Renewable Energy In Africa: What’s In It For Investors?

A new report by Africa Oil Week and Wood Mackenzie has highlighted that the global energy transition will drive divestment of oil and gas assets in Nigeria and other Sub-Saharan countries. It went ahead to state, “Carbon emission is increasingly key when screening assets for divestment. Low-value, high-emissions assets will be prioritised for sale.” When reporting on how the market will respond to the increased divestment, the report stated that above-ground risks, oil price risks and access to finance on reasonable terms would continue to shrink the pool of buyers for these oil and gas assets.

Energy projects rise and fall on finance. While, as the report highlights, access to finance for fossil fuel assets will continue to be a challenge, financing for clean energy projects in Africa is on the rise. Only last month, the African Development Bank (AfDB), the Korean Ministry of Economy and Finance and the Export-Import Bank of Korea committed to providing $600 million in co-financing for energy projects in Africa, with a focus on renewable energy (RE) solutions. Additionally, Financial Sector Deepening Africa (FSDAi) is investing $4.5 million in Pay As You Go (PAYG) solar in three African countries including Nigeria, complementing an already total raised of $23 million.

These investments are further strengthened by the quickly reducing cost of RE technologies when compared to fossil fuel projects. A report by the International Renewable Energy Agency (IRENA) revealed that almost two-thirds of renewable power generation brought online around the world last year, accounting for 162 GW of power, had lower costs than the cheapest fossil fuel options.

Further, Mark Napier, CEO FSDAi in his comment during the announcement of FSDAi’s PAYG investment, acknowledged the falling cost of RE technologies, “The falling cost of renewable energy technologies means that our investment will enable clean electricity to be provided in a way that is accessible across the continent.”

According to Anthony Monganeli Mehlwana, Economic Affairs Officer at the Economic Commission for Africa (ECA), “Levelized Cost of Energy (LCOE) or fossil power plants is more expensive than wind and solar. Onshore wind costs $59 per MW while utility solar PV costs $79 per MW. Meanwhile, the cost of coal is $109 per MW and natural gas stands at $74 per MW.”

As the cost of investing in RE projects becomes more economically viable than fossil fuel projects and the need to transition becomes dire, development finance institutions, international banks, government agencies and private sector entities are putting in more money in the RE pool. Early last month, the World Bank announced its new $465 million fund to improve RE integration in West Africa. It has also approved $168 million financing towards Burkina Faso’s efforts to increase access to electricity in rural areas and support the country’s transition to clean energy.

Similarly, the International Finance Corporation (IFC), and The Rockefeller Foundation (RF) announced mid-last month, a new partnership that aims to mobilize up to $2 billion of private sector investment in distributed renewable energy solutions, with an initial phase distributing $30 million in blended concessional finance and grant capital to leverage an active pipeline of distributed renewable energy projects developed by the IFC. The funding is to go toward IFC’s prototype scaling mini-grid program in addition to distributed renewable energy generation, battery energy storage, and other innovative clean energy technologies.

Around the same time, the Africa Renewable Energy Fund II (AREF II) raised €130 million from seven investors to finance renewable energy in sub-Saharan Africa. Only two weeks ago, TotalEnergies also announced an investment of about $60 billion in renewable energy projects between now and 2030. From Europe, the European Investment Bank (EIB) has also approved $95 million for funding geothermal energy projects in East Africa. A funding mechanism by Electricité de France (EDF) equally aims to mobilize diaspora financing for rural electrification, with an aim to fund renewable energy capacity of up to 100 million GW in Africa.

In addition, AfDB President, Dr Akinwumi Adesina announced two weeks ago that the bank was working on a Desert-to-Power Initiative, which would lead to the development of 10,000MW of solar power in the Sahel of Africa, providing electricity to 250 million people. In this regard, he highlighted that the bank had increased the share of total financing devoted to climate from 9% in 2016 and was aiming to reach 40% by the end of 2021.

Under the Biden administration too, the US Development Finance Corporation has committed new money to fund renewable energy in Sub-Saharan Africa.

With an ECA recent report showing that many African countries have large energy deficits – and Nigeria accounting for the highest levels, there is a massive market for new energy supply on the continent, particularly decentralized energy. As the energy transition is enabling new financing for transition projects that focus on renewables and in some cases, natural gas as a transition fuel, to make hay would be for an investor to look to investing in RE technologies and benefiting from the grants and low-interest development loans for this purpose.