Due to a lack of “competent competition”, the market has potential to offer significant returns for private sector finance.
Despite issues surrounding policy and regulation, investment in African solar energy presents investors with potentially high returns in a rapidly growing, high-impact sector.
According to the International Energy Agency, Africa has 60% of the best solar resources globally, but only 1% of installed solar photovoltaic (PV) capacity, requiring a “rapid redirection of resources, including investment”.
“Now is the time to invest,” Benjamin Hugues, Investment Director at climate and impact fund manager Camco, told ESG Investor. “Huge growth is already happening and it’s only going to accelerate.”
His sentiments were echoed by Saad Islam, Investment Director within the Infrastructure and Climate Group at British International Investment (BII), who said the long-term trend for solar is “very favourable”.
Annika Brouwer, Analyst at global investment manager Ninety One’s sustainability team, called solar in Africa a “positive returns story for private investors”.
However, policy and regulatory issues are having a negative impact on the sector. Brouwer identified political will, the unstable political environment in some African countries, and corruption as central challenges affecting investor appetite in the continent’s solar sector.
Increasing investment in Africa
More than 60% of Camco’s portfolio is invested in solar projects, Hugues said. He highlighted the advancements in solar technology, and the level of economic and population growth in Africa as an “exciting story” in terms of the amount of profit that can be made by private-sector investors and governments from investing in solar.
Hugues said improvements in solar technology will also have a “beneficial impact on the socio-economic development of Africa”.
In Q1 2023, the Camco-managed Renewable Energy Performance Platform (REPP) invested in Nuru, the company behind the Democratic Republic of the Congo’s first solar PV metrogrid, which is set to build 13.7-megawatt (MW) peak of isolated solar grids by mid-2024.
It also funded a 7.5MW solar plant in Burundi, which provides more than 10% of the nation’s electric generation capacity, as well as a 5.7MW solar plant installed to hybridise existing fuel oil power stations in Madagascar and a 25MW solar PV plant currently under development in Chad.
BII has invested in several solar projects in Africa including a US$1 billion renewable energy technology project to back Scatec in South Africa, providing 540MW of solar power capacity and 1.1-gigawatt hours of battery storage capacity.
In South Africa, BII provided US$50 million in debt financing to global power developer ACWA to build the 100 MW Redstone Concentrated Solar Power project. Once complete, the project will deliver 100 MW of concentrated solar power generation to offset approximately 480,000 tonnes of carbon per year, reducing greenhouse gas emissions intensity.
Separately, BII has provided a joint US$90 million in funding to Greenlight Planet, the largest provider of solar-powered home energy products in sub-Saharan Africa, as well as Nigerian off-grid solar generation company Lumos. It has also invested in Egypt’s Benban Solar Park, one of the biggest solar installation plants in the world.
“We’ve seen solar prices come down significantly over the past 20-30 years, and in a lot of countries it has become the most economic way to add power,” Islam told ESG Investor.
Incentivising investors
Investors may be nervous about making investments in smaller countries but this can be where the larger returns are.
Apart from in large countries like South Africa, Nigeria, and Kenya, there is “no competition” for African solar installation projects, Brouwer told ESG Investor.
“Robust energy systems and grid systems have not yet been established [in those smaller countries] and this is therefore a cheap, fast way to ensure energy security for hundreds of thousands or millions of people,” she said.
“It is a market that’s not been tapped into, and when you look at the financials of solar itself, there’s fairly high returns,” she added.
Brouwer said that returns could range from a normal commercial return of 6-8% to as much as 20%, with the “lack of competent competition ultimately meaning higher returns”.
Solar for homes can offer returns of 10-20% annually, while large-scale solar projects like solar farms offer 5-10% each year, she said, with solar bonds offering 3-5% annual returns.
Ninety One’s Emerging Africa Infrastructure Fund has supplied US$35 million of debt financing to commercial operator Urbasolar to develop, construct and operate a solar plant in Burkina Faso which will generate around 30MW of energy, reaching up to half a million customers.
“Burkina Faso is probably not on the list of most asset owners’ areas to invest, but if we are putting public money to work in such a way that makes them more investable it increases the amount of investments in catalytic sectors like solar,” she added.
Revamping policy and regulation
Despite these strong returns, the widespread perception of high risk is slowing investment flows.
David Carlin, Head of Climate Risk at UNEP FI, recently wrote that the “lack of data and perceptions of risk are leading to a massively inefficient global market for low-carbon projects and rendering them financially unfeasible in too many places.”
“We need strategies to improve project transparency and de-risking from development finance to unlock private capital and drive these rates down,” he added.
Analysis by non-profit Climate Policy Initiative found that risks from the solar sector can mean that there are extremely high required rates of return for Solar PV-based power generation in emerging markets and developing countries.
The data included eight African countries, with required returns from solar projects varying from 15% in Morocco up to 38% in Zambia. Six of the countries had a required rate of return of 21% or higher, more than doubling the US at 9% and trebling Germany at 7%.
BII’s Islam said that about 80% of solar projects fail at the feasibility and business planning stage.
“Policy and regulatory uncertainty can lead to a lack of belief in a consistent policy framework required to develop long term investments,” he added.
He noted grid constraints, such as low installed grid capacity, as being a “key barrier” to solar power in Africa.
According to Islam, there should be a “strong supporting regulatory environment and a clear policy framework across the countries that want international investors and local investors to commit to long-term projects”.
He also underlined the importance of “working more closely with governments to help them unlock political and regulatory certainty for projects to go ahead”.
Brouwer suggested that organisations, such as the World Bank, should invest in “strengthening policies and skills” in certain African countries to ensure that the investment environment is safer for investors.
