AfDB injects $184m into Africa's largest solar project

From the newsletter

The AfDB has approved a financing package of $184.1 million for the development of Africa's largest solar power plant in Egypt. The Obelisk plant will have 1,000 MW of solar capacity and 200 MWh of battery energy storage. It is expected to be fully operational by the third quarter of 2026, with the Egyptian national utility company as the sole off-taker.

• The project falls under Egypt’s Nexus of Water, Food, and Energy (NWFE) platform, launched in 2022, which plans to add 10,000 MW of renewable capacity by 2030. Since its inception, it has delivered 4,200 MW of privately led projects.

• Egypt plans to have renewables account for about 42% of its electricity mix by 2030, up from the current 11%. Achieving this will demand a fourfold growth in renewable energy capacity.

More details

• The Obelisk Solar Plant is estimated to cost over $590 million and is being developed by Obelisk Solar Power, a special-purpose vehicle wholly owned by renewable energy developer Scatec.

• Once operational, the plant is expected to generate 2,772 GWh of electricity to meet the rising demand in Egypt's grid, which is driven by a growing population and increased cooling needs. Beyond meeting the energy needs, the project will generate 4,000 jobs during construction and 50 permanent roles during operation.

• The project has already made substantial progress in securing financing. Construction commenced in May this year, following the successful acquisition of $120 million in equity bridge loans. The Arab Energy Fund contributed $90 million, with the European Bank for Reconstruction and Development (EBRD) providing the remaining $30 million.

• The AfDB becomes the latest to join the funding with a comprehensive package of $184 million, including ordinary resources and concessional funding from the Sustainable Energy Fund for Africa (SEFA) and the Canada-African Development Bank Climate Fund. The Climate Investment Funds’ Clean Technology Fund has also contributed.

• To ensure long-term stability and attract international financing, the electricity generated by the plant will be sold to the Egyptian Electricity Transmission Company (EETC) under a 25-year USD-denominated Power Purchase Agreement (PPA). This agreement provides crucial long-term revenue certainty.

• Scatec has signed a mandate letter with a consortium of development finance institutions for the long-term non-recourse project debt. This debt is anticipated to cover approximately 80% of the total project cost, with financial close expected in the coming months.

• Egypt has proven to be an attractive market for raising funding for such large-scale energy projects. The country's growing electricity demand, projected to increase by at least 3% annually until 2027, combined with favourable government policies, has instilled confidence in investors. 

• In addition, Egypt has garnered interest from countries in Europe and the Middle East for electricity imports, which has been a key factor in securing power purchase agreements for these projects.

Our take

• USD-denominated PPAs attract investors but can burden local consumers when the local currency depreciates. Egypt should find ways to protect consumers from future currency fluctuations, perhaps through hedging or a stabilisation fund.

• However, exporting surplus electricity could generate foreign currency revenue, providing much-needed reserves for the country. This dual impact—managing domestic cost while boosting national reserves—is key for Egypt's economic stability.

• Egypt's abundance of wind and solar resources from its expansive coastlines and deserts gives it the opportunity to undertake mega-projects in these areas. Connecting them through the same power lines could cut down on infrastructure costs.