Subsidy cuts unlock renewables investments

From the newsletter

Angola has one of Africa's lowest electricity tariffs for businesses, at just $0.016/kWh, roughly 14 times cheaper than Kenya's. This low price is due to heavy government subsidies, which are set to end by late 2025 as the government aims for cost-reflective tariffs to attract independent power producers (IPPs). Now they’re coming.

• Construction has officially begun on the 80 MW Quilemba Solar project, set to become Angola's largest privately-owned solar plant. It will be built by a joint venture led by TotalEnergies. The first phase will have an installed capacity of 35 MW and is expected to be operational by the first half of 2026. The second phase will add 45 MW.

• Across Africa, the private sector's role in power generation is becoming increasingly vital as countries target universal electrification goals, some as early as 2030.

More details

• In the joint venture, TotalEnergies will be the majority stakeholder with a 51% stake, alongside Angola's state-owned oil and gas company Sonangol (30%) and French-based oil company Maurel & Prom (19%). The plant is projected to provide clean electricity to approximately 40,000 households, significantly contributing to the nation's efforts to decarbonise its energy mix.

• Angola restructured its electricity law in 2015, allowing independent power producers into the market. However, this generally lacked pace because of the government's highly subsidised tariffs, which made it difficult for investors to charge cost-reflective tariffs. In June 2019, electricity subsidies were cut by 85%, leading to retail rate hikes of 77%. Plans are underway to end the subsidies by the end of 2025.

• Fuel and electricity subsidies have long been a thorny issue for renewable energy development. Despite the declining prices of renewable technologies, these subsidies grant fossil fuels and grid electricity an unfair advantage, deterring potential investors. Consequently, governments are increasingly recognising the necessity of implementing cost-reflective pricing. Countries like Nigeria, Kenya, and Egypt have already removed fuel and electricity subsidies for various customer categories, retaining them only for lifeline customers.

• International lending institutions such as the World Bank and the IMF are now making the removal of subsidies a prerequisite for securing certain loans. Nigeria, Angola, Egypt, Ethiopia, and Senegal are among the nations that have received such conditions. This, combined with local policy shift prioritising renewables like targeted incentives, has proven effective in attracting private sector investment in renewable energy generation.

• Though Angola still faces a significant electrification gap, with only 51% of the population having access to electricity, and a worse situation in rural areas, where just 14% are electrified. The government is pursuing both grid and off-grid electrification strategies. Several grid-connected projects, primarily in hydropower and solar, are currently underway.

• For its off-grid plans, a substantial push for rural electrification is being supported by significant loans from the US Export-Import Bank (EXIM). This includes a $1.6 billion loan for 65 solar mini-grids with energy storage in four southern provinces, building upon an earlier $900 million loan for two photovoltaic plants totalling over 500 MW.

Our take

• The renewables sector faces ongoing risks from fluctuating fossil fuel prices. Calls from the US for more drilling and an existing oversupply have driven prices down. Attention now turns to Saturday's OPEC+ meeting, which may approve another output hike for July, potentially depressing oil prices further. Such declines can reduce renewables' immediate economic competitiveness, despite their long-term benefits.

• Allowing excessive private power generation poses a risk of higher electricity prices for consumers. Governments must maintain a crucial market role, ensuring regulatory oversight to balance investor returns with consumer affordability and public interest.

• Despite falling renewable technology costs, the overall price of energy often remains high for many African households. Widespread adoption, especially among low-income populations, will require continued government subsidies and incentives. This includes targeted lifeline tariffs or upfront support to bridge the affordability gap and ensure universal access.