Author: Marco Dorothal
On the 5th of October 2017, Solarplaza organized a webinar on solar development in the African market: Commercial capital investments in African solar PV projects, in the run-up to the 2-day Unlocking Solar Capital Africa conference organized in Abidjan, Côte d'Ivoire on the 25th and 26th of October, 2017.
Adriaan van Loon, project manager at Solarplaza, was joined by Charles Ayenu, regional coordinator at CEADIR West Africa, and Jan Malan, principal transactor at Nedbank CIB. Together they gave an in-depth look at the past experiences from previous projects, perspectives of international and local commercial banks on solar PV, including key considerations for investing in solar PV projects in Africa. The entire video recording of the webinar and the speakers’ slides can be freely accessed here.
Charles Ayenu, regional coordinator at CEADIR West Africa and CEO of Home Energy Africa has extensive banking experience in the region and sees some challenges when it comes to scaling up commercial bank lending for clean energy in Africa. He believes that bank staff in Africa has insufficient knowledge of clean energy technologies, as well as a lack of knowledge on different business models and suitable loan products. In order to tackle this issue, there is a huge need for development in Human Resources and capacity building.
Challenges to scaling up lending
African countries are facing steep regulations in the banking sector imposed by the central bank in each country, making it very challenging to scale up commercial lending. The need for longer tenor loans, high interest rates and high collateral requirement due to perceived risks are also challenges to take into consideration when scaling up.
When it comes to risks involved in the banking sector, currency mismatch and local currency risks are key barriers to encouraging lending. One major challenge that the developers are still facing in the region is the central bank regulation and the bankability in terms of lending. Banks are discouraged from lending money to clean energy projects because many clean energy developers are new entrants without business credit histories, lacking robust project business presentation, especially in the off-grid sector.
Lending is also discouraged because of the lack of standardization of clean energy equipment used in solar PV projects. However, more recently, the standardization of certification processes has increased the confidence levels of banks to rely on the value given to solar energy equipment.
Interest Rates for Commercial Banks
CEADIR assessed the clean energy sector and has found some key findings in the West African region. The graph shows the average commercial bank interest rates in the region that range from 9.25% in Senegal to 27% in Ghana, with other countries, such as Guinea and Nigeria, with interest rates in between.
Other key findings were the agreement of participating banks to increase clean energy lending, the establishment of new departments for clean energy lending in some banks and the sizeable market opportunities that exist in lending for off-grid (distributed) energy.
Role of Commercial Banks
One of the biggest risks that commercial banks experience is the offtaker risk, according to Jan Malan. This risk entails not being paid by the utility company and/or the government doing something that would compromise solar PV projects. The loan profile of these deals involve long term contracts tied to a tariff that needs to make sense for the offtaker and the consumers. Nonetheless, the risk to do so is fairly high. From a bank’s perspective, a qualified investor is one that has survived a number of presidential elections and is fairly sure that its project will be able to generate the necessary electricity for the total lifespan of the project.
Commercial banks tend to partner up with development finance institutions (DFIs) on projects for the various benefits that they offer. These DFIs have a strategic view on development, while commercial banks have purely a commercial outlook. This means that DFIs can deal with certain risks better than commercial banks, making the partnership very valuable for both parties. Commercial banks can then offer commercial structuring abilities, make sure that the deal is efficient and also raise additional capital if needed.
DFIs can lend direct support to commercial banks in those situations in terms of sharing and mitigating certain risks in order to make it imminently financeable for the commercial market. Direct support could be political risk insurance or export credit agency cover or anything to that nature that would get commercial banks as well as equity investors comfortable with the project. Thereby, duly mitigating governmental and non-payment risks, making the deal inevitably feasible.
Jan concludes by stating that there are deal specific considerations that have to be taken into account by investors, especially, enforceability. Typically, what commercial banks want to see is international law being the applicable law and the possibility for offshore arbitration. That way, investors can get an international stamp of approval and access to courts where they feel comfortable that the court will not be influenced by the political climate is at that particular moment. These two elements provide much comfort to international investors and opens a big market for international players to come in.