At between US$0.80 to US$1.50 per kWh, the retail price for electricity in Somaliland is among the highest in the world
By Nigel Carr
Somalilandsun – Renewable energy provides an opportunity for Somaliland to create a large new supply of electricity with its own local resources, at lower cost, and positive impact on the environment and the economy.
At between US$0.80 to US$1.50 per kWh, the retail price for electricity in Somaliland is among the highest in the world. This is primarily because power is generated almost entirely from imported diesel fuel, which is subject to price fluctuations in the global market.
By contrast, renewable generation is completely insensitive to the volatility of oil, natural gas, and all other commodity fuel prices. There is no fuel input cost for technologies like wind and solar. Moving forward, this is an important consideration for Somaliland when deciding what technology to use for new power generating systems. Both options – renewable and fossil – require a large up-front cost to build the system. With renewables like solar, however, there is no added cost for fuel and no price uncertainty.
The Benefits of Less Expensive Electricity
Prices for basic infrastructure services like telecommunications, water, and electricity are a concern for countries around the world. If any one of these essential needs is expensive, it is a major constraint to growth.
In Somaliland, energy expenses account for 30 percent of monthly household income while 70 percent of businesses find electricity prices burdensome. Reducing the high electricity cost with renewables will alleviate a significant burden for both residents and businesses. Capital that would otherwise be spent on electricity can be put to use in the local economy. Businesses can use the extra cash to invest in expansion and hire new workers. Residents will have more spending power.
The Effect of Oil Exploration on the Local Energy Market
Exploring local oil and gas resources has been gaining headlines and momentum in Somaliland, with the arrival of multinational companies such as Jack Resources, Genel Energy and Petrosoma. This fact does not necessarily make explored oil a substitute for renewable technologies. Extracted petroleum can produce a wide array of products besides just fuel inputs for power plants. But in order to be used in any capacity, petroleum requires heavy chemical refining. This transformation is one of the most energy intensive manufacturing processes that currently exist.
The question is then, hypothetically, who would refine the resource into usable commodities? Without local refining capacity, raw petroleum products would still need to be exported for processing and shipped back into the country for use. With this in mind, oil and gas exploration is unlikely to push fuel prices down significantly in the near term.
As an alternative, building a local refining industry complete with oil distillation units and steam reformers would likely be expensive, as the facilities are very large and complex. The cost for these units would need to be fully depreciated before significant price reductions could be seen in refined diesel fuels.
However, it is critical to note here that the entire process of refining is energy intensive and requires a large quantity of electricity. Without less expensive electricity, local refining would rely on the high cost electricity that currently exists in Somaliland. In this case, renewables could be an excellent catalyst for developing more efficient local refining facilities in Somaliland. Lower cost renewable power could be used to power the units, reducing expenses in the conversion process and helping generate less expensive fuel products.
The Best Path Forward
The unique nature of renewable energy, which typically provides intermittent streams of power, makes the pooling of infrastructure capabilities critical. Greater regional expansion and connection of the grid is essential to reduce disruption from varying weather patterns and smooth demand shocks across geographies.
Somaliland’s grid infrastructure needs appropriate capacity and resilience to cope with the intermittent nature of renewable energy sources. Currently, Somaliland already has approximately 70 MW of installed capacity. Both large and small scale renewables can be a valuable supplement to this existing generation.
In areas where the grid already exists, larger, more centralized renewable systems up to 5MW could be built by collaborating with Somaliland power provider. Connecting these larger systems to the grid will ultimately depend on a local circuit of sufficient voltage and the use of mitigating technologies. Over time, when many renewable systems like solar are distributed across a region, weather-based variation tends to even out.
Small solar systems sized to meet the electricity needs of an individual building or residence offer a less expensive alternative for producing on-site electricity with a diesel generator. In reality, many local businesses already rely on their own generators to face power outages and complement grid-delivered electricity.
In either case, both small and large renewable systems are a valuable contribution to Somaliland’s electric infrastructure – solar power in particular. Fossil fuel generators typically run constantly at all hours, creating “base load” power. Because solar systems produce power during the day when demand for electricity is highest in most developed countries, solar reduces the need for utility fossil fuel generators to satisfy this “peak” power demand, reducing their costs.
Making the Transition
To grow its economy, Somaliland has a pressing need for new power capacity. Fortunately, it has substantial renewable energy resources – strong coastal winds and exceptional sun irradiation among the best in the world.
Leveraging these resources takes only a strong commitment – and the results can be dramatic. For example, in just five years, Portugal has cut its dependence on fossil fuels dramatically, with nearly 45% of its grid electricity coming from renewable sources this year, up from 17% in 2005. Ten years ago, Portugal’s transmission lines were owned by private power companies that had no interest in investing in renewables.
To get around this, the government started working with the private sector in planning the grid infrastructure, and began adapting the grid, including more flexibility and better connections in remote areas to allow the production and distribution of electricity from small generators, like domestic solar panels. There was also a combination of incentives to encourage developments, including the introduction of feed-in tariffs. Portugal’s next target is 60% renewable energy by 2020.
A developing country like Somaliland, with a young and dynamic population stands to benefit from replicating a similar strategy. Renewable energy technologies will help the country achieve its goals for secure, reliable and affordable energy, electricity access for all, reduced price volatility and the promotion of social and economic development.
Securing Capital for Renewable Projects
In Renewable Energy, although many cost factors like equipment are either technical or resource-related (e.g. wind speeds or solar insolation), the cost of the capital itself is critical. This important item depends more on external factors. It can be negatively affected by a lack of experience in financing renewable projects of a particular type in a country. Addressing the real or perceived risks of renewable projects is critical – and can have a large impact on the cost of electricity the renewable project yields. For example, the cost of electricity from a wind farm project is 60% higher when the cost of capital is 14.5%, rather than 5.5%.
Bringing the recent equipment cost savings to Somaliland is essential, but doing so successfully requires a team with global development experience, access to discerning financing partners, and an understanding of how to structure power projects correctly.
Special attention needs to be paid to ensure that projects can access funds in the initial growth phase of the market. Once banks and other local financing sources have experience with new technologies in their markets, financing should then be easier to access on favorable terms.
This is why at Qorax Energy, we believe a balance between local and external capital is the key to minimizing financing cost and satisfying all stakeholders. Qorax achieves this balance by leveraging our international expertise. Our team members have performed energy market analyses and worked on both small and large scale renewable energy projects in the US, Puerto Rico, Egypt, and Saudi Arabia, including projects for the government of Saudi Arabia.
On the global market, we have access to equity partners with a tolerance for the risks of renewable projects in frontier markets – and who understand the importance of achieving broader economic development and education goals in tandem with energy cost savings. We are able to work with firms in China, Malaysia, the Middle East, and the US to develop projects with both traditional financing as well as interest-free Islamic financing. The geographically and technically diverse experience of our team allows us to bring together the right pieces from around the world to build the best solution for each stakeholder.
Seeing Benefits throughout the Economy
Underlying many of the challenges facing Somaliland are fundamental problems with capacity in terms of skills, knowledge and technology. Overcoming these challenges requires addressing issues beyond the traditional remit of the energy regulator.
Technical courses should be offered at local universities to improve the level of labor force skills. These should cover construction, installation and maintenance of RETs, grid management skills such as grid operation and demand forecasting. Multinational companies can bring powerful benefits in these arenas. Incentives should be provided for them to invest locally and enhance local skills rather than rely on foreign workers. To facilitate this process, the government can provide a legal regime that protects intellectual property rights so that knowledge transfer and expertise sharing can be effected to maximum benefit.
Qorax Energy is committed to helping Somaliland’s educational system meet these needs. We are actively training university students to take on expert roles in this sector and exploring many avenues for collaborating directly with universities.
Nigel Carr is a partner at Qorax Energy, a joint American-Somali renewable energy development firm with offices in Boston and Hargeisa. He can be reached at firstname.lastname@example.org. Further information is available at www.qoraxenergy.com . You can follow Qorax Energy on Facebook (www.facebook.com/QoraxEnergy ) and Twitter (www.twitter.com/QoraxEnergy).