AfDB champions new rural electrification platform

From the newsletter

The African Development Bank (AfDB) has approved a $40 million investment in equity platform Zafiri to accelerate renewable energy access across Africa. The fund – jointly developed with the World Bank – aims to address the critical shortage of patient, longer-term equity capital needed to de-risk and scale decentralised renewable energy (DRE) solutions in Africa.

• DRE are best suited to connect Africa's dispersed rural populations due to its modular and scalable business model. More than half of all new electricity connections by 2030 are expected to come from DRE.

• Zafiri is structured as a permanent capital vehicle. This allows it to invest in DRE projects that might take a long time to mature and generate consistent returns, without the pressure of forced exits.

More details

• The African Development Bank’s $40 million contribution consists of $30 million in senior equity from its balance sheet and $10 million in junior equity from the Sustainable Energy Fund for Africa (SEFA), a multi-donor special fund managed by the Bank. Zafiri is targeting to raise $1 billion through a phased approach, with Phase One targeting $300 million in total commitments, equally split between junior and senior equity. This junior equity serves as a key catalyst to crowd in the private sector in this higher-risk, undercapitalised market.

• The fund is part of Mission 300, led by the World Bank, which targets connecting 300 million people by 2030. Kevin Kariuki, AfDB's Vice President for Power, Energy, Climate, and Green Growth, underscored the significance of the initiative. "Zafiri is a catalytic platform that will be an integral component of the Bank’s strategy to accelerate universal access to modern energy in Africa," he stated. "With just five years remaining to reach Mission 300’s goal of an additional 300 million connections by 2030, this initiative provides a timely and innovative solution to scale private capital for impact."

• One of the most persistent hurdles in financing DRE projects in Africa is the perceived high risk, which translates into expensive capital. Lending costs for projects can be several times higher than in developed countries. This risk premium is often due to factors including nascent regulatory frameworks, currency fluctuations, political instability, and a lack of established credit histories for rural communities and small businesses.

• The African continent, however, continues to make great progress in establishing clear policy and regulatory frameworks. The AfDB and World Bank's Mission 300 is set to further accelerate policy development by setting it as a pre-condition for obtaining funding. At least twelve countries will update their policies, with many focusing on reducing blockers for the private sector, not just in grid-level projects but also in small distributed renewable energy projects.

• While renewable energy technology prices have fallen drastically over the last decade, Africa still relies on imports, with very little manufacturing happening. This reliance is evident even for meeting basic demand, let alone for utility-scale projects. However, there is huge potential for African countries to localise the manufacturing of renewable energy technologies, particularly solar PV. This could potentially lower costs by avoiding issues like import taxes and supply chain expenses, leading to lower panel prices.

• Countries like Nigeria are looking into the growing local demand for solar panels, particularly for solar home systems, through government-led electrification programmes. The government is mainly focusing on rural electrification via solar home systems. It has received $750 million in funding from the World Bank and plans to set up a 1,200 MW plant for this initiative. The government is even mulling a ban on solar imports to support the localisation of manufacturing.

• DRE solutions need more than capital to succeed. There should be proper quality regulation of products to ensure that the impact is long-lasting. Governments also need to provide some public funding for such initiatives like Zafiri to scale. Investors always shy away from high-risk markets, and there should be developed mechanisms to protect those willing to take a risk.

Our take

• DRE solutions are not just effective for rural electrification but also in strengthening grid reliability by reducing strain on centralised systems and improving energy security. A holistic energy strategy for Africa must embrace both DRE and grid development in a coordinated manner.

• Africa's huge population without access to electricity is a big opportunity for companies to meet demand and to establish local manufacturing plants that could enjoy economies of scale. While disruptive in the short term, it has more long-term benefits. This could lower prices and make it affordable for many.

• But most of all, capital financing needs to scale. Despite the Zafiri fund targeting a $1 billion raise, it's not enough to meet the rural electrification demands. But it can serve as a catalyst by de-risking and attracting more private capital in the sector.