ENERGY INSIGHTS | 27 MAY 2019

African renewable projects require a stable investment environment

Bhavtik Vallabhjee Author

Bhavtik Vallabhjee

Senior International Banker & Head: Power, Utilities and Infrastructure

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Regulatory certainty and supportive policy frameworks are needed to support investments in renewable energy projects in Africa.

A clear, predictable and supportive regulatory framework, backed by a stable investment environment, will be key to attract investors and funders to renewable energy and power projects.

Another important consideration is a viable tariff, which provides an equitable Return on Investment to the investor commensurate with the risk of an Emerging Market – while at the same time making it affordable for the end user.

Governmental support varies across sub-Saharan Africa

The regulatory framework for renewable energy projects in sub-Saharan Africa differs from country to country, depending on the level of commitment by governments to support this sector.

The future for renewable energy projects is bright, but investors want regulatory and policy certainty.

With the falling cost of renewable energy technologies, Renewables is now at grid-parity in some countries, and renewable energy projects can be built without the need for Government subsidies.

Project Financing is credit-intensive, a multitude of risks have to be considered. Risks have to be carefully assessed and appropriately mitigated. This is a pre-condition for debt and equity funding to be secured.

As utilities may not be the most credit-worthy or financially robust entities, some form of credit enhancement to backstop the utility is required. This could take many shapes or forms. For various reasons, Government Guarantees may not always be possible.

Tariffs have to be scrutinised carefully. Many first-world countries have subsequently revisited tariffs that they initially signed-up to in their PPAs.

The lesson is becoming clear: when tariffs look too good to be true (culminating in enormous returns for developers), they probably are.

Absa already has a solid track record as the pre-eminent regional bank in providing funding for renewable energy and conventional power projects.

The bank has closed several deals in Africa in the last several years and is now very adept at understanding the risks associated with power projects, bringing its vast experience to bear to successfully structure, fund and close complicated multi-sourced, multi-tranched project financing deals.

The perception of risk

Projects seldom go ‘insolvent.’ Instead, there could be a temporary blip, which usually all works out well in the end. Nonetheless, these risks have to be appropriately mitigated and projects acceptably structured.

South Africa, Egypt and Morocco are leading the way with a regulatory and policy framework because their governments are supportive of investment by Independent Power Producers (IPPs).

For example, in South Africa, the country has had more than 102 IPP projects in the past nine years, bringing approximately R200 billion in direct investments.

This compares with less than 30 IPPS in the whole of sub-Saharan Africa (excluding South Africa) prior to the launch of South Africa’s IPP programme.

South Africa has spent a lot of time, money and effort working with good legal, financial, technical consultants to develop a Renewable Energy programme that is acceptable to the developer and financing community alike – to the point where other countries have been examining closely how SA’s programme has been structured with a view to emulate our success.

Infrastructure projects in Africa have notoriously long lead-times. Policy certainty, a clear regulatory framework and a supportive Government providing acceptable credit support for their Offtakers would go a long way to help fast-track projects in Africa. Renewable Energy can provide clean and reliable power affordably, whilst going a long way to increase energy access across Africa.

Bhavtik Vallabhjee Author
Bhavtik Vallabhjee

Senior International Banker & Head: Power, Utilities and Infrastructure

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