CrossBoundary Advisory
03.08.2023
White paper
03.08.2023
White paper

PPA Bankability in Africa: Moving away from Sovereign Guarantees and the Rise of Energy Intermediaries

Key Insights
Innovative models are emerging to address concerns around offtake security and project bankability.
New energy intermediaries have emerged to facilitate access to power pools and balance the supply and demand for energy.
DFIs are well positioned to shift their focus away from primarily lending to generation projects and instead to increase their risk appetite and support this new nascent sector.
Historically, the bankability of grid-connected power projects in Sub-Saharan Africa relied on sovereign guarantees. However, with debt burdens growing to unsustainable levels, there has been a rise in IMF interventions, and countries are increasingly reluctant and unable to provide sovereign guarantees for power projects.

Download the white paper

As a result, innovative models are emerging to address concerns around offtake security and project bankability. New energy intermediaries have emerged to facilitate access to power pools and balance the supply and demand for energy, including between countries. However, given that these business models are still nascent, they require support to attain the scale needed to ultimately achieve sustainability.

In parallel, local lending institutions and pension funds are increasingly interested in financing clean power generation. As such, we believe that development finance institutions (DFIs) are well positioned to shift their focus away from primarily lending to generation projects and instead to increase their risk appetite and support this new nascent sector of intermediaries.

In addition to enabling this emerging sector, DFI support could catalyze domestic financing for generation projects, improve the performance of critical power pools, and grow the amount of capital available for clean power projects, ultimately increasing the pace of electrification on the continent. We believe, and hope to see, DFIs evolve their role into enablers of the private capital that will be critical to closing the vast financing gap that impedes access to electricity on the continent.

Context

Sub-Saharan Africa continues to face a disproportionate gap in access to electricity.

More than 50% of the population in Sub-Saharan Africa remains unelectrified, representing more than 75% of the 750 million+ people globally without access to electricity.

Insufficient power generation is a key driver of this problem. In 2021, only 23% of all electricity generated in Africa was from renewable energy sources with a cumulative capacity of 56 GW, despite the vast potential of solar (10 TW), hydro (350 GW), wind (110 GW), and geothermal (15 GW) capacities.

A key barrier inhibiting investments into projects has been their bankability. This is primarily due to off-taker solvency concerns, since many of the utilities on the continent struggle with weak balance sheets and/or lack financially sustainable operations (owing to technical and commercial losses, inability to have cost reflective tariffs, etc.). In order to overcome these concerns, governments have historically offered sovereign guarantees in Power Purchase Agreements (PPAs), to cover any payment shortfalls by the off-taker. These sovereign guarantees enabled projects to further utilize support mechanisms such as political risk insurance (often by the world bank’s political risk insurance arm MIGA), in order to provide sufficient risk mitigation to enable projects to access long-term project finance from lenders.

Download the white paper