by Jason Deign, Solarplaza

A shake-up in African solar financing may be needed to avoid a ‘funding gap’, according to an influential advisory body. African solar developers and financiers may need to re-think current approaches to financing to overcome a so-called ‘funding gap’, an advisory body has said.

“The projects say there is no money and the money says there are no projects,” said Ina de Visser, project manager for the Africa-EU Renewable Energy Cooperation Programme (RECP). Besides working on market development, market information and match-making between European and African entrepreneurs, the RECP works on reducing the gap between finance and projects “The gap we are trying to narrow is specifically that the banks say there’s a shortage of bankable projects. There is, however, an incredible number of projects being developed on the ground, but they are often considered ‘not bankable’.”

Renewable energy projects such as solar parks represent a challenge for African lenders because of their high upfront costs and long periods for return on investment, de Visser said. In countries with high interest rates, a return-on-investment period of 10 or more years, as is typically the case with solar, can significantly affect the viability of investments.

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Three of the world’s top 10 highest interest rates are in African countries. Malawi leads the list with a 27% interest rate, according to figures from TradingEconomics.com.

In addition to Malawi, Ghana, Gambia, Uganda, Zambia, Liberia, Burundi, Seychelles, Angola, Tanzania, Zimbabwe, Sudan, Kenya, Guinea, Nigeria and Mozambique all have interest rates above 10%.

Such high interest rates make it hard for renewable energy to compete with fossil-fuel plants, which can be built for relatively lower upfront costs and with much shorter payback times. “Local banks in Southern and Eastern Africa can lend their money to construction companies at an 18% rate with a three-year payback period,” de Visser said. “Unless you can compete with that you are out of the game.”

At the same time, international development banks that might be less concerned about currency risk are usually keen to finance very large infrastructure projects, for example in the €80 million to €100 million range, de Visser said.

These lenders traditionally undertake extensive due diligence work that increases the financing costs for smaller projects, effectively locking out the medium to small-scale solar plants that would be very suited to much of sub-Saharan Africa. Overcoming the mismatch between funding parties and project developers would require work by both sides, de Visser told Solarplaza.

For project developers, she said, “it would be very important” to improve the quality of funding requests. “We do see applications for funding that are sub-standard,” she observed.

Meanwhile, financiers have often had a tendency to place unrealistic conditions on lending, de Visser noted. “If funders have serious intentions to fund small and medium-sized projects, they should look at their application procedures and reduce the barriers to entry,” she said.

Finally, a major problem in some African markets is a lack of clear regulation and off-taker strength. All this makes it important for renewable energy players to think carefully about how they structure their projects and approach funding for African projects, said de Visser.

One option worth considering, she said, is to apply for development funds to non-traditional lenders, such as rural electrification programmes, and then turn to local banks for refinancing. Similarly, blended packages, with a mix of grant, concessional and commercial finance, might offer a way to overcome the funding gap.

The good news is that policy environments are improving in a number African markets, with South Africa and Kenya leading the way. And “it can in some cases make a difference what market segment you are looking at,” said de Visser. “In Nigeria, if you look at captive power production up to 1 MW, that’s a huge market with potential clients with own equity, as well as relatively light-handed procedures and regulations.”