According to the United Nation’s predictions, the Africa’s population is expected to grow from 1.3 billion in 2020, to approximately 2.4 billion in 2050, making Africa the continent with the fastest demographic growth (1). Such rapid growth will have an impact on energy demand in Africa as the continent’s energy need is very likely to evolve from 679 terawatt-hours today to a need close to 1,600 terawatt-hours by 2040 (2). To answer this need, a better exploitation of solar energy in Sub-Sahara African countries could help meet the rising energy demand by households and industries.
For more solar projects reach financial close, stakeholders should apply an efficient risk allocation when dealing with Africa, understand how to cover land, tariff and regulatory and political risks.
Bankability and Risk Allocation
Bankability is a moving concept but one of the main factors of a project’s bankability is the risk allocation that will reassure lenders providing the financing. If bankability from the perspective of a commercial bank providing debt financing is different from the perspective of a development finance lender providing limited recourse debt financing, the risk allocation is likely to impact their decision to provide financing.
In emerging countries, whereas projects are often built on a build, own, operate (“BOO”) basis by Independent Power Producers (“IPPs”), it is important to note that the broad set of risks that these projects entail are well identified and properly allocated among the government and private sector. The principle of risk allocation is that the party that is the ablest to manage a risk holds it unless both parties agree to share the risk. Bankability is always assessed through risk allocation among the Parties to the Project, hence the necessity to set up a proper risk matrix when drafting project agreements.
Covering the Land Risk
In emerging markets, securing the land or the site envisaged for solar projects by acquiring land rights are less certain than in developed markets where established land registries and records exist. One solution to make projects more attractive for financial or lending institutions would be to have States finance pre-feasibility studies in order to identify potential sites for solar projects. It has been observed that very often, developers run out of money at that stage without any certainty of the result of these studies.
Addressing the Tariff Risk
Practice shows that attractive solar projects often fail to reach financial close because they fail to meet lenders’ expectations. One of the key elements is the tariff levels. States should be able to determine in advance the proper tariff for the purchase of solar energy in their country on the basis of a typical risk matrix structure and guarantees granted to projects. With this standard tool, developers will have a common basis for setting up their financial models, which could bring down the costs of projects discrepancies in the electricity tariffs among projects. On the other hand, bankability is closely linked to the capacity of the project to have stable revenues and prevent potential tariff payment failures of the off-taker. The profile of the off-taker is key in this assessment.
Facing the Regulatory and Political Risks
The regulatory and political Risks included here are typical risks to be addressed under project agreements. Regulatory risk such as discriminatory change in law affecting the project are usually covered by the State. Typical risk allocation will provide that to the extent the change in law adversely affects the general economic balance of the project, the private party is entitled to appropriate compensation or relief from the State. Political risk is a change in the political framework of the host country which adversely affect the project is a State’s risk and an event of force majeure. Here, the private party is usually entitled to issue notices to the State to remedy within a specified period of time, failing which it will be entitled to terminate and/or to receive compensation from the State.
This article is a high-level summary about some bankability aspects for a solar project. In addition to the risks highlighted above, other important risks to be tackled in the risk matrix would include: solar resource or input risk, construction risk, design risk, completion risk, demand risk, maintenance risk, force majeure risk, currency, exchange and interest rate risk, insurance risk, early termination risk etc.
We’d be very happy to help you navigate through those risks and issues.
(1) Eurogroup Consulting. 2015. Energie Afrique Horizon 2050.
(2) McKinsey. 2015. Brighter Africa: The growth potential of the sub-Saharan electricity sector