Financing Renewable Energy Projects in Africa
Financing for renewable energy in Africa involves dealing with unique challenges. Currency fluctuations, less reliable power grids, and shifting political situations can derail projects. However, it is possible to succeed by keeping projects small, making them bankable, and building public support. Using standardized agreements, reducing currency risk, and working with local banks are other ways to maximize funding opportunities.
We are Positive on Smaller Projects with Strong Offtakers
There is a growing consensus that starting small is the key to financing renewable energy projects in Africa. According to Anthony Ighodaro of the African Renewable Energy Alliance, 75MW to 100MW plants are a reasonable size. Ighodaro emphasized the need to avoid white elephant projects that are too large and often never completed.
We also agree on the need for smaller projects and we think that smaller solutions are more effective in underserved remote areas where power is most needed. We also expect the growth of the green bond market to become more accessible in developing countries.
The Challenges in Creating Bankable Projects
Most ideas for renewable energy projects in Africa cannot get financing because they lack appropriate supporting documentation. Vahid Fotuhi of Access Power emphasized the need for early-stage entrepreneurs to create plans for dealing with taxes, social concerns, and environmental issues. At EHI, our consultants have the experience required to develop bankable projects and we also help to mitigate legal and execution risks.
Building Public Support is Vital
Another problem for financing renewable energy projects is the unpredictable local opposition that sometimes occurs in Africa. Not in my back yard (NIMBY) opposition to wind power is a problem that knows no borders. Financial institutions need a way to ensure public support before they commit funds.
Scaling Solar is a very effective approach developed by the International Finance Corporation (IFC), which is part of the World Bank Group. Among other goals, Scaling Solar seeks to standardize elements of agreements between banks and renewable energy developers.
According to Jamie Fergusson of the IFC, negotiations in Africa often last three to five years. On the other hand, building a solar plant can take as little as three months. By standardizing agreements, Scaling Solar has already succeeded in completing solar plants in Zambia in only two years.
International Currency Issues Heighten Risks for Investors
Dealing with currency fluctuations remains one of the outstanding issues in financing African renewable energy projects. When projects receive funding from international sources, the lenders usually expect to be repaid in dollars, euros, or other leading currencies. Yet, renewable energy projects depend on fees paid in local currencies. That is a difficult problem, which may eventually be solved with currency hedging.
However, this type of hedging is only possible when dealing with heavily traded currency pairs today. We think that leasing is a viable solution, along with various “pay-as-you-go” frameworks.
Local Banking Opportunities
We believe that local banks must provide funding for smaller projects because of exchange rate risks. However, significant oil industries in many African countries still create skepticism toward renewable projects. Fortunately, this skepticism can be overcome. Investors may also recall that local banks in the oil-rich Gulf Cooperation Council were not interested in solar power as recently as 2014. Today, regional financial firms are among the largest backers of solar projects in Saudi Arabia and the United Arab Emirates.
There is a great need to build bridges between markets. There is a mismatch between renewable energy projects in Africa without money and money without projects at organizations like the World Bank.
At EHI, our experience in international energy markets gives us the ability to facilitate agreements between diverse organizations. We manage the entire PPA and procurement process from request for proposals to contract signing and the start of new supply. Please contact us today.
Also in Infrastructure Insights
There is a sizable water infrastructure investment gap in both the United States and around the world. In the U.S. alone, the American Society of Civil Engineers (ASCE) estimated this gap to be about $80 billion per year. The economic consequences of this underinvestment in water infrastructure are considerable. By investing $80 billion more, it would be possible to raise total annual economic activity by around $220 billion.