"Financing costs can be at least two to three times higher than in Europe and North America. As a result, projects remain on the drawing board, and energy costs rise for Africa's consumers," an expert said.
Some experts in the energy sector in Africa have proffered solutions to worrying energy transaction costs across the continent.
Energy transaction costs in Africa include all the costs involved in transacting energy, such as investment, financing, and legal costs, among others.
A World Energy Outlook Special Report titled Financing Clean Energy in Africa, unveiled in September by the International Energy Agency (IEA) in association with the African Development Bank Group (AfDB), highlighted that energy investment on the continent has fallen short, accounting for a mere 3 per cent of the global total, even though Africa is home to one-fifth of the world's population.
The report's examination of the cost of capital in Africa, which is at least two to three times higher than in advanced economies, is a stark reminder of the formidable challenges the continent must address to unleash its full development potential, William Ruto, President of the Republic of Kenya, said in a foreword captured in the report.
According to Mr Ruto, who is also the Chair of the Committee of African Heads of State and Governments on Climate, by effectively mobilising private capital and securing USD 28 billion of concessional funding by 2030, the African Union can unlock the necessary USD 90 billion in private investment for clean energy that will revolutionise the continent's trajectory and support global climate ambitions.
Fatih Birol, Executive Director, International Energy Agency, in the report, said African countries are often unable to access affordable capital.
"Financing costs can be at least two- to three- times higher than in Europe and North America. As a result, projects remain on the drawing board and energy costs rise for Africa's consumers - including the poorest households and least developed economies," the expert said.
"Our analysis highlights that clean, affordable solutions are available to meet Africa's energy needs, both in relation to energy access and in many other areas. But investments are held back by a range of policy and regulatory hurdles, weaknesses in project preparation and scale, and a lack of alignment between the needs of project developers and those of finance providers.
"This is why the African Development Bank Group is spearheading efforts to unlock Africa's vast renewable energy potential. The Bank no longer funds coal energy projects. Since 2016, 87 per cent of our investments in power generation are in renewables, including transformative projects such as the 510 megawatts (MW) Noor Ouarzazate solar project in Morocco, which is the world's largest concentrated power plant and the 310 MW Lake Turkana wind project in Kenya, which is Sub-Saharan Africa's largest wind farm."
Mr Birol said the Bank's USD 20 billion Desert to Power programme is developing 10,000 MW of solar power across 11 countries in the Sahel and East Africa that will provide renewable energy via solar for 250 million people.
According to him, African countries have huge energy potential, including a spectacular range and quality of renewable energy resources. Africa is home to more than half of the world's best solar resources, as well as great potential for hydro, wind and geothermal power, among others.
"But these riches are largely untapped and they will remain so without greatly improved access to capital," he said, adding that energy spending in Africa has been falling for over five years but needs to double by 2030.
Legal Costs
Speaking on the legal costs, which are rarely highlighted but highly significant in these transactions, Tolulope Fadipe, Assistant General Manager, Legal, Sahara Group, said, "Building in-house capacity can help energy companies in Africa lower transaction costs arising from legal fees."
Mr Fadipe, who spoke at the Afreximbank Trade Finance Seminar (ATFS2023) in Lagos last week, said training and stretch programs with reputable law firms can facilitate knowledge acquisition and enhance technical abilities required for complex transactions in the continent and beyond.
He noted that having in-house lawyers and personnel with a full grasp of the legal dimensions of transaction complexities remained the "best shot" for helping companies reduce legal costs.
"Full participation of company lawyers in strategy development and execution of transactions has to be the way forward when you are looking to reduce legal costs. Energy firms and companies need to be intentional about growing wide and varied, across-the-board capacity for various energy projects and transactions," he said.
Mr Fadipe said in-house transaction strategy review and negotiations, leveraging technology and deploying virtual transaction processes can also help reduce legal costs incurred by organisations in executing projects.
"At Sahara Group, we continue to give our people platforms to grow capacity to support our upstream, midstream, downstream, power, and technology business operations across Africa, Asia, Europe and the Middle East. This has resulted in significant cost savings and overall value addition to our operations," he said.
Mr Fadipe said some of the major drivers of legal costs in finance transactions in international jurisdictions include regulated solicitors' charges in the jurisdiction of the transaction, travel costs incurred by external counsel in carrying out Due Diligence and other aspects of the transaction, complexity/value of the transaction, availability of competent legal counsel in the jurisdiction of the transaction, and bilingual services, among others.
"Right from the point of hiring, it is essential for energy firms to be intentional about talent acquisition into the in-house legal team and also adopt a robust capacity-building strategy to support regional and international transactions," he added.
Cost of Capital
The energy report highlighted that the cost of capital largely reflects two sets of risks: those associated with the country (the base rate) and those associated with the sector, project or company (a premium).
"These risks vary significantly across the continent - some countries have investment-grade credit ratings and/or a well-developed energy sector, while others experience conflict or instability with low economic growth and struggle to attract investment.
"Costs also vary by capital provider and currency, depending on whether the provider is taking on currency risk, their familiarity with the local market and the base rate in their country of origin. And finally, they vary according to the company or project that is seeking to raise capital," the report said.
The report stated that larger international companies are more able to tap into concessional finance from DFIs and donors or cheaper capital in international markets.
Meanwhile, local companies that are more reliant on domestic capital markets can struggle to access both early-stage financing to bring projects to bankability and sufficient affordable capital to develop projects.
Recommendation
Among other interventions, the report highlighted that a dramatic increase in energy investment into African countries is essential. Achieving the region's energy development and climate goals requires energy investment to more than double from today's USD 90 billion by 2030, at which point nearly two-thirds of spending would go to clean energy, it added.
Making capital more affordable can unlock significant development across Africa and achieving universal energy access requires a step change in energy project financing.
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Multiple financing instruments need to be scaled up to Africa's energy future because there is a mismatch between the type of capital available and the needs of Africa's emerging clean energy sector, with a particular lack of early-stage and equity financing.
Similarly, the report said concessional capital must act as a catalyst for project development and private investment.
Alongside improvements in policy and regulation, the report stated that concessional capital of around USD 28 billion per year is needed to mobilise the USD 90 billion of private sector investment by 2030 in the Sustainable Africa Scenario.
The President, African Development Bank, Akinwumi Adesina, in the report, said, "We must bring down the cost of capital for clean energy projects in Africa. Treading a low-carbon development pathway necessitates targeted concessional support and technical assistance from international finance institutions and multilaterals.
"Through the Bank's Sustainable Energy Fund for Africa (SEFA), we are unlocking private-sector-led renewable energy and energy efficiency projects across the African continent by de-risking investments in green baseload power, green mini-grids, and decentralised off-grid energy systems."
SEFA's current portfolio is expected to leverage a total of USD 9.2 billion in investment, delivering approximately 3,700 MW in new capacity and around 2 million new connections, he said
"In the interim, what Africa needs is a lot more financing to support its drive to universal access to quality energy. We should leverage the private sector for climate finance. We should accelerate investments in renewable energy. We should have just and fair energy transitions - but also guarantee universal energy access, and affordable and secure power for Africa.
"We should accelerate the support to countries on the development of their Nationally Determined Contributions and the Long-Term Strategies to support green transitions and green growth for our economies," Mr Adesina said.
