African countries started liberalising their electricity sectors around the mid‑1990s, with Senegal among the earlier adopters. Private participation in Senegal started in the generation sector through the introduction of independent power producer (IPP) projects, mainly for fossil fuel base power at the beginning. The vertically integrated and state-owned electric utility, SENELEC, maintains a monopoly in transmission and distribution (outside certain rural zones where private concessions are allowed) and is the main counterpart to IPPs for power purchase agreements (PPAs). Senegal’s power system still relies heavily on fossil fuels, and fuel oil in particular, but the country has also shown impressive growth in renewable power capacity and generation over the years, with private IPPs representing a significant portion. Solar PV and wind IPPs accounted for 21% of total annual power generation in 2022.

On top of the changes in the market structure, Senegal has also undergone various reforms since the early 2010s to attract foreign direct investment and encourage more private sector participation across the economy. Net inflows of foreign direct investment to Senegal reached over USD 2 billion in 2021, almost 30 times more than in 2000. The Plan Senegal Emergent, a strategic roadmap developed by the government in 2012 to get Senegal to become an emerging economy by 2035, was an important driver of these investments, and infrastructure was a pillar of the plan. On the electricity side, over USD 1 billion in investments were mobilised into more than ten IPP projects over the last decade. Around 375 megawatts (MW) of fossil fuel-based IPPs reached financial close between 2014 and 2022 in Senegal, and over 300 MW of solar PV and wind IPPs. In terms of installed capacity, IPPs accounted for about two-thirds of the country’s total installed capacity in 2022 (1 139 MW out of a total of 1 789 MW).

The Ministry of Petroleum and Energy is responsible for power sector policy, including project planning, as well as awarding projects and granting concessions. Direct negotiation has been the most common form to award IPP contracts in Senegal, though a few projects have been awarded through competitive tendering as well.

Most of the capital provided for utility-scale solar PV and wind IPPs that reached financial close came from development finance institutions (DFIs) in the form of debt. A close look at seven projects – which together total about 150 MW of solar PV and 160 MW of wind capacity – shows that over 75% of project financing was composed of debt (mainly from DFIs) and the rest of equity (mainly from international private investors). Two projects, awarded under the Scaling Solar programme, obtained local financing, from Senegal’s sovereign wealth fund Le Fonds Souverain d’Investissements Stratégiques (FONSIS).

Scaling Solar is a “one-stop shop” programme launched by the World Bank Group and led by the International Finance Corporation (IFC) that works with emerging market and developing economies (EMDE) to provide technical assistance, competitive bidding, standardised PPAs, risk mitigation products and simplified procurement for utility-scale solar PV. The government of Senegal, under this programme, awarded 60 MW of solar PV capacity for two projects, the Kahone and Kael solar PV plants. Each project received six bids and the price achieved in the tender was a record low for the region, at about USD 0.05 per kilowatt-hour (kWh). Apart from FONSIS, the French utility Engie and investment fund Meridiam were the other two project sponsors. Debt funding included loans from the IFC, the European Investment Bank and the French DFI Proparco, at concessional rates. This debt was key to achieving a very low cost of capital for these two projects, as well as a very low cost of power generation.

Despite Senegal’s progress, off-taker risk and the ability to access the transmission grid remain a concern for IPPs, according to data from the IEA Cost of Capital Observatory. Access to finance for solar PV and wind projects in Senegal is relatively available, though high payment risk – particularly payment delays that affect projects’ operating cash flows – and transmission bottlenecks remain a worry to investors and put pressure on the cost of capital. There is optimism for the coming years, though. The government of Senegal launched a Just Energy Transition Partnership (JETP) in June 2023 to achieve universal energy access and consolidate a low-emissions energy system. The government launched the JETP in partnership with France, Germany, the European Union, the United Kingdom and Canada, who will provide technical and financial support. For renewables, international partners and multilateral development banks committed to mobilise EUR 2.5 billion in new and additional financing over a period of at least three to five years.

Senegal has managed to attract over USD 500 million to solar PV and wind generation since the mid‑2010s. The country was able to do so by offering a relatively attractive investment proposition to investors and financiers: highlighting its good economic performance and political stability (it is one of the strongest democracies in the region), lower currency risk (in part given its local currency is pegged to the euro) and commitment to renewables. This combination of factors was key to attract international investors and reduce risk perceptions. Interviews performed by the IEA under its Cost of Capital Observatory concluded that financing costs are lower in Senegal given lower macroeconomic and political risks, compared with other sub‑Saharan African countries as well as other EMDE. For instance, the latest data from the IEA’s Observatory shows that the cost of capital of utility-scale solar PV projects in Senegal, at about 9%, was similar to or below large EMDE such as Brazil and India, illustrating Senegal’s relative attractiveness, despite being in a region with high real and perceived risks.

Senegal’s experience with Scaling Solar also shows how a comprehensive one-stop shop programme can be critical to achieve both a very low cost of capital and record low prices for electricity. However, it is also a reminder that these initiatives should be set within long-term strategies that incorporate further de‑risking – to address off-taker and transmission risks in this case – to break the dependence of concessional funding. As markets mature, the role of DFIs should decline, moving away from providing direct finance at concessional rates to focusing on de‑risking mechanisms or shifting to riskier sectors.