Risk Mitigation Strategies in Financing Renewable Energy Projects in Sub-Saharan Africa

Abstract

There is an acute electricity shortage in Sub-Saharan Africa (SSA), and electricity blackouts are common. Climate change and carbon dioxide gas emissions from conventional power-generating systems are also of great concern. Africa has vast renewable energy resources, including hydropower, solar, wind, biomass and geothermal, which are relatively unexploited. However, there is currently a knowledge gap on how renewable energy projects can be derisked to increase the flow of international private capital into them. Based on a literature review, this study aims to identify the risk factors that hinder investment in renewable energy development in SSA. The review finds that barriers to renewable energy development include fragmented electricity markets, utilities with poor balance sheets and low credit ratings, high energy transmission losses, political risks, high initial capital costs, poorly directed subsidies, insufficiently developed money markets, and a poor regulatory framework. Efficient risk mitigation strategies are proposed. The study also finds that the global utility-scale levelized costs of electricity from renewable energy resources compare favourably with those of conventional sources. Countries in SSA need to draw up a clear policy framework with legally binding targets for the contribution of renewable energy to the energy supply portfolio. In addition, subsidies currently enjoyed by conventional energy generators need to be restructured to target low-income groups. SSA countries should identify pipelines of suitable renewable energy projects, complete feasibility studies and invite potential developers. Risks faced by international investors in renewable energy projects, including political, commercial and financial risks, are insurable. SSA faces a large infrastructure financing gap. Closing this financing gap requires building efficient local capital markets to mobilise domestic savings, reduce the costs of capital for renewable energy projects, and reduce reliance on foreign debt. An important consequence of this work is that it is possible to accelerate the development of innovative financing solutions to ramp up investment and deliver clean energy for all.  

Keywords: Finance, Renewable Energy Projects, Risk Management