Financing Wind Power Development in Sub-Saharan Africa: from one donor to many

12 October 2017 | 10:11

Financing Wind Power Development in Sub-Saharan Africa: from one donor to many

A wind farm in South-Africa Photo: Warren Rohner

 

Sub-Saharan Africa is undoubtedly the most important frontier for climate change mitigation and adaptation. More than 620 million people, two-thirds of the population, lack access to electricity. Electrifying sub-Saharan Africa using existing energy mix jeopardizes the goal of limiting warming below two degrees Celsius above pre-industrial levels reiterated in the Paris Agreement. Finding a low carbon path for sub-Saharan Africa requires significant investment and cooperation in renewable energy, including wind, solar, hydro, geothermal, nuclear, and biofuels.

 

 

Wind power stands out among renewable energy options in the region for three reasons. First, sub-Saharan Africa has abundant wind potential, especially in highlands of Chad and Ethiopia and coastal regions. McKinsey estimate puts onshore wind capacity at 109 GW. Secondly, wind farms are less controversial and more quickly to build. Hydropower dams are costly and pose irreparable dangers to the local geography and communities. Solar farms take up large parcels of land and require regular cleansing. Once wind farms are operational, they do not disturb nearby farming and grazing activities. Thirdly, price of wind technology has declined drastically in the past decade. Comparison of levelized cost of electricity (LCOE) by Lazard, an international financial advisory and asset management firm, shows wind is one of the cheapest renewables and comparable to coal. However, it is worth noting that LCOE does not account for technology transfer costs, adapting the grid, regional variations, cost of capital, and other risks associated with launching new technologies in sub-Saharan Africa.

 

Currently, sub-Saharan Africa accounts for less than 1% of global installed wind power capacity. Despite its small presence, wind development in the region expanded exponentially in the past decade, with introduction of new actors, financing mechanisms and institutional arrangements. Case studies of wind farm development in Ethiopia, Kenya and South Africa seek to illustrate the robust wind financing landscape in sub-Saharan Africa.

 

Ethiopia currently has two wind farms in operation—Ashegoda Wind Farm and Adama Wind Farm. Both wind projects were supported through its Growth and Transformation Plan (GTP), a five-year plan setting targets for the entire economy. In 2008, Ethiopian Electric Power Corp. (EEPCo), the then national utility company, signed an ECP (Engineering, Procurement and Construction) contract with Vergnet of France to development a 120MW wind farm at Ashegoda. French Development Bank (AFD) and BP Paribas financed 90% of the $289.7million project through a mixture of commercial and concessional loans, with the Ethiopian Government covering the remainder. Ashegoda Wind Farm was inaugurated in 2013.

 

In 2009, HydroChina and CGC Overseas Construction Group (CGCOC) signed an EPC contract with EEPCo to develop a 51 MW wind farm at Adama. It was the first Chinese overseas EPC project in clean energy. Export-Import Bank of China financed 85% of the $117 million project through the preferential export buyer’s credit. Following completion of the first phase, EEPCo added 153 MW to Adama Wind Farm under the same financing framework. Adama Wind Farm II inaugurated in 2015. Both Ashegoda and Adama Wind projects adopted concessional financing from single donor to mitigate institutional uncertainty and promote domestic industry overseas. In Ethiopia’s case, the government has no experience and no regulatory support for wind farm development. Thus companies treading into unchartered waters rely on national development agencies to safeguard through extensive negotiation and challenges. Single donor concessional financing model offer them maximum flexibility.

 

Kenya: Independent Power Producer (IPP) & Multilateral and Private Financing

 

Kenya officially liberalized its electricity generation sector through power sector reform in 1996, allowing IPPs to own and operate energy projects along national generation company. Long tradition of IPPs has enabled creative financing packages to support wind energy. In addition to IPPs, Kenya supports wind energy through feed-in tariffs. Kipeto Wind Farm is a $323 million project to add 100 MW wind capacity in Kenya. Owned by a joint venture between African Infrastructure Investment Fund, International Financial Corporation (IFC) and Craftskills Wind Energy International, the project is part of U.S. Power Africa Initiative, which seeks to double access to electricity in sub-Saharan Africa. Under the Initiative, Overseas Private Investment Corporation (OPIC), the U.S. government’s development finance institution, has committed a $232 million loan. China Machinery Engineering Co is the EPC contractor with turbines as well as operation and maintenance (O&M) provided by General Electric.

 

Valued at over $800 million, Lake Turkana Wind Farm project is the largest private investment in Kenyan history, as well as the largest wind farm in Africa at 310MW capacity. Developers for Lake Turkana Wind Farm are KP&P Africa B.V and Aldwych International. Other equity partners involve three Nordic investment funds –Finnfund, Nofund and the Danish Investment Fund for Developing Countries (IFU). African Development Bank (AfDB), with the Standard Bank of South Africa and Nedbank as co-arrangers, arranged debt financing. Most notably, $128 million of the loan came from AfDB’s own Green Bond program, which finances a portfolio of eligible Greenfield renewable energy projects. Fourteen financial institutions, including European Investment Bank, Netherlands Development Finance Company, PTA Bank, Danish export credit agency (EKF) and others, collectively provided over $600 million in loans to the project. In addition to private investors, public institutions, such as Government of the Netherlands and EU Africa Infrastructure Trust fund, were also crucial in providing grants and loan guarantees. The wind farm came online in July 2017. Due to its innovative public-private partnership financing structure, the Lake Turkana Wind Farm project was nominated as the “African Renewable Deal of the Year”.

 

South Africa: IPP & the Renewable Energy Independent Power Producer Procurement Programme (REIPPP)

 

Despite South Africa’s vast wind potential along its coastal regions, abundant coal resources in the country had slowed development of wind power. South African government introduced renewable energy feed-in-tariffs (REFIT) in 2009. However, the government replaced REFIT with the Renewable Energy Independent Power Producer Procurement Program (REIPPP) in 2011, a competitive tender process for renewable energy projects. REIPPP has been lauded for its transparency and effectiveness. Between 2011 and 2015, there have been five rounds of bidding with a total of 92 IPPs awarded, accounting for 6327MW of renewable capacity. Of which, thirty-seven are wind farm projects, accounting for 2660MW of wind capacity.

 

Financing for wind projects in South Africa come from a variety of sources. To highlight a few, Sere 100MW wind farm received a $365 million loan from AfDB and the Clean Technology Fund, a climate investment fund to facilitate technology transfer; Enel Green Power, developer for 111MW Gibson Bay Wind Far, obtained a $170million loan from German Development Bank (KfW); a joint venture between South African developer Exxaro Resources and Tata Enterprise, financed the Amakhala Emoyeni Wind Farm through a debt/equity ratio of 80/20, with $323.8 million loan from IFC ($72million) and Standard Bank of South Africa ($256million). In fact, one report notes that Standard Bank of South Africa has financed 40% of 1760MW renewable energy capacity operational in South Africa in 2015. The growth of South Africa’s renewable energy program, as well as local financing capability is truly awe-inspiring.

 

Trends & Challenges

 

Wind farm financing and development across Ethiopia, Kenya and South Africa demonstrate large variance. However, several trends emerge.

 

  • Financing for wind power indicates a variety of options and sources, ranging from traditional western/OECD donors to emerging markets; multilateral development banks to local banks; Clean Development Mechanism to Green Bond.
  • Adoption/availability of these various financing mechanisms responds to local institutional and regulatory environment. In Ethiopia, lack of regulatory and institutional support limit financing option to single donor, whereas in Kenya, tradition of IPPs enable innovative financing structure; however, lack of institutional support limit the number of wind project opportunities. Finally in South Africa, competitive, transparent and regular IPP tendering process has allowed private investors to flourish.
  • Despite significant progress in wind energy development and financing in sub-Saharan Africa, there is under-utilization of new climate financing mechanisms, such as Clean Development Mechanism (CDM), Green Climate Fund and the China South-South Climate Cooperation Fund. At the moment, some sub-Saharan countries find CDM cost-ineffective to register. In addition, CDM does not account for mitigation from emerging market investors. Sustainable development mechanism, CDM’s post-2020 successor, should address these issues.

 

 

Development and financing for wind energy in Sub-Saharan Africa has traditionally relied heavily on the public sector with greater involvement from the private sector in recent years. Facing the double-threat of climate change and energy poverty, public financing will be grossly insufficient. Scaling up private sector wind energy finance is crucial in limiting global warming to two degrees Celsius, as well as meeting Sustainable Development Goal of ensuring universal access to affordable, reliable and modern energy.

 

Yanning Chen is a Ph.D. student at Johns Hopkins SAIS in International Development Department. Her research focuses on the role of investment in the diffusion of renewable energy in Africa. She holds a M.A. from Boston University. She received a B.S. in International Political Economy from Georgetown University.

 

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