Africa is rich in renewable energy sources and has an opportunity to leap ahead in the shift to clean energy with its vast solar, wind and hydropower assets. Supporting and investing in renewable projects will be crucial to enhancing power generation – a core objective for many African countries.
The African Trade Insurance Agency (ATI), a pan-African institution that offers political risk and trade credit insurance to companies, investors and lenders doing business in Africa, is providing extensive support to the power sector to enable economies to unleash their potential in renewables.
In this Industry Perspective, Obbie Banda, underwriter at ATI, discusses ATI’s resilience amid the pandemic, why it is crucial for players in trade to invest in clean energy in African markets, and how the energy landscape is changing across the continent.
GTR: Tell us about ATI; how has the team ensured resilience throughout the Covid-19 crisis for players in trade?
Banda: In the last year to 18 months, we’ve improved our internal processes and risk management framework. We’ve also recruited some additional staff to ensure that as enquiries come through, we are as robust and well placed as possible to provide support. We’ve continued to look at deals and underwrite in a similar manner to what we did prior to the pandemic – albeit with greater prudence – which is different from other institutions that may have changed their approach following the onset of Covid.
What we have seen, though, is because of the slowdown of economies in a lot of countries and regions, many traders and/or lenders that were looking to grow their business or scale up certain transactions have not done so. Incremental development has been deferred for another year or two as industries recover from the pandemic.
GTR: As we emerge from the pandemic, the focus on climate change is sharpening, particularly around energy. How is ATI supporting renewable energy?
Banda: Our extensive support for the renewable energy sector has always been a core part of our business. In around 2017, we started to partner with European development finance institutions (DFIs) on strategic instruments that we’ve since developed. Before the pandemic hit, we had three flagship initiatives: the Africa Energy Guarantee Facility (AEGF), the Regional Liquidity Support Facility (RLSF), and the Transparency Tool. Those are set up to address certain market gaps.
One of the challenges facing developers and lenders who are looking to provide financial support for projects on the African continent, is a concern around the risk of non-payment. You see that across any industry, but the risk of non-payment is quite elaborate on power projects. We set up the RLSF to address that concern. Despite the pandemic, we’ve closed three deals under that facility – in support of two solar plants in Malawi and one in Burundi. We expect to complete two more in the coming six months.
Going forward we will enhance these initiatives, and we’re going to seek additional funding to improve them. We’re going to make sure they are responding in a manner that the market needs and are affordable to developers – we’re assessing how we can reduce our pricing where possible – and essentially make our products easier to deploy and use across countries and projects.
GTR: Why do you think it is important for players across the trade spectrum to support clean energy projects and companies on the continent? How do you think the energy landscape is evolving across Africa?
Banda: There are various reasons, and the first one is the most obvious: access to electricity. As of today, about two thirds of people in Sub-Saharan Africa do not have access to electricity. As a result, we have communities that can’t get any work done past 6pm when it gets dark, as well as hospitals that can’t effectively deliver medical services beyond a certain hour. Fundamentally, access to electricity goes a long way towards addressing these problems.
The second reason is considering what alternatives are available. Across most African countries, a lot of the existing power plants are either powered by diesel or coal. Additionally, when many people in rural areas outside of major cities cook, they use traditional methods such as firewood or charcoal, which are not only bad for the environment, but for the people using them on a day-to-day basis. Sadly, because of the nature of certain African households, these tasks may fall on the women in the family. What you tend to see is a poor health effect on women and girls in communities as they bear the brunt of traditional cooking methods.
The third one is around job creation – related to the power plant itself and to what the availability of electricity would do for the area. And the last one is around cost. Clean energy options have become very competitive relative to alternatives. What that means is that the cost of electricity in these African countries is cheaper to access, making it easier for governments to deploy because they don’t have to provide subsidies to cover some of the cost for end users.
Across Africa, one thing that we’ve seen in the last year is more private sector participation. There’s a realisation that to bring greater access to electricity and to make sure more projects close, you can’t entirely rely on the traditional form of financing, which came mainly from DFIs. Now more commercial banks have some appetite for renewable energy projects and more private sector entities are taking the lead in developing and closing these deals.
GTR: How is ATI supporting African businesses as they recover from the pandemic, and what is the plan going forward?
Banda: Four years ago, ATI had about 12 or 13 member countries – effectively where we can do most of our business. As of today, we have 19. We expect by the end of the year we might be at 20. More members means that we can make a bigger impact across countries; we can support more traders across a wider market and cross-border trading amongst those countries. We will also improve existing solutions. We have products that cater for large-scale traders and lenders, but there are other areas – the SME space – that have not been supported as much with guarantee and insurance products. We are developing solutions to encourage lenders to do more in that space.