FinancingGREEN ENERGYInfrastructureIN AFRICA: Case Studies of Large- and Small-scale Renewable Energy Projects

CONTENTS

Introduc�on ......................................................................................................................................4

The Ra�onale for Green Energy Infrastructure in Africa .................................................................6

Financing Op�ons for Green Energy ..............................................................................................10

Case Studies of Large-Scale Renewable Energy Project Financing ................................................15

Case Studies of Small-Scale, Off-Grid Renewable Energy Financing .............................................29

Discussion ......................................................................................................................................30

Conclusions ....................................................................................................................................32

References ......................................................................................................................................33

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EXECUTIVE SUMMARY

Africa urgently needs a massive rollout of modern energy services to meet the basic needs of its under-served and rapidly growing population, and to power industrialisation and urbanisation. At the

same time, the world needs Africa to leapfrog to a low-carbon energy regime to help avoid catastrophic global climate change. This structural transformation in Africa's energy sector will require innovative �nancing mechanisms to unlock the continent's vast renewable energy (RE) potential and boost inclusive and sustainable development.

This report examines case studies of recent and current green energy infrastructure projects and their �nancing in Africa. In particular, it contrasts the �nancing of utility-scale RE projects by large institutional investors and governments with �nancing mechanisms developed by decentralised energy service companies to deliver off-grid solar power technologies in relatively poor rural communities. The case studies demonstrate that both on-grid and off-grid RE investments can be successful in low-income and middle-income African countries. However, different �nancing mechanisms are appropriate for different types and scales of renewable energy. In particular, both top-down and bottom-up �nancing solutions have a role to play in Africa's energy transition.

The case studies of large-scale RE projects showed that various �nancing sources (donors, development �nance institutions, governments, private investors) and mechanisms (grants, loans, loan guarantees, corporate �nance, equity injections) have been successfully deployed in Africa. Although public investors have played a critical role in many of Africa's successful renewable energy projects to date, constraints on government budgets have meant that private-public partnerships (PPPs) and independent power producers (IPPs) are becoming increasingly popular.

The small-scale, off-grid RE sector relies on a fundamentally different �nancing model. While relying on donor or DFI support in the start-up phase, the two energy service companies investigated both use a novel end-user �nancing scheme in which customers purchase solar PV energy on a pay-as-you go basis, using mobile payment platforms. This innovative approach to lighting up rural Africa provides an illuminating example of synergistic technological leapfrogging – not only are the latest generations of telecommunication (mobile), energy (renewable solar PV) and �nance (mobile payments) being utilised, but they are being fused in a way that makes a whole new genre of energy service possible.

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Financing Green Energy Infrastructure in Africa - January 2018

INTRODUCTION

This structural transforma�on in Africa's energy sector will require innova�ve financing mechanisms to unlock the con�nent's vast renewable energy poten�al and meet

burgeoning demand, and thereby ensure the achievement of the Sustainable Development Goals (SDGs). Investors, on the other hand, are seeking stable returns in a global investment environment characterised by low returns on conven�onal, low-risk financial assets such as bonds, and high risks a�ached to short-term equity investments. Investments in Africa's green energy sector offer poten�ally a�rac�ve returns, although various precondi�ons need to be met to ensure the success of new projects.

The primary aim of this report is to examine op�ons for financing green energy infrastructure investments in Africa, and to iden�fy the cri�cal challenges and success factors. The report uses a case study approach, drawing on available informa�on from energy companies and secondary literature sources. Specific green energy investment projects and their financing arrangements are reviewed in order to draw lessons from experience and to highlight the poten�als and pi�alls that investors and governments should be aware of. The focus is on investments in power genera�on from solar (photovoltaic and thermal), wind, geothermal, and large-scale hydropower sources, and does not consider electricity transmission and distribu�on infrastructure, nor other renewable energy carriers such as gaseous, liquid and solid biomass fuels. The report inves�gates both large-scale renewable power plants and small-scale, off-grid solar systems. The case studies demonstrate that both on-grid and off-grid RE investments can be successful in low-income and middle-income African countries.

Africa urgently needs a massive rollout of modern energy services to address extensive energy poverty and lack of access to electricity, to meet the needs of its rapidly growing population, and to power industrialisation and urbanisation (Africa Progress Panel, 2015). At the same time, the world needs Africa to leapfrog to a low-carbon energy regime to help avoid catastrophic global climate change (Pachauri et al., 2014).

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The conclusion drawn is that quite different financing mechanisms are appropriate for different types and scales of renewable energy. In par�cular, both top-down and bo�om-up financing solu�ons have a role to play in Africa's energy transi�on.

The report is organised as follows. Sec�on 2 summarises the ra�onale for green energy infrastructure investments in Africa, from the dual perspec�ves of boos�ng sustainable development and mi�ga�ng climate change by pursuing a low-carbon development trajectory. Sec�on 3 considers various possible financing sources and mechanisms for green energy investments. Sec�on 4 presents case studies of several recent and current large-scale renewable energy projects in Africa, and discusses their financing arrangements. Sec�on 5 presents case studies of the financing methods employed by two companies that provide off-grid renewable energy solu�ons in East and West Africa. Sec�on 6 discusses the two types of RE financing and highlights the cri�cal success factors for green energy investments. The final sec�on concludes.

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The report highlights a number of lessons from these practical examples, such as common challenges encountered in green energy �nancing – including economic, political, regulatory, technical and environmental risks – and the prerequisites for success.

Financing Green Energy Infrastructure in Africa - January 2018

THE RATIONALE FOR GREEN ENERGY INFRASTRUCTURE IN AFRICAProvision of energy services is a critical element of meeting broad sustainable development objectives, including economic growth, social equity and environmental sustainability. Access to affordable and clean energy features prominently as one of the Sustainable Development Goals, but clearly energy has a much wider role to play in socioeconomic development. This section sets out the rationale for green energy investments in Africa, considering both socio-economic goals and environmental imperatives. It also summarises the investment case in terms of market growth (demand) and resource availability (supply).

Energy and economic development have always been inextricably linked (Hall & Klitgaard, 2011). From a produc�on perspec�ve, energy is a fundamental requirement for all economic ac�vi�es – the 'master resource' which makes

everything else possible. From a demand point of view, economic growth and rising incomes result in growing demand for a range of energy services by residen�al, industrial and commercial users. The close rela�onship between energy and economic ac�vity has strong theore�cal underpinnings (Stern, 2011) and has been established empirically in numerous country-level studies (e.g. Chontanawat, Hunt & Pierse, 2008), including in Africa (Akinlo, 2008). Energy is essen�al for all kinds of economic ac�vi�es; it can lay the pla�orm for Africa's farmers to raise their produc�vity; it allows entrepreneurs to create flourishing businesses that generate livelihood opportuni�es for others; and it enables industrial development and structural transforma�on (UNCTAD, 2012).

Electricity is a very efficient and versa�le energy carrier that enables massive produc�vity gains, for example by enabling the use of informa�on and communica�on technologies. However, Africa is s�ll reliant on tradi�onal biomass and waste fuels – mostly fuelwood and charcoal – for almost half of its primary energy supply (IEA, 2017). The other major contributors are fossil fuels – oil (21.9%), natural gas (13.6%) and coal (14.4%). Hydropower (1.3%) and nuclear energy (0.5%) make marginal contribu�ons while modern renewables – solar, wind and geothermal energy – barely register (0.2%). Electricity comprises just 9% of Africa's total final energy consump�on, while biofuels and waste contribute 55% and oil, 26% (IEA, 2017).

South Africa alone accounts for nearly half of the continent's 90GW of grid-connected power generation capacity, while Spain's electricity consumption is greater than that of the entire Sub-Saharan African region (Africa Progress Panel, 2015). 6

In Sub-Saharan Africa the residen�al sector accounts for the bulk of energy consump�on, while emerging industrial and commercial sectors are starved of energy, especially electricity. The con�nent needs access to modern, efficient energy sources, par�cularly electricity, to enable manufacturing and other higher-value economic ac�vi�es. The lack of access to modern energy in Africa results in a variety of economic costs that put a drag on economic development. These include the constric�ng effect of energy shortages, the impact of high energy prices, the economic effects of household air pollu�on, and a rela�vely high energy intensity of economic ac�vity.

Social development and greater inclusivity also require expanded access to modern energy sources and increased energy consump�on levels. Energy poverty is s�ll rife in Africa, with an es�mated 600 million people s�ll lacking access to modern energy and some 80% of the popula�on relying on solid biomass for cooking (Africa Progress Panel, 2015). Africa's total primary energy supply per capita is less than half the world's average (IEA, 2017). As of 2012, 32% of urban residents and 74% of rural dwellers lacked access to electricity across the con�nent; for the sub-Saharan region, these propor�ons were 41% and 84%, respec�vely (IEA, 2014). At the same �me, Africa's poorest people are paying among the world's highest prices for energy (Africa Progress Panel, 2015). If the con�nent con�nues on its current trajectory, it will take un�l 2080 to achieve universal access to electricity and an addi�onal 100 years or so to ensure universal access to clean cooking facili�es (Africa Progress Panel, 2015).

Furthermore, the lack of modern energy sources perpetuates various social problems, such as poor health and educa�on. For example, household air pollu�on resul�ng from the combus�on of wood, dung and charcoal leads to the death of an es�mated 600,000 Africans each year, half of whom are children under the age of five (Africa Progress Panel, 2015). Lack of electricity in schools across the con�nent is hindering human capital development and undermining the produc�vity of the future workforce.

Environmental concerns are another reason for Africa to adopt modern renewables. Over-reliance on wood fuel is causing deforesta�on and related problems such as soil erosion, silta�on of rivers and lakes, and biodiversity loss. Climate change driven by rising anthropogenic Greenhouse Gas (GHG) emissions is considered by many to be the most serious challenge facing human society (IPCC 2014). Although Africa's historical contribu�on to global GHG emissions is negligible, if the con�nent were to develop along a conven�onal, fossil-fuel based trajectory, the global climate would be placed in far greater jeopardy, given the projected growth in Africa's popula�on and economic ac�vity. Africa needs to forge a clean energy path by adop�ng low-carbon, renewable energy sources such as solar, wind, geothermal and hydro.

From an investor point of view, there is a clear ra�onale for inves�ng in green energy infrastructure in Africa, based on market growth and resource poten�al. Future energy demand in Africa will be propelled by three main socioeconomic factors. First, economic growth and rising incomes will boost demand for energy by industrial, agricultural, commercial and residen�al users alike. Second, Africa's popula�on is expected to more than double in size from 1.1bn today to 2.4bn in 2050 (UNDESA, 2013). Third, the �dal wave of African urbanisa�on – from about 40% urbanised at present to 50% soon a�er 2030 – will concentrate demand for new energy infrastructure and services in the con�nent's burgeoning ci�es (Pieterse and Parnell, 2014). Overall, the IEA expects Africa's energy demand to increase by some 80% by 2040 (IEA, 2014).

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Energy-sector bottlenecks and power shortages are estimated to cost about 2-4 per cent of GDP annually, undermining economic growth, employment creation and investment (Africa Progress Panel, 2015).

Financing Green Energy Infrastructure in Africa - January 2018

Africa has vast untapped renewable energy resource poten�al. Geographically variegated, this poten�al includes hydro, solar, wind and geothermal power. Hydropower is Africa's most widely developed modern renewable energy source, yet only a small frac�on of the es�mated poten�al – which could reach 93GW by 2040 – has been tapped (IEA, 2014). The largest single opportunity – by some es�mates up to 44GW of capacity – is the Grand Inga Project in the Democra�c Republic of Congo (Maupin, 2015). Elsewhere, Ethiopia is in the midst of a massive hydro build programme, with a target of 25GW of capacity from 27 new dams by 2027 (Cuesta-Fernández, 2015). Nevertheless, climate change poses a serious risk to hydropower via altered rainfall and run-off pa�erns (Rodriguez, Delgado, DeLaquil & Sohns, 2013).

Straddling the Equator and including huge deserts with excep�onally high solar radia�on, Africa has abundant solar energy resources. The IEA (2014) foresees solar genera�ng capacity reaching 45GW by 2040 – 12% of total genera�on capacity. Of this, 4% is expected to come from solar photovoltaic systems and 3% from concentrated solar power (CSP – using lenses or mirrors to focus sunlight onto a small area, driving a heat turbine). Together, these are expected to total 108TWh of power.

Africa has considerable wind power poten�al, especially along its coastlines. However, the IEA (2014) projects that wind power will grow more slowly in Africa than other regions, mainly because other op�ons are more cost compe��ve and because of concerns about wind's intermi�ency. Wind capacity is expected to grow to 12GW by 2040, by which �me it is expected to contribute 2% of the electricity mix (over 30TWh).

The poten�al of geothermal energy is es�mated to be 14,000 MW in the East African Ri� Valley (IEA, 2014). The advantages of geothermal are its cost compe��veness with other thermal power op�ons, and its ability to provide base-load power with a high ra�o of actual to poten�al output, known as a high capacity factor. Geothermal capacity could expand to 8GW by 2040, and comprise 3% of total power genera�on – about 45TWh.

Overall, the resource poten�als of hydro, solar, wind and geothermal energy resources in Africa present huge supply-side market opportuni�es for low-carbon technology development and transfer.

Finance is the catalyst needed to unlock the continent's vast renewable energy potential and boost inclusive and sustainable development. 8

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Household air pollution resulting from the combustion of wood, dung and charcoal leads to the death of an estimated 600,000 Africans each year, half of whom are children under the age of �ve

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Financing Green Energy Infrastructure in Africa - January 2018

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FINANCING OPTIONS FOR GREEN ENERGYFunding for green energy infrastructure projects can come from public or private sources, or a combination of the two. The sources can also be domestic, international, or both. The principal sources of funding are: governments (through �scal expenditure, �nanced from current revenues and/or debt); foreign direct investment (FDI), i.e. private sector investors such as private equity �rms or energy companies; Development Finance Institutions (DFIs); Overseas Development Assistance (ODA); capital markets; commercial banks; and institutional investors such as pension funds (Teljeur et al., 2017: 221). In recent years, a growing number of African countries have created Sovereign Wealth Funds (SWFs) to manage the revenues generated from resource extraction and exports. Such SWFs can provide a rich source of funds for (energy) infrastructure development (Hove, 2016; Ncube, 2017).

Special features of renewable energy �nance

The financing requirements and risk profiles of RE are different from those of conven�onal

energy projects, and depend on factors such as “scale, capacity, energy resource characteris�cs, points of sale for output, [and] status of technology” (Sonntag-O'Brien & Usher, 2004: 4). In par�cular, the large up-front capital costs for renewables rela�ve to opera�onal costs (since there are negligible or zero resource/fuel costs) calls for unconven�onal financial structuring. Discoun�ng means that future streams of benefits tend to be heavily discounted rela�ve to up-front capex costs. These features o�en imply a need for significant external financing, which must be amor�sed over the project lifespan (Sonntag-O'Brien & Usher, 2004: 6). Furthermore, the generally small size of RE projects compared to conven�onal energy infrastructure means that the transac�on costs (e.g.

due diligence, environmental impact studies, permi�ng fees and engineering costs) tend to be dispropor�onately large (Sonntag-O'Brien & Usher, 2004: 6).

Different RE technologies require tailored financing arrangements, depending on their characteris�cs. For example, large-scale hydro and geothermal power plants have some similari�es with conven�onal fossil fuel-based thermal power sta�ons, in that they serve as dispatchable, base-load genera�on. They are also typically of a large scale (in terms of capacity in megawa�s) and have long life spans of 30-plus years. By contrast, solar PV and wind farms are very different, not just because their scale is typically considerably smaller than hydro and geothermal power plants, but also because of their intermi�ency, which means they do not provide dispatchable power and consistent revenue streams. Another factor that ma�ers for financing arrangements is whether the RE

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infrastructure is grid-connected or off-grid, an issue that is explored further in the following subsec�ons.

Financing for large-scale, grid-connected RE

The various ins�tu�onal sources of funding men�oned earlier employ a variety of financing mechanisms and instruments for infrastructure projects, including large-scale, grid-connected RE (see Teljeur et al., 2017: 221-223). DFIs and ODA provide finance in the form of direct injec�ons (grants), loans and loan guarantees. Donor funding is most appropriate for projects with poor prospects for cost recovery but high social benefits, and is especially sought-a�er by countries with limited access to capital market borrowing.

Governments are o�en the main source of funding for large energy infrastructure projects. Such state funding can come in the form of direct injec�ons, so� loans and loan guarantees. Governments can either use current revenues, or resort to borrowing in the form of bond issuances. For instance, diaspora bonds are targeted at a na�on's ci�zens living abroad. One such example is Ethiopia's Millennium Corporate Bond, issued in 2007, which garnered funds for the state-owned electricity u�lity (Ncube, 2017: 594).

Project bond financing, some�mes referred to as infrastructure bonds, cons�tutes a debt instrument issued by private companies or governments to raise money from capital markets for specific projects (Teljeur et al., 2017: 221). Infrastructure bonds have several advantages: that they are usually less costly than conven�onal loans; their maturity structure can be adjusted to the concession period (which is typically 20 to 30 years for RE projects); bonds can be raised for incremental financing; and the bonds can be denominated in various currencies (Teljeur et al., 2017: 222). Pure infrastructure bonds are at a nascent stage in much of Africa (Teljeur et al., 2017: 222). However, Kenya has taken the lead among fron�er economies, raising several infrastructure bonds worth over $1 billion since 2009. The success of Kenya's bond programme owes in part to the use of incen�ves such as a tax exemp�on on interest earned from bonds, as well as permi�ng the use of bonds as collateral (Ncube, 2017).

Instruments such as corporate bonds or government infrastructure bonds are limited to countries with sufficiently developed domes�c bond markets (Ncube, 2017). Some electricity u�li�es issue bonds of their own, but usually this is restricted to large, well-established u�li�es in middle-income countries, such as South Africa. Green bonds, bonds raised specifically for green or low-carbon infrastructure projects – are an increasingly popular way of raising debt finance. For example, the Moroccan government recently issued a green bond to finance solar PV plants.

An increasingly popular approach in many African countries is public-private partnerships (PPPs), in which private investors collaborate with the government. PPPs represent a win-win solu�on, in that private investors are en�ced with the prospect of earning commercial returns and are provided with an element of state guarantee or support in the ini�al phases, while governments are able to keep within �ght budget constraints (Teljeur et al., 2017: 221-222). Private sector know-how might also boost efficiency in the delivery of energy infrastructure. Nevertheless, PPPs carry certain risks. For example, if the contracts are not carefully specified, the state may absorb too much of the risk while the private contractors garner most of the profits. Also, PPPs are less well suited to projects with low financial returns and high social impact. In the African context, it can be important for electricity PPPs to secure anchor demand from emerging industries, such as mining, mineral processing and manufacturing.

Large-scale power projects may bene�t from loan guarantees and other de-risking measures, at least until investors recognise that the industry is maturing and pro�table.

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Financing Green Energy Infrastructure in Africa - January 2018

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Another route for private equity investors to take in respect of RE investments is to set up independent power producers (IPPs). IPPs typically require off-take agreements with large consumers (such as na�onal u�li�es) in order to guarantee a revenue stream (Teljeur et al., 2017). They also typically invest in power genera�on, but not transmission and distribu�on infrastructure, which has more natural monopoly characteris�cs. The right balance has to be struck between the risks faced by the IPPs and by consumers (in terms of electricity prices). Private equity funds source financing from foreign and domes�c ins�tu�onal investors as well as DFIs.

Bank loans cons�tute another possible source of financing for RE companies. Commercial and investment banks some�mes u�lise syndicated loans in order to spread the risk across mul�ple lenders. However, interna�onal banks are o�en reluctant to lend to energy projects in Africa because of the currency risk involved (Baker, 2015: 151). Some established infrastructure companies devise specialised infrastructure funds, which offer a combina�on of financing instruments including senior and subordinated debt, equity, or mezzanine finance (Ncube, 2017).

RE projects are o�en financed through a combina�on of debt and equity, typically with a 70:30 debt to equity ra�o (Mendonça et al., 2010 in Baker, 2015). Equity investors carry higher risk and therefore demand higher returns. A higher propor�on of debt tends to lower the average cost of funding, resul�ng in lower energy tariffs (Baker, 2015). However, if the project risks are high, then lenders will be less forthcoming and more equity will be required (Sonntag-O'Brien & Usher, 2004). Quasi-equity or mezzanine finance (e.g. junior debt) can some�mes fill the gap between equity and debt.

Finally, an important component of RE projects is financial risk management, which “entails using financial instruments to transfer specific risks away from the project sponsors and lenders to insurers and other par�es be�er able to underwrite or manage the risk exposure” (Sonntag-O'Brien & Usher, 2004: 15). One way to lower the risk premium a�ached to on-grid RE investments is to create a price support mechanism, such as a feed-in tariff, which provides stability and predictability in the medium to long term (Sonntag-O'Brien & Usher, 2004: 10). In addi�on, large-scale power projects may benefit from loan guarantees and other de-risking measures, at least un�l investors recognise that the industry is maturing and profitable.

Financing for small-scale, off-grid RE

mall-scale off-grid RE investments are typically undertaken by entrepreneurs, who require different forms of finance along a con�nuum, including start-up capital, opera�ng capital and end-user finance (Sonntag-O'Brien & Usher, 2004). Each dis�nct phase can involve private and/or public methods of delivery. The various

Public-private partnerships and independent power producers have recently grown in popularity in Africa, as they serve as ef�cient vehicles for mobilising private sector investment with government support.

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types of finance have different risk/return profiles, and, in general, finance is o�en difficult for entrepreneurs to obtain.

In the first phase, start-up capital is required by the entrepreneur to plan and ini�ate the enterprise, possibly with the support of grants from ins�tu�ons such as development agencies or governments (Sonntag-O'Brien & Usher, 2004: 19-20). The amount of start-up capital required will depend on whether the entrepreneur is responding to public procurement opportuni�es (in which case the local government provides the funding) or is building infrastructure to provide energy services directly to customers (which has substan�al up-front costs). Relevant financing instruments include business development grants and seed capital, which is o�en accompanied by enterprise development services. Donor funding is a common source of seed capital in developing countries (Sonntag-O'Brien & Usher, 2004).

In the second stage, opera�ng capital is needed for short-term purposes (working capital) and long-term requirements (e.g. inves�ng in service infrastructure) (Sonntag-O'Brien & Usher, 2004: 21). Opera�ng capital is usually financed with loans from local commercial banks, but bank finance can be difficult for RE small and medium enterprises (SMEs) to access in developing countries, as banks shy away from the risk or the local banking system may be underdeveloped. Hence, public, donor or DFI funding mechanisms are o�en required to bridge the gap with commercial banks, for example through lines of credit or credit enhancements for loans (e.g. interest rate reduc�ons or risk sharing).

The third stage is end-user finance, of which there are at least four types (Sonntag-O'Brien & Usher, 2004). In the supplier credit model, the enterprise itself provides short-term (3-12 month) credit to the end user to purchase the RE equipment. This means that the enterprise must finance its own purchases, or receive credit from the manufacturer. Alterna�vely, in the consumer credit (or micro-credit) model, customers obtain small-scale loans directly from banks or micro-credit lenders. In the fee-for-service model, consumers pay for an energy service and thus face lower risks. A variant of this is the lease model, whereby the RE enterprise (lessor) retains ownership and maintains the equipment.

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Recently, the advent of mobile phone based payment systems has facilitated the introduction of “pay-as-you-go” �nancing solutions for off-grid RE services, thereby extending energy access to underserved communities

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Challenges for RE �nancing in Africa

RE project developers face financing challenges wherever they operate, but in Africa some of these challenges are especially acute. In general, Africa's large energy infrastructure deficit “is the result of the lack of governments' capacity to generate the necessary funds, small domes�c markets, limited effec�ve regulatory and legisla�ve frameworks, and the difficulty of a�rac�ng private sector investment.” (Teljeur et al., 2017: 220). Risks and uncertain�es are prevalent across a number of categories (e.g. poli�cal, regulatory, technical, and financial), making it more difficult and costly for RE companies to raise financing.

Poli�cal risks include “violence, currency conver�bility and transferability, poor labour rela�ons, expropria�on, and breach of investment agreements” (Teljeur et al., 2017: 227), as well as policy uncertainty, corrup�on, civil unrest, vandalism and the� (e.g. through illegal electricity connec�ons). In Africa, many of the ins�tu�ons that underpin RE investments are underdeveloped. RE markets and value chains are incomplete, financial and capital markets are rela�vely underdeveloped, and regulatory frameworks are o�en inadequate or are subject to poli�cal interference.

Technical risks that can hinder RE �nancing include a prevailing lack of local project management capacity in Africa and the lack of skilled labour for installation and maintenance of RE equipment. There are also often logistical dif�culties arising from poorly developed transport infrastructure such as ports, railways and roads, which raises project costs (Chaponda & Lishman, 2017).

Furthermore, a lack of power transmission and distribu�on infrastructure can hamper grid-connected RE investments. When it comes to financial challenges and risks, some are applicable for other types of investment in Africa as well, while others are more specific to RE investments. The majority of economies on the con�nent have underdeveloped capital markets, while most African governments face severe budget constraints and have low sovereign credit ra�ngs, which constrains their access to interna�onal finance (Ncube, 2017: 592). This makes private sector funding sources vital, whether it be through project bonds or PPIs (Teljeur et al., 2017: 230). Revenues are uncertain due to a prevalent lack of sufficient effec�ve demand among Africa's rela�vely poor consumers, and the lack of credit-worthy large customers in many countries. The small size of most na�onal markets limits the poten�al for economies of scale (Teljeur et al., 2017: 230), although this is generally only a problem for very large-scale projects such as hydro and geothermal power. In fact, the scalability of RE is an important advantage rela�ve to other forms of power genera�on, such as coal-fired and nuclear power, which have much larger minimum efficient scales. Furthermore, RE installa�ons are not subject to interna�onal fossil fuel price vola�lity.

Off-grid, decentralised RE has its own unique set of financing challenges. These include rela�vely high up-front costs, including the costs of raising capital for new businesses, higher market awareness costs, and increased transac�on costs (Sonntag-O'Brien & Usher, 2004). Other prac�cal challenges include gaps in the policy and regulatory context, difficul�es in extending “last mile distribu�on” to customers in remote rural areas, the need to gain customer confidence and to understand customer needs, and the need to scale up fairly rapidly in order to achieve profitability (Pailman, Kruger & Prasad, 2015; Bardouille & Muench, 2014). Furthermore, “energy service providers usually face financial fragility, having to cope with infla�on, currency exchange vola�lity, customers unable to cope with increased fees, and high repair and maintenance costs” (Pueyo, 2013: 22).

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CASE STUDIES OF LARGE-SCALE RENEWABLE ENERGY PROJECT FINANCING

Investment in large-scale renewable electricity generation capacity in Africa has increased markedly in recent years. This section presents brief case studies of successful green energy investments in several

African countries, including Cabo Verde, Ethiopia, Kenya, Morocco and South Africa. The energy sources include hydro, wind, geothermal, solar photovoltaic and concentrated solar power (CSP). In each case, practical details of the project are provided (including generating capacity and cost), along with a description of �nancing sources and mechanisms, and a discussion of key challenges and success factors.

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Wind power in Cabo VerdeThe small island na�on of Cabo Verde demonstrates a very successful example of wind power investments. Four wind farms, with a combined capacity of 26 megawa�s (MW), provide a quarter of the island na�on's electricity. The project was developed through a public-private partnership involving the Government of Cabo Verde (GoCV) and the local electricity u�lity, Electra. The construc�on and financing were managed by a special purpose company called Cabeólica S.A., which is jointly owned by the GoCV, Electra, InfraCo, the Africa Finance Corpora�on (AFC) and Finnish Fund for Industrial Coopera�on (AfDB, 2010). The African Development Bank (AfDB) contributed €15 million and the European Investment Bank provided €30 million in debt funding for the €65 million project (AfDB, 2010). Equity was supplied by the principal shareholder, the Africa Finance Coopera�on, as well as Finnfund and the lead project developer, InfraCo Africa. The project has been hailed as a great success, having garnered the award for Best Renewable Energy Project in Africa at the Africa Energy Awards 2011 (PIDG).

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Hydropower in EthiopiaWith an ambi�ous dam-building programme planned un�l 2030, Ethiopia is leading hydropower development on the con�nent. The country commissioned Africa's largest hydropower plant in 2015. The 1,870 MW Gilgel Gibe Dam III reportedly cost €1,470 million (Salini Impregilo, 2016), and financing problems caused long delays. The European Investment Bank, the World Bank, and the African Development Bank refused to finance the project directly, forcing the Ethiopian government to raise most of the funds itself, although a $470m loan from China was also cri�cal (The Economist, 2016).

The East African na�on's flagship hydro project is the 6,000 MW Grand Ethiopian Renaissance Dam (GERD), which will be the con�nent's largest hydropower facility. Construc�on began in April 2011. With an es�mated price tag of some €3.4 billion (Salini Impregilo, 2017), GERD is being partly funded by an innova�ve scheme involving 'diaspora' bonds, which raised $39 million for the GERD up �ll January 2017 (Mulisa, 2017). However, the GERD project faces several major financial risks. The Ethiopian federal government has become heavily indebted as a result of its dam-building programme. The rapid and large-scale increase in Ethiopia's hydropower genera�on capacity means that produc�on capacity now substan�ally exceeds power demand. Ethiopia therefore needs to sell surplus power to neighbouring countries, including Kenya, South Sudan and Uganda, in order to generate revenue to repay loans (Cuesta-Fernández, 2015). A key requirement for economic sustainability is the comple�on of the 2,000 MW Kenya-Ethiopia Electricity Highway, which is currently under construc�on and is expected to be completed in 2018 (Cuesta-Fernández, 2015). Recurrent droughts, exacerbated by climate change, present another financial risk in that river flows cannot be counted upon to sustain consistently high rates of power genera�on and thus revenues. The GERD has also fomented geopoli�cal tensions with Ethiopia's downstream neighbours, Sudan and Egypt, who have complained about the impact on their water resources (Teljeur et al., 2017: 200).

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Geothermal power in KenyaKenya is Africa's leader in developing geothermal power, with a series of turbines having been installed at the Olkaria complex beginning in the early 1980s. The Olkaria IV geothermal plant was added in 2014 with a capacity of 140 MW. Procurement problems with the $126.5 million project resulted in delays of about two years (Mitchell, 2014). The plant is operated by and was financed through the former parastatal power company Kengen, which is now 70 per cent owned by the Kenyan government and has 30 per cent private shareholding. A further 140 MW extension of the geothermal complex, known as Olkaria V, is currently underway. A $403 million financial package has been secured from the Japan Interna�onal Coopera�on Agency (JICA) (FS-UNEP, 2017: 29). In addi�on, the project will be partly financed by KenGen from its cash reserves, drawing on the proceeds of a recent rights issue (Herbling, 2016). Mul�lateral lenders including the German Reconstruc�on Bank (KfW) and the European Investment Bank have agreed to fund an addi�onal $314 million project to build another 70MW steam turbine at Olkaria I geothermal plant (Herbling, 2016).

The Olkaria III geothermal power plant, which consists of four genera�ng units, is owned and operated by a US-based private company, Ormat Technologies. Ormat expanded the capacity of Olkaria III by 29 MW in 2016 (Odhiambo, 2016). The power is sold to Kenya Power according to a 20-year power purchase agreement. Ormat financed its first three plants with a $310 million loan from the US government's Overseas Private Investment Corpora�on (OPIC), its development finance ins�tu�on (Odhiambo, 2016). The fourth plant was financed by Ormat equity, which is insured against poli�cal risks under a World Bank affiliated insurer, MIGA (Odhiambo, 2016).

Clearly, the success of Kenya's geothermal power development has been largely con�ngent on funding from mul�lateral lenders. A private sector company has developed a por�on of the geothermal energy reserves, but also with recourse to a mul�lateral ins�tu�on. The rela�vely low costs of geothermal electricity has helped to make this energy source compe��ve in Kenya, displacing more costly oil-based thermal power. The Kenyan government has been a strong supporter of increased geothermal power capacity, which features prominently in the country's Vision 2030 na�onal development plan (Republic of Kenya, 2007).

Photo credit: Lake Turkana Wind Power

Wind power in KenyaKenya has also made its mark with Africa's largest wind farm, located at Lake Turkana. Completed in March 2017, the facility has 365 turbines with a combined genera�ng capacity of 310 MW (LTWP, 2017). The development cost of the wind farm and related transmission lines and road rehabilita�on amounted to about $680m (AfDB, 2017), and is reputed to be Kenya's single largest private investment (Weston, 2017). Under a Power Purchase Agreement, the power generated at Lake Turkana will be sold at a fixed price to Kenya Power & Ligh�ng Company Ltd (KPLC) for a period of 20 years (LTWP, 2017).

The project was developed by a consor�um of private investors and donor agencies including turbine manufacturer Vestas, Kemperman Paardekooper & Partners Africa, Aldwych Interna�onal, Sandpiper Limited, the Investment Fund for Developing Countries of Denmark, the Finnish Fund for Industrial Coopera�on, and the Norwegian state-owned private equity firm Norfund (Weston, 2017). Vestas intends to sell its 12.5% stake to Google (Weston, 2017). South Africa's Standard Bank Limited and Nedbank Limited provided financing, with support from the African Development Bank and the European Investment Bank (AfDB, 2017; LTWP, 2017). Funders implemented innova�ve methods to manage the liquidity risk associated with the project, for example through a mixture of le�ers of credit and escrow account arrangements (AfDB, 2017).

The project required a co-investment by the Kenyan government in a 430-kilometre high-voltage transmission line to connect the wind farm to the na�onal grid. This is an example of “integrated project development”, which makes the power genera�on component more viable. The upgrading of 208kms of roads has enhanced access to markets as well as health and educa�on facili�es in the region (LTWP, 2017). The consor�um has set up a founda�on, named Winds of Change, to support local community development ini�a�ves once the revenue stream begins to flow (LTWP, 2017).

The Lake Turkana Wind Farm has not been without its challenges. The project encountered numerous delays since being conceptualised in 2006, partly because of poli�cal uncertain�es and the logis�cal challenges of building a wind farm in a remote area poorly serviced by roads and lacking transmission lines, but also by extended financing delays. Financing agreements were eventually signed in March 2014. Construc�on at the site finally began in October 2014, and the first turbine was installed in March 2016 (LTWP, 2017).

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Concentrated solar power in MoroccoThe Kingdom of Morocco has invested heavily in renewable energy infrastructure in recent years. Investors poured in excess of $500 million into renewable energy in 2015 (FS-UNEP, 2016), although the amount invested in 2016 fell by more than 60% (FS-UNEP, 2017). One of Morocco's flagship RE projects is the Noor 1 Concentrated Solar Power (CSP) plant, which is the first phase of a three-phase development at Ouarzazate. With a capacity of 160 MW, the parabolic trough Noor 1 CSP plant began opera�ng in February 2016 (Nelson, 2016). The cost is es�mated at over $1 billion and the PPA off-take tariff is 18.9 US cents per kWh (NREL, 2017).

The European Union, including the European Investment Bank, provided roughly 60% of the project funding (Ceurstemont, 2016). When all three phases have been completed, the cost of the 580 MW Ouarzazate solar complex is projected to be $9 billion (Nelson, 2016). Investments in the complex include $400m from the World Bank, $1bn from the German investment bank KfW, and $596m from the European Investment Bank (Nelson, 2016). The Moroccan Agency for Solar Energy (Masen) raised addi�onal finance of EUR106m in November 2016 through the issue of Morocco's first green bond. Based on an analysis of Noor 1, Frisari and Stadelmann (2015: 12) conclude that “public financial ins�tu�ons can play a leading role in reducing the cost of CSP support on public budgets by providing concessional loans in countries where public and/or private finance would be too expensive, or extending maturi�es where commercial investors are present but poorly suited for project finance.”

South Africa's renewable energy IPP programmeSouth Africa's Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), launched in August 2011, offers a striking example of what can be achieved within a robust and transparent regulatory framework. A�er considering a feed-in-tariff system for several years, the Department of Energy eventually decided on a compe��ve bidding process. Bids are evaluated according to price (below a cap, which has been reduced in successive rounds) as well as economic development factors including job crea�on, community ownership and local content (Baker, 2015: 149). The successful bidding companies are guaranteed o�ake by the na�onal power u�lity (Eskom), thereby guaranteeing revenues over the an�cipated project lifespans

The REIPPPP has had a number of key successes. Firstly, the scale and speed of new genera�on capacity addi�ons has been remarkable: nearly 6,400 MW of renewable electricity capacity has been procured thus far within a series of six rounds of compe��ve bidding (Ngobeni, 2016). Over 100 projects have been signed off already, with another 40 in the pipeline. Second, there have been substan�al price reduc�ons in successive bid rounds; average solar photovoltaic (PV) tariffs declined in nominal terms by 68 percent and wind by 42 percent over the first three

rounds (Eberhard et al., 2014). Third, local content increased over the bid rounds and “there have been notable improvements in the economic development commitments, primarily benefi�ng rural communi�es” (Eberhard et al., 2014: 1). Fourth, the REIPPPP has thus far a�racted more than $15bn in finance from interna�onal and domes�c investors.

The financing arrangements underpinning the REIPPPP, which have drawn on both domes�c and interna�onal sources, have been varied and evolving over �me. Of the roughly $14 billion commi�ed in the first three rounds, approximately two-thirds comprised debt, a quarter was equity and shareholder loans, and the rest was sourced from corporate finance (Eberhard et al., 2014). Over 80 per cent of projects in the first three rounds were project financed (Baker, 2015: 149). The majority of debt financing in the first two bid rounds was provided by South Africa's “big four” commercial banks (ABSA, First Rand Bank, Nedbank and Standard Bank), along with diversified financial services group Investec. The remainder was provided by DFIs (Development Bank of Southern Africa, Industrial Development Corpora�on, European Investment Bank and World Bank), export credit agencies and insurance

Several factors underlying the REIPPPP's successes have been iden�fied (Eberhard et al., 2014). First, the programme management approach involved an ad hoc IPP unit within the Department of Energy, which was composed of experienced personnel who were able to build good rela�ons with private sector players, and which was able to draw on resources to appoint professionals who ensured the transfer of best interna�onal prac�ce. Second, the programme design, namely compe��ve bid rounds on a substan�al scale with a�rac�ve ini�al tariff caps, provided sufficient incen�ves to garner private sector par�cipa�on.

funds (Eberhard et al., 2014:1), usually for 'unproven' technologies such as CSP (Baker, 2015). The third round “saw a shi� to corporate financing and a reduced role for South Africa's banks” (Baker, 2015: 150). In addi�on, “equity investment is provided by a diversity of players including various different combina�ons of: na�onal and interna�onal infrastructure, technology and investment funds; South Africa's DFIs; BEE investors and partners; and community trusts, themselves o�en funded by the IDC, DBSA and Public Investment Corpora�on (PIC) on subsidised terms” (Baker, 2015: 152).

Several factors underlying the REIPPPP's successes have been iden�fied (Eberhard et al., 2014). First, the programme management approach involved an ad hoc IPP unit within the Department of Energy, which was composed of experienced personnel who were able to build good rela�ons with private sector players, and which was able to draw on resources to appoint professionals who ensured the transfer of best interna�onal prac�ce. Second, the programme design, namely compe��ve bid rounds on a substan�al scale with a�rac�ve ini�al tariff caps, provided sufficient incen�ves to garner private sector par�cipa�on. Compe��ve tendering in subsequent rounds enabled the lowering of bid prices, while the economic development requirements ensured poli�cal support. Third, market factors also played a role, in that stagna�on in OECD renewables markets led to considerable interest in REIPPPP from interna�onal players. The depth of South Africa's capital markets and the quality of advisory

services also facilitated solid financing arrangements.

Despite the successes, a number of concerns have been raised about the REIPPPP. The capacity and preparedness of the domes�c renewable energy market were overes�mated, which resulted in limited compe��on ini�ally (Eberhard et al., 2014). The dominant entry of Italian u�lity Enel in the third bid round led to significantly lower prices, which raised concerns among domes�c players about the financial sustainability of a local RE industry that could bring broader economic benefits (Baker, 2015: 153). Finally, Baker (2015: 146) finds “key tensions between REIPPPP's poten�ally transforma�ve requirements for economic development and community ownership in a country with gross socio-economic inequality along racial divisions; and commercial priori�es for 'bankability', risk minimisa�on and short term profit maximisa�on.”

Overall, an important lesson for other countries is that “private sponsors and financiers are more than willing to invest in renewable energy if the procurement process is well designed and transparent, transac�ons have reasonable levels of profitability, and key risks are mi�gated by government” (Eberhard et al., 2014: 2). Another requirement is an effec�ve champion who can garner the support of government officials, dialogue clearly with stakeholders, and interact with private sector players (Eberhard et al., 2014). Another lesson is that investors and project developers require a clear and transparent procurement system, whatever its type and design (e.g. FIT or compe��ve tender) (Eberhard et al., 2014).

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CASE STUDIES OF SMALL-SCALE, OFF-GRID RENEWABLE ENERGY FINANCINGIn recent years, there has been rapid growth in the market for small-scale solar systems, which typically comprise lights, mobile phone chargers and a variety of basic electrical appliances. A number of decentralised energy service companies (DESCOs) have established themselves in African markets, including M-Kopa, Off-Grid Electric, d.Light, Bboxx, Mobisol and Nova Lumos. Collectively, they have raised in excess of $360 million in �nancing and provide energy services to approximately 700,000 customers in West and East Africa (FS-UNEP & BNEF, 2017: 62). This section presents brief case studies of two of these companies in order to illustrate the typical �nancing mechanisms employed by DESCOs in Africa.

Off Grid ElectricOff Grid Electric (OGE) was founded in January 2012 by three entrepreneurs based in the United States. The company supplies integrated renewable energy solu�ons comprising hardware, so�ware, distribu�on, and financing. The main technology offering is solar home systems (SHSs), consis�ng of solar panels, ba�eries for energy storage, and an inverter. OGE also supplies efficient LED lights and appliances to make op�mal use of the solar energy. OGE has been opera�ng in Tanzania and Rwanda for several years, and more recently in West African countries such as Ivory Coast. The company is ac�ve in both peri-urban and rural se�ngs, supplying products mainly to low-income households, but also to entrepreneurs and small businesses (Shapshak, 2016). OGE has installed over four hundred thousand SHSs in Africa in recent years (Smith, 2016). Rather than simply selling products, OGE aims to build long-term rela�onships with its customers as an energy service provider (OGE, 2017). The company u�lises web pla�orms, mobile apps and two-way SMS to communicate with its customers. To overcome the challenge of rural “last mile” distribu�on, OGE uses informal supply chains to deliver its products at the lowest possible cost.

OGE has partnered with or received assistance from several large interna�onal organisa�ons, including: the U.S. Agency for Interna�onal Development (USAID); Power Africa, former US President Obama's ini�a�ve to increase electricity access in Africa; the Energy and Environment Partnership (EEP); the Overseas Private Investment Corpora�on (OPIC), a self-sustaining U.S. Government agency that assists American businesses investing in emerging markets; Africa Enterprise Challenge Fund (AECF); and the Interna�onal Finance Corpora�on (IFC) (OGE, 2017).

This illustrates the point made in sec�on 3.1.2, namely that off-grid energy investments o�en require some form of donor or DFI support, at least for start-up capital. OGE has also raised venture capital funds from a number of private sector companies, including $25 million in 2015 (Tweed, 2015) and $14 million in 2014 (Cons�ne, 2014). In late 2016, OGE entered into a joint venture partnership with France's power u�lity EDF, with the aim of supplying off-grid electricity to over two million people in Ivory Coast by 2020 (Pothecary, 2017).

The company also u�lises an end-user finance scheme, whereby customers pay for the level of energy service according to their needs and budget, using mobile payment systems. Customers pay approximately $6 per month for entry-level systems, and $15-20 per month for small business kits that include various appliances, such as hair clippers, a television (for bars) or solar lanterns (Shapshak, 2016). The company offers flexible payment terms and varying lease lengths. According to OGE, the pre-paid, low-cost financing model allows customers to pay from income or savings, and helps to reduce risks (e.g. of non-payment) and costs (OGE, 2017).

MobisolMobisol is a German-based company that provides affordable solar home systems to low-income customers in East Africa, with a mobile payment plan. The SHSs are available in varying sizes, depending on the needs and incomes of the customers, and can power efficient LED lights and appliances such as mobile phones, radios, TVs and direct current fridges. The company has to date supplied over 100,000 SHSs to households and small businesses in Kenya, Rwanda and Tanzania (Mobisol, 2017).

Mobisol's financing strategy has involved several elements, which are similar to those of Off Grid Electric. In 2014, the company received a grant from the European Union to supply solar energy in rural areas of Rwanda, illustra�ng the importance of donor support in terms of start-up capital. Mobisol has subsequently garnered funding from private sector investors and development finance ins�tu�ons. For example, in 2016 the company secured an equity investment from a consor�um including South African-based Investec Asset Management, the Interna�onal Finance Corpora�on (IFC), and the Dutch DFI, FMO (Mobisol, 2017). Investec followed this in 2017 with a further growth equity injec�on, which together with debt financing raised $25 million in financing for the company (Mobisol, 2017).

The company has also adopted a pay-as-you-go end-user financing model, whereby customers pay a small up-front amount for the equipment and then monthly or weekly payments for energy used. The daily cost of an entry-level system is similar to the amount customers would spend on alterna�ve energy sources, such as candles, kerosene, and ba�eries (Mobisol, 2017). According to Pueyo (2013: 10), this payment method “removes the barrier of affordability for poor consumers by substan�ally reducing up-front payments and adap�ng payments to the actual flow of income of consumers.”

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Financing Green Energy Infrastructure in Africa - January 2018

30

DISCUSSION

The case studies presented in sec�ons 4 and 5 demonstrate that both on-grid and off-grid renewable energy investment projects can be successful in low-income and upper-middle income African countries. However, certain prerequisites need

to be met and the challenges discussed in sec�on 3.2, including economic/financial, policy/regulatory and technical risk factors, need to be overcome. This sec�on reflects on lessons emerging from the case studies about cri�cal success factors for RE project financing.

Both the theore�cal review (sec�on 3) and the case studies have shown that large-scale grid-connected RE and decentralised off-grid RE investments have very different characteris�cs, with different financing requirements. The two forms of electricity are complementary, as they largely cater to different customer bases. Large-scale RE is useful where there are established electricity grids providing power to residen�al and industrial consumers, especially in urban environments. Small-scale, off-grid RE is ideal for rural customers and others that are beyond the reach of power grids. In essence, the former represents a top-down solu�on to energy provision, while the la�er is a bo�om-up strategy. One commonality is the importance of funding from donor agencies and/or DFIs in the majority of cases, at least in ini�al stages. As RE markets have matured and grown, the role of public funding has diminished – in both large-scale contexts (such as South Africa) and rural off-grid environments. One key difference is that governments tended to be heavily involved in most of the large-scale projects, while in the off-grid context there was very limited government involvement, with projects largely driven by social entrepreneurs with private financing backed by interna�onal donor agencies and DFIs. In the South African case, the role of government was confined to establishing the ins�tu�onal framework within which IPPs could operate.

The case studies of large-scale RE projects showed that various financing sources and mechanisms have been successfully deployed in Africa. Many of the projects were financed at least in part by DFIs, some�mes in partnership with state-owned u�li�es or the energy developers themselves. Some were wholly financed by the government concerned, such as some of Ethiopia's hydro plants, especially when DFIs considered the risks prohibi�ve. Some projects involved PPPs (e.g. in Cabo Verde's wind farm and Kenya's geothermal plant), while others relied on a consor�um of private investors and donor agencies (e.g. Kenya's Lake Turkana wind farm). In the South African case, all of the reviewed RE projects are IPPs falling within the government's RE procurement programme, and a mixture of bank loans, project financing, corporate financing and equity were u�lised by the energy companies involved. Some of the larger RE projects experienced considerable financing delays, las�ng up to several years. In Kenya, this was due in part to poli�cal uncertainty and logis�cal difficul�es; in Ethiopia, DFIs were put off by risks of scale and possible over-capacity in the face of underdeveloped consumer markets.

Some key lessons emerged about the economic, regulatory and technical prerequisites for successful large-scale investments. First, investors need bankable projects with reliable revenue streams that will ensure an adequate return on investment. For this, developers require compe��ve prices for RE. Fortunately, the costs of solar and wind power in par�cular have fallen drama�cally in recent years, and are now cheaper than

scale renewable power genera�on projects need co-investment by public en��es in transmission and distribu�on infrastructure. In African countries with currently low levels of effec�ve demand, smaller capacity RE installa�ons are more likely to be financially viable – and some (such as solar PV and wind farms) be scaled up at a later stage. Off-take agreements with the na�onal grid or large anchor customers can provide a degree of revenue certainty.

Second, investors need clear enabling policy and regulatory frameworks that provide a degree of certainty for investment planning and demonstrate the government's commitment to expanding electricity supply. Effec�ve independent energy regulators can reduce some of the risks facing investors. Indeed, South Africa's RE IPP procurement programme is an interna�onally lauded example what can be achieved within a robust and transparent regulatory framework, with an independent na�onal regulator staffed with experienced personnel. Arguably the main problem in South Africa's REIPPPP has been the difficul�es experienced by smaller domes�c firms to establish an RE industry, as they tend to be out-competed by larger interna�onal players.

Third, in order to harness its renewable energy resources, Africa needs knowledge, skills and technology transfers from more developed regions, together with capacity building for project management capabili�es and provision of local technical services such as installa�on and maintenance of RE systems.

Compared to grid-connected RE, off-grid solar PV requires a very different kind of financing solu�on, given the typical customer profile, namely, rural low-income households and entrepreneurs. One of the main barriers is the large up-front costs, which are ordinarily a deterrent to indigent consumers (Pueyo, 2013). Financial innova�ons, in the form of mobile phone-based payment systems, have enabled a new financing model for off-grid RE systems. In par�cular, pay-as-you-go systems help to reduce the up-front costs and allow greater payment flexibility, and therefore reduce barriers and risks of off-grid energy systems for low-income customers and energy providers alike. Nevertheless, the poorest segment of the popula�on in Africa remains under-served, as energy companies target customers who can afford to pay for the systems in order to achieve financial sustainability. Affordability could be broadened if the payment period for solar PV systems were extended (Oruoch, 2015), although this front-loads risks onto the DESCOs.

One of the cri�cal issues facing DESCOs is the “likelihood of reaching scale”, i.e. their ability to reach a sufficient number of customers to become financially sustainable (Bardouille & Muench, 2014: 12). The success factors underlying scalability include: managing revenues against investments per user so as to achieve simple payback periods of less than three years; u�lising mobile phone technology for remote control of energy and payment systems; maintaining low opera�ng costs, in the range of 25-35 percent of revenues; construc�ng solid distribu�on networks and providing adequate incen�ves to sales agents; and being independent of subsidies when opera�ng at scale, so as to avoid limi�ng condi�onali�es or unavailability of funding (Bardouille & Muench, 2014). The track record of Off Grid Electric and Mobisol in installing hundreds of thousands of solar home systems demonstrates that small-scale, off-grid renewable energy is financially viable even among rela�vely poor communi�es in Africa. Seed funding from donor organisa�ons and DFIs provided valuable ini�al support, un�l the businesses reached a cri�cal scale and became self-sustaining. Among the enabling factors is a suppor�ve regulatory and policy environment. In par�cular, this requires regula�ons that permit decentralised off-grid RE products and services, as well as mobile money licensing and regula�ons (Pailman et al, 2015). Furthermore, the business model requires awareness raising among poten�al customers, and capacity building among sales and distribu�on agents (Pailman et al, 2015), as well technicians who can perform maintenance of SHSs (Pueyo, 2013).

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Financing Green Energy Infrastructure in Africa - January 2018

CONCLUSIONS

The case for scaled-up investment in Africa's green energy sector is clear. The renewable energy resources are available, the latent demand for energy is massive and set to grow rapidly, and the threat of climate change makes this an impera�ve not just for Africa

itself, but for the world as a whole. Finance is the necessary catalyst to turn resource and demand poten�al into the reality of modern, low-carbon energy services that can facilitate rapid economic and social development. This study sought to inves�gate the op�ons, challenges and success factors for financing green energy investments in Africa.

The report highlighted a number of challenges that RE investors face in Africa. The prevalence of poli�cal, economic, technical and environmental risks on the con�nent means that investors demand higher returns, raising the cost of capital. Some of the main obstacles are uncertain or inadequate policy and regulatory frameworks, underdeveloped capital markets, insufficient effec�ve demand (i.e. ability of poorer consumers to pay for electricity), and a lack of managerial and technical capacity.

The study found that different financing solu�ons are appropriate for different types and scales of renewable energy. In par�cular, both top-down and bo�om-up financing solu�ons have a role to play in Africa's energy transi�on. The case studies of large-scale RE projects showed that various financing sources (donors, development finance ins�tu�ons, governments, private investors) and mechanisms (grants, loans, loan guarantees, corporate finance, equity injec�ons) have been successfully deployed in Africa. Although public investors have played a cri�cal role in many of Africa's successful renewable energy projects to date, constraints on government budgets have meant that private-public partnerships and IPPs are becoming increasingly popular. Several leading countries have shown that large-scale renewable energy projects are technically and financially feasible in both middle-income and low-income African countries, given the appropriate ins�tu�onal milieu.

The small-scale, off-grid RE sector relies on a financing model that is very different in some ways. While relying on donor or DFI support in the start-up phase, the two energy service companies inves�gated both use a novel end-user financing scheme in which customers purchase solar PV energy on a pay-as-you go basis, using mobile payment pla�orms. This innova�ve approach to ligh�ng up rural Africa provides an illumina�ng example of synergis�c technological leapfrogging – not only are the latest genera�ons of telecommunica�on (mobile), energy (renewable solar PV) and finance (mobile payments) being u�lised, but they are being fused in a way that makes a whole new genre of energy service possible.

Appropriate policy frameworks, regula�ons and incen�ve structures are required to a�ract finance that can unlock the huge poten�al of Africa's energy resources. Some of the policy tools that have proven successful in various African countries are compe��ve bidding processes and guaranteed off-take agreements for grid-connected RE investments. Governments need to co-invest in power transmission and distribu�on infrastructure (for grid-connected RE) and in human resource development to boost project management and technical skills. Financing solu�ons need to be designed according to the specific context, e.g. rural/urban, income level, and sophis�ca�on of the banking sector and capital markets. For off-grid companies to operate successfully, they need appropriate licensing frameworks that permit decentralised off-grid products and services, and mobile payment systems. With the right kinds of government support in place, realising Africa's energy poten�al represents a massive opportunity for investors from around the world.

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The Quantum Global Research Lab is an independent research partner to African countries. Its mission is to lead innova�on and excellence in the delivery of bo�om-up econometric models of African economies that are embedded in African reali�es. This report has been produced by Dr. Jeremy Wakeford, Senior Macroeconomist, Quantum Global Research Lab.

Designed by: Dirlene Lopez, Marke�ng Officer