Power Shift: An Innovative Solution For Africa’s Energy Marketby Knowledge@Wharton
When one thinks of innovation in the power utilities space, it usually involves replacing one mode of generation with another. Cynthia Wandia, managing director of Düsseldorf, Germany-based Astra Innovations, found a different approach — relocate the physical assets. Astra is a worldwide enabler of transactions dealing with the relocation of power plants, bridging all the gaps between a potential buyer and the seller to guarantee the success of the relocation. “There was an abundance of assets not useful anymore in Europe and a great demand for power in Africa,” says Wandia in this interview with Knowledge@Wharton. That was the inspiration for the venture.
An edited version of the conversation appears below.
Knowledge@Wharton: You founded Astra Innovations in 2014. What inspired you to do that?
Cynthia Wandia: I was working for a large German utility at the time and I noticed it was switching off a lot of its power plants due to market conditions. Very-efficient, nearly-new gas engines and turbines were being switched off. I’m originally from Kenya, where there was a power deficit. So my inspiration was effectively identifying a gap between supply and demand. There was an abundance of assets not useful anymore in Europe and a great demand for power in Africa. That’s more or less where my inspiration came from.
Knowledge@Wharton: Could you explain the set of situations and circumstances that led to this surplus capacity in the energy space in Europe and how that came about?
Wandia: Basically, it’s a series of events that has taken place over the past five years. We’re all aware of some of the major factors: with the financial crisis, manufacturing in Europe slowed down and with that the demand for power. Power is traded as a stock, so its price fell. Investments in power plants are quite large; they are very expensive assets and more so the fuel required to run them. In Europe, it’s a full mix of fuels, but gas, for example, is sourced through long-term contracts at fixed prices. That’s another reason for the disconnect; gas prices stayed fixed, but power prices fell. All of a sudden, power plants that run on gas became uneconomic.
That is one example. Another major factor was falling coal prices on the back of slow demand in China, and the U.S. discovering shale gas. This sent coal towards Europe and that dropped the price, which actually allowed coal plants to displace gas plants in the merit order. When you add other factors, European utilities found their billion dollar investments in power plants stranded. Very efficient power plants didn’t make money anymore.
“There was an abundance of assets not useful anymore in Europe and a great demand for power in Africa.”
Knowledge@Wharton: How much capacity came on the market because of that?
Wandia: There are different estimates, but it’s anywhere between 20,000 megawatts and 50,000 megawatts of generation capacity that is stranded, and “stranded” in this case means either dormant, mothballed, permanently decommissioned or even running, but at unfavorable contracts or unfavorable prices. The energy sector in Europe is a great case study on how you end up with a white elephant.
That’s where Astra comes in. What we do is try to utilize some of these plants, re-use them in power projects in Africa, Southeast Asia and Latin America. Of course, we are able to access these plants at a fraction of the cost. That makes it much more affordable for countries to invest in power projects.
That’s one advantage. The second advantage is from a time perspective. Developing a new power project takes time. There is also a lead time that needs to be taken into account when you order new equipment from the OEMs [original equipment manufacturers]. Here, because we are relocating an existing plant, there’s no lead time.
So that’s the value proposition we’re able to offer: you can get power much cheaper, a power plant much cheaper and in a much shorter time than you would with a new power project.
Knowledge@Wharton: If you switch to the demand side of the equation, where’s the demand coming from? In which parts of Africa have you seen most activity?
Wandia: Demand is across Africa. One in four people don’t have access to power. We target the institutional type of investor, because the plants that are available are large. They need to go on a grid. The smallest ones might be 30 megawatts, but we’re looking at a 100 megawatt to 200 megawatt range. On the demand side, we talk to state utilities, we talk to independent power producers. In some cases, we look at large industrial clients who are interested in generating their own power to have a little more control over that.
And so, that’s where we focus. But there is a trickle-down effect, of course. Even though we transact with large bodies or institutional bodies, the end effect is that more power comes on the grid; it makes it more affordable, more reliable. That attracts manufacturers or factories to come to our countries. That creates jobs and is a way to boost the economy. So while we do not directly sell to a consumer, we try to strengthen the institutional capability of countries to have access to cheap power.
Knowledge@Wharton: You have existed as a startup for two years? How many such power deals have you been able to do so far? And what’s your pipeline in the works?
Wandia: We have been online for a year; we started at the end of 2014. We have developed a pipeline of about 40 projects — about 3,000 megawatts. At the moment, we’re in the final stage of negotiating our pilot. It’s a 35 megawatt plant, which we hope to start this year. To give you an indication of some comparable projects, it can take up to three years to develop a power project, a new one, and we’re able to do that in about nine months.
Of course, the main reason here was the counterparty we had; they were very motivated and moved very fast. But, as I said, what works to our advantage is that we don’t have to redesign anything. There’s an asset. We try to keep it exactly the same way as it operates. You minimize on cost, you minimize on design time, there’s not a lot of back and forth discussion on which fuel should it use or how big it should be because we’re targeting an existing asset. We take it as it is and we move it. So that cuts down a lot of the conversations that exist with new plants.
“The energy sector in Europe is a great case study on how you end up with a white elephant.”
Knowledge@Wharton: How much is the cost difference between buying an off-the-shelf power plant compared to building something from scratch?
Wandia: For gas-fired plants, it can be up to half the cost. That offers a savings [which could go up to] hundreds of millions of dollars. Because, as I said, the capital expenditure on the actual asset is nearly negligible, so to speak, because some of these assets have already been written off and it’s only the cost of relocating them that you have to keep in mind. For gas plants, it can come up to half the cost. For coal power plants, it could be up to a third of the cost of a new power plant.
Knowledge@Wharton: So where is your first plant and which are the areas that you’re looking at for future deals?
Wandia: Our beachhead market is Sub-Saharan Africa. The first deal will be in Rwanda, which has given us a very agile development environment.
The other countries we are looking at are Botswana, Kenya, Tanzania, Nigeria and Ghana; the bulk of Sub-Saharan Africa is a market for us. We are targeting 15 countries to start with. But, ultimately, as long as there is an asset sitting somewhere, a power plant that’s not being used, and there is demand, we’ll try to plug that gap.
Knowledge@Wharton: How do these projects get funded and how do you navigate all the economic and political intricacies of those mega-deals?
Wandia: We’re learning as we go along.
The projects are funded through various mechanisms. Normally, there’s a lot of interest from private equity investors; they have the capital and they’re looking for projects to deploy them. There’s the story that you hear over and over in Africa: that the capital is there, but the projects are missing. And, of course, the state utilities try to access traditional financing mechanisms — the international financial institutions and the World Bank. We support them on that. Usually, we come in as a technical partner because we’re the ones bringing the asset. We do bring on transactional advisors who helped us navigate, but it’s really a team effort. With all the stakeholders involved, we try our best to meet the requirements of the lenders.
Knowledge@Wharton: As an entrepreneur, what’s been your biggest surprise so far in trying to create a business?
“There’s the story that you hear over and over in Africa: that the capital is there, but the projects are missing.”
Wandia: I am surprised that I see opportunities everywhere; I am constantly thinking about them. In terms of the actual execution, thankfully, I had the good sense to realize early on that I could not do it alone. Having an idea is all fine, but you very quickly need to bring on people who believe in the idea as well. If you have a very good team, a strong team invested in the success of the project, it makes it easier when speed bumps come up.
Knowledge@Wharton: What are the biggest risks that keep you up at night?
Wandia: I’ll be honest; it’s health and safety — so HSSE (health, safety, security and environment). We’re basically in the construction business, and we’re talking about large machines being dismantled, packed up, shipped and reconstructed. My biggest concern is that everybody stays safe and nobody gets hurt. On the other hand, we’re trying to tackle a relatively big problem. There are many ways to tackle the energy crisis. This is one approach; it’s not the perfect approach, it’s not the only one. One of the things that keeps me up is making sure we do it right.
Knowledge@Wharton: Can you tell me a little bit more about your background and how it prepared you for what you are doing now?
Wandia: I grew up in Nairobi. We had regular power cuts and power rationing. I will never forget studying for my final primary school exam, that’s at about age 13, using candlelight. But that was normal. My parents were both educated. They knew that education was important and pushed me in that direction. Also, in Nairobi, if there is a problem, you just roll up your sleeves and try to fix it.
I notice that that makes me unique. I can definitely say that my background growing up in Nairobi was a catalyst for being able to recognize an opportunity in the midst of chaos.
Knowledge@Wharton: Looking three to five years out, where do you want your business to be?
Wandia: We have ambitious targets. We should have proved the concept, we should have proved that there’s a clear advantage, just like there is for secondhand vehicles, that can really help to spur an economy. And I want to have seen the first plant moved and its impact, meaning a factory or a large industrial client has plugged into this plant and because of this now-more-reliable power, it’s been able to hire some people. I want to see that end-to-end chain for at least for one project — the endgame of what we’re trying to do.
