In Dar es Salaam, a new

central business, industrial, and residential core called Kigamboni City will eventually be

home to 500,000 people. The area plan will knit together existing development areas into a

larger coordinated commercial, residential and infrastructure development plan. Energy needs

will be partially met through 36 MW of wind energy.

Modderfontein City

source: www.heartland.co.za/

Kigamboni New City

Source:www.skyscrapercity.com/showthread.php?t=1799

653

These examples suggest a viable market for energy linked to property development could be

taking root. In South Africa, market momentum should be aided by an initiative of the South

African Property Owners Association (Sapoa) and South African Photovoltaic Industry

Association (Sapvia) who have an MOU for increasing the use of rooftop PV in the

commercial and industrial property sector. But there are residual challenges to growing the

sector that need attention. One is a temporal and scale mismatch in how these assets are

typically developed in isolation. Renewable energy developers pursuing non-utility scale

projects typically seek tens of megawatts to better absorb transaction costs, whereas a large

property project might yield only single-digit megawatts of on-site generation potential.

Moreover, large property projects tend to take anywhere from a few years to a decade or

more to develop and often progress over several stages. A similarly sized renewable energy

13

A green building rating system similar to LEED.

project brought forward on a site unencumbered by buildings could typically be executed in a

far shorter timeframe. Finally, where ownership is split between the property and energy

assets, new lease and covenant agreements will be required to assign both the generating

license to the appropriate party (financier/owner of the generating assets, or users of the on-

site energy production) as well as for hosting energy assets within the property footprint.

These latter agreements could be complicated by the nature of the underlying mortgage that

secures the property. The length of term may be considerably different than the life of the

asset and/or term of the power purchase agreement.

To overcome these, a level of industry standardisation and ‘learning-by-doing’ will help in

absorbing transaction costs and coordinating staged deployment. As in any new industry,

these will come with experience. Coordinated approaches to commercial-scale distributed

energy development and finance are in fact emerging in Africa, such as the

SOLAR4AFRICA platform which pulls together multiple supply chain participants under a

standardised project process. Analogous contracting and service arrangements that will be

familiar to many in the property sector can also provide learnings applicable to distributed

energy, e.g. service and ownership agreements between HVAC vendors and building owners

for large mechanical plant, and 3rd

- party energy efficiency finance agreements14

.

6. Reducing Finance Barriers

Local renewable generation decisions will ultimately be made on cost, and current figures are

compelling. The World Bank notes that solar PV can already deliver power at less than

15US¢/kWh with long-term price certainty in Africa.x Contrast this to the retail cost of

electricity across the continent - anywhere from 8-30US ¢/kWh. Moreover, diesel generator

power is on average two to four times the price of grid power, and would still be two to three

times as expensive if grid power reflected actual costs rather than benefiting from subsidies in

certain markets. Both are subject to global price volatility and electricity tariffs are generally

rising – significantly so in key markets such as South Africa15

. Thus the above figures

suggest distributed renewable cost bases at or only slightly higher16

than retail electricity.

Meanwhile battery storage in Africa presently delivers power at around 55-60US¢/kWh.

Once batteries hit levels comparable to distributed diesel generation (circa 40US¢/kWh),

scarcely any justification will remain for diesel back-up. Using present battery costs and

projecting a conservative 15% price drop per annum, the time in which the cost curves will

cross is three to four years. For any large-scale property project entering into feasibility

assessment and planning, this is effectively the timeframe in which newly constructed units

will be occupied. To not include localised renewable supply and storage in project design and

planning is to subject future occupants to higher than necessary energy costs.

Renewable energy finance is a new market for Africa, and even more so for distributed

generation. Donor/IFI and private equity funding sources are increasing for good quality

renewable energy investments - though financing favours larger projects with their

14

The Investor Confidence Project (http://www.eeperformance.org/), active in the US and in Europe, is an example of a collaborative effort amongst a range of NGO, governmental and private-sector actors to set uniform industry guidelines for project preparation. This greatly benefits the financial viability assessment of proposed investments and can facilitate aggregation of many small finance packages into larger securities. 15

The national utility ESKOM has just applied to NERSA for a retail price increase of 25%, driven principally by the fact that their back-up diesel turbines are being used more frequently for primary base-load generation. 16

Distributed PV will have a higher levelised cost than utility scale PV. Thus a range of 15US¢/kWh to 22US¢/kWh is a reasonable assumption.

economies of scale. For the localised energy market, commercial bank project or vendor

finance remains scarce, and specialised equity sources are only just coming to the market.

Localised generation costs are highly contingent on the availability and cost of capital.

According to the International Energy Agency (IEA), the average cost of solar power in

Africa would be cut in half if the continent could obtain the same cost of capital as in

Germany. The graphic below is just one example of the impact of interest rates, showing a

range of production costs in Uganda for systems between 1-100MW.

Levelised cost of electricity from Solar PV in Uganda against the Weighted Average Cost of Capital

Source: Fraunhofer Insititute

Fortunately, market advances in the U.S. and Europe are showing that localised energy assets

can be matched to innovative financial products and investment schemes that result in lower

capital rates and longer tenors – a critical need given the high upfront capital but very low

ongoing marginal production costs. Solar REITs (Real Estate Investment Trusts), YieldCos,

Solar or Green Bonds, and ‘crowdfunding’ are increasingly common with issuances that are

well- or over-subscribed17

. Broadly speaking, the innovation brought by these instruments is

that they have securitised the income stream from an aggregation of multiple renewable

energy assets – many at the small/distributed scale – to return capital to project investors.

Coupon rates below 3% have been seen, which becomes a proxy for low-end cost of capital

in certain markets. Importantly, aggregation and securitisation can minimise the time/scale

mismatch described in the section above, as multiple smaller (modular) assets can be brought

together from many different property schemes as they reach production.

For African banks operating in national markets, localised energy systems could offer an

attractive avenue for investment in the renewables sector. The investment sizes of centralised

renewable energy projects tend to exceed the balance sheet capacity of African banks and

thus are largely financed with international capital. Alternatively, distributed projects tied to

property development can work across existing relationships and business lines at African

banks where local knowledge is important – for example, property and local infrastructure

finance. Project or vendor finance from local banks could offer one part of the finance puzzle

– perhaps early stage debt – to bring projects forward to the point where longer-term ‘green’

debt and equity sources can step in. ‘Warehousing’ facilities that compile small assets for

greater scale in advance of securitisation could also be role for local commercial banks.

Other factors that increase the cost of capital for African renewable projects include

counterparty risk, permitting risk, and currency/macro-economic risk. Fortunately, the link

between property and the energy can help mitigate these. Property projects that secure large

debt and equity packages on their own accord suggest that the developers/owners will be

17

Examples include CohnReznick / Reznick Capital Markets Securities (bundled securitisation), Hannon Armstrong (REIT), SolarCity (asset-backed bond), and Wallenstam (general corporate Green Bond).

bankable counterparties to the energy project and offer a built-in off-taker. The currency and

macro-economic risks should also be somewhat mitigated by the larger property capex which

will drive the project. Similarly, land tenure risks (an obstacle for greenfield energy projects)

should not factor based on the necessary land assembly and titling needed for the property

scheme. Lastly, permitting risk can also be diminished as securing development consents for

the property will be made alongside those for the energy.

7. Case Study

dhk Group have recently prepared a conceptual master plan for a proposed 26 hectare mixed

use development in Accra, Ghana. The site, north of the Accra central business district, is

nearly equidistant from the CBD and Accra’s airport. It is bordered by existing low- to mid-

rise residential and commercial buildings, an open space/forest reserve, and a principal

motorway serving the city and connecting it to the east and west.

The master plan calls for 280,000m2 of floor space across residential (36%), office (48%),

retail (4%), hotel (6%), and hospital (7%) land uses. This will be built out in two phases. The

typology is low- to mid-rise with building heights ranging from 1-10 storeys. A parking

structure is also planned.

Accra North Mixed-Use Development: Land Use Plan

Indicative Building Design: Office Precinct

Indicative Building Design: Retail Space

Source: dhk Group

To demonstrate the potential value that could be derived from localised energy, a simple cost

and benefits model was created to quantify the net present value from building energy

efficiency, solar electric generation, and battery storage. Because there are a number of

assumptions in the model, a range of costs and benefits is offered. Some key assumptions are:

50-75% of the total building roof area can accommodate PV; a 3% electricity rate escalation

off of present averages for Accra (which are in the middle of the cost range for the continent);

substituting battery for diesel back-up during periods of grid interruption (a pressing issue in

Accra); and indicative capex/cost of capital ranges for property construction and distributed

energy for West Africa. This is certainly a simplified treatment but aims to show the potential

income streams and value capture of hedging energy expenditure from a combination of

efficient design and stable, lower-cost renewable energy generation and back-up; and

sales/rental uplift and lower cost of capital for the property due to the project’s ‘green’

features. The graphics show the itemised benefits and potential net value in $USD.

Localised Energy Benefits

Localised Energy Net Value

Modelling support provided by Gommyr Power Networks.

The model shows a small potential negative to a much larger potential positive value. Note

that it does not include other possible income and value sources that localised energy

networks can likely provide presently or in the near future such as peak demand management

(payments for load-shedding) or electrical vehicle charging. The cost of capital assumptions

in the model are also conservative and will move lower as the market matures. The model

also suggests self-generation of 25-50% of demand is possible based on the master plan’s

land-use and typologies, and there may be other options to increase the value of the localised

energy solution by increasing the overall system size. This could be done with additional

generation technologies and/or linking with adjacent owners of existing buildings that could

benefit from localised renewables to increase economies of scale, e.g. schools within close

proximity to the site.

8. Conclusions

To execute a strategy within a large-scale development where the property and energy assets

are severed for separate due diligence, financing and/or ownership will require a level of

process innovation to the ‘standard’ project development process, and greater interaction

between market participants (property and energy) than is presently the case. Scanning the

landscape for property projects that have embedded localised renewable energy shows there

are few existing models in Africa to go by, though learning can be brought from international

markets. Importantly, the fast-growing and infrastructure-constrained nature of Africa’s cities

present a more compelling value proposition for localised energy than in mature urban

markets where most international examples lie. There is a clear opportunity to leverage the

investment flows to the property sector to create local, low-carbon, and reliable infrastructure

that offers both internal (to the property) and wider network benefits.

To help the market grow, it is important to have effective public-sector strategic and

regulatory inputs. At the local level, this can range from acting in a stakeholder

engagement/facilitator capacity between the distributed energy and property industries;

creating urban development strategies that promote localised energy solutions, particularly in

growth zones where systems could in the future be linked to a larger local-area network; to

acting as regulator for land development and energy infrastructure matters. Similarly, more

focused attention from the finance sector – donors, international sources of capital, and

local/national sources of debt and equity – will be needed so that transaction costs can be

managed against the scale of these projects and that a level of standardisation in contract

terms between the property owners and occupiers and the energy asset owners can be

delivered. While property developers may have the balance sheet and capital raising

flexibility to integrate localised energy solutions within the larger project budget as well as

proxy experience with back-up diesel generators, it is more likely that finance innovation

leading to capital cost reductions will be driven by specialist energy project developers

entering the market. Lastly, it is incumbent on the property sector to institutionalise the

multiple income and value streams that localised energy offers and to integrate and balance

the attendant costs and benefits in their project financial projections and

management/execution models.

Meeting the promise offered by renewable, localised energy systems needs to be understood

less as a technical problem and more as system integration and project management ones.

Bringing energy partners to projects at an early stage will ensure that the localised energy

proponent becomes fully vested to the project; that the design and site/building engineering

decisions are fully aligned with options to maximise on-site generation and distribution; and

that project soft costs and asset finance are cost-effectively shared and deployed. There will

not be a one-size-fits-all approach, as individual project circumstances and the local context

will vary. Projects that become the first movers can surely help to create replicable models to

the benefit of both industries.

i IRENA, Renewable Power Generation Costs in 2014 ii T. Seba, Clean Disruption of Energy and Transportation. 2014

iii Ibid.

iv Ren21, ECOWAS (Economic Community Of West African States) Status Report. 2014

v Navigant Research Global Building Stock Database. 2014

vi The Africa-EU Renewable Energy Cooperation Programme (RECP): presentation slides from ‘Accessing

Africa’s Renewable Energy Market’, December 2014. http://www.euei-pdf.org/dialogue-events/accessing-africas-renewable-energy-markets vii

McKinsey, Brighter Africa: The growth potential of the sub-Saharan electricity sector. 2015 viii

Renewable Energy World, Egypt’s Renewable FIT Program Gains Traction. April 2015 ix Engineering News, Renewables tariffs dropped over 25% in round 4, but how low can they go? April 2015

x Scaling Solar: A World Bank Group solution to rapidly expand private investment in utility-scale PV power in

Sub-Saharan Africa. http://www.ifc.org/wps/wcm/connect/Industry_EXT_Content/IFC_External_Corporate_Site/Industries/Infrastructure/Power/Scaling+Solar