Energy Financing: New financial mechanism to mitigate foreign exchange risk needed – Experts say
At a session organised on Thursday 30 May 2024 by the African Development Bank (AfDB) Group as part of its 2024 Annual Meetings in Nairobi, debates focused on rethinking how clean energy projects are financed in Africa.
Moderated by Wale Shonibare, Director for Energy Financial Solutions, Policy and Regulation at the Bank, the panel included Maureen Hinda-Mbuende, Namibia’s Deputy Minister of Finance, Amadou Hott, Special Envoy of the AfDB Group President for the Alliance for Green Infrastructure in Africa (AGIA), Demba Diallo, Executive Director and ehad of Project Development at Africa50, and Auguste Claude-Nguetsopde, partner and head of Banking Sector Advisory at KPMG in South Africa.
Kevin Kariuki, AfDB Vice-President for Power, Energy, Climate and Green Growth, pointed to the issue at the opening of the session: “Energy transition remains a priority for Africa’s development, but it is underfinanced (…). The main problem is exchange rate volatility, which remains a concern for investors.”
“So long as we do not have a common currency, we need a transparent and well-governed mechanism in order to guarantee stability for investors, facilitate borrowing and reduce currency risks,” he said.
Demba Diallo seconded Kariuki’s comments: “Africa50 investors have borne the brunt of the devaluations of several African currencies, such as the Nigerian naira. Reducing currency risk will lower costs and offer a better return per project,” he said.
Wale Shonibare pointed out that for Africa to meet its energy and climate targets by 2030, annual investments of $200 billion are needed whereas investments in 2022 were less than $90 billion.
“African countries need to increase their national savings and pool their natural resources so that they can use these resources to raise the funds they need for investment in energy infrastructure. That calls for a paradigm shift in project financing in Africa,” he said.
Achieving the paradigm shift depends on three key factors. First, access to long-term sustainable financing that mitigates currency risk and keeps electricity tariffs affordable in a context where 600 million Africans still lack access to electricity. Second, African counties must pool and harness their wealth to attract international investors to projects that earn local currency without the need for government guarantees. Third, the continent must make best use of its rare mineral wealth. Many of these minerals are essential for clean energy technologies and should create new export markets.
The African continent has 60% of the world’s solar capacity and 50% of its wind power capacity. It also has 71.4% of the global reserves of cobalt, 76% of platinum and 58% of manganese. And yet, Africa currently attracts just 3% of global investment in energy and 2% of all investments in green energy.
African countries could avoid long-term borrowing in hard currency for infrastructure projects that generate revenue in local currency given this context, and pool their natural resources to facilitate borrowing in African accounting units. Panellists made the point that these units would be exchangeable against international currencies while maintaining stability in relation to local African currencies.
Most countries on the continent rely on hard-currency debt to provide the capital needed for development, exposing project developers to significant currency mismatches and currency risks that are difficult to hedge. This often has a very significant impact on national energy costs. Currency hedges exist, but can be costly and are not available for the currencies of many African countries, particularly in the long term, at low cost, and on the scale necessary to support clean-energy investments.
“We need to engage all stakeholders in the creation of a financial mechanism that enables African countries to mitigate exchange-rate risk in financing of energy infrastructure,” Maureen Hinda-Mbuende said.
‘If we want to lift Africa out of poverty, we need to do more than pool our resources – we also need to act on pricing. Many of our resources leave our continent without us being aware of their real value,” said the Namibian Minister. Namibia is particularly rich in rare earths.
“African countries fail to recognise the immense wealth that they possess. Borrowing on the basis of a basket of currencies would be beneficial to them, and if they can pool their resources, it will bear fruit,” said Auguste Claude-Nguetsopde.
‘We know that Africa possesses immense commodity wealth. Let’s start by looking at the resources in each of our countries and consider how we can make the most of them,” Hott concluded.
