Africa needs a regulatory and policy framework to support investment in renewable energy

A clear, predictable and supportive regulatory framework backed by a stable investment environment will be key to attract investors and funders to renewable energy and power projects, says Bhavtik Vallabhjee, head of power, utilities and infrastructure at Absa.

Another important consideration is a viable tariff, which provides an equitable return on investment to the investor commensurate with the risk of an emerging market – while making it affordable for the end user, he says.

Vallabhjee says the regulatory framework for renewable energy projects in sub-Saharan Africa differs from country to country, depending on the level of government commitment to support this sector.

He says the future for renewable energy projects is bright, but investors want regulatory and policy certainty. Amid the falling cost of renewable energy technologies, renewables are now at grid parity in some countries, and renewable energy projects can be built without the need for government subsidies.

“Project financing is credit intensive. A multitude of risks have to be considered. Risks have to be carefully assessed and appropriately mitigated. This is a pre-condition for debt and equity funding to be secured,” says Vallabhjee.

“As utilities may not be the most creditworthy or financially robust entities, some form of credit enhancement to backstop the utility is required. This could take many shapes or forms. For various reasons, government guarantees may not always be possible.”

Tariffs have to be scrutinised carefully. Many developed countries have subsequently revisited tariffs that they initially have agreed to in their power purchase agreements (PPAs). When tariffs look too good to be true (culminating in enormous returns for developers), they probably are.

Vallabhjee says Absa already has a solid track record as the pre-eminent regional bank in providing funding for renewable energy and conventional power projects. The bank has closed several deals in Africa in recent years. It understands the risks associated with power projects and can bring its vast experience to bear to structure, fund and close complicated, multi-sourced, multi-tranched project financing deals.

He says the view that Africa is “very risky”, politically and otherwise, is a perception issue. Few projects have gone into workout or recovery mode in Africa over the past 30 years. Projects seldom go “insolvent”. There could be a temporary blip, but usually it all works out well in the end. Nonetheless, these risks have to be appropriately mitigated and projects acceptably structured.

He says SA, Egypt and Morocco are leading the way with a regulatory and policy framework because their governments support investment by independent power producers (IPPs).

For example, more than 102 IPP projects in SA in the past nine years have brought about R200bn in direct investment. This compares with fewer than 30 IPPs in the whole of sub-Saharan Africa (excluding SA) prior to the launch of SA’s IPP programme.  

“SA has spent a lot of time, money and effort working with good legal, financial and technical consultants to develop a renewable energy programme that is acceptable to the developer and financing community alike – to the point where other countries have been examining closely how SA’s programme has been structured, with a view to emulating our success,” he says.

Infrastructure projects in Africa have notoriously long lead times. Policy certainty, a clear regulatory framework and governments providing acceptable credit support would help fast-track such projects in Africa.

Renewable energy can provide clean, reliable and affordable power while going a long way to increasing energy access across Africa.

This article was paid for by Absa.