Swedfund targets renewables

Gunilla Nilsson, Senior Investment Manager at Swedfund, talks to us what drives the Swedish development funding institution’s strategy in funding African energy projects

Can you explain Swedfund’s mandate in supporting African energy projects?

We have three focus sectors, one of which is energy and climate. Most of our energy activities are focused on financing projects related to renewable energy generation – we no longer make new investments in fossil fuel generation.

We focus on all types of renewable energy projects such as wind, solar and hydro. And our strong geographical focus area is Sub-Saharan Africa. That’s about 60% of our portfolio which is a relatively high number compared to other DFIs. When we invest, our primary focus is to make sustainable investments that lead to tangible impact. Also we support private sector development – we only invest in private sector projects.

Specifically, we’re particularly active in East Africa, which has always been a bit of a focus for Swedfund. One example is our investment in Frontier Energy’s renewable fund which has quite a strong presence in hydro, wind and solar specifically in countries such as Kenya, Uganda, Rwanda

What drives your investment approach?

We really try to find those projects that can make a difference in terms of development impact. What’s significant in Sub-Saharan Africa is that the prospects for solar power, wind power and hydropower are actually very good. But the data shows that there are relatively few projects actually being implemented.

Often the issue is that there’s a lack of developers able to take on early stage projects and develop them to the point where there is an operational power plant.

It’s not that there’s necessarily a lack of financing, it’s a lack of knowing how to structure the project, to do all the engineering and licences and approvals and so forth.

So our focus at Swedfund is to try and finance these kinds of developers. We have invested in a number of funds, like the Frontier Energy Fund. And it’s not because we’re necessarily wedded to the idea of this funding mechanism, we are able to consider other structures also. These funds are quite small, around $150-$300m, and the fund managers really act as on the ground developers. They are the ones building, owning and operating the project. So that’s an example of where we can have the strongest impact.

Currently we are effectively financing hydro projects in Uganda, wind farms in Kenya, and solar projects in Namibia. And that really is the core focus of what we do. In additional to focusing on development impact, we also do have a strong focus on ESG which is a core tenet in all our investments.

Has hydro power been left behind by the rise of solar and wind? Is hydro becoming less of a focus for Swedfund now?

Not really. There are definitely environmental concerns in terms of these large dams, although such issues can be managed. And most of the hydro projects that we have financed to date have been smaller scale. But I wouldn’t say that it’s become less of a focus for us.

What has ended up happening is that solar has almost become a commodity. But it often takes more engineering skill to construct hydro. So I think if you are trying to compete, often if you have a specific skillset in hydro, you can compete more easily perhaps than somebody who’s only focused on certain other sub-sectors within renewables.

Coronavirus is clearly an obstacle in terms of helping the flow of funding. Do you have any sense of how that might play out?

I think we’re all trying to find our footing to some extent. All energy projects will be deeply affected. What we have seen is that projects under construction are having issues because in many of these countries that are in lockdown people can’t actually go to the site. And then often the people supervising or managing the construction come from afar and you sometimes also need to be able to fly in experts from overseas which is challenging now.

So the construction process has either slowed down or completely halted, which means that everyone in the financing side needs to do what they can to help the project because that creates a risk of default.

All finance providers have to think, how can we best support the project. It can be better to make some allowances and then at the end of the day you have a wind farm, rather than just abandoning the project. That’s one issue.

The other issue is in terms of the projects that are operating. If you have an offtaker that’s state-owned, they may be experiencing financial problems because fiscal revenues are on the decrease and so forth. So that is a real challenge.

With respect to Africa there is such an inherent supply-demand gap when it comes to electricity that the underlying market is more resilient than a number of other markets can be. But of course, it’s hard to really predict.

What about the energy transition? Given that you don’t back fossil fuels, is change in Africa going as well as could be expected?

Yes, on the whole, I do think that the change has been tremendous. Things are absolutely going in the right direction. Renewables are often proving themselves to be competitive. I think that’s really been the shift in the market, in the sense that a couple of years ago, renewable energy needed subsidies in order to be able to compete, whereas now they’ve reached parity with fossil fuels in a number of places.

And even in many of the markets where there are issues, that does mean that there isn’t that much grid-connected electricity anyway. So if you’re getting renewable energy, the alternative is often standalone diesel genset, which is terribly expensive. So renewables really are competitive. And that’s also something that provides resilience The figures show there’s been quite an increase in energy generation capacity in Africa, just over the past five years or so. Ultimately things are going in the right direction.

What do you see as the main future challenges facing Africa’s energy sector?

I would say that the key thing is for there to be a coherent and transparent legal and regulatory regime. Having a well-established framework would greatly help spur further investments because investors want to have clarity and transparency about what’s going to happen now and in the future.

That’s the one thing really needed, because if you think about it, renewable energy in Africa should be a slam dunk. Solar power, wind power, hydro power, the natural resources are abundant here. What is needed is a legal and regulatory regime that is known and predictable. Renewable energy is already competitive on a cost basis. But the question is how do you make it competitive when it comes to other investments that people may want to make? 

Click to see more articles from the Africa Energy Yearbook 2020