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On paper, Africa ticks all of the boxes in terms of attractiveness to potential investors in renewable energy: a growing energy demand; an immense potential in power production from renewable sources such as wind, solar and biomass; and an international commitment to increasing the stake of renewables in developing countries’ energy mixes.
In 2016, just three percent of the continent’s entire electricity output was produced from renewable energy sources. Since 2016, investors’ appetite for renewable investment has grown. In 2018, investment in clean energy in sub-Saharan Africa more than tripled, from $2.3 billion in 2017 to $7.4 billion in 2018. Around half of that was accounted for by South Africa, the continent’s leading economy.
Although global and local investors are eyeing the renewable energy sector with increasing interest, the perceived level of investment risk remains high. As a result, it is necessary to identify the financial, regulatory and capacity risks in order to find solutions and dramatically increase the flow of capital being directed to renewable energy projects.
To alleviate risk and enable foreign investment in the sector, both the government and the institutional framework have a key role to play in the creation of jobs and skill development, the establishment of adequate legal and regulatory frameworks, and close collaboration with the local financial sector to design appropriate financing models.
First and foremost, an innovative strategy such as renewable energy development cannot exist without the full support of and commitment from government leaders. It must be an integral part of the country’s development plan and publicized as a key development goal. Phase 2 of Senegal’s development plan (Plan Senegal Emergent) includes massive investment in solar and wind energy. Similarly, Morocco set early, ambitious targets of reaching 52% of renewables in its energy mix by 2030. Thanks to a strong leadership vision, the country is now a role model for other African countries and inaugurated in 2016 the world’s largest concentrated solar power plant in the middle of the desert, Ouarzazate Solar Power Station.
A critical component of local content development, capacity building represents a long-term driver of economic growth and well-being. It aims to strengthen the base of employment, improve the range of locally available skills and provide long-term economic growth.
Strongly correlated with political will, capacity building must be conducted in conjunction with international partners through sound and fair partnership agreements. Project leaders can receive support in the form of knowledge transfer, technology cooperation, policy advice and investment measures, enabling them to develop and implement appropriate methods and instruments that can be used to advance transformational processes.
Sound and Effective Regulatory Framework
Few factors can reduce investors’ enthusiasm more than unclear policies and regulatory frameworks. Renewable energy development must be enabled by a range of supportive fiscal and regulatory models, which allows the creation of an open and competitive market. In 2019, international consulting company Pöyry conducted a study alongside the Renewable Energy Solutions for Africa Foundation, which aimed to recommend areas of improvement for countries looking to implement an efficient renewable energy policy. After conducting research throughout a wide sample of developed and developing countries, the study found that perceived investor risk can be lowered by implementing policies involving clarity about operators’ roles and about market functioning rules; dedicated renewable energy sources regulations, such as the Renewable Portfolio Standard, and priority of dispatching and connection; a competitive market; the introduction of Independent Power Producers; and the adoption of auction mechanisms.
Integrated Assessment Models are tools that can serve policymaking, since they allow for simulating the long-term implications of present efforts to reach climate change mitigation and economic development goals in a combined framework. They can be used to guide medium-term decisions in attempts to achieve a variety of long-term objectives.
De-risking financial tools is an important component of increasing investment attractiveness. Financial de-risking means partially or totally transferring the potential negative impact of a negative event to other parties involved.
Such is the role of risk insurance or guarantees offered by development banks, for example. The need to make renewable energy investment financially attractive for the private sector has inspired the development of a wide variety of public instruments. These public instruments can come at a cost to the industry, to consumers or to the taxpayer. The challenge is to design packages of public instruments which can cost-effectively catalyze private investment. Major commitments have been made in the past half-decade by a number of African countries including Senegal, Kenya, Morocco and Egypt, in terms of renewable power generation capacity, modernized renewable energy framework and other substantial initiatives.
While the continent as a whole still sees a long road ahead to meet the United Nations’ Sustainable Development Goals and the Paris Agreement climate change targets, stronger political will for renewable energy development is spreading across Africa with various initiatives being seen at a nationwide level. Investment opportunities are immense, and government leaders have committed to renewable development.