Five Recommendations to Boost Renewable Energy Finance in Southern Africa

As the COVID-19 pandemic induces public finance deterioration in many countries in the world, community health resilience and other social challenges, such as climate change and economic inequality, are making it imperative that countries receive enough support to invest in social infrastructure and sustainable growth.

A new report from the Global Development Policy Center examines progress in the Southern African Development Community (SADC) in meeting energy demands and policy goals, while also mapping the current contributions of development finance institutions (DFIs) to developing renewable energy in the SADC region. Based on interviews and surveys with local stakeholders and experts, the report investigates the barriers to renewable energy finance and uptake in the region, and provides five key policy recommendations.

The report was produced in collaboration with the SADC Development Finance Resource Centre (SADC-DFRC), the SADC Centre for Renewable Energy and Energy Efficiency (SACREEE), the Development Bank of Southern Africa, and the University of Pretoria Centre for Human Rights.

In Southern Africa, insufficient electricity supply is a major challenge to economic growth. Eight of the 16 SADC countries have less than 50 percent electricity access, and some countries, such as Malawi and the Democratic Republic of the Congo, have less than 20 percent access. SADC countries face enormous opportunities and challenges in developing their energy infrastructure over the next decades to power development and provide access to all. As levelized costs of renewable energy become competitive against fossil fuels, development finance will be important to scaling up renewable energy investment in the region and bridging the gap of energy access and sustainability.

Adding up all SADC quantifiable renewable energy targets found in national policies and the climate change Nationally Determined Contributions (NDCs) amounts to a target of 37.5 gigawatts (GW) of additional installed capacity after 2018. The estimated required investment is $66.7 billion. An analysis of current traceable DFI financing amounts to only $10.1 billion (Figure 1), showing a significant gap in current DFI financing trends and future needs.

Figure 1: Renewable Energy Finance Flows by DFI in SADC 2007–2018 (millions of USD)

Source: Authors’ elaboration, see Annex I: Note on Methodology.

Collaborative research of the report provides five key policy recommendations for stakeholders in the region to expand renewable energy finance for access and development:

1. Establish and Adopt a SADC Target of at least 53 Percent Renewable Energy by 2040

The Southern Africa Power Pool (SAPP) Pool Plan 2017 includes a “high renewables” scenario with 53 percent renewables in the total generation capacity (27 percent hydro and 26 percent other renewables) by 2040. With sufficient financial support, the SADC region would be able to reach this goal and full energy access at the same time.To reach this goal, the SADC region needs an estimated additional 60.7 GW of renewable energy capacity, or 2.8 GW per year through 2040. Since 2015, the SADC region has been deploying renewable energy at a rate above 1.5 GW annually on average. This leaves a gap of only 1.3 GW, requiring an estimated investment of $2.4 billion per year to 2040, or $52.8 billion in total. For just 0.3 percent of its Gross Domestic Product (GDP) annually, the SADC region can meet the energy needs of its people in a manner that will bring higher economic growth, employment, and well-being.

On the regional level, SADC should adopt the 53 percent target as a minimum high-level policy target, for example, at the Ordinary Summit of Heads of State and Government of the Southern African Development Community. Such political commitment is essential to overcoming perceived barriers and driving a better policy environment for greater renewable energy investment. The governments need to articulate how renewable energy can contribute toward and mutually sustain energy access and regional development goals, including industrialization, rural development, and economic transformation. The health benefits of ambitious renewable energy targets, such as reduced air pollution, should be explicitly noted.

2. Align the SADC Regional Development Fund to Support SADC’s 53 Percent Renewable Energy Target

Lack of access to affordable finance and project preparation capacity is reported to be a main barrier to renewable energy in the region. SADC is in the process of setting up a SADC Regional Development Fund (RDF) to mobilize resources from Member States, the private sector, and development partners to finance programs and projects to deepen regional integration. The RDF should have a specific mandate to support the development of renewable energy sources in the SADC region. This could take the form of a committed percentage of finance devoted to clean energy and energy access. The RDF could also help strengthen the SADC Project Preparation and Development Facility (PPDF) and provide other project preparation and capacity-building support.

The report also finds that insufficient transmission infrastructure and market access is hindering the potential of greater renewable energy investment in the regional market. The RDF should also support renewables integration into the SAPP and regional-level interconnection and transmission infrastructure, with a priority for renewable energy resource-rich areas. It is estimated that renewable energy interconnections can reduce demand and lead to 6–20 percent cost savings, depending on the avoided conventional energy costs.

As shown in the report, the region has a wide range of financial instruments and facilities committed to supporting renewable energy finance, yet there is a lack of coordination and information transparency. The RDF could also create a platform for co-financing projects with global and regional DFIs, and play a role as a platform or clearing-house for information and resource sharing, and in addressing some of the capacity barriers in the region. This platform could also establish a centralized database for renewable energy projects developed and under development in the SADC region.

3. Align National Policies in SADC Countries to Meet the 53 Percent Renewable Energy Goal

On the national level, SADC countries should each align their national energy strategies and policies with regional aspirations to meet or exceed a regional 53 percent renewable energy goal, and translate the increased level of ambition into their second NDCs. A potential model to follow could be the EU National Renewable Energy Action Plans (NREAPs), prompted by region-wide renewable energy targets, where countries reported their targets following a standardized format, which allows for clarity, transparency, and comparability.

Countries should invest in proper planning for renewable energy, including integrated resource planning, rural/off-grid energy master plans, energy resource mapping, as well as grid integration studies. SADC countries should also strengthen their regulatory approaches, including procurement frameworks and addressing unsolicited bids.

Regarding energy access, governments should undertake national bottom-up assessments on the needed financial and technology needs to provide Tier 3 energy access to all remaining underserved communities with state-of-the-art technologies, such as renewable energy mini-grids.

Off-taker risk and creditworthiness are also reported to be a major barrier to energy investment. Governments should seek to strengthen the financial status of public utilities to increase their creditworthiness as off-takers (contracted buyers of electricity, such as public utilities) and, as appropriate, enact reforms to facilitate participation of Independent Power Producers (IPPs) in the market. This will help do away with the need for sovereign guarantees on renewable energy projects in times of public debt crisis.

Policies should also maximize the use of local resources and capacities in local universities and technical colleges.

4. Align National DFIs with Renewable Energy Targets

Development finance is designed to overcome the barriers to development projects that are faced by the commercial sector, and correct market failures that ignore social and environmental externalities. National DFIs will be seminal to putting the region on a cleaner energy pathway.

SADC countries should align the finance from their national DFIs with the national and SADC renewable energy targets. DFIs should take a common approach in assessing the bankability of projects that will standardize feasibility studies and procurement processes across the region, bringing countries with higher risks in line with a region-wide benchmark. The SADC Energy Thematic Group (ETG) already serves as an SADC energy information platform. The International Development Finance Club (IDFC) can serve as a platform to establish a set of common principles for member DFIs, and to push procurement practices toward greater uptake of renewables in the energy portfolio of DFIs.

DFIs should support efforts in preparing and packaging renewable energy projects for financing and implementation to accelerate the attainment of the 53 percent target. DFIs should also support rural and off-grid electrification efforts to attain universal access.

At an internal level, DFIs also need to establish and reinforce the institutional incentives for personnel within each organization to raise the priority of renewable energy technologies. DFIs could also mitigate problems around project bankability by establishing Public-Private Dialogues and a platform for better communication of project expectations, responsibilities around pre-feasibility, and feasibility stages.

5. Call on International DFIs to Commit to Filling the Gap

While domestic resources will play an important role in countries where capital markets are not well developed, international DFIs should commit to fill the finance gap. This includes direct finance by international DFIs and leveraging the capacity of local partners. International DFIs should aim to increase the finance flows through devoted partnerships and collaborations with local partners, leveraging diverse resources for co-financing and project preparation. This could include greater collaboration between multilateral and national DFIs and local partners, increasing on-lending initiatives toward more small-scale projects, technical assistance, and capacity building between institutions and mutual learning.

Those international DFIs and multilateral development banks (MDBs) with strong credit ratings should step in to increase significantly and expand their existing efforts to provide guarantees for renewable energy projects in the region.

International DFIs should contribute to the financing of region-wide sustainable infrastructure, particularly transmission and interconnection infrastructure already identified and prioritized by SADC such as, for example, the ZIZABONA transmission line linking Zimbabwe, Zambia, Botswana, and Namibia.

With the landscape of energy demand, institutional stakeholders, policy instruments, financial and cooperation facilities, operational barriers and potential solutions mapped out in this report, all that is left is to take action.

Regional stakeholders should seize the development opportunities in the region and build resilience and sustainability into the growth and recovery of the SADC region.