Between them IHS Towers, American Tower, Helios Towers Africa and Eaton Towers own 45,450, or 36%, of sub-Saharan Africa’s 124,428 towers. Collectively they have a footprint in 14 countries, where grid availability and infrastructure varies significantly. All have major plans for investment in energy infrastructure. TowerXchange examine current energy initiatives under way at Africa’s big four towercos, understanding the technologies for which they have an appetite and problem areas they see.
The cost of power and motivations to reduce fuel consumption
Power is the single largest operating cost for sub-Saharan Africa’s towercos and often their biggest headache.
Excluding depreciation and amortisation, the cost of power represented 54% of Helios’ cost of sales in 2016 with diesel accounting for 35% and electricity 19%. For IHS Netherlands Holdco B.V. (the subsidiary of IHS which managed the 5,882 towers Nigerian towers outside of the former IHS-MTN joint venture in the country), power represented 49% of the cost of sales at 30 June 2016 (excluding depreciation and amortisation).
In terms of the challenges presented by power, volatility in fuel prices, fuel shortages, diesel theft, slow interconnection, logistic challenges, electricity price hikes, and poor grid availability are just some of the those faced by towercos on a regular basis.
Whilst solutions to tackle these challenges and optimise costs vary on a country by country and site by site basis, one focus remains constant across a towerco’s portfolio; reduce diesel consumption.
To what extent sites are reliant on diesel is varied. In some countries in which towercos operate, the vast majority of sites are completely off-grid, whereas in others there are only a handful. What’s more, grid availability also varies significantly; in South Africa there is only occasional and minor downtime whilst in Nigeria some stakeholders report grid availability as low as four hours a day (figure one). Plus many sites that are on-grid and with good grid availability also require backup power as a precaution for any unexpected outages.
Figure one: The grid situation in markets in which SSA’s big four towercos operate
Figure two illustrates how Helios’ diesel and electricity consumption varies per market, with the DRC having the highest level of diesel consumption per tower and Ghana the lowest due to better grid availability. Electricity costs in Ghana are however considerably higher due to greater grid usage but also higher electricity tariffs. As electricity costs continue to rise, the business case for alternative sources of generation improves.
Figure two: Helios’ cost of power per tower per year by country
Whilst contract structures between towercos and their tenants usually include provisions for any escalations in fuel or electricity prices to be passed on to the operator, these do not relate to the quantum of fuel or electricity used. A decrease in fuel or power consumption through alternative technologies or energy efficiency measures equates to an improved margin for the towerco; a margin which can add significant value to their EBITDA and thus valuation.
Reducing dependency on diesel also helps to reduce logistic costs associated with fuel delivery, as well as tackle the one of the biggest sources of pilferage, and also helps to reduce carbon emissions which is desirable for tenants and investors with carbon reduction mandates.
The high tech versus low tech debate
There is a large ecosystem of energy equipment providers who supply the telecoms sector (see “TowerXchange’s who’s who in passive infrastructure equipment and services”), each with a spectrum of new and improved products to showcase.
Whilst improvements in efficiency are desirable, and up front capex is inevitably a factor, the robustness of a given piece of equipment and how that affects Total Cost of Ownership (TCO) is often more important. “The real cost in Africa is logistics” explained one of the towercos “given the choice between an incremental improvement in efficiency or fewer site visits being required, we’ll always take the fewer site visits”. Truck rolls to service and repair sites contributes a large percentage of the cost.
Towercos cautioned against equipment being too high tech. The skills base in many regions is limited, so equipment that is over complicated and requires a highly qualified engineer to service and repair it creates resource bottlenecks. There is also an argument to not have too much variation in the equipment that is deployed across sites as this requires a maintenance contractor to become familiar with not only different technologies but also different combinations of technologies.
There is a lot of wear and tear on equipment in the field and, whilst long lifespans are promised by generator and battery manufacturers, in reality the technologies never last this long, in fact African towercos don’t expect them to. Generators are reported to typically last four to seven years and batteries just two to three. Whilst warranties are offered there are usually so many conditions attached to them that they can end up being meaningless. Improper maintenance of the equipment, failures which lead to it not being kept at the specified operating temperature and a range of other factors invalidate the warranties.
Towercos would like to see better integration between technology suppliers and maintenance contractors, with equipment manufacturers provider better training and support to ensure that their equipment is being correctly installed and maintained in accordance with guidelines.
Priorities post site acquisition
When towercos inherit sites from MNOs they find that the generators and batteries have often been poorly maintained, a problem compounded by long time lapse between agreeing and closing a transaction. The first step is usually to order a significant number of new generators for those that are beyond repair, “superfuel” existing ones, and fix up the batteries. Once sites are up and running it is more about improving efficiencies.
Battery selection, procurement and deployment
Because of the success that it has delivered over the past five years, the towercos have each put a focus on making sure sites are equipped with high density, quick recharge batteries in order to reduce both diesel and grid usage. At present the majority of sites are equipped with lead acid batteries but lithium-ion is gaining significant traction thanks to the technology’s ability to discharge quickly. Towercos have reported being in discussions with a number of suppliers and are considering converting sites to the technology. Whilst towercos are interested in alternative chemistries, TowerXchange has not been made aware of any large scale pilots under way.
On the subject of whether it makes sense to have battery banks which include both lead acid and lithium-ion batteries to cater for a greater variety of operating conditions, one towerco felt that this would be a suitable solution for about 10% of their sites in one of their markets and that it was something worth exploring.
Generally two to three years has been cited as the typical lifespan of batteries in the field with them being replaced on a cyclical basis. Whilst lithium-ion promises longer lifespans, towercos explained that there was currently insufficient in the field data to support these claims at present and so it remained to be seen how well they performed. As aforementioned, warranties that are currently offered have too many conditions which can easily invalidate them.
An added cost of equipping sites with batteries was the need for extra security to mitigate risk of theft, and installation of cabinets for cooling; this needs to be factored into the cost of procuring the technologies.
Figure three: IHS Towers’ current and planned solar installations
Renewable energy hybrid solutions
Of all the renewable technologies presented, solar is the one that Africa’s big four towercos are looking at. In Nigeria, IHS are in the process of replacing diesel generators on over 10,000 sites through their ‘Big Five initiative’, with a second phase (which will cover 6,000 further sites) due to be launched soon. The towerco has also deployed solar hybrid solutions across its other markets, operating 182 solar hybrid sites In Cameroon, 1850 in Côte d’Ivoire and 343 in Zambia (figure three) with plans for further rollout. What’s more, in Rwanda the company is looking into developing a solar farm to supply power to the grid where insufficient generation capacity is being compounded by an increase in demand in the country.
Helios initiated a number of solar and hybrid trials in 2016 to examine strategies to reduce fuel usage. In the DRC, the towerco deployed solar at 51 sites at an average cost of $33,900 per site; whilst in Tanzania, Helios set up four pilot sites for hybrid technologies at an average cost of $12,500 per site. Since implementation, Helios report that in the DRC the sites with installed solar power technologies have averaged a per site decrease in diesel usage of 915 litres per month; at an assumed price of $1.64 per litre in in the DRC, this equates to annual diesel cost savings of $18,000 per site. In Tanzania, the pilot hybrid sites have averaged a per site decrease in diesel usage of 842 liters per month for off-grid sites and 413 liters per months for on-grid sites; at an assumed price of $0.78 per litre in Tanzania, this represents potential annual diesel cost savings between $3,800 and $7,800 per site.
The company has laid out plans to invest $28.2mn in power management systems throughout the course of 2017. In the DRC, Helios has identified a further 400 sites in which they think are suitable candidates for solar and plan to deploy systems at 150 sites in the next year. In addition, Helios believe a further 1,200 sites in Tanzania, Congo Brazzaville and the DRC are candidates for hybrid technologies and plan to deploy such technologies at 380 sites during 2017.
Eaton currently have renewable energy pilots underway in Uganda and there is good potential for the technology in Burkina Faso and Niger; and American Tower are similarly looking to move away from their reliance on diesel through the deployment of hybrid solutions (as well as generator efficiency projects).
Whilst solar is demonstrating strong promise, barriers do still exist. Solar panels take up more space than other sources of generation and in many cases, the additional ground rent required can destroy the economics of the solar system. Installing solar isn’t simply about switching out existing equipment, it is important to bring down the load on the site. Air conditioners need to be switched out in favour of free cooling, indoor equipment needs to be moved outdoor and newer, more energy efficient antenna may be required. What’s more, the current configuration of equipment on site may logistically not allow for easy hybridisation. It isn’t simply a case of switching to solar; site amendments and negotiation and buy-in from the tenant are required. In many instances it may make sense to wait until an upgrade or amendment is planned by the tenant before considering a switch to a solar-hybrid solution on these legacy assets, at the same time sweating the existing energy equipment until the end of its natural lifecycle.
Further complications exist in switching to solar, with potential repercussions from the “diesel mafia” (entrenched diesel thieves), who may look to sabotage solar equipment. Solar-hybrid solutions also require more technical maintenance which existing contractors, familiar only working with diesel generators, may struggle with. For example, one towerco has inherited over 200 solar sites across two of its markets which had fallen into disrepair from improper maintenance, thus requiring them to be replaced.
Figure four: Helios’ planned investment in hybrid solutions
Appetite for an opex (ESCO) model
There are mixed feelings when it comes to the appetite of Africa’s big four towercos to work with ESCOs, with the biggest concern being an ESCO’s operational experience. Towercos have built their reputation and value proposition surrounding their ability to provide better uptime to MNOs and relinquishing that control to an unproven party is high risk. One towerco had proposed ESCOs partnering with their maintenance contractors to bring experience of operating power assets on telecom sites but then also questioned what the real value was that the ESCO was bringing. It was also commented how an ESCO would need to take over other roles such as security as power is so intrinsically linked to other site operations.
As aforementioned, power is one area where a towerco can make significant improvements to their margins. Whilst the nature of MLAs enables towercos to pass on fuel and electricity price hikes to their tenants, any savings made from reducing the quantum of fuel of electricity used (thanks to capital investments by the towerco) are not passed on; as such they represent a significant uptick in margins. Whilst operators have complained about the lack of gain sharing from energy savings, towercos believe that if they are the one making the capital investment, they are the ones who should benefit.
Handing over this to an ESCO deprives a towerco of the improvements in margin they could have otherwise made. With towercos trading at high multiples, losing a dollar on EBITDA translates to a much bigger loss in valuation; the benefits that an ESCO brings must significantly outweigh this. One towerco referenced that they would like to see ESCOs approaching them with a gain sharing model, giving the opportunity for the towerco to benefit from the upside of energy savings.
As a REIT, American Tower can only generate a defined percentage of its revenue from power, but with their African sites blended into a much larger portfolio of 100,000 sites, the towerco is not approaching this maximum.
The financial backing of ESCOs had been a concern regularly voiced by towercos previously, although one of the big four referenced how nearly all ESCOs who approach them now have funding in place. The problem is, however, that often the ESCO’s cost of capital is significantly higher than the towerco’s and as such, the towerco is in a better position to procure the energy equipment more cost effectively.
The ability for an ESCO to deliver a predictable cost of power is an attractive value proposition and, should they be able to provide an effective solution that reduces manpower hours spent by a towerco dealing with energy, then this would of course be attractive - although there was some scepticism on whether this would become a reality.
All towercos are in discussions with ESCOs, with Eaton known to be assessing both opex and capex models in their renewable energy trials in Uganda. American Tower have selectively utilised the ESCO model successfully in India, but with a stronger skills base and fewer remote sites due to the dense population, there is less risk and complexity in handing over control to a third party.
IHS’s “big five” project in Nigeria, where they have handed over 10,000 sites to five different service providers, with the service providers being able to select from pre-approved technology, is a form of ESCO project. At present TowerXchange do not have full details on the contractual structure, however we understand from stakeholders it is not a standard pay per the kWh type arrangement. The first wave of solar-hybrid sites in phase one are now coming on line and TowerXchange look forward to learning more about the project once everything is up and running smoothly. A second phase is expected to be announced in the coming months where a further 6,000 sites will be given to five new companies on which to replace diesel generators with solar-hybrid solutions under the same type of arrangement.
The potential held by micro-grids and the use of excess power
At present, excess power generated on cell sites is in a few cases being provided to local communities, a move that is an important part of towercos’ corporate social responsibility (CSR) initiatives and also helps to improve community relations, ultimately benefiting operations. Whilst monetising this power would add value, in many countries the sale of excess power is not permitted by current regulation, although net metering is in place in some countries in which towercos operate. One towerco referenced how they are in discussions with energy ministries in their jurisdictions regarding the option to sell power, while IHS recently commissioned a report with the Economist Intelligence Unit looking at renewable energy policies and frameworks across sub-Saharan Africa. Whilst there is a potential benefit to the creation of micro-grids if net metering is in place, transporting this power over long distances to other sites is not feasible due to the large transmission losses that would occur.
Summary
For each of Africa’s big four towercos, power is their single biggest operating expense and reducing dependence on diesel is a top priority. In order to do this, significant investment is being made right now by each of the companies, with long terms plans for further investment. Deep cycle batteries, increasingly including lithium-ion, and solar hybrid solutions are technologies of choice, although selecting the right solution for the right site is of paramount importance and a “one size fits all” approach doesn’t work. Whilst high efficiency solutions are attractive, standardised, simple and robust solutions that requires fewer site visits are more desirable. There is still scepticism around the ESCO model but the performance of IHS’ big five project will serve as interesting reference and help provide an indication of whether the model will gain traction.
For further reading on MNO and towerco appetites for energy solutions, download the reports from 2016’s working groups on energy storage and distributed generation.
The next energy working groups for African tower owners will be held on 3-4 October at the TowerXchange Meetup Africa & Middle East, being held at the Sandton Convention Centre in Johannesburg. If you are an MNO or towerco and would like to join, please contact Laura Graves at lgraves@towerxchange.com.
In addition, a small number of positions are held open for energy equipment vendors (with over 50% of spaces already allocated); if you are an energy equipment vendor and would like to enquire about eligibility please contact Annabelle Mayhew: amayhew@towerxchange.com
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