The access to finance for renewable energy development in Africa continues to be a massive challenge to meet climate commitments. There is an increasing shift towards C&I and rooftop solar projects, due to technical efficiency and a bankability point of view, but there are again uncertainties in obtaining finance. Access to low cost funding for solar projects is a critical requirement to accelerate the uptake of solar power in Africa. A clear and healthy growth trajectory is only possible with a supportive framework and sufficient funding flows. While regulatory improvements are taking place, albeit at a slower pace, a crucial area to address for the growth of the solar segment in Africa is financing. At REGlobal’s recent virtual conference on “Solar Power in Africa” industry experts presented their views on solar investments and emerging sources of financing for Africa.
Dr Daniel Schroth, Acting Director for Renewable Energy & Energy Efficiency, African Development Bank
The predictions are that solar power capacity is going to at least triple in the next decade. There is certainly been a lot of focus on solar and a lot of progress over the past couple of years in Africa. However, there is a potential for a significant progress going forward. Despite the negative impact of Covid-19 on the economy, the renewable energy sector has proven resilient with investments increasing. The African Development Bank (AfDB) has placed energy at the very top of its development agenda and have increased the renewables’ share in power sector generation investments. In terms of investments, we are focusing on all renewable energy technologies but there is a focus on solar. We have been first movers in technologies such as utility scale concentrated solar power. AfDB is the first development finance institution to contribute to the Ouarzazate Solar Complex project with a capacity of 580 MW which is in Morocco. AfDB is also investing in utility scale PV, in both public and private sector. We are also trying to invest in more difficult environments in fragile countries. AfDB is also emphasising decentralised energy solutions. We have a significant portfolio in the solar home systems segment. On the mini-grid side, we have been one of the early movers recognising the potential in the segment and driving local economic development. In terms of financing, we try to deploy different tools from our tool box, which include classic project financing, corporate financing and guarantees. Guarantees are particularly important in areas where utilities are struggling financially. Additionally, we are also trying to deploy concessional instruments such as our sustainable energy fund for Africa. This has developed from a purely technical assistance facility to a blended finance facility which can provide concessional loans. Moving forward, we need to scale up all the different instruments and need to work on the upstream de-risking, policy and regulatory framework, investments in transmission and distribution and financing of different type of projects.
To achieve universal access to electricity by 2030, it is clear that more than 50 per cent of the connections have to come from decentralised solutions, in particular also from mini-grids. The mini-grids market has seen quite an evolution over the past couple of years. Even though there are a large player moving into this segment, there are a number of challenges that still exist. To see more commercial investments in this segment, there should be a granular understanding of the market opportunities. There need to be market assessments to determine the locations where mini-grids make sense from a least cost energy perspective. There may also be some areas where solar home systems are the best solution for the immediate future.
The policy and regulatory frameworks need to adapt to these types of solutions and provide certainty to private sector investors. Several countries in Africa have uniform tariff policies. There needs to be some support or subsidy to ensure that these types of private-sector solutions are compatible in such an environment. The whole dimension is critical as it is where governments and institutes like the African Development Bank (AfDB) have a key role to play by offering targeted support. Further, to enhance the potential for revenue for mini-grids, there is a lot of focus on productive use appliances and agricultural models. At the same time, there must be more efforts to reduce the cost side which could then improve the overall economics of projects. One aspect that the AfDB is focussing on the mini-grid acceleration program, launched in December 2020, where it aims to build a clear idea about sites and is backed by a structured model. The funding model ensures guarantees and result-based incentives. One good example is from the Democratic Republic of Congo where the government, with help from the United Kingdom and AfDB, for three large mini-grids that are targeted to power cities with about 100,000 inhabitants each. With concessional funds from the green climate fund and the sustainable energy fund of the AfDB for Africa to make help develop and improve the bankability of these projects.
One step that governments can take is to set clear targets for the renewable energy sector as a part of national development plans as well as nationally determined contributions of the country towards the Paris agreement. These targets need to be underpinned by clear trends that encompass the different dimensions like the energy access centre. Further, addressing off-taker risks is also a priority that calls for a reform to address the financial sustainability of utilities but of course, this is a long-term plan which requires significant capex. This also calls for the support of many partners that are ready to assist. Ultimately, we cannot just work exclusively through offering guarantees to back up financially non-viable utilities.
There is the tremendous market potential for the C&I sector particularly when we think about replacing all the diesel generators in the continent. Policy regulations are an area that needs collective efforts to reform and must include the utility’s inputs as well. Further, there must be efforts to raise awareness among governments. Thirdly, the right financial instruments need to be employed; the AfDB has created incubation facilities for solar inclusion. For solar projects in the C&I space, it often does not make a lot of sense to the bank from a transaction perspective, but some intermediaries are quick to react to these projects.
Marcus Williams, Global Head and Sector Manager –Energy and Extractive Industries, The World Bank Group
The Multilateral Investment Guarantee Agency (MIGA) provides non-commercial risk guarantees. We are involved in project finance as well as corporate finance. MIGA also provides support for capital market transactions along with government borrowing to support specific aims. Energy is at the centre of our strategic focus. It is critical for development and economic growth. Historically, MIGA was brought in to support investors who are looking to set up IPPs. Over the last couple of decades, we have seen evolution away from fossil fuels with more hydroelectric power. In recent years the vast majority of what we do involved renewable energy; mostly solar photovoltaic projects. We are now seeing a shift towards distributed power, which includes off-grid, mini-grid, and commercial and industrial type projects. Given the significant credit stress in this sector in Africa, distributed power projects make a lot of sense from a bankability point as well.
It is indeed an important issue and to address it, we pool non-commercial risk into four categories. These include the breach of a contract between the government and the project, government interference in the project, warrants of disturbance, and finally, transfer restriction and inconvertibility. The fourth is considered one of the most important and the world bank offers guarantees that if one takes local currency to a local bank, either it is blocked, or the central bank does not have the currency. The World Bank also accepts the payment on site and facilitates transfers to respective agencies. Further, the World Bank’s business model looks at mediating and resolving disputes rather than paying claims. There has never been a situation where the agency has had to pay a claim related to transfer restrictions despite having over 1,000 projects across 108 countries. However, there have been quite a few instances where this happens, especially in countries that are already going through a foreign exchange crisis. In this situation, there is no guarantee offered; it is the concept of not insuring a burning house.
Most developmental institutions are focused on figuring out a way to keep the train running even while it encounters strong headwinds. it is very important for any country to not alienate foreign investors and banks, who could potentially help them weather the crisis and to restore things. Hence, it is vital to prioritise, and very often, the IMF, the World Bank’s sister institute is involved, and we try to figure out how to prioritise and sequence; the issue is usually the lack of cash more than the willingness to make funding available.
It is a tough role for the bond market and there isn’t too much happening either. The off-grid and mini-grid spaces are still nascent and these face challenges of bankability, feasibility, and economic sustainability. The bond market tends to be towards the conservative end of investments, so it is certainly early days. However, there is a lot of demand from bond investors and even institutional investors have started to get involved but for the moment, it is a bit of a holy challis.
Having the right environment for these projects to go forward is important. To add on, there is a large project on the project list which makes it harder from a bankability perspective. However, there are many ways to combat this challenge. One opportunity is that the C&I renewable energy sector, particularly using solar energy is coming forward as the first option for many companies to source power from. This trend can be attributed to the fact that many countries aim to meet their nationally determined contributions for climate change in line with the Paris agreement. There are a lot of benefits but as of now, they are disaggregated, and this goes back to poor planning by the respective agencies.
Jean-Jacques Ngono, Managing Partner, Finergreen
Finance is still a major challenge for renewables in Africa. However, a lot has been done by international institutions over the last 5 to 6 years. Financial instruments have been created and set up which have helped to spread renewable energy in Africa. To double or triple the level of PV solar projects in Africa over the next decade, we need a lot of investments in the sector. We need to find ways to finance different types of project: off-grid as well as utility scale projects. Both of these have their own set of challenges. For off-grid projects, developers need smaller amounts of financing that Meanwhile, for utility scale, the first thing to look at would be the bankability of projects. Bankability is quite valuable from a DFI’s perspective. The financial market in Africa is small and local banks are not very active in funding renewable projects. We need more involvement from local banks to finance smaller off-grid projects. Even though we have seen a lot of progress in financing of renewable energy projects in Africa, at the end of the day, finance remains one of the main challenges for renewable energy projects in Africa.
For utility-scale projects, the government can bring in guarantees, and we have seen a couple of initiatives by governments in Africa. These are aimed at improving liquidity and bankability. Another initiative that governments can take efforts to improve the performance of state-owned utilities which can further improve its creditworthiness.
There is scope for investment if debt financing is made easier in the C&I sector. In many cases such as Cote’d Ivoire, regulations are a big barrier. Often, there the law doesn’t provide enough protection for consumers in the C&I space to procure renewable power in a commercially viable manner. The other important aspect is that loans for C&I developers have an interest rate of about 10 per cent and hence, there must be a system to allow more banks to provide loans at cheaper rates and lower maturities.