Can Africa hit the accelerator on renewables?

More than a century has passed since electricity started to be installed in homes and businesses in Europe and North America. But electric power is still a distant dream across large swathes of Africa. Six hundred million people, around half the continent’s population, have no electricity at home. The true extent of the power gap is even greater, since hundreds of millions of people in Africa receive only a limited or unreliable supply.

Renewable energy is clearly a major part of the solution. Africa has some of the world’s best conditions for renewables, with an estimated 60% of global solar resources, and excellent potential for wind, hydropower and geothermal energy across large parts of the continent.

But despite its massive needs and colossal resources, Africa receives just 2% of global investment in renewable energy.

This seemingly illogical and evidently unfair situation is, however, now receiving serious scrutiny. Last year, African governments called for the continent to aim for 300 GW in renewables capacity by 2030. The need to redirect financial flows towards renewable energy investments will be a key part of the agenda at this year’s COP29 climate summit.

A host of other initiatives are also aiming to tackle the problem. One of these is the Accelerated Partnership for Renewables in Africa (APRA), established by seven African governments along with the United States, Germany, Denmark and the United Arab Emirates at last year’s COP28. The International Renewable Energy Agency (IRENA) acts as the secretariat for the initiative.

Speaking at the APRA Investment Forum in Nairobi this week, IRENA’s director-general Francesco La Camara said that “the time for convincing is behind us”. Scaling-up efforts to provide electricity access through renewables, he added, is a “matter of equality, fairness and inclusion”, as well as being vital to tackling climate change.

Attracting finance

So, what are the obstacles that need to be tackled for renewable power to accelerate?

Perhaps the most important is the difficulty in securing the investment needed to bring renewable power projects to life. “Finance is the biggest challenge” said Ghana’s deputy minister of energy, Collins Adomako-Mensah, at the APRA Forum. This view was echoed by officials from several other countries.

Part of the problem is that global macroeconomic factors have tended to draw investment away from Africa, and towards developed markets (especially the United States), over the past few years. High interest rates in the US have raised the cost of borrowing globally, while also facilitating higher returns in the US market.

This background means the economics around renewable energy projects are “tight”, said João Cunha, head of the African Development Bank’s renewable energy division, at the APRA Forum. “When you go and raise capital, this capital is very expensive, particularly in Africa,” he said, noting that the cost of capital on the continent can be twice the level seen in North America or Europe.

The renewables market is affected by the same macroeconomic tailwinds that are hitting private investment in Africa more generally. Abi Mustapha-Maduakor, CEO of the African Private Capital Association (AVCA), told African Business that the market remains “very difficult”. AVCA data suggests the capital raised by Africa-focused private markets investment funds this year will show little improvement from the notably low levels seen in 2023.

Mustapha-Maduakor does note there is “huge” potential for infrastructure investor to tap into local pools of capital. Pension funds on the continent traditionally focus on buying government bonds, however, where it is possible to generate good returns without the risk exposure that comes with investing in sectors such as renewable energy.

One of the investors that has been more successful in raising capital for renewable energy in Africa is African Infrastructure Investment Managers, which announced in August it had raised almost $1bn for a new fund that will target energy transition opportunities, along with other types of infrastructure.

Paul Frankish, investment director at AIIM, reports that he is seeing a “level of bifurcation in terms of the opportunity set”. He notes that a few markets, including South Africa with its well-established programme for independent power producers in renewables, have proven capable of raising significant levels of investment.

Elsewhere on the continent, however, he highlights that the major problem from the financier’s perspective is “the quality of offtake”.

Indeed, the reality is that a renewable energy developer will struggle to access capital from commercial sources unless it can convince lenders that the offtaker – typically a state-owned utility – is financially reliable. And this, in many countries, is easier said than done.

Offtaker challenges

Martin Nagell, adviser to the CEO of UAE-based renewables developer Masdar, agreed at the APRA Forum that ensuring offtakers are bankable is essential if governments want to attract renewable energy investment. This, in practice, means scrapping the subsidies that force utilities to operate at a loss. “If the government is not in a position to create cost-reflective tariffs, I think it’s impossible”, he said.

Nagell added that renewables can be a win-win, since their generating costs are so low in some cases, that they allow utilities to become profitable without needing to increase consumer tariffs.

Yet working with governments, regulatory bodies and state-owned utilities can bring multiple headaches for project developers.

Mads Vestergaard Sørensen is the CEO of Renergy Solar, a Danish company that has a pipeline of utility-scale solar projects in several African countries. He describes a litany of challenges. In Kenya, for example, Renergy’s planned 40 MW solar farm was held-up by a moratorium on new power purchase agreements that the government imposed while it reviewed previously agreed contracts.

Although the moratorium has now been lifted, electricity distribution company Kenya Power has not yet been willing to complete a PPA with Renergy. “It’s very frustrating, because theres a lot of capital tied up in this,” says Vestergaard Sørensen, noting that renewing various permits before a PPA is reached could expose the company to major losses.

In such a context, developers need to have the “stamina” to keep working and “continue throwing money after [a project] until you reach bankability”, he says.

“We would have liked to have been commissioned and making money from these plants that are struggling like this, instead of throwing capital after that,” says Vestergaard Sørensen. “We are not one of these conglomerates that will survive anyway. If all our projects continue like this, we will run out of money.”

Grid or off-grid?

Another challenge that developers face is being able to connect their projects to grid infrastructure. This is a global problem: the growth of intermittent wind and solar power is putting strain on grids around the world, with developers in many countries facing long delays in acquiring grid connections. The challenge is particularly pronounced in parts of Africa where the best wind and solar conditions are remote from existing grid infrastructure.

One solution is to bypass the grid entirely. Rachel Moré-Oshodi, CEO of infrastructure investment firm ARM-Harith, says that connecting rural areas to mini-grids powered by solar energy can allow these communities to “leapfrog” fossil fuels. She highlights “tremendous” opportunities for distributed power in Nigeria, where the painful recent increase in the cost of running a diesel generator makes solar power a much more attractive option.

On the other hand, access to finance remains challenging for mini-grid projects. Rural communities have a “much lower” ability to pay for power, meaning that securing finance from commercial sources is very difficult. Moré-Oshodi says that philanthropic capital will therefore need to play a role in scaling-up mini-grid platforms, along with investment from development finance institutions. “It’s not charity,” she says. “It’s just having capital from the onset that can enable [developers] to get to that scale for those projects now to be functioning on their own.”

Frankish, meanwhile, reports that AIIM is focusing much of its attention on distributed energy for commercial and industrial projects, where the offtakers are typically large corporations that may be seen as more ‘bankable’ than indebted state-owned utilities. “I think we’re going to see a lot more capital being absorbed, particularly into the C&I [commercial and industrial] space,” he says.

Accelerating investment

Despite all the challenges, there is growing optimism that Africa’s renewables rollout can shift into a higher gear within the relatively near future. Many of the fundamentals are in place – both the supply, in terms of renewable resources, and demand, through unmet power needs, are already present.

IRENA’s Francesco La Camera told African Business that “all the conditions are maturing” to allow Africa to go faster, highlighting progress at the APRA Forum in matching project developers with potential developers.

Vestergaard Sørensen, meanwhile, is convinced that despite the challenges, the outlook is bright. “I strongly believe that things are changing,” he says, predicting that more major energy and infrastructure companies will enter the African renewables market within the next five years.

While he expects that small developers will therefore face more competition, he adds that this is “not a problem”. With hundreds of millions of people lacking electricity, at the same time as the continent is experiencing rapid population growth, there should be more than enough opportunities in renewable energy to go around.