Mergers can save energy sector in Africa
THE energy sector has received substantial capital commitments. In the course of the continent’s growth, the sector has seen lucrative returns and enormous risks and losses.
There are increasing and tighter regulations in the energy sector, advocating for less use of fossils. An energy transition to the use of carbon-neutral fuels requires a collaborative and staggered approach to change.
Various players involved in fossil and non-fossil fuels have to engage in strategic mergers. This gives room for new energy technologies and innovations to be adopted while allowing a smooth energy transition.
The French electricity utility ENGIE merged with its African consulate, a move aimed at fostering green growth on the continent. The deal will be advantageous to the investors due to the high demand market and the growth of economies on the continent.
A diversified energy mix would be essential for meeting energy demand efficiently and effectively. Mergers allow for the realisation of this goal. In Nigeria, the primary source of power generation is natural gas.
Considering that Africa is on a high growth trend, both in terms of the economy and population, there is a greater need for energy supply. The required infrastructure is too expensive and very complicated to keep up with marginal increments in growth trends.
Energy companies invest a lot of capital, provide critical economic services, and employ significant people in the economy.
This sector is considered too big to fail and poses a significant systemic risk to African economies. These economies are primarily involved in primary and secondary production and rely heavily on the energy sector.
A typical example is Kenya, which is not a profound oil producer, but most sectors rely on oil for energy. About a third of the energy mix is accounted for by fossil fuels, and thus any country’s growth prospects will fall along the same lines. A substantial shock to the energy industry will result in the collapse of the economy.
In the business environment, three key influential elements: legal, social, and political aspects, have to be considered. Mergers bring rejuvenation to underperforming companies in most instances.
The aftermath of mergers involves related social settlements such as massive job cuts that may occur due to streamlined activities.
For energy firms to benefit from economies of scale, digitising processes will be vital in reducing operational costs. This downside to mergers is a significant concern as they continuously increase while the continent continues to record higher unemployment rates.
The negative impacts of mergers in the energy sector also affect the respective parties in the deal. These may include financial partners, shareholders, and even regulatory authorities. Post-transaction litigation risks are common, and these arise when there are legal breaches by the parties involved or their stakeholders.
Most of the energy sector investors are from prosperous developed economies, and as such existing protectionism policies may come into play.