With the world population recently crossing the 8 billion mark and Africa expected to contribute more than half of the projected increase in the global population up to 2050, now more than ever, access to reliable, sustainable, and affordable energy is critical for the continent. It is no hidden secret that up to half of the population on the continent do not have access to electricity. Many African nations have made net-zero commitments in line with energy projections and ever-growing demand, however, while it is abundantly clear that achieving net-zero carbon emissions by mid-century is necessary to avoid the worst climate outcomes, the path to decarbonizing the energy sector is not a “one-size-fits-all” between developed and developing markets. Given the historical strain between developed economies (which modernized with fossil fuels) and developing economies (now being asked to forgo this route), it is evident that sustainable, long-term global cooperation and energy security will be required to address the need for Africans to have access to sustainable, reliable, and affordable energy.
Sustainability is more urgent for countries hardest hit by climate change and often exposed to greater environmental risks. Reliability remains an elusive goal in many countries still working to bring basic electricity to its citizens in a secure and dependable way. Many of these developing economies also face roadblocks to electricity affordability due to weak government finances and credit, and corresponding higher cost of capital for infrastructure development. These challenges are even more pronounced for developing economies especially in Africa where transmission infrastructure, political uncertainty and capital markets can be lacking, creating unique hurdles for development. That’s why, says Susan Flanagan, president and CEO of GE Energy Financial Services (GE EFS), “developing markets now more than ever need government-enabled financing for renewables and gas power generation to support the energy transition, as private sector capital providers will expect a level of guarantee to mitigate risk and exposure on long cycle projects.”
In addition, no two countries are the same and an in-depth understanding of the peculiarities of the countries is required to ensure that the solutions fit and will deliver the required results. GE EFS has extensive experience in emerging markets, often playing a coordinating role as guide and helping stakeholders navigate the often-difficult project development terrain. “We’ve found that you have to have a tailor-made solution for each region or country,” says Seyi Akinwale, a senior vice president with GE EFS. For example, when international lenders get into position to make development loans to developing countries, they can often impose broad targets for growth or decarbonization that don’t easily fit the needs of individual economies, explains Akinwale. “But education and understanding are improving.” As we look to the future of energy, international lenders need to support and innovate risk models that adapt to the rapid technological change emerging.
For instance, electricity generation in South Africa and Nigeria accounts for more than 80% of GHG emissions on the continent. In South Africa, coal-fired generation currently accounts for more than 70% of installed capacity and is expected to remain the primary power generation source through 2030. South Africa’s Integrated Resource Plan aims to install 3GW and 9.6GW of solar and wind capacity respectively between 2023 and 2028 as well as 3GW of gas by 2030. In contrast, Nigeria, on the hand has about 13 GW of installed generation capacity, largely dependent on hydropower (12.5%) and thermal power (87.5%). Of this, only 3.5 GW to 5 GW are typically available for onward transmission to the final consumer. Self-generation installed capacity via diesel generator units is estimated to be about 25 GW. In its recent energy transition plan, the country intends to focus on strengthening the grid infrastructure, optimizing existing gas assets through upgrades, and including more renewables in the energy mix.
The Role of Public Capital
Public capital plays an essential role in accelerating energy infrastructure projects in both developed and developing markets. Developing markets especially need continued government-supported financing for renewables and gas power generation to enable an equitable energy transition. Governmental organizations such as Export Credit Agencies (“ECAs”) and Development Finance Institutions (“DFIs”) provide essential liquidity tools, risk management expertise and credit support that enables meaningful private sector investment. Despite significant global liquidity for financing energy transition projects, private sector capital requires credit support to mitigate the fundamental developing market risks: poor underlying credit and commercial structures, regulatory challenges, political uncertainty, and long-term underinvestment in infrastructure.
ECAs and DFIs have traditionally played an important role in catalyzing private sector investment in long-cycle energy and infrastructure projects globally. To meet net-zero goals, these institutions must continue to maintain central roles in the financing ecosystem. They can support sustainable infrastructure build-out through several channels:
- Access to Liquidity – ECAs can counter-balance cyclical liquidity challenges through tools such as direct lending and by providing optimal indemnity to unlock longer-term, competitive commercial bank funding. Continued innovation on financing structures is needed in areas such as blended concessional finance instruments, local currency financing and bridge solutions.
- Risk Allocation – DFIs can deploy a wide range of instruments which can address risk and risk allocation factors not adequately addressed in, for example, a power purchase agreement, or in other supply, transmission, or interconnection agreements. These risk mitigants include political risk insurance, export credit, partial loan guarantees and credit enhancements.
- Project Execution – Due to inherent risk factors, there are often financing gaps at early-stages of development of energy infrastructure projects. DFI involvement at this stage, for example, can incentivize large institutional investors and draw local financing participation early-on. Such involvement can increase the probability of project success and potentially yield substantial economic development benefits. Further, projects with larger capex requirements, such as mega-offshore wind projects, require ECA support; often more than one ECA is required to fill financing gaps. Overall, public capital institutions can bring rigor and discipline to underwriting, structuring and negotiation of projects and loan documentation that can increase the credibility and execution of an opportunity.
- Technology Innovation – ECAs play a leading role in support of new technology advancements, providing financial institutions comfort in financing new technologies. ECA willingness address technology risk is key to facilitating commercialization of decarbonization technology and projects. ECAs have room to be more forward leaning in their approach to risk assessment and underwriting.
- A Just Energy Transition – To meet global decarbonization goals while continuing to drive electrification and raise the standard of living in developing markets, ECAs and DFIs should strive to become even more engaged to support a broad range of decarbonization technologies, including for example, support of new natural gas power generation projects to replace existing or planned coal assets - a baseload power solution that ultimately helps to bring more renewable energy online.
We are in a critical decade of action, “there is no time to waste” says Susan Flanagan. The path forward is clear - If we truly want to increase electrification in developing countries in Africa and help provide reliable, affordable, and sustainable energy, policy makers and financial institutions must partner with project sponsors to tailor capital solutions that best fit the region and its countries. ECAs and DFIs along with commercial banks and other multilaterals play a critical role in enabling access to the capital required to deliver a more just and equitable energy transition today and for future generations.
Source - GE