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Energy investment opportunities that can drive Sustainable Development Goals

The term 'crisis' is used all too frequently but unfortunately it is often accurate, whether it's the Covid-19 global pandemic affecting us all or socio-economic crises that impact individual countries. The World Economic Forum reports that just recently, when business leaders were asked to identify the biggest risks of the coming decade, climate change was high on the list. Now that we are all faced with the immediate humanitarian crisis as a result of Covid-19, which has also quickly developed into an economic crisis, it is important that we don't lose sight of the longer term risk that climate change poses to humankind.

The United Nations' (UN)17 Sustainable Development Goals (SDGs) are among the most ambitious projects humanity has ever attempted. They represent our best hope of tackling the most serious challenges facing our societies and our planet. The investment required to meet the targets by 2030 cannot be provided by governments and NGOs alone. The private sector has a critical role to play if we are, collectively, to achieve them.

While many investors, corporations and financial institutions say they are committed to achieving the goals, capital is not flowing at the required speed to the countries where SDG investment matters most. In emerging markets alone, the UN estimates $3.9trn per year will be required to reach all 17 goals by 2030. At the current rate of investment, the UN has calculated a gap of $2.5trn per year.

SDG 7: Ensure access to affordable, reliable, sustainable and modern energy for all

SDG 7 is of particular relevance to us in sub-Saharan Africa. Investing in clean, renewable energy sources is vitally important for combating climate change, while ensuring universal access to electricity is fundamental for providing the basic standard of living needed to provide good life opportunities.

The private sector is well established as the leading source of finance for power generation in most economies around the world (accounting for 80-100 per cent of power generation in developed markets). Thus, private investment is critical for reaching SDG 7, and it is vital that as much of this finance as possible is directed into clean energy infrastructure. In emerging markets, private investors provide around 45 per cent on average of total funding. .

Some of the most compelling investment opportunities can be found in renewable-energy projects in emerging markets, where growing demand for new sources of reliable, clean and affordable electricity is greatest. In sub-Saharan Africa (SSA), it is becoming increasingly common for governments to use independent power producers (IPPs) to build new generating capacity. This benefits the economy by attracting necessary capital and expertise and can also offer attractive rates of return for investors in IPPs. In addition, because payment is made under long-term power purchase agreements, this type of investment can also provide certainty for investors. While emerging markets offer the potential for high returns there are also added risks, including payment in volatile currencies, and less-developed transport infrastructure which adds to the cost of construction.

The UN believes that progress towards universal access to electricity is accelerating, indicating that this important target can be achieved with enough dedicated resources. However, much more needs to be done. The share of renewable sources in the total global energy supply only increased from 16.6 per cent in 2010 to 17.5 per cent in 2016. This was despite international finance to support clean energy in emerging markets almost doubling across the same period (increasing from $9.9bn to $18.6bn). Recently, costs have been falling rapidly, particularly for onshore wind and solar power, often making them more affordable, which should pave the way for increased investment. Achieving universal access to electricity globally is an important step, but this alone will not be enough to achieve SDG 7.

A shift away from fossil fuel-powered electricity generation, towards clean renewable energy sources, will be needed to achieve this. Investors still have significant opportunities to contribute to SDG 7 by increasing investment to clean energy projects.

Investment potential in sub-Saharan Africa

The total investment needed in the power sector to achieve and maintain universal access to power across emerging markets by 2030 is estimated to be approximately $9trn. Considering average private-sector participation rates of 45 per cent, the potential private sector investment opportunity in achieving universal access to power in emerging markets by 2030 is about $4.2trn.

According to the OECD, sub-Saharan Africa (SSA) has the lowest energy access rates in the world. Roughly half the population, 600-million people, do not have access to electricity. Just over $146bn is required to achieve universal power access by 2030 in in five countries in sub-Saharan Africa - Kenya, Uganda, Nigeria, Ghana and Zambia alone. If international trends were followed almost $66bn of this would be expected to be contributed by the private sector.

While much of the developed world is substituting existing carbon energy sources for renewables, SSA is still ramping up its base load power to achieve universal access. Renewable energy plays a smaller role as most of the large scale developments are in gas and hydro, but the investment potential is significant. A recent Bloomberg New Energy Finance report indicates that $2.8bn was spent on renewables projects in sub-Saharan Africa (excluding South Africa) in 2018 .An interesting development is that smaller scale, off-grid renewable energy is making significant progress in reaching remote rural areas and this is largely being driven by private sector developers.

SSA has additional complexities which should be considered, not least of which is whether end users – and thus the countries - can afford to pay for the power. Of related concern are high levels of debt that have accumulated over the past decade leading to a recent appeal by African finance ministers to the IMF, World Bank and European Central Bank (ECB) for debt relief in relation to around $44bn in debt service payments this year. Covid-19 has accelerated matters but the broader debt levels have been increasing for some time.

As a potential solution, many sub-Saharan African countries have introduced legislation in the past decade to enable public private partnerships and are using this legislative framework to drive private investment in power. However, to date much of this has been investment in base load power rather than renewables.

Local financial markets

While there is no shortage of funding available for renewable energy, much of the recent debt financing in this sector has been provided by development finance institutions. There is room to increase the pool of lenders by structuring projects to facilitate the participation of commercial banks alongside DFIs. The World Bank and other multilaterals play an important role in this regard by enhancing borrower credit profiles through blended or viability gap financing and political risk mitigation.

Despite the progress to date, achieving universal power access is slow because utility scale IPPs are expensive in absolute amounts and take several years from bid stage to delivery of power. The high cost of developing new transmission lines to reach often remote areas which have renewable energy potential (for example, high solar radiance or wind occurrence) but are far from power demand centres further adds to the cost and timeline challenges of utility scale renewable energy projects. In addition, governments are still exposed to foreign currency risk as the financing markets require power purchase agreements to be indexed to the debt currency, which is invariably dollars.

With the exception of South Africa, local financial markets in SSA currently do not have the capacity to provide the long-term local currency finance required for infrastructure projects without incremental foreign currency risk. There is a drive to develop local capital markets to the point where they can finance projects in local currency, however this process is slow and will be set back further by current economic conditions. Recent successes in Cameroon and Kenya, where such structures are being developed, point the way to the future and should serve as successful templates for developers and lenders to emulate.

The off-grid or distributed power solutions mentioned earlier offer more immediate solutions for achieving universal power access in remote locations. These solutions typically make use of solar technology and are at the forefront of private sector renewable energy investments on the continent. On the back of electricity connections service providers have expanded their offering to include items like household appliances, internet connectivity, and financial services. All provided as part of a pay as you go package.

As these off-grid energy providers achieve scale they will increasingly look to consolidate operations and introduce strategic partners to take them to the next level – creating yet another avenue for private investors to play a role in achieving SDG 7.

As Covid-19 continues to unfold, and as everyone is focused on the immediate relief for those impacted and on the general economy, the subject of clean energy to support this agenda cannot be forgotten. Our motto should be to do no harm and to actively do good. The investments made today will preserve our planet for future generations.

About Alan Sproule

Alan Sproule is the executive director project export finance - Standard Chartered Bank.

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