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Financing wind in sub-Saharan Africa

AFRICA: Access to electricity is fundamental to economic development and all the associated health and social benefits. Yet sub-Saharan Africa is chronically short of power, despite decades of aid and investment.

More than a billion people in the region have no electricity, according to the United Nations (UN), while the capacity that does exist is generally stretched beyond its limits. And population and economic growth put further strain on facilities.

The UN estimates Africa needs an annual 7GW of new capacity, at a cost of around $41 billion (€31 billion), to satisfy growing demand. The continent is endowed with vast, untapped renewable resources, including more than 1,000GW of wind power, the UN says and it seems there are funds available for good projects. The problem is how best to mobilise them to unlock the potential.

The most promising areas for wind in sub-Saharan Africa are the coastal regions and the eastern highlands. This includes countries such as South Africa, Cape Verde, Kenya and Ethiopia, where 105MW has been installed, with 135MW under construction and nearly 1.4GW at an advanced stage of development (see map below).

Deployment is surprisingly low given the resource and the demand, but there are strong drivers supporting wind energy, with security of supply and rising fossil fuel costs an increasing concern. The region received about $15.6 billion in development aid last year, but this was outweighed by the $18 billion cost of importing oil, according to the International Energy Agency.
In good locations, onshore wind power is approaching grid parity with conventional generation, even in Africa, where development and installation costs tend to be high. And in some regions suffering from severe drought, wind can supply an alternative to hydro generation.

Private investment

Part of the problem is that spending tends to focus on operation and maintenance of existing infrastructure rather than long-term investment, the UN Environment Programme (UNEP) says in a recent report on private-sector finance in sub-Saharan Africa, published in February. It argues that the mobilisation of private investment is crucial to closing the funding gap, and says the private sector can provide the key skills and expertise needed to roll out renewable generation at scale. For this to happen, governments and policy-makers must take three critical and complementary steps, UNEP argues.

First, they must create a level playing field in terms of profitability between innovative renewable technologies and conventional generation. This needs clear targets, incentive mechanisms, the phasing out of fossil-fuel subsidies and the use of international climate finance and carbon markets to leverage more private capital and drive low-carbon investment.

Competitive access to market and grid must also be provided by, for example, reducing the dominance of state-owned utilities and decentralising markets. A clear, stable regulatory framework is equally important. The report also says governments need to reform political, economic and societal structures to reduce risk: "In many developing countries, regulatory and macroeconomic risks tend to be so pronounced, and the return expectations of private investors therefore so commensurately high, that many seemingly viable and financeable infrastructure projects are impossible to undertake." While only governments can reduce political and regulatory risk in the long term, various guarantees against country and exchange-rate risk are available in the meantime. Backed by development banks and finance institutions, they offer a degree of protection.

UNEP admits there is a long way to go to engage the level of private investment the region requires. Reform of the power sector has been slow, and only Kenya, Tanzania and Uganda have introduced feed-in tariffs. UNEP cites Cape Verde as a promising example, where a sizeable wind project has been achieved by changing energy market structures and introducing incentives.

Progress

But things are changing, says Remco Fischer, co-author of the report. In Kenya, for example, the momentum is increasing thanks to world-class winds, political commitment and volatile fossil-fuel markets. Things are also shaping up internationally, Fischer says. At the 2010 climate talks in Cancun, Mexico, developed countries agreed to set up a $100 billion-a-year Green Climate Fund (GCF) by 2020 to boost climate-change adaptation and integration in developing countries.

The GCF will be central to African development, Fischer argues. Given its limited resources and the scale of investment required, it will be best used to address regulatory and legal barriers. "Using public money in a smart way to unlock greater private finance," he says.

Martijn Proos, senior investment adviser at Frontier Markets, which manages the Emerging Africa Infrastructure Fund (EAIF), agrees that stimulating private investors is key. While there is a lot of money available for good projects, he says, the number completed by independent power producers (IPP) in sub-Saharan Africa is "shockingly low".

EAIF, which aims to address the shortage of long-term foreign-currency debt finance for infrastructure projects in the region, has been involved with a number of successful IPP projects. Factors that contribute to this success, Proos says, include: an effective legal or regulatory framework; a well-regulated power sector; good developers; appropriate risk allocation; and help from EAIF to secure a bankable legal contract to supply, overcoming the fact that many utilities in the region are either insolvent or a credit risk.

Even so, Proos argues, the main reason why wind and other renewables have not taken off is that generally they are more expensive than conventional power. "Governments look for the least-cost option," he asserts. If the donor community wants renewables in Africa, it will have to subsidise them. As the initial capital outlay falls, however, the amount of subsidy required also decreases, Proos points out. Which means the roll-out of renewable energies in the region should increase.

At the same time, the difficulty of securing long-term loans at reasonable cost is also hampering private investment, not helped by the global financial crisis. Here development banks and finance institutions have a crucial role, in being able to provide repayment terms of up to 15 years; commercial banks rarely go beyond seven. There is also an increasing trend for multilateral institutions to try to promote better skills and practices in the commercial banks they work with, which again helps reassure private investors, observes Careen Abb, coordinator of the banking commission at UNEP.

Carbon finance

While there is debate over the future of the UN's Clean Development Mechanism (CDM), and the associated certified emission reduction credits (CERs), most observers believe the mechanism will persist in some form beyond 2012, when the current agreement ends.

Under European Union rules at least, CERs generated by renewables projects in countries on the UN list of Least Developed Countries (LDCs) can still be imported by European companies wanting to offset their carbon emissions. There are 33 LDCs in sub-Saharan Africa, including Ethiopia, Senegal, Mozambique and Tanzania, all of which face major hurdles in securing equity and funding. The other option is the voluntary carbon market, though this is less liquid and attracts lower prices.

The hope was that revenue from CERs would help create a level playing field for low-carbon technologies in developing countries. However, UNEP argues it has failed to shift the energy sector in these nations onto a more low-carbon path. This is partly due to poorly functioning national authorities, alongside the lack of emissions data and local expertise. But the main reason, the UNEP says, is that global demand for CERs is too small and the resulting revenue streams too modest to be considered anything more than "icing on the cake". Proos agrees. While he never banks on securing CDM registration for projects because the process is too uncertain, the extra income provides an upside for equity and makes the investment more attractive.

However, Carlo Van Wageningen, chairman of Lake Turkana Wind Power, which is nearing financial close on a 310MW project in Kenya, insists CERs played a key role in agreeing a tariff with the state-run utility. The additional income allowed Lake Turkana to give the government a discount on the tariff, while retaining the required rate of return.

The China connection

China is a major investor in the region and has financed numerous infrastructure projects, including a growing number in the renewables sector. China is supporting wind power projects in Ethiopia, Tanzania and Lesotho and is also active in South Africa and Kenya. Most of the investment is state-driven and aimed at promoting Chinese technology, explains Professor Deborah Bräutigam, a leading expert on China-Africa relations at the American University. Support typically takes the form of preferential loans from China's Export-Import Bank, usually tied to the use of Chinese turbines and construction companies. China is also increasingly interested in establishing manufacturing plant locally.

In Ethiopia, Exim Bank teamed up with HydroChina International Engineering Company (HCIE) and Chinese construction group CGCOC to build a 51MW plant at Nazret. Goldwind supplied the turbines. HCIE is considering building towers and blades locally if another 153MW project at Nazret gets the go-ahead. Chinese firms also showed great interest in the recent bidding rounds in South Africa, notes Martyn Davies, CEO of Frontier Advisory, an adviser and deal-maker for Chinese capital into Africa.

Another vehicle is the China-Africa Development Fund, a $5 billion sovereign wealth fund investing in a private-equity manner, providing capital for leading Chinese firms in Africa, says Davies. The fund co-invests with Chinese companies along market principles, albeit with a higher tolerance of risk than "traditional" capital.

"China's financing model has enabled it to get traction in Africa very quickly," Davies remarks. The main attractions for borrowers are generally easier — and therefore cheaper — access to long-term debt, and a greater willingness to consider local manufacture and assembly, he explains. Another important factor is sheer size, Bräutigam adds. China's huge export credit agency can finance far more than its Western counterparts. Chinese loans also tend not to come with conditions such as transparency and improvements in governance.

China's share of the wind market in sub-Saharan Africa is still small but certain to grow. As will private-sector finance from around the globe, as governments and the international community work to reduce the risks involved and more investors seek to get a share in this emerging market. If all goes well, they will help provide the investment, skills and technology that sub-Saharan Africa desperately needs.

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