Multiple recent crises have made it increasingly challenging for many African countries to raise financing to support their clean energy ambitions, despite the continent’s huge needs and rich and varied resources. Africa accounts for around 20% of the world’s population but attracts less than 2% of its spending on clean energy. In recent years, African countries have had to deal with a series of overlapping crises, including the Covid-19 pandemic, the energy and food crises following Russia’s invasion of Ukraine and worsening climate risks. Borrowing costs have reached unsustainable levels in multiple countries, and debt servicing costs are now double the level of clean energy investment across the continent.  

Achieving the region’s energy development and climate goals requires energy investment to more than double from today’s USD 90 billion by 2030, at which point nearly two-thirds of spending would go to clean energy. Energy investment in Africa has been falling in recent years. Spending on fossil fuels – which has typically accounted for around two-thirds of investment – has declined and clean energy investment has remained flat. This report explores the continent’s investment needs under the Sustainable Africa Scenario (SAS) developed in the IEA’s Africa Energy Outlook 2022. The scenario considers the diverse needs of different African countries and sectors and lays out a pathway to achieve the energy-related Sustainable Development Goals, including universal access to modern energy by 2030, as well as fulfilling all announced climate pledges in full and on time. This requires a step change in investment, shifting away from fossil fuel projects designed to supply foreign countries towards clean energy projects, including a larger role for decentralised systems. All of this requires opening up a range of new capital sources and financing approaches.

Despite ample resources and favourable underlying economics, multiple barriers hinder the development of bankable clean energy opportunities in Africa and deter private investments in projects and companies at the necessary scale. The debt crisis in many parts of the continent means there is limited public capital available, including for state-owned utilities. Private capital therefore needs to play a key role, but many private investors are reluctant to enter African markets because of high perceived and actual risks. In more nascent markets, the regulatory environment is often not fully developed and may lead to contract instability and delays. In countries with rising debt, there are higher payment risks from state-owned utilities .And in fragile states, the political and reputational risks can be too high. The result of this environment is that most investors feel there are not enough investable projects. For the moment, development finance institutions are the largest clean energy investors in the region.

Higher perceived and actual risks push up the cost of capital, which can make projects uncommercial or more expensive for end users. The technologies deployed at scale in the Sustainable Africa Scenario are mature and commercially viable, utilising some of the highest-quality renewable resources in the world. Yet despite the limited technology risk, the cost of capital for utility-scale clean energy generation projects in Africa is at least two to three times higher than in advanced economies and China. It is even higher for smaller scale projects, especially those that can only access debt from local commercial banks. Measures by lenders to mitigate risks, such as demanding high collateral requirements, can be prohibitive. This not only acts as a brake on investment but also pushes up the costs of electricity for consumers, leaving them reliant on polluting options with lower upfront costs but much higher operating expenses.

By 2030, investment in energy access in Africa needs to reach nearly USD 25 billion per year to ensure modern energy for all – a small share of overall energy investment but a dramatic increase compared with today’s spending. Today, more than 40% of the population in Africa live without access to electricity, and 70% without access to clean cooking fuels. The socioeconomic impacts of this are huge. The lack of clean cooking contributes to 3.7 million premature deaths annually, disproportionately affecting women and children. While USD 25 billion is only a small amount in the context of global energy spending – the equivalent of one new LNG terminal – it requires a very different type of finance. Investment is needed in small-scale projects, often in rural areas, by consumers who have very limited ability to pay.

Affordability constraints make it less likely projects will be commercially viable, but there is a strong case for concessional financing given their social impact. We estimate that due to affordability constraints, only around half of new electricity access connections (including grid, mini-grid and stand-alone systems) providing the most basic energy services are likely to be commercially viable without incentives such as reduced connection charges, lower tariffs and subsidised electrical appliances. Without external support, most clean cooking access projects, except for improved cookstoves, would not be affordable. Grants therefore play a key role both to fund access programmes for the poorest households, as seen with the mini-grid programme for rural communities in Nigeria, and to provide early-stage financing for local companies, such as women-led off-grid companies (as seen in Rwanda, supported by GET.invest, a European programme specifically designed to support investment in decentralised renewables). Concessional finance providers can also drive further private capital involvement via the creation of more equity financing vehicles (such as Beyond the Grid Fund for Africa), piloting innovative off-balance sheet financing approaches (as in Togo), supporting commercial banks to provide more affordable long-term debt (as in Kenya), and financing productive uses (as in Uganda).

As things stand, there is a mismatch between the type of capital available and the needs of Africa’s emerging clean energy sector, with a particular lack of early-stage and equity financing. In the Sustainable Africa Scenario, significant investment is needed across all areas of the clean energy spectrum. This requires a broad range of instruments to move projects through the development cycle. Grants and equity tend to play a larger role in the early, riskier stages, while affordable debt becomes more important once a project moves into construction or operation. This capital evolution varies by technology, as does the moment at which the private sector is most likely to get involved. However, across all areas of clean energy, investors often cite a lack of investable projects, indicating there is not enough funding going into the pre-bankability stages to support areas like feasibility studies.

For utility-scale clean power, private capital can take the lead, but concessional finance still plays a key de-risking role in less developed markets. Renewable power projects represent a major investment opportunity, accounting for 80% of capacity additions across the continent this decade in the Sustainable Africa Scenario. Private investment has been growing, for example in solar PV in South Africa and Egypt, where multiple auction rounds have resulted in private-led developments. In many countries, however, renewables projects are either fully or partially reliant on the involvement of concessional capital. Many projects commissioned to date have required multiple credit enhancements, including guarantees and risk sharing with development finance institutions. Innovations in this space – such as the creation of dedicated guarantee providers that can support clean power projects in nascent markets like Madagascar, the development of currency hedging products such as those offered by the development finance initiative The Currency Exchange, and the piloting of new liquidity support mechanisms in Gabon – are already allowing for the deployment of more private capital. But greater transparency around the financing terms and credit enhancements used would be likely to support more efficient mobilisation of private capital, allowing development finance institutions and donors to concentrate on the most complex investment environments.

Reliable and robust electricity grids are a missing piece of the puzzle. In the Sustainable Africa Scenario, grid investments rise from around USD 10 billion per year today to nearly USD 50 billion by 2030, requiring new financing models that are less reliant on limited state funds. Many African state-owned utilities struggle with poor financial health and high systems losses, which averaged 15% across the continent in 2020 compared with the global average of 7%. As a result, they are unable to finance the necessary expansion and modernisation of grids that the influx of renewables requires. Alongside efforts to improve the financial health of utilities, achieving the spending increase is likely to rely on grants and highly concessional capital to develop and pilot models that shift some of the financing to private players. Countries like Kenya and Uganda are also already testing innovative concession or brownfield asset refinancing approaches with the support of development finance institutions, which can serve as models for elsewhere on the continent if successful.

Energy efficiency needs to play a key role in Africa’s energy economy as demand expands, but it is not yet getting enough priority. Energy efficiency spending increases sevenfold by 2030 in the Sustainable Africa Scenario, in areas such as efficient green buildings and consumer appliances like refrigerators and air conditioners. However, financing efficiency projects can be challenging, with investment in efficiency covered by less than 15% of concessional funding instruments. While many efficiency projects are cost-effective and result in savings, they are relatively small-scale and there is a low awareness of their potential, risks and business models. Increasing public capital – from governments, development finance institutions and donors – will be essential to raise awareness, as will the creation of consumer finance schemes such as green mortgages or on-wage and on-bill payment plans such as in Kenya, Ghana, Senegal and Rwanda. Affordable low-cost debt, through instruments such as green bonds, can also prove particularly impactful for the buildings sector.

The global private sector can play a significant role in mobilising finance for the development of clean energy supply chain projects. African countries with critical minerals – such as the Democratic Republic of Congo, Mozambique and Madagascar – or with low-emissions hydrogen potential, such as Namibia and Mauritania, can take advantage of growing global demand for clean energy to drive domestic industries. Much of this critical mineral development can occur via the balance sheet of major mining companies, although their involvement will be increasingly dependent on both the regulatory situation and the strength of environmental, social and governance (ESG) data and policies. Most low-emissions hydrogen projects will rely on public support, including the critical step of creating common standards for hydrogen trade and a larger pool of buyers willing to underwrite supply projects with long-term commitments.

Alongside improvements in policy and regulation, concessional capital of around USD 28 billion per year is needed to mobilise the USD 90 billion of private sector investment by 2030 in the Sustainable Africa Scenario. This is a more than tenfold increase from today and requires a significant change in how concessional finance providers operate. While these providers continue to act in some cases as direct financiers of projects under the Sustainable Africa Scenario, a much larger role for them is to spur the mobilisation of private sector financing. Various initiatives are underway, notably the Bridgetown Initiative, to review and reshape how multilateral development banks operate. Stepping up their support for clean energy investment will likely require greater use of blended finance instruments. Guarantees and concessional equity can come with high mobilisation ratios and add greater flexibility to the financing sources available.

With the right regulatory environment and support in reducing risk, the global investment community could be mobilised to play a larger role, including in financing existing assets. Institutional investors worldwide hold trillions in assets but currently have limited involvement in the energy sector in African countries. Understanding where they can best be deployed and developing the right instruments is key. Institutional investors are unlikely to fund greenfield projects but can invest in brownfield projects, either via government-sponsored asset recycling programmes – as seen in The Gambia, Zimbabwe and Togo – or by providing refinancing via green or sustainable bonds, as seen in Egypt and Nigeria. Such investments have the additional advantage of freeing up construction and development capital for other greenfield projects. International bond markets can also be tapped for developing energy efficiency projects – as seen in the buildings sector in South Africa, Kenya and Côte d’Ivoire – or for innovative solutions, like setting up a securitisation company that uses bond issuances to grant loans to financial institutions, as done by impact investor platform Symbiotics. Governments can develop taxonomies to help these markets grow – and use a sovereign bond programme to help develop the corporate bond market, as has been done in India and Colombia.

In the Sustainable Africa Scenario, finance originating from or disbursed through local channels increases nearly threefold by 2030. Local finance removes currency risk, reduces exposure to external shocks, and can price risk more effectively due to familiarity with the local markets. Local private finance can come primarily from commercial banks and the growing base of institutional investors, notably pension funds. Today, apart from the large pan-African banks, most of these institutions lack the familiarity with the industry to participate or provide affordable capital. Governments can stimulate this involvement via the creation of public green finance facilities, supported by capacity building and concessional funds from development finance institutions and donors for onward lending, as seen in South Africa, Rwanda and the African Development Bank Group’s Africa Green Bank Initiative. Equally, development finance institutions can support the creation of facilities that are targeted to increase local capital involvement, such as the providers of local currency guarantees seen in Nigeria. 

Scaling up and replicating existing innovative financing solutions requires a coordinated approach from African governments, development finance institutions, donors and private capital. For this report, with the support of the African Development Bank Group, we reviewed over 85 case studies and conducted interviews with more than 40 stakeholders operating successful clean energy projects, companies or funding programmes on the continent. This research revealed a series of best practices that can be replicated. It also highlighted some major recurring obstacles. For example, concessional finance providers may need to take on more risk, including for pre-development stages, to help get more bankable projects in front of investors and to increase support in fragile and low-income countries. African governments also need to create the right enabling environment, ensuring stable regulation and financially reliable utilities. Meanwhile, the private sector can ensure it accurately prices risks and works in tandem with concessional providers of blended finance instruments, particularly in technologies and markets that are already proven. The African clean energy space represents a massive opportunity for growth, employment and innovation. All stakeholders – public and private, domestic and international – will need to play their part to move the continent towards a sustainable energy future.