Over the past few years, the Sustainable Development Goals (SDGs) have led to a push towards the achievement of inclusive growth. For this to become a reality, access to clean, affordable, and environmentally friendly energy is critical. The attainment of positive outcomes in health and education, as well reductions in the cost of doing business, unlocking economic potential, and creating jobs are all propelled by access to reliable and affordable energy.
We have seen many people lose their sources of livelihood in the face of the COVID-19 pandemic, and millions were unable to transition to remote working and learning due to their limited access to electricity, computers and smart devices. With more than one billion people globally still living without electricity, the economic and social disruptions caused by the pandemic further emphasized the importance of universal access to electricity.
Many of the people living without electricity are in Africa. According to a 2019 report by the International Energy Agency, in spite of Africa being home to 17% of the world’s population, the continent currently accounts for just 4% of global power supply investment. As a result, approximately 65% of the population in Sub-Saharan Africa, predominantly in rural areas, do not have access to clean energy for cooking or for electricity. This greatly undermines the continent’s potential.
Ensuring universal access to energy is a costly feat. It is estimated that annual investments of USD 120 billion are required for Africa to achieve reliable electricity supply for all by 2040. This is nearly a fourfold increase in current funding directed towards electricity generation. Public funding is insufficient to meet this demand, so it is essential that the energy sector tap into capital held by the private sector and the capital markets if it is to increase investments in the sector. This is where blended finance comes into play.
What is blended finance
Blended finance solutions leverage concessional capital from public and philanthropic sources to de-risk transactions to attract private investment. Blended finance allows each investor in a transaction to meet their objectives, whether commercial, impact, or a combination. Additionally, real investment risks such as currency volatility, inflation risk, and credit risks, which greatly inhibit investments in the continent, can be mitigated through blended finance structures. Finally, bringing in the private sector allows limited public funding to be strategically utilized, which will help the capital go further.
Blended finance has played a key role in financing projects within the energy sector. Convergence’s database of historical blended finance transactions has captured over 180 transactions that target the energy sector with a total deal volume of USD 76 billion. This accounts for 27% of all the transactions captured within the database.
__PPPs together with blended finance can catalyze greater private investment __
Well-structured public-private partnerships (PPPs) can additionally create broad benefits to the energy sector by not only increasing the flow of private capital (with blended finance approaches providing risk mitigation), but also through the efficiency gains and technical expertise of private companies. The South African Renewable Energy Independent Power Procurement Programme (REIPPP) provides a compelling example with many valuable insights.
REIPPP is one of two programmes, the other being the Small Projects IPP Procurement Programme, that were designed to increase the installed electricity generation capacity in South Africa through a transparent private procurement process. REIPPP is a PPP that encourages independent energy producers to submit bids on the development and design of large-scale renewable energy power plants within South Africa to address the nation’s pernicious power shortages and outages.
The program was launched in 2010 and has seen the procurement of more than 6,000 megawatts of renewable energy in just 10 years. It has further reduced South Africa’s carbon emissions by 33 million tons, and water use by 39 million kilolitres. Additionally, over 38,000 jobs have been created, predominantly in local communities near the power plants, with many economic and social benefits for women and youth. The program has also attracted over ZAR 209.4 billion (USD 15 billion) in committed private sector investment, which has alleviated pressure on the fiscus.
As the program’s structure involves competitive bidding windows, REIPPP has also resulted in a significant decrease in the price of renewable energy for electricity supply. Such initiatives, which increase the participation of independent power producers can be coupled with blended finance structures to unlock private sector investment into economically viable solutions. The blended finance structures allow for concessional capital to mitigate prevailing risks and adjust the risk return profile of projects to crowd in private capital. Blended finance has enabled the financing of several projects under the REIPPP.
One example is the XiNa One Solar Project, a 100MW concentrated solar power (CSP) plant in the Cape Province. The project received a concessional loan from the Clean Technology Fund (CTF) via a cross-currency swap, initiated by the African Development Bank (AfDB). This allowed CTF to lend in local currency (ZAR), alongside the other domestic commercial debt providers. The arrangement allowed XiNa to service the loan in ZAR and make debt repayments to the AfDB, who would then swap the local currency amounts into USD before repaying CTF. Given the prevailing foreign exchange risk, the arrangement reduced Xina’s exposure to dramatic foreign exchange fluctuations and reduced CTF's potential hard currency losses due to exchange rate changes. The concessional loan also lowered the overall cost of capital for the project. XiNa further secured debt from the Development Bank of Southern Africa (DBSA), as well as from commercial banks, including Absa, Nedbank, and FirstRand, alongside a USD 37 million loan from the International Finance Corporation. Equity investors included the Industrial Development Corporation (IDC), the Public Investment Corporation (PIC), KaXu Community Trust, and Abengoa Energia.
For impact, optimize and replicate a transparent independent power procurement process
REIPPP is an example of a solution that could be adapted across the region to close the energy funding gap. Replicating REIPPP and ensuring proper program management and deployment could rapidly improve energy access and transparency within the energy procurement program.
The success of REIPPP suggests that private sponsors and financiers are more willing to invest in renewable energy if the procurement process is transparent. REIPPP further ensures extensive due diligence on developers, which is published publicly with independently reviewed evaluation criteria. This has helped to create a level playing field for all participants and has boosted private sector confidence in the process.
Another insight from REIPPP is drawn from the exemption of SA domiciled companies from following the national PPP law, to allow a customized procurement process. This streamlined approach attracted experienced project developers from around the world, increased the number of eligible companies, and quickened the process for bringing new power generation capacity to market, in light of South Africa's worsening power deficit. The process can be replicated to significantly contribute to the region making faster advancement toward the SDGs.
There exists a huge opportunity for the region to chart its own path to reliable electricity supply. Deliberate efforts towards scaling access to clean energy for all are therefore imperative. Countries can learn from what has worked, and they can improve on and replicate these solutions. Moreover, through blended finance solutions, we can create bankable projects that are commercially attractive and can attract private investors to help the region close the existing funding gap and ultimately, inch closer towards achieving the SDGs.
By Claire Njoki, Senior Associate, Africa, Convergence (former)