EDFI: Africa and Energy Access – Financing Impact

by CFI | July 26, 2012 2:12 pm

[1]Energy is arguably one of the major challenges the world faces today. For those living in extreme poverty, the lack of access to modern energy services dramatically affects health, limits opportunities and widens the gap between the Haves and Have-Nots. In Africa, the lack of affordable and reliable energy impedes economies to develop by shortening business operating hours, making business production uncertain and discouraging investment. The poorest people pay a high price in health, labor, time and cash for the energy they use. Access to energy and affordable energy in Africa is a necessary precondition to achieve development goals that extend far beyond the energy sector: it provides the basis for the development of modern forms of healthcare, education, transport, production and communication.

Energy is back on the agenda of governments, international organizations and the development scene in Africa. 2012 was declared International Year of Sustainable Energy for All by the United Nations. The UN Secretary-General Ban Ki-moon launched the “Sustainable Energy 4 All” (SE4All) initiative, urging all stakeholders to take concrete action toward three critical objectives: (1) ensuring universal access to modern energy services; (2) doubling the share of renewable energy in the global energy mix and (3) doubling the global rate of improvement in energy efficiency. The global target date for achieving the SE4All targets is 2030 but this will not become a reality without massive increases in the quantity and quality of energy services. Africa is the continent with the highest priority on energy development: in 2012 nearly half of the countries in Africa face energy crisis. Even though the African continent is well endowed with renewable energy resources (hydropower and geothermal especially), most remain untapped. However, changes in precipitation can result in loss or variability in hydro-electricity potential, variations in runoff and impacts on biomass production. Therefore, access to energy in Africa also includes developing conventional energy such as gas and diesel, to provide for instance stability to grids, because of the changing climate conditions of Africa and dwelling resources. There is no (or less) renewable power to provide when there is no (or less) water, sun or wind.

Africa is a key priority for many of the 15 European bilateral development finance institutions (EDFIs): in 2011, €689 million have been invested in 61 projects in Africa. To benefit from additional financial leverage and risk sharing, EDFI has also created two joint financing initiatives with the European Investment Bank (EIB): European Financing Partners (EFP) especially designed for Africa, the Caribbean and Pacific countries and the Interact Climate Change Facility (ICCF), which also includes the Agence Française de Développement and is especially designed for projects focused on clean energy or energy efficiency. EFP and ICCF’s unique decision model is effective, efficient and serves as the foremost example of the strong partnerships, which European institutional investors are increasingly forging, in order to play a leading role in sustainable private sector development in Africa and in the energy sector. For every project, the EDFIs have upheld the highest standards on environmental and social issues, and in corporate governance in Africa.

[2]The European Development Finance Institutions (EDFI) and its joint financing initiative in ACP countries: European Financing Partners and in energy efficiency: Interact Climate Change Facility. EDFI seeks to support economically, environmentally, and socially responsible development by fostering the growth of the private sector in developing countries, and do so by providing capital for long-term investments. EDFI member institutions often join forces to finance larger projects, which will serve their clients, while achieving higher development impact. Approximately €375 million has been approved for 26 projects under the EFP through 2011, 20% of which has been committed to power or energy projects. On the individual projects, this funding is complemented by additional financing coming directly from individual EDFIs. With the success of EFP, EDFI decided to create the same type of co-investment facility focused on energy efficiency and climate change projects. Interact Climate Change Facility was created in February 2011.

Why invest in joint instruments when bilateral development finance institutions can do it individually? Firstly, EFP and ICCF financing supplements the total financing raised, which enables EDFIs to invest in larger projects. This is important because many energy infrastructure projects require economies of scale to be bankable and because long term funding is scarce, especially in Africa, where the country risks are often considered too high for commercial banks to provide funding. Secondly, EFP and ICCF financing enables broader participation by a range of DFIs with minimal additional costs and without the requirement for their significant dedication of administrative resources, as the execution and subsequent monitoring of the project is undertaken by one of the EDFIs on behalf of the group of DFIs. EFP and ICCF enhance very much the efficiency of the transaction.

[3]

What are the Impacts for Energy Investments in Africa?

On the African continent, according to ARE (Alliance for Rural Electrification), the overall amount of people without access to electricity has reached 589 million in 2008. The number of people that have no access to electricity has increased by 9 million people annually[1]. Access to sustainable sources of reliable and affordable energy has a profound impact on multiple aspects of human development; it relates not only to physical infrastructure (e.g. electricity grids), but also to energy affordability, reliability and commercial viability. Most firms are less concerned with the price of power than with the quality and reliability of supply. So, how to invest and in which country? EDFI and its joint financing instruments EFP and ICCF focus on energy investments with the highest impact potential in target countries with binding constraints. Two example countries with these characteristics are Kenya and Zambia.

Energy supply in Kenya is a constraint on growth: Kenya has required emergency power generation every year since at least 2005. A 2009 World Bank study suggests significantly improving electricity generation capacity could increase Kenya’s annual GDP growth rate by 1.7 percentage points. In contrast to Kenya, Zambia is not yet supply constrained, though it still has a growing need for investment. In particular, the country has tremendous potential to grow its energy production, especially hydro, with the aim of exporting power to other countries. Zambia is rich in lakes and rivers, and has a potential hydro capacity of 6,000 MW[2].

In 2012, EDFI contracted Dalberg Global Development Advisors to undertake an independent evaluation of three energy projects in sub-Saharan Africa financed by EFP: Copperbelt Energy Corporation in Zambia (CEC), Olkaria III in Kenya; and Rabai Power in Kenya[3]. The consultants analysed the impact of the projects and the role of EFP: while not always the only option, EDFIs provided finance on terms unavailable from commercial lenders, and sometimes key advisory support as described for the three energy projects evaluated:

The three projects assessed, illustrate the potential multiplied impact of energy infrastructure investments, especially in constrained environments. For the Kenya IPP projects, new electricity generation should help support hundreds of thousands of jobs additional to the number of jobs created in the plant. Furthermore the projects will lead to national cost savings in the tens or even hundreds of millions of dollars. For example, Olkaria III has allowed economic benefits from lower costs and higher reliability: the plant added 3.5% in national capacity; is currently supplying 6% of Kenya’s energy consumption; and helped reduce load shedding in the country while keeping the environmental impacts especially small. In Zambia, CEC’s transmission infrastructure was already in place, but its maintenance and expansion is important to growth of Zambia’s most important export sector, mining, and the government’s plans to double the contribution of mining to GDP by 2015.

[4]

Olkaria III plant in Kenya (Copyright: DEG)

The Rabai project may never have been completed without DFI finance due to the high political risk in the country at that time, whereas for CEC, the acquisition arrangements would likely have been sub-optimal without DFI finance.

“Energy infrastructure projects enable DFIs to achieve public sector scale, with private sector efficiency.”

– Dalberg Global Development Advisors, EFP evaluation, 2012

Source URL: https://cfi.co/africa/2012/07/edfi-africa-and-energy-access-financing-impact/