By Benjamin Mugisha, Senior Underwriter at African Trade Insurance Agency (ATI)
In the last two years, there has been an exciting development in sub-Saharan Africa (SSA). Some countries have started, for the first time, to experience the possibility of short-term energy oversupply. The irony in Africa’s energy paradox cannot be overemphasised.
In 2017, the United Nations Environment Programme and the African Development Bank released the Atlas of Africa Energy Resources, which estimated that, on a per capita basis, electricity demand in SSA has remained mostly unchanged in the last decade at close to 400kWh as compared to Northern Africa where it almost doubled between 2000 and 2012 reaching 1,500kWh.
Energy is a crucial component of future economic growth. The challenge then is how to balance the prospects of any short-term oversupply, with an attendant increase in energy costs for capacity charges, with the need to increase per capita consumption while at the same time keeping costs affordable to reduce poverty. All this, while monitoring energy generation’s impact on the environment and society. Since 2011, there has been increased recognition of the need to increase renewables in the energy mix. In part, this has been aided by the dramatic fall in the costs of these technologies, particularly for solar.
Private sector involvement
The macro picture is therefore how to ensure that the energy potential in Africa is harnessed for the economic growth of the continent at affordable costs to the end user. Development partners and the private sector continue to seek ways to address this, whether through increased generation, improved transmission or energy integration through regional energy pools.
Private sector participation remains key to achieving these goals, and significant progress has been made in power generation. However, even here, challenges exist. Over the last 10 years, the African Trade Insurance Agency (ATI) noticed that there was a lower than 5% conversion rate in the energy sector; only a small percentage of projects being developed were reaching financial close. A majority of Independent Power Producers (IPPs) faced challenges reaching financial close due to the offtaker risk and the problems in effectively mitigating this.
The reality is that lenders to IPPs are wary of off-taker risk in SSA because of the poor credit rating of most utilities and potential payment delays. Therefore, some form of liquidity buffer is required to address this risk. Traditionally, this would be in the way of a letter of credit (L/C) and a Debt Service Reserve Account (DSRA) of the IPP. If the L/C is arranged by an IPP, it often faces challenges in providing the collateral for the L/C. Utilities themselves would be reluctant to post this collateral as they usually have constrained liquidity and need their cash for investments in infrastructure such as transmission and distribution.
A robust solution
To address this gap, ATI, working together with the German Kreditanstalt für Wiederaufbau (KfW), innovatively developed a Regional Liquidity Support Facility (RLSF) to provide up to six months liquidity to IPPs through a standby L/C from Absa Group Limited. In qualifying countries, the L/C is available to renewable generation projects of up to 50MW. The long-term objective is that RLSF helps projects reach financial close faster, improves the perception of SSA energy markets and lowers the cost of projects, ultimately reflecting in lower tariffs.
RLSF was launched in 2018, and the response from the market has been excellent. The challenges are real but, with innovation, can be surmounted. It is through innovative transactions that SSA will be empowered to achieve Sustainable Development Goal 7 of universal access to affordable, reliable and modern energy services by 2030, including contributing a substantial share of renewable energy to the global energy mix. ESI
About the company
African Trade Insurance Agency (ATI) provides political risk insurance to companies, investors, and lenders interested in doing business in Africa. With deep roots in Africa, we are best positioned to understand, assess, and help mitigate the risks by offering robust solutions. Backed by credibility, financial strength, and underwriting capacity our financial partners rely on our assessments.
www.ati-aca.org | email@example.com | @ATI_ACA