Foreword Energy is central to Africa’s future development, and Africa in turn will play an increasingly important role in shaping global energy trends. How these roles play out in practice will depend in large part on investment, particularly in affordable, reliable and clean energy for African consumers. African countries have huge energy potential, including a spectacular range and quality of renewable energy resources. Africa is home to more than half of the world’s best solar resources, as well as great potential for hydro, wind and geothermal power, among others. But these riches are largely untapped and they will remain so without greatly improved access to capital. African countries should make their energy decisions based on the realities they face and the priorities they have set out. In 2022, the International Energy Agency (IEA) published a landmark Africa Energy Outlook, which highlighted the challenges, trends and dynamics at work in African energy systems and how they could evolve in the coming decades. It laid out an ambitious path for the continent’s energy systems in the form of a new Sustainable Africa Scenario in which all African energy-related development goals are achieved on time and in full. It also revealed a major shortfall in terms of investment: energy spending in Africa has
been falling for over five years but needs to double by 2030. Our new analysis, working in close cooperation with our friends and colleagues at the African Development Bank Group, shows what it will take to expand dramatically the flows of investment capital to clean energy projects across Africa.

Executive summary

A dramatic increase in energy investment into African countries is essential Multiple recent crises have made it increasingly challenging for many African countries to raise financing to support their clean energy ambitions, despite the continent’s huge needs and rich and varied resources. Africa accounts for around 20% of the world’s population but attracts less than 2% of its spending on clean energy. In recent years, African countries have had to deal with a series of overlapping crises, including the Covid-19 pandemic, the energy and food crises following Russia’s invasion of Ukraine and worsening climate risks. Borrowing costs have reached unsustainable levels in multiple countries, and debt servicing costs are now double the level of clean energy investment across the continent. Achieving the region’s energy development and climate goals requires energy investment to more than double from today’s USD 90 billion by 2030, at which point nearly two-thirds of spending would go to clean energy. Energy investment in Africa has been falling in recent years. Spending on fossil fuels – which has typically accounted for around two-thirds of investment – has declined and clean energy investment has remained flat. This report explores the continent’s investment needs under the Sustainable Africa Scenario (SAS) developed in the IEA’s Africa Energy Outlook 2022. The scenario considers the diverse needs of different African countries and sectors and lays out a pathway to achieve the energyrelated Sustainable Development Goals, including universal access to modern energy by 2030, as well as fulfilling all announced climate pledges in full and on time. This requires a step change in investment, shifting away from fossil fuel projects designed to supply foreign countries towards clean energy projects, including a larger role for decentralised systems. All of this requires opening up a range of new capital sources and financing approaches.

One of the principal conclusions of the IEA’s Africa Energy Outlook 2022, which laid out pathways for Africa to achieve all its energy and climate-related goals by 2030, was the need for the rapid scale-up of clean energy investment. Overall investment in Africa’s energy sector, across fossil fuels and clean energy, has been falling since 2014. Despite making up one-fifth of the global population, Africa currently accounts for only 3% of global energy investment and a mere 2% of the world’s clean energy investment. While trends vary across a very diverse African energy landscape, this shortfall in investment is alarming. It puts at risk the achievement of a host of sustainable development goals and could open up new dividing lines in energy and climate at a time when clean energy transitions are gathering speed in other parts of the world, notable advanced economies and China.
This report, Financing Clean Energy in Africa, digs deeper into the opportunities and barriers facing investors in clean energy and infrastructure across the continent. It explores both the financing needs for different elements of the energy sector (Chapter 2) and the types of finance available (Chapter 3). In doing so, it reveals fundamental mismatches within the current system that are preventing adequate financial flows reaching clean energy projects in Africa. Project developers often find capital to be too expensive and with unworkable terms, while on the finance supply side, investors find many clean energy projects on the continent to be too small or risky. Reducing these mismatches requires progress on both the demand and supply sides. This report uses case studies to demonstrate how these obstacles can be overcome. It opens with a discussion introducing Africa’s investment needs under the IEA Sustainable Africa Scenario (SAS) and considers the risks and other factors contributing to the elevated cost of capital for clean energy projects in Africa.

Investment to support the SDG7 goal of achieving universal access to energy reaches USD 25 billion per year by 2030 under the SAS. This represents only 1% of current global energy investment. By contrast, prevailing policy settings in the STEPS see access investment reaching only USD 5 billion by 2030. This highlights the importance of improving the policy environment for access projects, particularly via the creation of national targets and action plans that clearly lay out the role for different energy access solutions and providers. This policy action needs to be coupled with new financing solutions to support the effective use of public capital and to activate private capital where possible (see Chapter 2). Investment directed towards end-use activities increases under the SAS. This surge in spending focuses primarily on enhancing the efficiency of buildings, vehicles, appliances and lighting. These efforts are driven by stricter regulations and aim to reduce energy consumption and environmental impact, for example by phasing out the traditional use of solid biomass for cooking. Other end-use activities growing in prominence include the switch to electric two- and three-wheelers, as well as green public transport such as electric buses and urban rail systems, and the use of renewables in buildings and industry for heating and cooling. These areas combined account for 20% of spending in 2030 compared with roughly 5% a decade earlier.

The structure of Africa’s external debt stocks has also changed over time, with the share of concessional lending decreasing continent-wide (Figure 1.3). This slump is particularly significant in sub-Saharan Africa and in countries reliant on concessional finance, which are less likely to be able to absorb the additional costs that accompany commercial debt. Across the continent, traditional lenders such as official bilateral and multilateral creditors went from holding 20% of its debt in 2011 to 16% in 2021, even as new bilateral lenders such as China took on a more prominent role. A broader and more diverse creditor base can complicate debt restructuring processes, as illustrated by Zambia’s two-year-long negotiations before reaching an agreement with creditors on new repayment terms for up to USD 6.3 billion of debt (Reuters, 2023a). Ghana, whose debt structure also includes a significant amount of domestic debt, has recently secured an agreement with the IMF and the World Bank on an extended credit facility of USD 3 billion (BBC, 2023), which could signal a replicable breakthrough for other countries facing similar challenges.

Governments can take steps to reduce the risks associated with high debt levels by publishing regular and transparent data on debt and implementing sound debt management practices, such as disclosing actual assets and liabilities, and tracking possible but uncertain (contingent) liabilities – for example, the potential need to pay indemnities for a breach of contract that leads to termination. Failure to do so reduces government reliability as a partner for future investors, raising the default risk, while also preventing governments from investing in much-needed infrastructure. Greater investment in clean energy on the continent requires the private sector to play a significant role, which in most African countries requires careful management of contingent liabilities but does not necessarily entail raising public debt.

Hedging mechanisms such as forex options or forwards can protect investors against future depreciations, but they remain expensive options. While commercial banks have hedging products, the availability of these in African markets tends to be limited, with the exception of South Africa, due to banks’ own risk management and the underlying illiquidity of local capital markets (AVCA, 2022). Global hedging platforms such as the Currency Exchange Fund (TCX) fill that space by providing swaps and forward contracts that shift the currency risk away from investors, projects or countries to TCX and currency markets. TCX manages the currency risk via its currency pooling mechanism and large balance sheet. 4 Currently, TCX is primarily used by MDBs and other development financiers to provide loans in local currency, but there is scope to expand its use to other private investors if they can absorb the cost. In the long term, developing local capital markets to provide financing in the local currency will be key to scaling up investment in clean energy projects with low exposure to currency fluctuations.

The poor financial health of utilities also increases transmission risk since in many cases they have limited ability to finance the necessary investment in grid maintenance and expansion. The grid’s inability to absorb power has multiple implications. Where the grid is not ready by a project’s commercial operation date, it can result in the utility paying for power that is deemed to be generated (e.g. the Lake Turkana wind project in Kenya), or, in extreme cases, developers may be forced to utilise distribution lines to evacuate power, leading to heavy losses and potentially damaging the lines. Success stories, such as Rwanda, showcase how.

Chapter 2 Designing finance solutions for clean energy

Introduction Mobilising capital to meet Africa’s requirement for clean energy investment means tapping into all sources of finance, leveraging debt to develop capital-intensive projects and bring down total costs, and raising equity for smaller, riskier undertakings that lenders would struggle to finance. Matching these alternatives – as well as the needs of finance providers – with the profiles of different subsectors, technologies and countries is key to scaling up investment in an efficient way. This chapter examines the differences among projects by focusing on the investment profiles of their respective subsectors – energy access, renewable power, grids, energy efficiency, and the development of critical minerals and low-emissions hydrogen. Each of these areas plays a critical role under the SAS and needs to be financed by the right mix of public, concessional and private sector capital. This chapter identifies business models already in use in the region to highlight where concessional capital is most needed and to demonstrate how private capital can be deployed.

development financing – and using their concessional funds to mobilise the private sector. This means DFI capital is particularly active in renewable power generation, including in relation to electricity access projects, emerging technologies (such as lowemissions hydrogen) and clean cooking. Meanwhile, state-owned enterprises maintain a key role in grids and storage, although achieving the necessary level of investment will rely on improving their financial health and is likely to require grants and concessional support from donors.

Energy access More than 600 million people in Africa (over 40% of the population) had no access to electricity in 2022, and 990 million (nearly 70% of the population) lacked access to clean cooking. The majority of people without modern energy services are concentrated in rural areas – around 80% for electricity and two-thirds for clean cooking. Five countries – the Democratic Republic of the Congo (DRC), Ethiopia, Nigeria, Tanzania and Uganda – together account for around half of the people without access to electricity in Africa, with a similar trend for clean cooking.

Achieving universal access requires a significant shift in the types of projects that are financed. Around 42% of the population gaining access to electricity by 2030 in the SAS does so with a grid connection, with grids eventually reaching almost every customer by 2050 (IEA, 2022). Particularly in the coming decade, decentralised solutions play an important role: of the people gaining electricity access by 2030, 30% do so via mini-grids and the remaining 27% with stand-alone systems, mostly solar PV based. On the clean cooking side, new IEA analysis highlights that around USD 250 million of cooking equipment needs to be distributed to achieve universal access by 2030 (IEA, 2023a). Improved biomass cookstoves account for 40% of this, representing a viable and affordable solution in rural areas, 33% LPG, 10% electric cooking devices and the remaining 15% biogas and ethanol stoves.

Off-grid solar companies and mini-grid operators that are successful largely target the most profitable projects, such as peri-urban areas, back-up power or smaller products. However, the presence of these companies provides a useful source of technical expertise and the opportunity to devise models to enable them to deploy in more challenging areas when financial schemes and incentives becomes available.

Without reduced electricity tariffs currently in place, no households without access to clean cooking would be able to switch to electric cooking. Improved biomass cookstoves are generally more affordable. Such cookstoves do not require the household to change fuel and by reducing consumption lead to energy and expenditure savings, paying back the upfront cost almost fourfold within one year (IEA, 2022). Along with the overall household savings associated with a switch to clean cooking, there are significant positive health impacts, particularly for women. Poor air quality from traditional cooking indoors is a major contributor to premature death, which if assessed on its own would rank third among the leading causes of death globally, and second in Africa, where over 60% of premature deaths are among women and children (IEA, 2023a). These multiple benefits indicate that clean cooking should be a priority area for public support.

Once countries already have a developed market for renewables projects, the pipeline of new projects can primarily be funded via commercial debt with partial assistance from the public sector. This opens the country up to a larger pool of capital providers while also freeing up DFI or donor capital to invest in more nascent markets. Benban Solar Park in Egypt (380 MW) was originally funded with equity from the private sector and debt solely from development banks. In April 2022 Scatec and it partners refinanced the non-recourse project debt through the issuance of a 19-year USD 335 million green project bond (OECD, 2022). This transaction – the first of its kind in Africa – allowed for the reduction of the project’s financial costs while also freeing up development bank capital to reinvest elsewhere. The project also incorporates risk mitigation instruments, notably guarantees from the Multilateral Investment Guarantee Agency (MIGA) protecting over USD 50 million from currency risk for 15 years. These kinds of transaction could set a precedent for future deals that move Africa towards the objectives of the SAS.

Digitally enabled solutions, such as solar PV plus battery behind-the-meter systems or mini-grids, are also often a cost-effective approach to ensuring reliability in new demand centres. For instance, a recent pilot project in Uganda called Utilities 2.0 has demonstrated the potential for private developers to fund remote mini-grid projects that are operated using digital meters monitored by the national distribution system operator, Umeme. This approach ensures that the local network is installed according to the utility’s technical standards, guaranteeing interoperability for the future, while also minimising costs for consumers.

Investment in grids also needs to focus on improving existing infrastructure, as well as ensuring the system can deal with the influx of more variable sources. Under the SAS, maintenance and modernisation of existing infrastructure represents almost a quarter of the total spend on grids to 2030, helping to reduce losses in 2030 by 30% compared with 2022 (IEA, 2022). A variety of sources of flexibility are utilised under the SAS (see Spotlight), including a small amount of battery storage, primarily near large utility-scale solar and wind projects. At current price points, the use of batteries is limited to short-duration flexibility and providing storage in remote applications. However global price declines show promise in making batteries increasingly cost-competitive beyond the 2030 outlook. Public utilities will need to be responsible for much of the investment in upgrading electricity systems across the African continent, accounting for 80% of grid investment in 2030. This is a daunting prospect given their perilous financial state today. Poor payment collection rates, illegal connections, cost increases (including the cost of capital), operational problems and supply chain constraints are reducing cash flows and driving up debt. Private sector financing will therefore need to take on a larger role, although this is likely to be limited to countries that have relatively well-developed power systems and a stable regulatory environment. A variety of approaches to this kind of investment are used globally (see Table 2.3). Governments can prepare for it by carrying out tariff structure reform and authorising the use of concession agreements or other regulatory carve-outs for private sector investment and ownership, as well as the introduction of auctions and competitive tenders.

Energy efficiency finance is still a nascent market in many economies, yet to be prioritised for concessional and commercial capital. Only 13% of the instruments analysed for this report explicitly cover energy efficiency projects, while 16% cover e-mobility (see Figure 2.8). The complex and relatively small-scale nature of energy efficiency projects – combined with low awareness about their potential, risks and business models – requires a more systemic approach. Projects often need de-risking, standardisation and aggregation mechanisms to mitigate transaction and financing costs that reflect higher risk perception among local financial institutions. Initially, this is likely to require grants and equity capital as markets and business models develop.

Resources in Africa remain underexplored largely due to insufficient geological data. Improving surveys and mapping is therefore a first major step to attracting interest. African governments may also need to strengthen their environmental, social and governance (ESG) data and policies, since investors globally are facing pressure to include ESG factors into their decision-making. Private capital providers, especially from Europe and North America, are likely to require enhanced governance and transparent mineral wealth management at the country level and strong environmental and social management practices at the project level. The extractive industry already brings significant revenues to African countries and this source of income is set to grow as global demand soars. In 2021 metals and minerals (excluding gold and other precious stones) generated USD 70 billion of sales revenue and accounted for 20% of Africa’s overall exports, compared with only 11% in 2016. Currently, sub-Saharan Africa accounts for 13% of global market revenues for copper and battery metals. With a similar market share by 2030, revenues would double, and with a share reaching 20% by 2050, they would exceed USD 100 billion, on a par with current revenues from fossil fuels (IEA, 2022). Dependency on commodity exports may, however, create economic vulnerabilities as well as social and governance risks. Of all African countries, 45 are considered commodity-dependent, and minerals represent over 50% of total product exports in 14 African countries, up from 9 in 2016 (UNCTAD, 2022). There is a strong need for transparent mineral wealth management to translate mining revenues into widespread economic prosperity and use them to support diversification of the economy.

Anchoring demand for large low-emissions hydrogen projects in a foreign offtaker can provide the stable revenue stream needed to mobilise investors at the necessary scale. However, such projects should retain a strong focus on leveraging inflows of hard currency, technological capacity and skills to spur domestic benefits beyond pockets of domestic industrial application. Such benefits could be achieved by oversizing facilities to provide power to local communities – critical in a continent with an average electricity access rate of 57% – and by training a skilled workforce to benefit from the creation of new jobs. Namibia has taken the lead in this regard, signing an MoU with the European Union and a partnership with Germany at COP27 in 2021. In May 2023 Namibia signed a feasibility and implementation agreement with a German company (Hyphen) to develop a project that would produce 2 Mt of low-emissions ammonia per year for an estimated investment of USD 10 billion (equal to over 80% of the country’s GDP in 2021). The country also mobilised concessional funding of EUR 540 million (USD 579 million) from the European Investment Bank and Dutch firm Invest International to finance its industrial clean energy ecosystem and to fund a potential equity share in the project. Mauritania and Egypt also signed agreements with private developers for major projects and MoUs with potential offtakers.

Chapter 3 Mobilising capital for a sustainable future Many clean power projects in Africa are reliant on concessional funding, with development finance institutions (DFIs) acting as some of the largest energy investors on the continent. There is significant variance across countries and technologies, as outlined in the previous chapter, but the current approach to financing energy development in the region is failing to keep up with the needs of the SAS. This chapter looks at the challenge through the lens of the supply of finance, and understanding how the main sources can be better mobilised to support the growing investment needs under the SAS. Enhanced commitments by donors and DFIs are an essential condition to scaling up clean energy investment. However, this also needs to be accompanied by improvements to their existing delivery channels, reviewing their business models to take a more active role in riskier early-stage project development and focusing on how to mobilise more private investment. DFIs and donors also play a particularly vital role in fragile and conflict-prone countries, where other capital is severely lacking. These markets continue to be underserved and risk being further left behind.

Maximising concessional capital DFIs – both multilateral development banks (MDBs) and bilateral DFIs – are critical actors in financing clean energy transitions in Africa. But the level of investment being made thus far falls well short of what is required to meet rising demand for energy services. A stronger focus on private capital mobilisation and a shift away from direct financing towards derisking clean energy projects can help to scale up private finance in the region. Support is also needed for project preparation and structuring to build project pipelines that can scale rapidly and address the current lack of bankable clean energy projects. Total bilateral ODA from OECD countries to Africa has risen slightly in recent years, but energy continues to account for a relatively low 6% share – a level that has been relatively static (Figure 3.1). The largest shares of ODA support health (20%) and education (9%). Aid budgets from donor governments have come under increasing pressure in recent years, and they are likely to continue to struggle to allocate more capital to energy projects in Africa due to added pressures on budgets.

The African region has been one of the main recipients of blended finance both in the number of deals and total amount, with current annual spending of around USD 3 billion (see Figure 3.2). However, this falls short by a factor of nearly ten the needs of the SAS in 2030, by which time an estimated USD 28 billion in concessional funds would be required to 6 The OECD defines blended finance as the strategic use of development finance (from public and philanthropic funders) for the mobilisation of additional finance towards sustainable development in developing countries. IEA. CC BY 4.0 80 International Energy Agency | Financing Clean Energy in Africa mobilise some USD 90 billion in private financing.7 About half will be needed to create and expand renewable power systems, with another third going to efficiency and end-use, and the remainder supporting development of low-emissions fuels, grids and energy storage. Concessional financing will play a key role in supporting newer technologies such as battery storage and low-emissions hydrogen that are not yet cost-competitive.

Unlocking international private investment
International investment plays a key role in clean energy development, particularly while local capital markets are still developing. However, overall foreign direct investment (FDI) into Africa has been volatile over recent years, falling to its lowest level since 2005 in 2020. While this was primarily the result of the Covid-19 pandemic, even in the five years prior, FDI had fallen from USD 55 billion to USD 40 billion as investor interest in EMDEs waned. Flows have since rebounded but, excluding South Africa, inflows are still nearly 20% lower than the record high reached in 2015.

Greenfield FDI – investment into new production facilities as opposed to the acquisition of existing ones – has also failed to significantly ramp up. Globally, greenfield FDI fell at an average rate of 3% per year between 2010 and 2021; Africa accounted for less than 10% of this investment. Despite this, there are signs of progress in sub-Saharan Africa, with FDI taking on a larger share of gross fixed capital formation since 2016 – a measure of total investment.

African countries can also tap into the potential of VCMs to develop climate mitigation projects. However, only 11% of all credits used in VCMs between 2016 and 2021 were issued in African countries. The African Carbon Markets Initiative (ACMI) estimates that Africa currently utilises only 2% of its yearly carbon credit potential (ACMI, 2022). VCM projects are currently concentrated in five countries (Kenya, Zimbabwe, DRC, Ethiopia and Uganda), which account for 65% of credits issued over the past five years. Moreover, 15 project developers own projects that have issued 73% of all credits on the African continent over the past ten years (ACMI, 2022). And 85% of all African VCM carbon credits issued between 1996 and 2023 are from two types of project: forestry and land use, and clean cookstoves (see Figure 3.5).

Some African leaders, such as Kenya’s President William Ruto in his address at COP27 (NTV Kenya, 2023), have called for higher transparency and fewer intermediaries in VCMs.8 Costly (international) intermediaries between project developers and buyers, and a lack of overall transparency on benefit sharing can significantly reduce the amount of funding to Africa and local communities, often to as little as 10% of the carbon revenue (Climate Action Platform Africa, 2023). The lack of regional validation and verification bodies also adds costs to the VCM credits. Some countries, such as Zimbabwe (Bloomberg, 2023a), Kenya, Malawi and Zambia (Bloomberg, 2023b) have proposed measures that stipulate the share of carbon credit revenue that must be allocated to the government and local investors.

Green bonds are generally the preferred instrument by number of issuances. Use of proceeds are dominated by renewable energy, which accounts for 40% of cumulative issuances (see Figure 3.7). Public transport has been a key target for public sector bonds; for example Egypt’s first sovereign green bond, issued in 2021, will be partially used to finance the Cairo Monorail, and Morocco’s rail operator issued a green bond in 2022 to refinance debt to build an electrified high-speed line. Within the past two years green buildings have also become more prominent, particularly in South Africa and following Kenya’s first green bond issuance, which will fund efficient student housing in Nairobi.

Just 0.3% of this early- and growth-stage investment went to Africa-based start-ups in 2022 (see Figure 3.9). While the global amount of VC for energy start-ups has risen sixfold since 2015, and more than doubled since 2020, African start-ups have represented a steadily decreasing share. Just five countries – Kenya, Tanzania, Ghana, Nigeria and South Africa – represent 95% of the African total since 2015. This concentration is, in large part, due to the financing challenges in smaller markets. Shifting this trend to a more positive outlook will take a long-term commitment to addressing barriers, some of which lie far outside the purview of energy and environment ministers (IEA, 2020). The development of institutions that nurture and formalise private equity investment is a step that underpins the development and growth aspirations of most EMDEs (Bonini and Alkan, 2012).

The evolving range of tools available to attract both local and international capital to energy projects in Africa demonstrate that it is possible to achieve the investment needs of the SAS, but there are still significant challenges to overcome. Many clean energy projects in Africa are still considered too risky by private investors and the over-reliance on limited concessional finance resources acts as a break on developments. Urgent steps are needed to unlock private capital, starting with some of the lower-risk investments, such as clean power projects in countries with a successful track record and established regulatory environment. This can allow concessional funds to focus on some of the more complex or non-commercial areas, such as early-stage financing, energy access projects, or fragile and conflict-affected states. Concessional funds also play a vital role in supporting governments as they implement regulatory reforms and build capacity at energy institutions. This review of financing channels has sought to highlight where each type of capital can immediately focus its attention in order to most rapidly scale-up spending on clean energy in African countries. As outlined in the cycle of change laid out in Chapter 1, this financing increase cannot be realised without a series of coordinated actions from African governments, donors and DFIs, and the private sector. These efforts can not only ensure Africa’s secure and sustainable energy future, but also help achieve urgent climate objectives and drive the continent’s socioeconomic development.

Source:IEA