Last week, we interviewed Ana Hajduka, CEO of Africa GreenCo, and a speaker at our Spotlight Seminar on the Future of Renewable Energy in Africa. Ana discussed the problems with financing energy in Africa, spoke passionately about the urgent need for blended finance, and Africa GreenCo’s mission.
1) What are the problems with existing financing models in Africa?
The current financing model for independent power projects in Africa is based on long-term bilateral power purchaser agreements between a single generator and a single purchaser for the entire capacity of a generation facility. This financing model means that the generator and investors rely too much on the off-taker’s credit risk.
African state utilities are the main off-takers, but most are financially weak, resulting in a risk profile far beyond the appetite of most investors. What’s more, private sector financiers require risk-adjusted returns, which would make the electricity tariffs unaffordable. As a result, African governments rely on the international development community to provide the necessary capital. Yet these public sector institutions lack the resources to provide the US$60-90bn per year that the African Development Bank estimates are needed to achieve universal access throughout Africa by 2025.
As a result, the bilateral model can’t provide the capital required to achieve development goals and provide clean and reliable power for sustainable economic growth. Existing financing models also place a heavy burden on host governments who are often required to provide security for the payment obligations of national utilities. Consequently, governments are less able to invest in other core infrastructure.
2) Why can blended finance spur growth in existing African markets?
We believe that concessional development should be used to spur private investment and market development, creating a truly independent sustainable energy sector. As the Addis Ababa Accord notes, we need blended finance models that will incentivise the domestic and international private sector to work alongside the donor community. Otherwise, we won’t be able to raise the trillions of dollars needed to boost clean energy on the continent.
3) Are there any regional African power markets?
Yes, there are five power pools at different stages of development covering different geographical regions (North, West, Central, East, and South). Within sub-Saharan Africa, the Southern African power pool (SAPP) is the most established both in terms of connection and the stage of development of competitive markets.
SAPP was established in 1995 and started work on developing a competitive electricity market for the SADC region in 2004. The day ahead market was established in 2009 and the SAPP trading platform was upgraded in 2015 to include weekly and monthly forward physical markets and the intra-day market. While there remain a number of transmission constraints across the region, particularly during times of drought, traded volumes have grown strongly over the last year, hitting a high of 245,163.30 MWh in October 2017.
4) What role can regional power pools play in scaling up private sector financing?
Regional power pools provide an alternative route to market compared to the current model of individual power projects contracted to national utilities. In these models, the off-take risk of a project can be viewed the same way as the risk of a blended power pool of potential purchasers rather than as a single off-taker. As a result, regional power pools would be able to breach national sovereign ceilings. They’d also be able to expand sources of finance, resulting in reduced cost of capital and lower electricity tariffs.
5) What makes Africa GreenCo’s contribution to energy financing unique?
Africa GreenCo addresses more than pure financing. It’s an operating business embedded in the local electricity sector that’s able to mitigate risks physically rather than simply reallocating them. The company aggregates the international development community’s risk tolerance into an efficient, centralised and coordinated structure. This can boost development impact and pass the majority of the cost savings generated through to the local market.
As a stable and independently managed counterparty, GreenCo will increase private sector confidence in the market and reduce reliance on DFI financing for renewable energy generation projects. This capital could then be used in other priority areas such as transmission and distribution.
The Africa GreenCo business model complements the focus and priorities of regional stakeholders such as SAPP, the Regional Electricity Regulators’ Association of Southern Africa, and NEPAD. In fact, all of these organisations have all written letters in support of GreenCo’s operationalisation. The Association of Power Utilities of Africa also supports GreenCo as a means of securing greater renewable energy generation capacity at lower costs and supporting African utilities in their transition to creditworthiness.
GreenCo also aligns completely with the goals of the SADC members set out in the SADC Regional Infrastructure Development Master Plan (RIDMP). We’re thrilled that the community approved a $2.145 million grant from the SADC Project Preparation and Development Facility towards the advisory costs necessary to support GreenCo’s implementation.
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