Highlights from Hogan Lovells renewable energy report lll
In the third and final series of our analysis on the Hogan Lovells research on the Renewable Energy sector in Africa with the theme: Africa and Renewables Wholesale change or short term surge?, we focus on some of the approaches recommended to raise capital to finance renewable energy projects.
As the report shows, many projects fail not so much due to lack of financing but the absence of the right kind of finance structured to meet the goals of the project. According to the report, financiers and governments are increasingly looking at innovative financing solutions to get projects off the ground.
In South Africa where commercial banks are faced with concentration risks, have resorted to removing assets from their balanced sheets through securitisation process, thereby liberating capital for the next opportunities. Many of these prospects have come from the renewable energy sector which is seeing rapid growth.
Another funding mechanism highlighted in the report, is the issuance of sovereign green bond in Nigeria worth about $30million in December 2017. This made Nigeria the first African country and only the fourth in the world to issue green bonds.
“It takes significant efforts for a country to issue its first green bonds compared to traditional bonds,” said a World Bank spokesman cited in the report who worked on the deal. Nigeria had to build capacity within its ministries and authorities, schedule its bond to coincide with the national budget, coordinate its institutions and build criteria for projects to receive the funds, according to the spokesman.
With more African governments using sovereign bonds to raise debt for infrastructure projects generally more green bonds are likely to follow.
Global green bond issuance rose to $155 billion in 2017 according to a report obtained the Market Development, Climate Bonds Initiative (CBI), and over 1500 green bonds were issued across the globe during the period, accounting for 78 per cent growth in 2016.
The group said that projects eligible for Green Bonds financing were renewable energy, pollution prevention, green buildings, clean water, energy efficiency and climate change adaptation, among others.
Another source of funding is private equity which is featuring heavily in the financing of renewables projects in Africa. At least $4billion from the private equity and hedge funds will be used to finance Ethiopia’s upcoming geothermal projects as it attempts to replicate the success Kenya has had in becoming the world’s largest geothermal power producer.
East Africa’s geothermal potential exceeds 15GW and represents a $40billion investment opportunity, according to USAID-led initiative Power Africa.
The Nigerian off-grid energy investment company, All On, in February this year, announced equity and debt investment to Port Harcourt based Green Village Electricity (GVE), Nigeria’s leading mini-grid player, for expansion in the Niger Delta and across Nigeria, while ColdHubs is receiving a convertible debt facility to expand its solar-powered marketplace cold storage business to new markets in the region.
These developments came three months after All-On announced its first set of transactions in Nigeria’s off-grid market, and two months after the firm and U.S. Africa Development Foundation (USADF) announced a $3 million partnership to expand access to energy for underserved and unserved markets in Nigeria.
Chinese participation in the financing of renewables projects is also another source of funding mentioned in the report. This has been on an upward trend particularly in large-scale hydropower projects, and this trend will continue, the report says.
Some examples of the projects funded by Chinese funds include Kaleta and Souapiti dams under construction in Guinea – which will have a combined capacity of 800 MW – were financed by Chinese investors and have engineering, procurement and construction contractors from China. Another Chinese backed hydropower project is under construction in Uganda.
A further option includes Islamic Financing which the report says could offer an additional source of funding. Islamic lenders will consider the bankability of any project on its own merits. However, the development banks within the Islamic space that seek out opportunities are not solely driven by commercial gain.
“Renewable energy projects in Africa lend themselves to the ethos of Islamic finance which fundamentally seeks to better people’s lives in addition to generating a return for investors,” said Imran Mufti, a Dubai-based partner at Hogan Lovells.