Finance

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

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

(SOLARPLAZA) - 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.

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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

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