Financing Renewable Energy in Africa in the SDG Era

24 April 2018

At a time when developing renewable energy has become a priority for sustainable development, how can Africa best take advantage of the myriad international financing options that are available to develop sustainable energy systems that support the continent’s economic transformation?

Renewable energy, in its many forms and with a multitude of financing options, is here to stay, as it will play a pivotal role in efforts to implement both the Sustainable Development Goals (SDGs) and the 2015 Paris Agreement on climate change. As a clean and much-needed alternative source of energy, it can be instrumental in supporting enhanced energy access in Africa and driving the continent’s sustainable development agenda. For these grand objectives to materialise, however, there is a need for African countries to design the right strategies in order to secure the necessary funding for the deployment of renewable energy solutions.

Renewable energy and the Sustainable Development Goals

A real life story from a community in Zambia is a good way to set the stage for our discussion. Mutemwa Community in Zambia’s Sesheke District received financial support to implement a water reticulation project from the World Bank’s Pilot Programme for Climate Resilience in 2014. The proposal submitted was a response to the impact of climate change. The main idea was to bring water closer to the community, which is located in a drought-prone area where changing climate patterns have led to more severe drought episodes. Three solar-powered boreholes were to be installed at the school and in two other communities at a total cost of US$50,000, benefiting 1,442 people, half of them women.

When it had been successfully implemented, the project meant that the community’s women and young girls no longer had to walk long distances to the crocodile-infested Zambezi River where they used to fetch water every day. In the process, it also reduced the risk of deaths and loss of livestock from crocodile attacks. With a solar-powered borehole, members of the community now have clean water close to their yards. Neighbouring households extended pipes to common locations nearby to reduce the distance from the main tap at their own cost. In order to ensure sustainability, the community instituted a mechanism for the collection of fees towards repairs, maintenance, and the security of the solar installations.

A number of lessons emerge from this project. Renewable energy enabled the community to secure their important assets such as cattle, goats, and chickens in the advent of climate change. Clean water has meant fewer cases of diarrhoea and other waterborne diseases that all-too-often plagued the community as a result of drinking contaminated water from shallow wells and rivers. The school can now boast of access to water for its school feeding programme supported by the government of Zambia and donors such as the World Food Programme and UNICEF. The water and sanitation situation at the school is better because toilets can now be cleaned more consistently.

The Mutemwa water reticulation project illustrates, in clear and simple terms, the strong synergies between renewable energy, the SDGs, finance, and international cooperation, which are all essential ingredients for Africa’s sustainable development. The story of the solar-powered boreholes in rural Africa is not unique. Other systems such biogas, geothermal, and wind solutions are equally important inputs in the transformation agenda. All these options have tremendous potential and can provide thesources of energy needed to support communities, households, small businesses, and literacy classes in rural areas across the continent. They can also, for example, improve the delivery of health services in villages which conventional electric power lines do not reach. This is in addition to reducing the environmental damage caused by the unsustainable cutting down of trees for firewood and charcoal.

On a large scale, some examples in East and North Africa can be considered. Solar farms such as Africa’s largest 2.2 billion euro Noor Ouarzazate IV power station in Morocco, spanning 137 square kilometres and generating 582 megawatts of renewable energy for over 1 million people, can deliver greater benefits at scale. In Kenya, a 630 megawatts geothermal plant has come on line, providing electricity for 500,000 households and 300,000 small and medium-sized enterprises. Kenya alone has the potential to generate 10,000 megawatts from its geothermal resources. The Japan International Cooperation Agency is currently providing a loan of approximately US$400 million for the construction a new 140-megawatt geothermal plant in the country. As clearly illustrated by these examples, renewable energy can be a powerful engine for sustainable development at various levels of society in Africa.

Why is investment in renewable energy important for Africa?

Estimates by the International Energy Agency suggest that close to 600 million people in Africa, which represents a little less than 60 percent of the continent’s total population, do not have access to electricity, while around 780 million rely on traditional solid biomass for cooking (mainly fuelwood and agricultural waste). Nearly 80 percent of those lacking access to electricity across sub-Saharan Africa are living in rural areas. Looking at the targets contained in the nationally determined contributions (NDCs) submitted by countries that are party to the Paris Agreement, the International Renewable Energy Agency (IRENA) found that Africa’s renewable power installed capacity could increase by 290 percent between 2015 and 2030, compared to 161 percent for Asia and 43 percent for Latin America. IRENA also estimates that the cost-effective potential for renewables on the continent is around 310 gigawatts by 2030.

In terms of financing needs, the World Bank has estimated a required investment of US$43 billion per year in infrastructure in the power sector, while the African Development Bank and the United Nations Environment Programme (UNEP) estimate a need for a package of US$41 billion per year to finance the development of the energy sector in Africa. According to the Africa Progress Panel, an additional investment of US$55 billion per year will be needed until 2030 to achieve universal access to electricity on the continent. Looking at renewable energy specifically, IRENA has estimated that to fully exploit Africa’s significant potential in renewables, US$32 billion will be needed on average every year from 2015 to 2030. Most of these estimates are based on the cheapest source of energy and must thus be seen as a lower floor for the investment needed in renewable energy. In this context, how does Africa secure these funds?

Financial instruments

Coming back to some of the specific projects mentioned above, we note that in the case of the Moroccan solar project, the funding avenues included resources from the German KfW development bank, the European Union, the European Investment Bank, and the Saudi Arabian ACWA Power group. In the Mutemwa project, the role of partnerships between the government of Zambia, the Climate Investment Fund, and the World Bank is also part of the story. In each case, it is worth noting that the grant mechanism served as a means to de-risk these important investments. For example, the World Bank provided a US$4.5 million grant towards the first phase of the main Pilot Programme for Climate Resilience project to support the efforts by the government of Zambia to conduct feasibility and baseline studies, draft operation manuals, establish institutions with appropriate staff and systems, engage stakeholders, and raise awareness among members of the benefiting communities on their role in the project. Being a community-based intervention for adaptation with co-benefits in climate change mitigation, the Mutemwa project received grant funding for this innovative initiative.

Overall, international cooperation through bilateral and multilateral relationships has played a crucial role in delivering the much-needed technical, technological transfer, and financial support towards renewable energy projects in Africa, both large and small in scale. African countries have the opportunity to utilise the global social and environmental goodwill to access cheap technical, technological, and financial resources to make leaps in the continent’s sustainable development agenda. The Mutemwa and Morocco consolidations of various financing instruments are good examples of how African countries can mobilise various resources to achieve scale and secure the necessary project financing.

The current financing landscape hosts large players such as the World Bank, which had a US$61 billion portfolio in 2016, funding large and small infrastructure projects all over the world, including Africa. Alongside a large loan portfolio, the World Bank also provides concessional financing to countries whose GDP per capita does not exceed US$1,215 per annum. In total, an estimated US$12.6 billion was allocated towards projects in sub-Saharan Africa by the World Bank in 2016. The African Development Bank, based within the continent, has approved a total of US$103 billion in loans and grants across Africa since its creation in 1974. In 2016, the Bank disbursed US$6.3 billion towards projects and programmes on the African continent. Another important source of funding, the Global Environment Facility (GEF), was established in 1992 on the eve of the Rio Earth Summit by UNEP, the United Nations Development Programme, and the World Bank, with the objective of tackling the world’s pressing environmental problems, and is a reliable response to some of the SDGs. To date, it has provided over US$17 billion in grants for various projects worldwide. Most recently, the world saw the emergence of the Green Climate Fund (GCF) in 2011, and its first financial envelope reached US$10.6 billion in 2015. Like the World Bank, the African Development Bank, and the GEF, the GCF offers avenues for supporting private sector initiatives towards development objectives.

Taken together, these funding channels offer a variety of funding options, making available both grants and loans (concessional and non-concessional) to countries depending on the nature of the specific projects they seek to finance. Other players such as the European Investment Bank, the European Union, the Japanese Development Agency, the United States Agency for International Development, the Swedish International Development Cooperation Agency, the Danish International Development Agency, the UK’s Department for International Development, the Canadian International Development Agency, and other bilateral institutions also provide grants and loan schemes to African countries. In this sense, opportunities for financing the SDGs, and renewable energy projects in particular, are wide-ranging.

What should African countries do to access funds?

The choices available are myriad, but there are a few guiding principles that African should follow to optimise access to these funds and maximise their potential.

First, countries need to define their needs accurately and in a manner that optimises their chances of achieving their sustainable development objectives. This is key to access funds, enhance their impact, and support country ownership. Most African countries have produced long-term visions and national development plans to guide medium-term strategies, but technocrats need to be focused and deliberate about accessing resources for renewable energy investments.

Second, African technocrats must produce bankable projects in advance, before financing entities come knocking at their doors. Coordinating institutions of government should drive the renewable energy agenda, as opposed to being driven from the supply side. This approach can spur countries into a proactive engagement with financiers by creating a demand for resources. And to win in the race in this context, a country need to present more bankable projects than others.

Third, putting in place an enabling environment is crucial for attracting investment. Policies on taxation and feed-in-tariffs must be structured with an eye to making a winning case. Locally managed power companies should also play their role in reducing inefficiencies in electricity generation and thus help make the most of financial resources that are already available.

Fourth, embracing the private sector will also be key. The private sector can play an important role in rolling out renewable energy investments quickly and at no cost to governments. These investments are a vital source of technology transfer and deployment of young talent at scale.

Fifth, almost all funding entities look for recipient institutions that meet internationally accepted fiduciary standards and have appropriate environmental and social safeguards in place. This entails professionalism, employing modern tools and systems of management, and efficient execution of projects. Government officials must engage with the experts from multilateral and bilateral funding institutions as equal partners for better deals. Africa has plenty of these experts but they must be gathered at the negotiating table across from these partners to represent their country.

Author: David Chama Kaluba, Chief Executive Officer, Welada Bio-energy Solutions.

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