Hydropower plays a central role in many sub‑Saharan African countries’ power systems, providing clean baseload power. In many cases, there is a single off-taker and, although private participation is allowed in the generation space, development finance institutions (DFIs) or public sources make up the primary sources of finance. Uganda’s electricity utilities were unbundled in 1999, with private sector participation authorised in the generation and distribution sectors. The government is currently discussing reform to merge the utilities, but this is not expected to reduce the role of the private sector.

Hydropower plays a central role in Uganda’s energy system, accounting for 80% of the country’s electricity generation. The 250 MW power plant at Bujagali dam has been one of the country’s largest electricity suppliers since it became operational in 2012, accounting for 45% of the country’s annual electricity generation. Financing for the project was originally agreed in 2007 and included various de‑risking instruments in order to attract private debt and equity investors. The debt financing included a step up in repayments in 2018 which, since Uganda has cost-reflective tariffs, would have been passed through to consumers. At the time, tariffs were already comparatively high for the region, so the government sought to refinance the debt and reduce financing costs associated with the project. The refinancing agreement was one of the first of its kind in sub‑Saharan Africa, with the savings passed on to consumers via a reduction in tariffs.

Bujagali is a run-of-river hydropower project which has had a significant impact on Uganda’s electricity system. When it was commissioned, it displaced more than 100 MW of diesel power plants and reduced the marginal cost of power by more than 65%. This reduced the need for tariff subsidies from the government, which at the time accounted for USD 180 million per year, freeing up government spending for other sectors.

Along with senior loans provided by DFIs (IFC, African Development Bank and European Investment Bank), South Africa-based commercial banks Absa and Standard Chartered provided commercial loans accounting for 13% of the project financing (USD 115 million). This represented the largest private investment into the country’s energy sector and was facilitated by the provision of partial risk guarantees by the World Bank. Thanks to these guarantees, the commercial banks were able to extend their loan tenors and reduce their interest rates to be more in line with those provided by DFIs. The tenor extensions were particularly impactful on the required tariff. Commercial loans were provided with 16‑year maturities; estimates indicate that if these maturities were between seven and ten years, as is more common from commercial banks, then the tariff would have needed to be 30-50% higher in order to cover the debt servicing costs.

Once the dam became operational, there was an opportunity to lower the costs associated with the debt financing, given that the project risks had significantly decreased since the development and construction phases. In July 2018, more than USD 400 million in loans to Bujagali Energy Limited, the owner of the dam, was refinanced, accounting for the vast majority of the senior and subordinated (second in priority in the event of bankruptcy) loans originally provided in 2007. Financiers included in the deal were primarily DFIs – the World Bank, African Development Bank, and DFIs from France, the United Kingdom and Germany – as well as two South African commercial banks – Absa and Nedbank.

The refinancing extended the loan maturity, pushing the payback date for almost a decade, from 2023 to 2032, and therefore reducing the debt servicing costs. In 2017, Bujagali Energy Limited’s tariff was USD 0.113/kWh, which was due to increase to USD 0.133/kWh in 2018, gradually rising to USD 0.147/kWh by 2023. As a result of the refinancing, Proparco, one of the financiers, estimated that the final tariff would be reduced by an average of USD 0.231/kWh between 2018 and 2023 for the 7 million people who may potentially benefit from the over 1.5 TWh generated by the hydropower plant every year.

The refinancing deal also cleared the path for SN Power, owned by the Norwegian DFI Norfund, to take a 65% stake in Bujagali Energy Limited. In 2020, SN Power, which also held assets in the Philippines and Laos, was sold to the Oslo-listed private company Scatec Solar. This represented a transfer of the assets from a public DFI to private ownership.

The refinancing of the Bujagali dam is a clear example of how existing assets with low operating costs, such as brownfield hydropower projects, can be leveraged to bring in cheaper capital, including from private investors. Although many of the utility-scale hydropower projects in Africa are reliant on DFIs that can provide concessional finance, the cost of capital can still be higher than in advanced economies given the higher risks around off-takers or perceived risks around construction delays and cost overruns. Hydropower projects have significantly more risk in the development and construction phases, due to environmental and social risks prior to construction and the risk of delays due to the site-specific nature of construction. Once built, risks fall and operational costs are minimal. This makes them a perfect candidate for refinancing, allowing for lower-cost capital to be brought in and freeing up less-risk-averse capital to reinvest elsewhere.

Since 2018, there have been several other high-profile refinancing announcements elsewhere in the energy sector, notably the Benban solar project in Egypt which utilised green bonds to attract lower-cost capital. Refinancing options are also increasingly being structured into deals. For example, financing agreements for the Nachtigal hydropower project in Cameroon include a guaranteed option for banks to refinance their debt after 7 and 14 years. This reduces risk to banks by providing them a clear exit, while also ensuring there are opportunities for longer-term investors, who may be able to provide lower-cost capital, to enter the project.

The sale of SN Power to Scatec Solar also demonstrates that operational hydropower assets can be attractive to private sector investors. Under the Net Zero Emissions by 2050 (NZE) Scenario, private sector financing in clean energy in Africa rises from just over 40% of investment today to nearly 65% of spending by 2030; however, there are still several countries and sectors across the region that the private sector struggles to access. Identifying areas, such as the refinancing of operational assets, where the private sector can be readily deployed will be essential to ensure maximum capital mobilisation.