Africa's Electrification Mix Series: Financing Africa’s Electrification Efforts (Part 3 of 4)

African countries require significant private investment to expand energy access. Historically, the continent’s energy sector has received the least amount of investment. However, in recent years, governments across the region have intensified their electrification efforts. This has resulted in several policy and regulatory reforms intended to develop the electricity industry.

African countries require significant private investment to expand energy access. Historically, the continent’s energy sector has received the least amount of investment. Africa only receives 3% of the annual global energy investment. Historically, Africa’s power sector has been hindered by often-dated and ineffective policies and regulations, that impede electricity market development. 

However, in recent years, governments across the region have intensified their electrification efforts. This has resulted in several policy and regulatory reforms intended to develop the electricity industry. The liberalization movement of the early 90s and 2000s resulted in the entry of Independent Power Producers (IPPs) across the region. Between 1990 and 2016, over 125 IPPs with an overall installed capacity of 10.7GW, totalling investments of $24.6 bn operated in Africa. Over the past half-decade, there seems to be a reversal in investments across African energy markets. One reason for this has been the inability of electricity markets to sustain the reforms needed to transition to fully market-based electricity industries. 

Notwithstanding, Africa is still in need of huge power supply capacities, as over 600 million people currently do not have access. Large-scale power generation and supply capacity will be required to electrify most of the continent. The global transition to clean energy presents a unique investment opportunity. African countries can directly build clean energy-based systems rather than conventional systems that would then need to be retrofitted or replaced. 

Investment Opportunities 

Solar

Solar has the largest renewable energy potential on the continent. The falling price of solar components continues to make the technology more cost-competitive. There is a huge opportunity for different solar technologies like concentrating solar power (CSP) and photovoltaics (PV), enough to meet and surpass current demand. CSP can also complement PV deployment by providing baseload power due to its energy storage capabilities. The ease of deployment and modular nature of solar PV solutions also make them a preferred option for advancing rural off-grid electrification access. 

Hydropower

According to the International Energy Agency (IEA), Africa currently utilizes only 11% of its significant hydropower potential. The majority of these are large-scale hydropower plants which constitute over 70% of current renewable energy capacity. One often overlooked potential is the continent’s small-scale hydro potential. Small-scale hydro plants usually have a maximum capacity of 10MW. The estimated potential for small hydropower plants across sub-Saharan Africa is about 25GW. According to IRENA, the levelized cost of electricity (LCOE) for small hydropower plants in developing countries ranges from $0.02 and $0.10/kWh, a cost-competitive option for grid supply and even for the electrification of large off-grid communities. 

Despite these opportunities, technological imitations, viability of business models, and access to financing remain some of the biggest barriers limiting the development of these solutions.

Financing Challenges

Renewable energy projects on the continent are mainly financed by public funds. To meet electrification and climate targets, the IEA estimates that the private sector will need to provide about 60% of the financing needed for clean energy projects. 

Although the off-grid sector continually adopts innovative deployment and business models that have improved project financing, for large-scale clean energy projects, scaling access to private financing remains a challenge. 
Investors are ready and willing to take advantage of the opportunities that Africa’s electrification drive presents. However, governments and policymakers across the continent need to do more to attract private financing at the scale needed. Governments need to develop the right policies, strengthen institutions and make governance transparent. This is necessary to create an enabling environment for private investment. 

However, this alone will not de-risk projects. Project developers still need access to a large pool of concessional finance to mitigate the major country and project risks that developing large infrastructure projects in Africa face. These funds will help to enhance projects’ ability to obtain credit and attract private investors. Blending low-interest debts alongside credit enhancements and guarantees will enable secondary lenders to leverage capital markets. 

To replicate the growth seen in China and India—where domestic capital has been the private capital driver for clean energy project development—African countries must develop their local capital markets and instruments. Foreign exchange risks in recent years have drastically reduced foreign investments on the continent. Developing the domestic capital market will help bridge this gap. 

Africa’s electrification effort presents huge opportunities for both project developers and for the continent’s financial markets and systems. However, policymakers, governments and other stakeholders across the regions must develop the policies, institutions and partnerships to ensure that they attract the financing needed to expand energy access for millions. 

*Image Credit: The World Bank

 

Join us at the Africa Energy Expo from 4 - 6 November in Kigali Centre Rwanda and experience the Africa energy landscape at its finest. The event will serve as a scene-setter to the Africa Power Vision by bringing key energy stakeholders together to increase the level of international support and facilitate access to modern, affordable and sustainable energy solutions in Africa.