No user image
Amy.Offord_111 Aug 12

FINANCING AFRICA’S ENERGY TRANSFORMATION

FINANCING AFRICA’S ENERGY TRANSFORMATION image

Interview with Vera Songwe, Under-Secretary General and Executive Secretary, United Nations Economic Commission for Africa (ECA)

Power projects in Africa are being held back by high funding costs. The problem requires innovative solutions, such as the proposed SDG7-Sustainability Bond, says Vera Songwe.

The development objectives of African countries, as embodied in various national development plans, the UN’s 2030 Agenda for Sustainable Development and the African Union’s Agenda 2063, cannot be attained without access to modern energy forms and services. 

Without stepped-up action to close Africa’s energy gap, by 2030 we will have close to 590m people with-out access to electricity – the same number of people without access at present. In fact, urban electrification rates range from 4% in South Sudan and the Central African Republic to 100% in Cabo Verde and Mauritius, while rural electrification rates range from 1% (Central African Republic, Chad, Democratic Republic of Congo, Djibouti, South Sudan, Burkina Faso, Guinea, Guinea-Bissau and Niger) to 71% in Ghana and Swaziland, 89% in Cabo Verde, 99% in the Seychelles and 100% in Mauritius.
 
In terms of total installed electricity capacity, the situation is dire. For example, South Africa on its own has an installed capacity equivalent to the rest of Africa (excluding North African countries) – and similar in scale to the 53GW of solar photovoltaic capacity additions made by China in just one year (2017). Furthermore, the continent’s limited energy mix is still dominated by thermal power, despite its abundant renewable energy resources.

Energy access shortfalls in Africa are constraining both human development and economic growth. Lack of access to electricity prevents children from studying in the evening, which hinders educational advancement and the growth of human capital. Electricity is also crucial for the provision of health services, such as for the operation of medical equipment. 

In terms of economic growth, electricity is crucial to the sustainable growth of the private sector. Unreliable and/or high-cost power supplies lower the competitiveness of Africa’s tradeable goods industries, especially manufacturing and services, such as data processing. Power shortages also contribute to the lack of productive employment, which drives migration from the continent. 

Yet Africa has huge and widely distributed renewable energy resources that remain largely underinvested owing to a combination of factors, including the lack of appropriate policy and regulatory frameworks to signal and stimulate investments. If properly invested in, Africa’s industrialisation agenda could be powered by clean energy sources and provide quality jobs to the continent’s growing, youthful population, enhancing livelihoods, catalysing trade and responding to climate change.

Notwithstanding the challenge of closing Africa’s huge energy deficit, much progress has been made. Governments are taking advantage of increasingly cost-competitive new technologies and innovative financing models to review, revise and re-engage with their national energy strategies, leveraging opportunities to unleash the continent’s abundant renewable energy resources.
The momentum towards the adoption of the renewables on the continent has been increasing since 2014, with transformative actions in Morocco, Egypt, South Africa, Ethiopia, Ghana, Kenya, Senegal and Zambia. 

The ECA’s analysis of announced, financed and/or under construction renewable energy projects in Africa to 2030 shows a pipeline of at least 183GW, dominated by projects in Democratic Republic of Congo (particularly the Inga development), Ethiopia, South Africa, Egypt, Kenya Morocco and Nigeria. At an average of cost of $2m/MW, this pipeline represents investments opportunity of close to $370bn.

There is insufficient public finance to meet the huge capital flows needed to unlock Africa’s renewable energy potential. Much of it will need to come from the private sector through public private partnerships (PPPs).

But the level of private-sector engagement in Africa’s energy sector remains very small, given the market size. The scale of investments from existing sources falls significantly short of what is needed at a time when Offshore Wind there are competing demands on public resources. African governments lack the fiscal space to finance more than a fraction of the capital investment projects needed to close the gaps in infrastructure. 

Innovative approaches are needed to mobilise the financing Solar Treqhermaluired for Africa’s energy transformation. That is why the ECA is working with Onshore Wind financial institutions and the United Nations Secretary General’s sustainability council to develop a template for defining sustainable investments consistent with the Sustainable Development Goals of the UN’s 2030 Agenda for Sustainable Development. Secondly, it has conceptualised and proposed the SDG7-Sustainability Bond as a key instrument for fast tracking secured investments for clean energy in Africa. The bond aims, in the first instance, to raise $5bn through the issuance of paper with a 15- to 20-year maturity.

The proposed SDG7-Sustainability Bond envisages capital market entities and development finance institutions with stand-alone cred-it profiles of AAA issuing bonds on the Eurobond market. The proceeds of these would then be used to purchase the debt of companies investing in the power sector in Africa, especially those undertaking PPP projects in electricity generation, transmission or distribution. 

The debt issued by these projects will carry market rates of interest, usually with a relatively small premium, which should allow a small margin over the cost of the bonds issued by the development institutions or agencies. The pricing algorithm used will be sensitive to the pricing of other energy bonds being issued on the Eurobond market, the tenor and risk profiling. The stream of debt repayments from the energy projects in Africa will be used to service the bonds issued by the development institutions or agencies.

PREDETERMINED PRICES

PPPs are becoming increasingly important vehicles for financing and implementing infrastructure projects in Africa. Under a typical power-sector PPP, a private company will build a generating facility and supply power to the national grid at predetermined prices under a long-term contract.

The PPP will be financed partly by equity and partly by debt, with debt typically comprising about two-thirds of the total finance required. Normally, the debt is raised from international investors with the private-sector arms of multilateral development banks.

Because power-sector projects are capital intensive, the cost of debt is a crucial determinant of the long-term cost of the power generated. High debt-servicing costs mean that power tariff s must be higher if the project is to be commercially viable. In turn, the cost of power generated by the project is a crucial determinant of its long-term social benefits. Lower power tariff s mean that users in the business sector will be more competitive and thus more likely to expand and create employment. It also means that electric power will be more affordable for low-income consumers.

Through the proposed SDG7-Sustainability Bond, capital market entities and development finance institutions can make a positive contribution to economic and social development in Africa by participating in the financing of PPPs, alongside other institutional investors. By doing so, they can help to lower the cost of debt finance. Without such contributions, all the finance would have to be raised from commercial sources and it is likely that commercial investors would demand higher premiums that are above market rates of interest to compensate for the perceived higher risks of long-term investment in Africa. That, in turn, would lower the long-term social benefits of the projects being financed.

Furthermore, the participation of reputable development finance institutions sends a signal to commercial investors that the project promoters are credible, and that the project is viable in the long term. This will help to reduce the cost of finance for pro-jects, thereby catalysing Africa’s energy transformation.

With adequate access to energy, especially baseload energy, the potential of signature decisions like the Africa Continental Free Trade Area, the Single African Air Transport Market and others to deliver benefits will increase significantly, creating more jobs and enhancing livelihoods as Africa becomes more competitive and more prosperous. This will ensure no one gets left behind. 

This article is an extract from the Africa Energy Yearbook 2019, a partnership between African Business and EnergyNet.