Local Currency Financing for Off-Grid Energy Solutions in Africa Limited -AfDB

lthough advantageous, local currency financing for off-grid renewables projects and businesses in Africa is still limited, according to a new report released by the African Development Bank.

The report, Exploring the Role of Guarantee Products in Supporting Local Currency Financing of Sustainable Off-Grid Energy Projects in Africa, summarized findings of an in-depth study of documents on the off-grid energy and local currency financing sector, as well as interviews of energy stakeholders in the commercial and industrial and mini-grid sectors in Ghana, Kenya, Nigeria, and Tunisia.

Companies that invest in off-grid renewable energy solutions in Africa grapple with limited access to credit as a result of risk profiling that is of concern to providers of local debt financing. Where credits are offered, the interest rates can be extremely high.

There are potential advantages in using local currency debt financing for off-grid renewables projects and businesses to mitigate foreign exchange (FX) risks in the African continent. With the emergence of leasing and solar-as-a-service providers, there is the need for credit enhancement products to assess the availability of local currency finance for sustainable energy projects in Africa and the obstacles developers face in tapping into local financial and capital markets.

“Engaging with local currency markets to provide access to long-term local currency funding will allow borrowers to reduce currency and interest rate risks,” Dr. Daniel Schroth, Acting Director for Renewable Energy and Energy Efficiency, said in opening remarks made at the virtual launch of the report on 25 November.

Countries are facing the dual objective of increasing the availability of energy to households and businesses while decreasing the dependency on fossil fuels by adopting renewable or low carbon technologies. However, local currency finance providers have limited appetite for investing in the commercial and industrial sector, other than through traditional on-balance sheet corporate lending to established players, the report reveals.

The African Development Bank through the Sustainable Energy Fund for Africa (SEFA), actively searches for solutions that can help to catalyse investments in Africa to scale-up the deployment of decentralized energy access solutions.

Wale Shonibare, Director, Energy Financial Solutions, Policy and Regulations, at the African Development Bank said, “the participation of local banks and capital markets in Africa’s off-grid sector is still extremely limited. Therefore, mobilizing local capital into Africa’s energy sector is important for developers deploying off-grid solutions.”

One approach to stimulating local currency lending is through credit enhancement products that provide risk mitigation for local currency lenders and institutional investors.

Alastair Smith, Co-founder & Head of Nigeria Operation of Power Gen Renewable Energy, argued that interest rates on local currency debt financing is extremely high in countries that PowerGen operates. “If we are able to use local currency, it will be preferable for us, but we are unable to get local currency support that is affordable in most countries.”

While there are challenges, the panellists also highlighted there has been progress with developing and launching more innovative structured solutions. Eric Mboma, Director of Subsidiaries and Affiliates at the Africa Guarantee Fund indicated that that through their Green Guarantee Portfolio, they provide a risk sharing offer for financial institutions, “taking up to 55% of risk in the sector to incentivise financial institutions to lend.”