Finance

Best Practices for Risk Mitigation in Africa’s Solar Sector (Solarplaza)

Best Practices for Risk Mitigation in Africa’s Solar Sector (Solarplaza)
Tuesday, 01 October 2019 09:02

Solar power is getting cheaper by the day, which has caused many to view it as a key component in the renewable energy revolution. Yet, the deployment of solar power technologies has been lagging behind in some emerging markets due to various layers of risks perceived by the private sector in relation to financing solar projects, especially in Africa.

According to Antoine Vagneur-Jones, research analyst at BNEF, project risks take a variety of shapes in Africa. Factors such as political risk, off-taker non-payment, currency risk, a lack of standardized power purchase agreements (PPAs) and complexities arising during site acquisition all contribute to the insecurity. All of these factors tend to be more present in the development of solar energy projects in Africa, than in project development in regions with more mature renewable energy sectors.

  SOLAR

Vagneur-Jones further indicates that political and economic instability, which are particularly prevalent in Sub-Saharan Africa, means that policy continuity cannot be taken for granted. In order to justify projects with high upfront investment costs, such as utility-scale solar projects, clear and long-term investment signals are crucial.

When analyzing offtaker non-payment and currency risk, it is important to note that these two issues are interrelated. Most PPAs are signed with state-owned utilities, which often have below-par finances and do not recoup their production costs. The fact of the matter is that the state will usually keep such companies afloat while they operate at a loss. That, in turn, can fuel long-term, structural issues, causing them to fall into arrears on payments to independent power producers (IPPs).

That brings us to currency risk. As currencies start to fluctuate, repayment becomes an even greater issue. Even if an IPP is being paid in hard currency, a growing gap between the local currency and, for example, the US dollar, can make it complicated to keep up with payments. In many Western African countries, the use of the CFA Franc gives some sort of stability, as it is fixed to the euro. While some governments do employ fixed exchange rates when signing contracts, this is not the case across the board.

All of this begs the question: how can these risks be mitigated?

There are many mechanisms available to manage these types of risks. Having said that, all incur additional project costs and can be administratively burdensome to certain players. Sovereign guarantees are often used to mitigate some of these risks, allowing the state to step in to ensure payments are made if the off-taker defaults. However, such guarantees are only as good as the government's balance sheet.

Another method would be the use of currency hedging instruments. There are various options available here. Forward contracts could be one way to go about this, which have been widely employed by Enel Green Power, for example. Political risk insurance could be another option, but factors like high costs, complex application processes and a preference for large projects can limit its use.

In some cases, risk mitigation is out of the hands of the project developer. Uncertain grid access and curtailment form a key part of project risks that have to be taken into account when choosing the location of the project site. These types of risks could be foreseen and minimized in the early stage of development, but ultimately lie in the hands of governments and their grid infrastructure.

Want to learn more about risk management mechanisms for solar projects in Africa? Join us at Unlocking Solar Capital Africa, the largest solar finance and investment conference in Africa, taking place on the 16th and 17th of October 2019 in Dakar, Senegal. The program includes an entire session dedicated to mitigating risks when financing solar projects in the region.

Marco Dorothal, Research Analyst

logosolar

On the same topic
• IMF extends Niger’s Extended Credit Facility (ECF) program by one year through December 2026.• IMF approves a $41 million disbursement tied to...
EBRD grants $100 million loan to Banque Misr to expand credit access for SMEs and women-led businesses. Loan supports Egypt’s green finance...
UTB’s restructuring delayed to end-2026 due to incomplete audits; reorganization plan expected by March. Despite a CFA 15.2B injection, the bank...
DRC launches campaign to diversify investors in government securities 98% of bonds now held by banks; aim is to reduce risk and broaden...
Most Read
01

• Inflation within the West African Economic and Monetary Union (UEMOA) fell to a two-year low of 0....

UEMOA: Inflation Drops to 0.6% in May, Driven by Lower Food Prices
02

• Interbank volumes rose 18.7% in May, while rates declined across the market• The BCEAO cut its mai...

WAEMU Sees Easing Conditions on Regional Interbank Market
03

• The U.S. imposed a 20% tariff on cashew exports from Vietnam and a 40% tax on suspected transshipm...

U.S. Tariffs on Vietnam Cashews May Disrupt Trade, Hit African Growers (Interview)
04

Cauri Money launches Gajo Money, an e-wallet for the Cameroonian diaspora, targeting €120 mil...

Cauri Money Targets Cameroonian Diaspora with Digital Wallet Launch
05

• Qatar Airways and Kenya Airways establish strategic agreement, introducing a third daily flight be...

Qatar Airways Expands its Network in Africa, Building Presence in Kigali, Johannesburg, and Nairobi
Enter your email to receive our newsletter

Ecofin Agency provides daily coverage of nine key African economic sectors: public management, finance, telecoms, agribusiness, mining, energy, transport, communication, and education.
It also designs and manages specialized media, both online and print, for African institutions and publishers.

SALES & ADVERTISING

regie@agenceecofin.com 
Tél: +41 22 301 96 11 
Mob: +41 78 699 13 72
Média kit : Download

EDITORIAL
redaction@agenceecofin.com

More information
Team
Publisher

ECOFIN AGENCY

Mediamania Sarl
Rue du Léman, 6
1201 Geneva
Switzerland

 

Ecofin Agency is a sector-focused economic news agency, founded in December 2010. Its web platform was launched in June 2011. ©Mediamania.

 
 

Please publish modules in offcanvas position.