Best practices to overcome financing barriers for access

A range of real and perceived risks affecting projects in Africa, as well as higher borrowing costs following the Covid-19 pandemic and Russia’s war in Ukraine, mean there is a limited pool of affordable capital that energy developers in Africa can tap. According to the report, Financing Clean Energy in Africa, the cost of capital for utility-scale clean energy projects on the continent is at least two to three times higher than in advanced economies. This prevents developers from pursuing commercially viable projects that can deliver affordable energy solutions.

The new report explores innovative ways to address this challenge based on a review of more than 85 case studies across Africa and more than 40 interviews with key stakeholders. 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. This will require strong engagement from both the public and private sectors, as well the support of foreign and domestic institutions.


Best practices for clean energy finance

International support is key to accelerating investment and overcoming the challenges associated with access financing, but governments must also play their role by creating a transparent enabling environment. Currently, only 48% of the people without access to electricity in Africa are based in countries with official national targets and plans in line with SDG7.1 goals, and only 17% of those without access to clean cooking. Developing integrated energy strategies including such targets, accompanied by action plans and dedicated government agencies and programmes, is a fundamental building block to identify where investment needs are greatest and how projects can be financed while providing certainty to investors and the private sector.

Governments also have a major role to play in funding access projects. Grid extensions are generally publicly funded, although there are several models of private involvement being trialled in the region. Some successful grid extension programmes have combined central government and local community financing, ensuring local engagement. For example, in 2020 Ghana introduced the Self-Help Electrification Scheme, which allowed communities to be connected to the grid earlier if they could provide poles for low-voltage lines and guarantee that at least 30% of the households in the community are ready to start using the electricity provided (IEA, 2022). Upfront connection costs are often a significant barrier for households close to the grid but without access. Some countries have implemented the option of on-bill repayment of connection costs, reducing the upfront burden and permitting many households to legally connect – as in Côte d’Ivoire.

Mini-grid projects also require public sector assistance to support the relatively high upfront costs and to ensure a tariff structure that is both cost-reflective and sensitive to end users’ affordability needs. Mini-grids serve around five million people in Nigeria thanks to the combination of electricity reforms, the existence of dedicated government agencies such as the Rural Electrification Agency catalysing a strong presence of development agencies and donors, and the ability to access finance from the Nigeria Electrification Project. Up-front grants were made available during the first mini-grid programmes in the early 2010s, creating a strong presence of local players. Developers are now able to access results-based finance, particularly since mini-grids can also be used as a clean alternative to diesel generators, and take out commercial loans from local banks (GET.transform, 2021). However, accessing growth-stage equity remains a major challenge – it is in short supply and one of the major obstacles to scaling up the industry.

One of the greatest challenges to financing stand-alone electricity and clean cooking projects is their small scale and how to get local SMEs fully involved. Larger, often international, companies can access international grants and equity investment, and can seek to aggregate projects either to support economies of scale during procurement or, depending on the creditworthiness of end users, to create tradable securities to raise debt.

Smaller, local companies often struggle to access DFI capital or impact funds that are based abroad and they are therefore reliant on commercial banks, who have difficulty understanding off-grid business models. Many companies therefore operate as retail businesses, which can attract more private capital but need to focus on the most profitable projects. An alternative to this approach would be an energy-as-a-service model via public– private partnership, where the government leverages DFI capital to buy the solar home systems from a private developer, and the households pay affordable tariffs for the use of energy (and providing for equipment maintenance), which is ensured via a long-term contract.

Identifying productive activities that could benefit from electricity (while also stimulating rural economic development) is also key to increasing demand and improving the profitability of rural electrification projects and hence attracting greater levels of private finance. Examples include the hybrid solar mini-grid plant on Bugala Island in Uganda, which saw 400 additional businesses connected in the framework of a productive uses programme, increasing demand by almost 50% (Power Africa, 2021). Productive uses require stronger upfront planning and investment since demand can be four times higher per capita than the provision solely of essential household services (The Rockefeller Foundation, 2023). Developing productive uses also requires much broader economic development programmes, particularly targeting rural areas, which are likely to rely on government funding with donor grant capital.

Financing clean cooking, as with off-grid solar, requires supporting several small and local actors, but with the added complication of understanding which technology is best suited to the households’ needs. The poorest families might initially benefit from switching to improved biomass stoves, using a micro-credit loan that they pay off using savings from reduced charcoal or wood purchases. Families relying on collected biomass present particular challenges for access to clean cooking. Improved biomass cookstoves (and in some cases biodigesters) represent the most viable solution in the short term for these families, but the upfront costs would need to be fully covered in most cases.

Wealthier families, especially in urban areas, have better access to LPG or electric cooking at affordable rates, but awareness campaigns, access to credit and regulated energy prices are all required to ensure sustainable and long-term adoption. End-use LPG investments rely on infrastructure for import, local production and distribution, which if not designed correctly can push up the price for the end user. However, innovative business models such as PayGo LPG, as seen in Kenya and South Africa, can help lower the cost of supply as well as the upfront cost of cylinders to households. Meanwhile, finance for electric cooking can come from electricity providers; for example, the Kenyan utility KPLC is exploring on-bill repayment for households to purchase electric cooking appliances and already has a results-based financing facility in place for clean cooking providers to access (IEA, 2022).

Carbon markets are already playing a role in providing clean cooking solutions. Credits for clean cooking stoves represented almost a quarter of the voluntary carbon market credits issued in Africa between 1996 and 2023, and with the market set to grow, this is likely to provide a major revenue stream for clean cooking projects. However, there are still significant gaps in regulatory frameworks and monitoring and verification systems, discussed in more detail in Chapter 3, which need to be addressed to ensure the positive impact of this growing market


Excerpt of: Financing Clean EDnergy in Africa (IEA 2023)


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