Southern Africa’s largest hydro plant gets high-profile backing

From the newsletter

The World Bank will fund Mozambique's 1,500 MW Mphanda Nkuwa hydropower plant, set to be Southern Africa's largest hydroelectric project. Though the exact amount is undisclosed, the Bank is backing the $5 billion plant and a $1.4 billion transmission line. This was revealed by World Bank President Ajay Banga in an interview with Bloomberg.

• The World Bank plans to provide debt and equity funding for the project. It will also offer risk guarantees and insurance to help ensure construction stays on schedule.

• Once completed, the dam will significantly boost local mineral processing and revenue from electricity sales. In 2024, Mozambique earned at least $431 million from selling electricity to South Africa and Zambia.

More details

• The Mphanda Nkuwa hydropower project will be built on the Zambezi River by a consortium of EDF, TotalEnergies, and Sumitomo Corporation. The Mozambican government and the public company Hidroeléctrica de Cahora Bassa will also hold stakes. The project is expected to start operating by 2031.

• The World Bank's involvement brings together several of its arms: the IFC for financing and participation, the IBRD for guarantees, the IDA for concessional loans, and MIGA for political risk insurance. The project also includes building 1,300 Km of transmission lines. These lines will supply electricity to Mozambique's southern network and boost exports to nearby countries like Zimbabwe, Zambia, and Malawi.

• As a member of the Southern African Power Pool (SAPP), Mozambique already sells a significant amount of its electricity to South Africa. Its total exports to the region totalled 1,891 GWh in 2023, representing over 30% of the country’s entire production. There is a clear demand for more power due to shortages in neighbouring countries such as South Africa, Zambia, and Malawi, and potentially further in the Eastern Africa region, like Kenya. Mozambique is now planning to build power interconnectors to Malawi and Zambia to unlock additional export opportunities.

• Hydropower continues to see a renewed investment trend, with the World Bank actively working to de-risk the sector. Recent projects in Africa earmarked to progress to construction include the Mpatamanga Hydropower in Malawi, for which the World Bank provided $350 million in grants. The Grand Inga Dam in the DR Congo, where the World Bank plans to provide $1 billion to attract private capital. Small hydropower is also experiencing increased investment. Guinea, early this month, secured $112 million in funding from the ECOWAS Bank for Investment and Development to construct three micro-hydroelectric power stations.

• These multilateral lending institutions are de-risking investments in hydropower, a sector that has historically faced high-risk profiling, causing many projects to stall. Over 18,500 MW of approved hydropower projects are currently stalled in Africa. However, a recent trend indicates a positive shift, with approximately 4,507 MW of new hydropower capacity coming online in 2024, doubling the additions from 2023.

• For Mozambique, the easing of conflict is opening up investment in various sectors. The IFC recently announced its backing for the construction of the 460 km Chimuara-Nacala transmission line, which will connect the central and northern regions of Mozambique. The African Development Bank approved $43.6 million in financing for electricity transmission line infrastructure, and the country last week completed feasibility and environmental impact studies for a 400 MW solar power plant, paving the way for its construction.

Our take

• Hydropower's relevance in the wake of renewables is becoming more critical. Africa has plenty of it, but the long construction periods for large hydro dams brings with it risks to investors, especially in currency inflation, which can push costs higher. Grants and concessional loans could help with these.

• But loans alone are not enough. Addressing the sector's varied risks requires more than just providing capital; it demands a comprehensive approach that directly tackles investor concerns. This includes providing insurance, stable policies and de-risking mechanisms to protect against issues like currency fluctuations.

• Peace is a crucial element for attracting investments. History shows that conflict-torn countries often experience a surge in investment after the cessation of hostilities. DR Congo and Mozambique serve as perfect examples. African governments must diligently safeguard their peace to ensure sustained and reliable investment flows into their economies.