Financing costs represent a critical barrier to scaling up clean power projects
Africa’s power demand is rising rapidly, with renewables expected to account for 80% of new capacity by 2030, mainly from solar PV, hydropower, and geothermal. Achieving climate and energy access goals requires even faster adoption, doubling annual energy investment from $110 billion to over $200 billion by 2030, driven by clean power projects and supporting infrastructure.
However, financing remains a challenge due to public funding constraints, high debt servicing costs, and underdeveloped financial markets. This leads to heavy reliance on external funding from development finance institutions (DFIs) and private financiers. While DFIs offer lower rates, private investors factor in higher project risks, increasing capital costs and making projects less bankable.
Expanding clean power in Africa requires overcoming these financial barriers through effective solutions, ensuring investment in sustainable energy while making power affordable and accessible. Addressing these challenges is crucial for Africa’s clean energy transition and long-term economic growth.
Concessional capital is vital to reduce financing costs for renewable projects
In 2024, the IEA added Kenya and Senegal to the Cost of Capital Observatory, an initiative tracking capital costs across countries. Both nations benefit from clear government targets and a rising share of renewables. Kenya expanded its solar and wind sectors, hosting Africa’s largest onshore wind farm, the Lake Turkana Wind Project. Senegal secured over $1 billion for IPP projects, financing 310 MW of wind and solar capacity, including the Ten Merina solar PV (30 MW) and Taiba N’diaye wind plant (159 MW).
Despite investor interest, clean power projects in both countries face high financing costs, with WACC ranging from 8.5% to 9%, compared to 4.7%-6.4% in North America and Europe. However, concessional capital from international financial institutions lowers costs, making projects viable. Without such funding, domestic businesses face borrowing rates above 15%, with short payback periods, limiting large-scale energy development and highlighting the need for better financing solutions.
Macroeconomic and technology-specific risks still push up rates
Many renewable projects in Africa using concessional finance relied on political risk insurance or guarantees to reduce investor risks. However, country-level political and macroeconomic concerns still drove up borrowing costs.
The cost of capital consists of a base rate, reflecting national risks, and a premium for sector and technology-specific risks. In Africa, the base rate makes up 60%-90% of the WACC for solar PV, compared to 35% in China and 10% in advanced economies.
In Kenya and Senegal, sector-specific risks—such as regulatory uncertainty, off-taker reliability, and weak transmission networks—add 5%-7% to the base rate. By contrast, South Africa’s more developed solar sector sees lower premiums of 3%-4.5%, highlighting the need for stronger regulatory frameworks to reduce financing costs.
To reduce financing costs, different risks require tailored solutions
Financing clean energy projects in Kenya and Senegal often relies on foreign currency, increasing capital costs. Off-taker risk is a key concern, as state-owned utilities—Kenya Power and Senelec—face high debt levels, raising the risk of non-payment to power producers. All Power Purchase Agreements (PPAs) in these countries are in hard currency, with Senegal’s tied to the euro and Kenya’s to the US dollar, leading to additional financial strain due to currency devaluations. In 2023, Kenya’s state utility even delayed payments due to difficulties in securing foreign currency. Addressing off-taker risk through external guarantees and long-term financial health improvements, such as cost-reflective tariffs and debt restructuring, can help lower capital costs.
The regulatory environment is another major risk despite Kenya and Senegal ranking high on Africa’s Energy Regulatory Index. Investors remain cautious until markets mature and regulations prove stable. In Kenya, uncertainty over a new auction system stalled project procurement, while in Senegal, investors seek clearer auction designs and simplified authorization processes.
Broader economic factors also drive high financing costs. With only Botswana and Mauritius holding investment-grade credit ratings as of January 2025, many African countries face high borrowing costs. Calls for a reassessment of credit rating criteria could improve investment conditions. Expanding local currency lending, as seen in South Africa, could mitigate currency risks, though high domestic rates remain a challenge.
Lowering the cost of capital requires stronger policy frameworks, concessional finance, and increased equity and grant funding to attract private investment and scale clean energy development.
