The African Development Bank (AfDB) has a core role to play in supporting power developments in Africa.
AfDB plays a similar role to the World Bank – but with a focus just on Africa. The institution has 41 offices around the continent.
Wale Shonibare, the inaugural director of energy financial solutions, policy and regulation at AfDB, said: “AfDB acts as a catalyst. We are not here to replace commercial banks but to complement them. It is often the case that power projects are big, need a lot of investment, and will involve amortising debt over a long time. Commercial banks are unable to go as far as the 20-plus years that are required, and AfDB is here to help with the provision of tenor extension instruments or partial credit guarantees for example.”
The department functions as a leading transactions team on the continent. It has undertaken a number of mandated lead arranger roles. Shonibare’s team has set out steps intended to create an enabling environment for private sector investment in the energy sector.
“Another common problem met by commercial banks is on securing payments from power utilities. AfDB can help fill that gap by agreeing to cover the shortfall and pursuing utilities and governments in order to secure repayment,” he said.
The AfDB also has a role in working to make power sectors in different countries more attractive to foreign investment.
The international finance that African states need to support their energy aspirations have their pick of where to invest.
“Investors will follow the path of least resistance and will go anywhere they can in order to do business. Governments have to make the local environment attractive for those investors. This involves a long-term commitment where both sides believe in the sanctity of the contract”, said Shonibare.
The AfDB publishes an Electricity Regulatory Index (ERI) every year. This benchmarks systems in countries, allowing investors to see which jurisdictions are doing better than others.
Financing remains a challenge for utilities. Collecting tariffs in a local currency, while paying back debt denominated in euros or US dollars can leave such companies exposed to exchange rate fluctuations.
Managing risk is at the forefront of investment decisions. Financiers’ concerns about the creditworthiness of African lending can lead to particularly onerous documentation needs. The number of hoops required for a project to jump through can require years before ground is broken and ultimately power generated.
One way to tackle this would be to encourage local savings. Domestic financial sources will have a better understanding of local demands and work can come faster. Increasing domestic financial options would also tackle the foreign exchange problem.
One area AfDB will no longer countenance is coal, Shonibare made clear. This red line was set out by the bank’s president Akinwumi Adesina in 2019, who described coal as “the past”, while renewable energy was “the future”. Adesina also set out plans to increase the bank’s climate financing to $25 billion by 2025.
Shonibare noted the trend towards renewables, while calling for baseload investments. “The idea of Africa leapfrogging directly from an energy system dominated by bioenergy to a fully decarbonised system is attractive, but it is hard to see how such a system can be achieved cost effectively in the coming decades, while also meeting the continent’s stated goal for industrialisation and economic development.”
A transition is needed to reach “green growth”, he said, which cannot be sustained by solar alone. “Gas or hydropower will anchor more intermittent types of energy, and countries’ energy mix will depend on local resources”.
North Africa is well suited for solar and wind, while Mozambique has plentiful gas resources and Ethiopia’s rivers are well suited for hydropower.
“Investors are keen to put money into renewables, as evidenced by the fast growth of the sector and the technology improvement. Solar is now competitive against a range of other energy sources but battery storage needs to catch up: Egypt has made remarkable progress in developing its solar resources and tariffs are dropping. Other countries such as Morocco, Kenya and Uganda have made similar progress.”
Africa’s power problems do not end with generation. Distribution and transmission are also areas that require investment. Politically there are incentives to keep tariffs low but this deters investors from coming to the sector.
One positive area has been growth in cross-border supplies, such as the West African Power Pool (WAPP). More consumers can mean more competition for power, although there can be political challenges.