Author: Chijioke Mama, Africa Energy Analyst for Solarplaza
Recently there has been a proliferation of financiers looking into the African energy market but solar project promoters in Africa may be underestimating the amount of funds accessible to African RE projects. In order to secure the needed finance what should promoters do?
Recently there has been a proliferation of financiers looking into the African energy market, as well as an increase in the overall portfolio size of the funds available to project promoters. However, solar project promoters in Africa may be underestimating the amount of funds accessible to African renewable projects. The financing options are also wide, including equity, debt mezzanine and grants. So the question has now become: ‘In order to secure the needed finance in the midst of abundance what should promoters do?’
The improvements in available funds for solar projects have been followed by other initiatives designed to ensure that African entrepreneurs have optimal access to them. For example, the Africa-EU Renewable Energy Cooperation Program (RECP) holds a useful database of about 75 renewable energy funds. The database is accessible online at the RECP website, and as RECP Service Line Coordinator, Michael Franz, explains: “The RECP is a European platform to support market development for renewable energy and to stimulate investments in Africa. It acts as a facilitator, convener and provider of support to the various market actors”.
This financing database along with other similar initiatives underscores the fact that solar project promoters can now raise funds from traditional financial institutions such as local and national banks and, more importantly, from other modern sources of capital such as private equities and Development Finance Institutions (DFIs) such as the African Development Bank (AfDB), the World Bank and the US Power Africa Initiative. In addition, many developed countries now have funds dedicated to African renewable energy projects which are deployed using different instruments.
One such example is the Sustainable Energy Fund for Africa (SEFA). Launched in 2012, this is a USD 95 million multi-donor facility administered by the African Development Bank, funded by the governments of Denmark, the United Kingdom, the United States and Italy.
SEFA seeks to increase the pool of “bankable” investments in small- and medium-scale renewable energy projects in Africa through grants for project development and equity investment to bridge the financing gap.
However, this necessary abundance of funding is not by itself a sufficient condition for renewable energy to proliferate in Africa. To use the words of Jamie Fergusson, Chief Investment Officer of the International Finance Corporation (IFC): “There is abundant liquidity for solar in Africa; liquidity is not the issue. The issue is bankable scalable projects” (watch full talk).
The apparent delay in securing finance (despite available funds) could be attributed to many factors including poorly bankable projects and poor project conceptualization.
According to Joao Duarte Cunha, SEFA Coordinator, “many African project developers lack the technical know-how and risk capital to prepare a project that could meet the stringent criteria of commercial financiers”.
African energy entrepreneurs should then understand the best approaches and procedures for securing capital, and familiarity with platforms such as the RECP’s Database could prove essential to successfully securing finance.
The RECP database consists of 75 active and substantial funds, and has the capacity to provide equity investments, debt, debt guarantee, grants and other forms of structured finance.
Mr. Franz believes project promoters should understand the diversity in the structure, expectations and preferences of the listed funds, since a proper alignment of financiers’ and recipients’ expectations will be critical to the success of many financing relationships. He says: “In addition, almost every financier has at least in large parts their own models and procedures”.
For example, one of the listed funds, Ariya Capital, provides equity investments in the range of USD 3-10m and specifically looks out for ‘Innovative, high growth businesses that have the potential to become significant regional players’. Another RECP listed fund, Actis Infrastructure, has a total fund size of USD 750m and commits higher ranges of USD 10-50m to projects in the form of equity. And Energy Access Venture is a solar-focused fund with approximately USD 55 million in total fund size, making equity investments as well as grants.
Jacob Klingermann is the Vice President of Climate Investments at the Danish Investment Funds for Developing Countries.
He says: “In seeking funds for project development amidst numerous available sources many promoters shop around far too long before they agree on the commercial terms with a consortium. The effect of this is that the project runs into time issues in order to meet the agreed deadlines in e.g. the PPA agreement. So we advise to agree with the co-investors as soon as possible in order to get the project off the ground and actually happen, instead of trying to optimize a theoretical gain.”
To emphasize what he considers the right mindset for successfully securing finance he adds: “Again they need to accept that these [financing and team partnerships] do not come cheap – i.e. they will be diluted but nevertheless the project’s chances of success increase, and they may actually make real money instead of being the 100% owner of a great idea that stays an idea”.