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27 Nov 2020

Report: Exploring the Role of Guarantee Products in Supporting Local Currency Financing of Sustainable Off-Grid Energy Projects in Africa

Energy Access
Finance and Investment
Renewable Energy
Local currency financing of energy projects in Africa

Universal and sustainable energy provision is a key priority across Africa. Countries are facing the dual objective of increasing the availability of energy to households and businesses while also decreasing the dependency on fossil fuels by adopting renewable and /or low carbon technologies. 

In addition to relying on imported fossil fuels, most African countries are also reliant on hard currency debt for the financing of energy infrastructure. This creates significant exchange rate risks that are difficult to hedge and which can have profound implications for energy costs.

There is a strong case for developing the capacity and capabilities of local financial intermediaries to provide competitively priced local currency term credit to reduce reliance on hard currency financing. In the off-grid sector, this is particularly relevant for local commercial banks and institutional investors (where sizeable opportunities exist).

One approach to stimulating local currency lending is through credit enhancement products that provide risk mitigation for local currency lenders and institutional investors. Credit guarantees aim to help improve the credit profile of borrowers and by doing so, enhance the financing terms on offer from lenders and investors. In turn, this can improve the current lack of competitiveness of local currency debt financing against other forms of financing, including equity and hard currency financing, thereby increasing its uptake.

The aim of this report is to assess this hypothesis by exploring the supply of and demand for local currency finance for off-grid renewable energy projects in Africa. Grid-connected renewable energy projects are also discussed, but only in the context of applying credit enhancement solutions in these markets. The research includes in-depth examination of the markets in Ghana, Kenya, Nigeria, and Tunisia. It also explores the obstacles that developers and businesses face in tapping into local currency credit and capital markets and analyses the extent to which credit enhancement in the form of competitively priced guarantees – of multiple forms – could entice local banks and other financial intermediaries to provide local currency debt finance to the off-grid sector.

The research is based on an extensive desk-based review of publications on the off-grid energy and local currency financing space, as well as documents related to solar household systems (SHS), commercial and industrial (C&I) and mini-grid sectors in four countries. In addition to this, consultations have been carried out with 163 organizations working in the field. The intended outputs of this report are to provide information, analysis, and insights on local currency opportunities for off-grid energy businesses and projects, with the objective of stimulating private sector initiatives in the off-grid space.

Download the report below.