By TBY | Ghana | Nov 14, 2017
With uncertainty dominating the global markets, solar energy in Ghana offers secure, long-term returns if investors adopt the model of reciprocal altruism.
A total solar eclipse is seen in Cape Coast Ghana March 29, 2006. The track of the eclipse stretches from eastern Brazil, across the Atlantic to north Africa, then on to the Middle East, Central Asia, west China and Mongolia. Reuters/Luc Gnago
If 2017 could be summed up in a word, very few would argue “uncertainty” wouldn’t suit. From academia to corporate offices, from TV talk shows to think-tank conferences, the world is seeking to find equilibrium in what seems to be a rather erratic era.
But decisions still need to be made, and businesses are desperate to hold on to the most sheltered investment environments to achieve returns.
This explains the increased attention being placed on macroeconomics, with any hint of political stability offering investors at least some hope.
With an aggregate growth expected to rise to 3.2% in 2018 and 3.5% in 2019, Africa has scaled up the ranks of the preferred investment destinations. However, at over 30 million sqkm and with 54 nation states, choosing the right part of the continent to allocate resources is crucial.
To do so, traditional economics manuals teach complex mathematical rules and formula all based on one basic assumption: the best decisions are based on rational selfishness.
Dubbed as the “Three S” of Africa, Ghana is acclaimed for being a “Smiley, Secure, and Stable” country. The new administration, led by HE Nana Akufo-Addo, has been hard at work inviting foreign firms to invest in the country.
Opportunities are numerous, and looking at the wide array of resources, agri-business and energy undoubtedly represent the two sectors most in need of FDI which also offer strong potential for higher returns.
Solar power in particular presents itself as a technology investment capable of combining high returns with low exposure.
Ghana’s strategic geographic location close to the equatorial belt is ideal for solar energy. Ultimately, 240,000MW of energy could be produced if grid-connected solar panels were introduced across the country.
So what is holding financial commitment back?
Unfortunately, investing in solar energy is usually not profitable except in the very long term, making it near impossible for investors to actually collect yields. To go back to the Economics 101 introduction class, students are taught that individuals make rational decisions based on a limited amount of resources.
Solar energy, however, doesn’t fit into that model.
The unlimited amount of sunlight available should push investors to change their decision-making approach based on rationality and marry the theory of reciprocal altruism advanced by behavioral economists.
This approach implies that solutions are found through exploratory means such as experimentation and a willingness to temporarily reduce your own fitness to increase another organism’s fitness.
Naturally, this is with the expectation that the other organism will act in a similar manner at a later time.
This by no means implies taking a leap of faith. Rather, it implies that analyzing data, arranging a couple of meetings, and trusting developers in a country like Ghana from far away is not enough to guarantee high returns.
An investment decision in solar is a full-time commitment that requires constant follow-up with feet on the ground. This is especially true now that the industry is witnessing a fall in the cost of capital, which brings a new range of challenges.
As a matter of fact, while investors should be more and more willing to underwrite long-term debt positions for solar energy, developers want a dependable way to liquidate higher-cost equity capital to reinvest it in the next project.
Such a dilemma cannot be solved over a Skype conference, especially since this fall in capital cost is not temporary.
As a matter of fact, according to a McKinsey estimate, the global weighted average cost of utility-scale solar PV fell by 62% between 2009 and 2015, and could decline by 57% from 2015 levels by 2025.
Solar long-term contracts allow this experimentation and cooperation to take place, and so do the overall political, economic, and geographical environments. In a moment of extreme uncertainty, investors should rely on the few definite factors: sunlight in Ghana is definitely one of them.