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September 6, 2023

‘Early-stage financing’ needed to scale up clean energy in Africa, says IEA

African household
The IEA report estimates that it will cost about $25bn a year by 2030 to bring clean energy access to all African households (Photo: Medialensking/Envato)

Concurring crises affecting many emerging economies have left a gap in funding to develop Africa’s green energy sources, which can be filled with the support of concessional and blended finance.

A new report from the International Energy Agency and the African Development Bank is calling for the use of new types of financing to speed up the development of clean energy projects on the African continent, with concessional and blended finance serving as catalyst for innovative solutions. It suggests what types of financing and investors would be more suitable to different projects, based on a review of more than 85 projects in the region and the input of stakeholders.

In a note accompanying the report, the organisations say: “Lowering the cost of capital and supporting the creation of investable projects will require scaling up a range of instruments. These include the provision of more early-stage financing and greater use of tools that can reduce perceived investment risks in order to attract private capital.”

The IEA executive director Fatih Birol adds: “The African continent has huge clean energy potential, including a massive amount of high-quality renewable resources. But the difficult backdrop for financing means many transformative projects can’t get off the ground.”

It is estimated that today, 600mn Africans do not have access to electricity, and roughly 1bn lack access to clean cooking energy. The report, “Financing clean energy in Africa”, puts a price tag of $25bn in spending a year by 2030 to bring energy access to all African households.

The obstacles and lack of progress on clean energy distribution are exacerbated by a number of crises many African countries are facing. From battling climate change impacts, to rising food and energy costs, little wiggle room is available in government budgets following the increased debt burden driven by the Covid-19 pandemic and the war in Ukraine.

Weak policy and regulatory frameworks, flaws in project preparation and scale, and a mismatch between the needs of developers and those financing projects are also to blame, according to the report.

Due to a range of real and perceived risks, the cost of capital for clean energy projects on the continent is at least two to three times higher than in advanced economies, the study notes. This results in many projects becoming commercially unviable, which then also leads to higher energy costs for African consumers in lesser-developed economies.

But the lack of available capital is not the only problem. The green transition in many African countries requires small-scale projects, often in rural areas, with a customer base that has limited resources. This dynamic would need a very different type of finance than in other regions, the report highlights.

The IEA and the AfDB suggest that concessional finance, which is below market rate funding issued by development finance institutions and donors, is crucial to attract more private capital and reduce the risks for investors, especially in early-stage financing. Collaboration between governments, private investors and local financial institutions should also stimulate the creation of robust policy frameworks, which can then enable blended finance instruments to be deployed, say the organisations.

You can read the full report here.

A service from the Financial Times