Hardly a month goes by without the announcement of a new fund or financing initiative for renewable energy in Africa. Some of this is developed-world donor money but there is still a lot of private finance scouring the globe for returns, and renewable energy in Africa is increasingly looking like a proven and established investment category.
In December last year, the UK government announced an additional US$126 million for funding renewables in Africa, while in January 2019, the AfDB said it was putting US$25 million into ARCH Africa, a US$250 million private equity fund for renewable energy investments across sub-Saharan Africa. In February, the Development Bank of Southern Africa announced that it was putting aside US$200 million for ‘embedded’ energy projects such as factory-scale solar PV facilities.
In March it was the AfDB again, announcing a US$95 million fund for small and medium-scale renewables, committed by the governments of Norway, Denmark and the US. In April, the Frontier Energy II Fund announced final closure at US$227 million after a major contribution from Allianz, one the world’s biggest asset and insurance managers.
The activities of multilateral lenders – the World Bank, International Finance Corporation (IFC) and the AfDB, for instance – remain critical, as do donor operations such as the US government’s Power Africa initiative and IFC-managed funds donated by most developed countries. These are the institutions that put up the portion of initial project funding, which is most at risk. Their involvement is regarded by the private sector as a sort of ‘guarantee’ that a project is viable.
In August last year, the IFC announced that it was to partner with a Morocco-based wind-power developer, Gaia Energy. The partnership is intended to develop 22 wind projects in nine North, West and East African countries before being ‘enlarged’ to other countries. It will tap into two IFC funds – the US$150 million IFCIntra Ventures global infrastructure development fund and the EUR114 million Finland-IFC Blended Finance for Climate Programme.
The latter is an example of a ‘blended fund’, where the IFC combined its resources with international development finance put up by developed country governments (including Australia, Canada, Japan, the Netherlands, the UK and the US). The purpose is to ‘catalyse investments in renewable energy, energy efficiency, climate-smart agriculture, clean technologies, and adaptation that would otherwise not happen’. In the solar space, the IFC and the World Bank have launched Scaling Solar, an initiative that operates as a ‘one-stop shop’ to help governments mobilise privately funded grid-connected solar projects at competitive tariffs. Scaling Solar has been active in facilitating mini grids in several countries, including Nigeria and Ghana.
However, arguably, the major long-term impact of Scaling Solar has been on utility-scale renewables programmes in Zambia, Ethiopia, Madagascar and Senegal, where it has delivered 1 200 MW of solar power so far. In Zambia, Scaling Power brought together ‘a suite of services and instruments’ to create viable markets for grid-connected solar PV power plants. The electricity generated from the 34 MW plant located outside the capital city of Lusaka came on-stream earlier this year. This is the second solar PV project in Zambia, after the 54 MW Bangweulu in the north of the country. It illustrates the complex deal-making involved in financing renewable energy projects in Africa. The project is 80% owned by the Italian energy group Enel and 20% by the state-owned Zambian Industrial Development Corporation. Enel invested US$40 million in the project, the IFC put in US$10 million, the European Development Bank US$11.75 million and US$12 million came from the IFC-Canada Climate Change Programme.
Scaling Power, as with the other multilateral programmes, hopes to produce a gearing effect as early projects demonstrate the viability of renewable energy in African jurisdictions. Evidence of success is that Zambia has this year awarded contracts for a total of 120 MW with the goal of developing 600 MW of on-grid solar power over the next two to three years. In Ethiopia, a tender is also out, for 1 000 MW of both wind and solar power. One of Scaling Power’s principals, the World Bank, recently moved the process ahead by providing US$200 million in guarantees.
While Africa’s markets for renewable energy continue to deepen, the picture is diverse. Beyond the pump priming done by the donor agencies, true sustainability requires private sector involvement. This is simply a matter of financial arithmetic. With adequate private sector involvement, African governments can install renewable energy programmes without touching their own national fiscus. In February, South Africa’s then Energy Minister Jeff Radebe said that the introduction of 3 776 MW of renewable power from independent producers had been ‘cost neutral’ to state-owned power utility Eskom. ‘Eskom has not incurred a cent in buying electricity from the independent power producers that they have not been able to recover through [tariffs].’
It’s the more mature renewables jurisdictions that are most attractive to private capital. Three African countries made it into the Top 40 of consultancy EY’s 2019 Renewable Energy Country Attractiveness Index: Morocco (13), Egypt (14) and Kenya (37). The notable African omission is South Africa, which has dropped out of the index after ranking 34 last year and as high as 13 in 2015. Kenya, meanwhile, has retained its place on the index.
South Africa’s dropping off the EY index points to the most important factor for financiers of renewable energy. The money will go to the jurisdictions where policy and institutions are stable and therefore returns least risky. It does not matter that South Africa has by far the deepest pool of potential finance – including, at US$316 billion, the eighth-biggest pension reserves in the world (ahead of Germany) – so long as public policy is not favourable, investment in renewable energy will look for better prospects.
South Africa’s problems are related to Eskom’s debt of ZAR400 billion plus, racked up in the course of building two super-large coal-fired power plants. In 2011, the country implemented what is now one of the most successful renewables programmes in the world, the Renewable Energy Independent Power Producer Procurement (REIPPP) programme, which is contracted to provide 6 422 MW from more than 100 independent power producers. However, it is currently clouded in uncertainty. Observers say that until the way ahead to fix Eskom’s financial woes is clear, a further renewables procurement round may well be delayed.
South Africa still has the most developed renewable energy finance market on the continent. It is well into developing a secondary phase where the initial investors sell out (at a profit) to bigger, more cautious entities, such as pension funds. These secondary investors are generally looking for steady returns over a longer period, perhaps 10 or 20 years. Two companies have listed on the Johannesburg Stock Exchange to look for these sorts of deals: GAIA Infrastructure Capital and Hulisani. Both seek returns of CPI plus 6%.
Increasingly, those looking for examples of best practice in infrastructure finance in sub-Saharan Africa are looking to Kenya. The 310 MW Lake Turkana wind farm is an international exemplar of how to finance a big renewables project in a remote region. Lake Turkana involved multiple sources and types of finance with a completely separate instrument being set up to finance its transmission system. Led by the AfDB, with South Africa’s Standard Bank and Nedbank Capital as co-arrangers, the project mobilised US$853.12 million. It has seven equity partners (owners) and drew on 15 sources of capital, including two outright donations (from the Netherlands and the EU). Many of the players are known to be looking for further opportunities in Kenya and further afield in East Africa.
Kenya is implementing plans to increase its electrification rate to 80% by 2020. Further renewables projects, including the ninth-biggest geothermal power station in the world, are under way, again with multiple sources of funding. The country’s first utility-scale solar independent power producer project, the 40 MW Malindi, achieved financial closure in June. This means that all the necessary funders are on board and signed up. They include the UK’s Commonwealth Development Corporation (the lead arranger) along with project developer Globeleq, the Africa Energy Development Corporation and German development finance institution DEG. Debt finance of US$52 million has been raised. It is expected that the plant will be constructed within one year and will be commercially operational in 2020.
The number of players looking for viable renewable energy projects in Africa is at an all-time high. This has happened very quickly, starting only in 2011. Reservations, expressed among others by the World Bank (in 2012), that there would be insufficient demand to make the projects viable have proven misplaced. Renewable energy was once seen as a developed-world luxury. But now, Africa is providing the market where the viability of the technology is being proven. The queue of interested financiers is testament to that.