by Szabolcs Magyari, Solarplaza
It is evident that Africa is in dire need for large-scale electrification if it is to speed up its economic development. One of the main issues when it comes to development of new energy generation capacity boils down to the poor planning and implementation of power projects.
With very few developed, local financial institutions, and large unpredictability in terms of political and fiscal conditions, investment in Africa’s power industry still seems like a challenging and risky business. On the flip side, once properly executed, these same weaknesses bear great potential. With the right planning, not only can sustainable solar projects be implemented properly, but access to electricity can also be increased significantly. In an attempt to aid in the acceleration of Africa’s solar industry, Solarplaza is - for the second time - organizing the conference Unlocking Solar Capital Africa. The conference is set to take place in Abidjan, Côte d'Ivoire on the 25-26 of October 2017, featuring hundreds of representatives from development banks, investment funds, solar developers, IPPs, EPCs & other solar stakeholders. For more information please visit the event website by clicking here.
In preparation of this conference, Solarplaza organized a webinar through which one could get a glimpse at the intricate mechanism governing the African solar market today.
There are several entities working side by side to help the continent achieve its huge potential. The list ranges from developers to Development Financial Institutions (DFIs) and from governments to local financial institutions. Although the respective tasks in the quest of electrification may vary significantly, all participants are pursuing the same goal; to provide energy for those that are in need in a sustainable manner.
|OUSSEYNOU NAKOULIMA /// DIRECTOR FOR RENEWABLE ENERGY & ENERGY EFFICIENCY - AFRICAN DEVELOPMENT BANK GROUP|
|Nakoulima, a Senegalese, holds a Master of Business Administration from Harvard University Business School, USA and Master degrees in Engineering and Applied Mathematics from Ecole Polytechnique and Ecole des Mines in Paris. He brings along more than 15 years of experience in energy, climate change, international banking and financial sector development. Nakoulima has been the Director at the Green Climate Fund in Korea since 2014, with global responsibility for partnerships, country strategies and project preparation support. He was responsible for managing relationships with 140 countries, advising them on how to develop low carbon and climate resilient programs, while managing substantial financial resources for technical assistance and project development. As member of the senior management team of the Green Climate Fund, he was instrumental in the successful launch of the Fund, which has mobilized significant resources for renewable energy projects globally. Before joining the Green Climate Fund, he worked at BNP PARIBAS from 2009 to 2014 in Paris and then in Senegal. As Deputy CEO of the local subsidiary, he positioned the Bank as lead advisor of the Government of Senegal in energy and infrastructure. He proposed innovative schemes to finance the overhaul of the electricity sector and coordinated the financing of a major airport project. He oversaw the mobile banking business to develop the concept for low-income banking and established new business lines including factoring, leasing and commodity finance. Nakoulima had earlier on worked at the African Development Bank as Senior Investment Officer between 2002 and 2009, having joined the Bank as a Young Professional. During that time, he developed projects in fifteen countries in power, water, sanitation and infrastructure and led teams in high impact transactions, including a corporate loan to Eskom, the power utility of South Africa, a private hydropower project in Madagascar and the Bank’s first Public-Private advisory activity for a hydropower program in West Africa.|
DIRECTOR FOR RENEWABLE ENERGY & ENERGY EFFICIENCY /// AFDB
|CHARLOTTE AUBIN-KALAIDJIAN /// FOUNDER & CEO - GREENWISH PARTNERS|
|Charlotte Aubin has 20 years of experience in environmental and infrastructure investment and financial asset management, including 8 years dedicated to international and Sub-Saharan Africa renewable energy. She is founder and CEO of GreenWish, a pioneer of renewable energy development and investment in Sub-Saharan Africa. Since 2014, GreenWish successfully raised $270 million equity, set-up of a team of 24 members with offices in France, Ireland, Senegal, Cote d’Ivoire and Nigeria and completed the development, financing and commissioning of the first solar Independent Power Producer in West Africa, the 20 MW Senergy 2 solar PV project. GreenWish today has over 300 MW of projects in advanced development and a pipeline of projects of 1 GW. Charlotte is former Managing Director of Morgan Stanley Investment Management, where she she built the French and Swiss activities up to a multi-billion dollar asset level and developed a vast experience in project structuring and management, business strategy, team management as well as capital raising across different asset classes like infrastructure, private equity, cleantech, venture capital, agroforestry and real estate. She is committed to Women empowerment and Climate change. She is Board Member of Women in Africa Initiative and jury member of the Africa Energy Generation Prize.|
FOUNDER & CEO /// GREENWISH PARTNERS
African solar sector: A bird-eye view
In his contribution to our webinar, Ousseynou Nakoulima, the director for renewable energy & energy efficiency in the African Development Bank (AFDB) offers the DFI perspective to facilitating the continent’s development. Under the ‘New Deal on Energy for Africa’ initiative, the AFDB targets a 100% access to electricity throughout the continent in 2025 (Figure 1). To achieve this ambitious goal, the issue has to be tackled from both an on-grid and and off-grid point of view with clear quantitative targets. These targets include the increase in generation capacity by 160 GW and the creation of 130 million new connections to the grid system; as well as the allocation of clean cooking energy for around a 150 million households and the addition of 75 million off-grid power provisions.
The two most crucial aspects in achieving these targets, and thus the main focus of the AfDB, are removing barriers and scaling up investment. The general ambitions of the bank to realize the former objective is to provide project preparation funding through the ‘Sustainable Energy Fund for Africa’ and to advise governments in independent power producer (IPP) procurement processes. Scaling up investments is envisioned through the leveraging of climate funds to provide blended financing as well as developing mini-grids in particular to enable the nexus energy between energy, water and agriculture.
In order to facilitate the continent’s off-grid revolution, the AfDB organizes workshops where timely issues such as risk mitigation and suitable business models are discussed. The bank also supports small scale renewable energy activities through the ‘Facility for Energy Inclusion’ (FEI) umbrella debt program. The funding for the cause will amount to USD500m including the USD100m that has already been approved by the AfDB board. Lastly, Mr. Nakoulima believes that in order to establish a sustainable development platform for the future, local financial institutions have to be strengthened, from which the respective countries can benefit in a bottom-up type of fashion. Consequently, the AfDB’s ‘Africa Green Financing Facility’ (AGFF) will provide lines of credit to local banks alongside with technical assistance with capacity building and project appraisal.
African solar sector: A close-up
Another instrumental role in the continent’s electrification efforts is that of the developers. Obviously, the sole monetary support and institutional development that is being provided by institutions like the AFDB would not lead to an increase in capacity without the involvement of actual project developers. Charlotte Aubin-Kalaidjian, founder and CEO of clean-energy developer GreenWish Partners, shares some of the challenges and associated solutions that were encountered during their experiences as project developer in Africa. Her main source of inspiration for advice stems not only from her extensive experience with environmental and infrastructure investment, but also from concrete recent experience, like the recently commissioned 20 MW Senergy 2 solar park in Senegal, which was the first IPP-developed solar plant in West Africa upon completion.
Like most energy projects, solar plants require careful financial and logistical planning to determine commercial viability. The importance of this is accentuated in the case of Africa where political and financial uncertainty can jeopardize projects at several points in the development process. Consequently, the acquisition of counterparty guarantees (often sovereign guarantees) is crucial, due to the long-term approach of such projects. Since governments and other counterparties in Africa are significantly constrained by their balance sheets, this aspect often proves difficult.
The second most important challenge encountered during the development of Senergy 2 was the difficulty in deal implementation. The €26 million investment that was allocated for the project proved to be a challenging amount of money to amortize the costs of development and the costs of financial structure, especially project finance. This led to delays besides the sheer difficulty in deal implementation during the process.
Lastly, Ms. Aubin-Kalaidjian highlights the lack of adaptation of solar projects as the third most prominent challenge for non-recourse project finance in Africa. Since timing is key for project finance, maladaptive due diligence, technical and environmental study requirements can make projects too slow and too expensive.
However, the outlook on what needs to be done in order to face such challenges is clear. Standardization of key contracts is pivotal in both reducing the duration agreements take as well as increasing scalability for projects. As a result of standardized contracts commercial banks could finance solar plants in portfolios, which significantly accelerated solar development in Europe.
Alternative debt financing is another possibility for projects to overcome timing issues. Initially, in the case of Senergy 2, bridge financing was put in place during construction to solidify short-term position which was later refinanced to suite long-term financing. By doing so, GreenWish Partners was able to separate the risk profile of construction and operation while adapting the right cost of capital to the right risk guarantee which led to the project’s success.
Country risk is, however, significant both for project developers and for the states required to provide guarantee against them. Consequently, the creation of regional bundles of Political Risk Guarantees (PRGs) around regional portfolios is advised for DFIs to diversify the exposure of partial risk guarantee without putting too much pressure on the dedicated states.
Finally, structured portfolio options including solar energy could be the key to simultaneously increasing the prevalence of clean energy sources on the continent as well as decreasing costs for participating companies across multiple sectors. Ms. Aubin-Kalaidjian brings the example of her current project, implicating solar battery solutions for the telecom sector to demonstrate her point. While the creation of such portfolios create clear value to companies, these processes require innovative financing that does not resemble project, asset or corporate financing.
African solar sector in action
The interaction between DFIs and developers is, by no means, restricted to a parallel relationship. While developers observe the difficulties and points of improvements in the process of implementation, DFIs have the power to address these issues. In the debate between the two representatives, the most important questions were vetted and discussed.
Firstly, the necessity of sovereign guarantees was discussed for successful solar project project development in Africa. Ms. Aubin-Kalaidjian pointed out that bankability is the heart of project development and that, without it, solar plants cannot be established. Since the majority of the financing (70-80%) is provided by lenders, whose risk appetite is lower than that of developers, guarantees are critical elements of bankability.
Subsequently, the role of DFIs in creating political commitment was discussed during the webinar. Both parties agreed that DFIs should play a key-role as governments generally lack solar or IPP experience. The most important aspect in which DFIs can be of help to governments is through offering legal services in order to give an equal ground for governments and developers for the negotiation.
Lastly, the AfDB’s role in advocating for equal tax and subsidy treatment across technologies was debated. Since fossil fuel sources enjoy significant subsidies that distort the ability for other renewable sources to compete, this topic is a crucial one in Africa’s energy future. The question gains an extra level of complexity when it is considered that, for many African households, subsidized diesel fuel is the only means to obtaining electricity. Thus, cutting subsidies on fossil fuels is not the right way to tackle the issue of sustainability and energy access. The two experts agreed that instead of cutting existing ones, new subsidy measures would be required for renewable energy sources to maintain competitiveness while sparing existing diesel subsidies. In addition, there was an agreement between the two webinar speakers that this topic of equal tax and subsidy treatment should be broadened to the scope of the Paris Agreement .
In conclusion, linking finance to the untapped solar potential in Africa not only needs several players’ participation but also requires their efforts to be properly coordinated. While this issue is not a simple one, as both DFIs and developers are constrained by the challenges inherent to their focus activities, the goals are aligned well. With each successful project implemented, the challenges and possible solutions become clearer for the participants and we get one step closer to realizing universal electricity access in Africa.
Interested in learning more about the challenges and solutions to financing of solar projects in Africa? On 25 and 26 October 2017, Solarplaza will host the second annual edition of Unlocking Solar Capital Africa. This event, Solarplaza’s 9th event on the continent, will bring together hundreds of representatives from development banks, investment funds, solar developers, IPPs, EPCs & other solar stakeholders. Learn more at africa.unlockingsolarcapital.com.