De-risking investments for a green Africa
2020 Flagship Publication: Chapter 2
The RES4Africa Foundation aims to support the private sector as it contributes to the delivery of Africa’s socio-economic development targets through the expansion of access to sustainable, reliable and affordable electricity. However, Africa’s electricity markets are still perceived as risky environments for private sector investors. Renewable energy projects, in particular, are by nature exposed to a range of risks throughout their development cycle: some are directly related to the technical characteristics of the project, some to its financing structure, while others are strictly dependent on the broad macro-economic environment and will vary from country to country. Examples include cost overruns, delays, offtake risk, connectivity, asset expropriation, foreign exchange and convertibility, access to land and others.
The IPP model has been effective to date in attracting private capitals and supporting the development of new RE capacities in Africa, however equity investors and lenders continue to face a range of risks. These act to undermine the confidence of the private sector and hold back more international participation and delivery of RE projects in the African RE market. The RES4Africa Foundation’s view is that the need for a robust, stable policy and regulatory framework, as well as proper management of country-level risks and project-specific ones, calls for additional collaboration, greater on the ground involvement and targeted de-risking measures.
The existing landscape of de-risking instruments provided by national and international institutions (DFIs and IFISs) tends to be fragmented and often incomplete. Studies have shown that most instruments do not offer a complete set of de-risking tools and also that they often don’t cover all the phases of a RE project life-cycle. Only by filling the gaps and delivering the end-to-end de-risking instruments needed, will increased levels of private investments be attracted to support the development of greater numbers of bankable renewable energy projects.
Understanding and responding to investors’ and countries’ needs in a comprehensive manner should be the first step in the development of more holistic de-risking instruments. The required features of a new de-risking initiative that builds on and consolidates what already exists, are manifold. The new program will need to focus on strengthening political commitment towards energy reforms and renewable energy expansion, on improving the adequacy and predictability of policy and regulatory frameworks, on building capacity, on managing socio-environmental risks, on expanding private and public dialogue and cooperation, on adopting a project lifecycle approach, and on increasing the accessibility of financial de-risking products.
Chapter 2 of our 2020 Flagship Publication begins to examine some of these challenges with a particular focus on country and project level risks. With an understanding of these, it then reviews the initiatives, instruments and tools that are currently available to overcome them, and attempts to identify the gaps and challenges that remain to be addressed in any proposals for new initiatives and instruments.