Africa’s energy projects get new solution to mitigate offtaker risk
The German development bank KfW and the African Trade Insurance Agency (ATI) have formally launched a new €63.2mn instrument to support renewable energy projects in Sub-Saharan Africa.
The regional liquidity support facility (RLSF), which is expected to be deployed by the end of the year, is designed to enable independent power producers (IPPs) developing small and mid-scale green energy projects in Africa to reach financial close by obtaining the liquidity required from lenders.
Speaking to GTR, John Lentaigne, chief underwriting officer at ATI, says the new instrument seeks to address one of the biggest obstacles to financing power projects in Africa, namely the perceived poor financial state of the main sovereign offtaker and the risk of offtaker default.
To mitigate this risk, project lenders frequently require a liquidity guarantee, in the event their offtaker delays payment. However, offtakers, usually state-owned utilities, are often unable or unwilling to provide the necessary cash collateral, and as a result projects are put on hold.
“There are a lot of investors in the power sector in Africa trying to get projects off the ground, but it’s quite hard to bring a project to financial close, and one of the biggest, if not the biggest, obstacle is how do you mitigate the offtaker risk? So we are directly focused on that risk with this facility,” Lentaigne explains.
The new instrument will provide the necessary cash collateral supported by guarantees to a commercial bank, which will in turn open a standby letter of credit to the benefit of the IPP. The amount provided will enable the IPP to operate and service the debt for up to six months.
The German government, as part of its Paris Agreement commitments, has committed a grant of €31.6mn to the facility via KfW. It will be managed by ATI, which will provide another €31.6mn for additional on-demand guarantees.
The German government is further providing €1.3mn in technical support to ATI.
All letters of credit under the RLSF initiative will be issued by one bank, which ATI has appointed following a tender process initiated in August. ATI expects to name the bank soon.
A test case
The launch of the RLSF happens at an opportune time: the International Energy Agency (IEA) expects Sub-Saharan Africa’s renewables capacity to grow by 73% (24.4GW) over the period 2017-22.
In a statement, the parties call the new tool an “innovative instrument” that differs from other available solutions currently in the market.
One way in which IPPs today protect themselves against offtaker payment defaults is through arbitration award default insurance, but this can be both an expensive and protracted process.
Another common way to mitigate the risk is through a partial risk guarantee, from the World Bank or the African Development Bank for example, but according to Lentaigne these usually require a counter-guarantee from the relevant ministry of finance, which can be difficult and lengthy to obtain for smaller projects.
The RLSF, he says, is similar to a partial risk guarantee but does not require a counter-guarantee. Instead, ATI will seek commitments to the initiative through memoranda of understanding with the relevant utility, ministry of energy and ministry of finance.
Unlike most IPP letters of credit, which tend to have a 12-month tenor, the RLSF is designed to cover for up to 10 years – further setting it apart from other offerings in the market today.
ATI is already engaging with interested governments and offtakers in Kenya, Benin, Côte d’Ivoire, Zambia and Malawi.
To begin with, Lentaigne expects the facility will support about 10 power projects and facilitate a minimum of US$500mn investment into the renewable energy sector in Africa, supporting a total output of between 200MW and 400MW of green energy.
“In a way, this is a bit of a test case, because the capacity pool isn’t infinite,” he says. “But if we see that this really works and makes a difference, we would look to augment it in due course, whether with additional grant money from the German government or bolting on other insurance options and potentially bringing in other co-guarantors. This could be the start of something that becomes a lot bigger.”
ATI has already seen a high demand for the new tool, he adds. “We initially thought this would be a three to five-year support process, but having seen the demand out there, it could be a lot quicker. Quite possibly we could use the whole facility within the next 12 to 18 months.”
ATI will apply its usual underwriting criteria and standards to chose the projects eligible for support. The cost to the IPP will be assessed according to the quality of the risk, the level of formal comfort that ATI receives from the host government and offtaker, and the handling charges of the bank.take me back