We are seeing a huge amount of interest in utility-scale (and small scale) solar energy in Africa, both from renewables companies, governments and international organisations. Studies have shown that Africa benefits from some of the best irradiation levels on the planet.
However, the development of utility-scale solar power plants in Africa is still slow. There are a number of reasons for this, but high transaction costs and a high perceived risk and cost of capital are certainly some of the obstacles. Given that solar projects tend to be relatively small, this process needs to be simplified in order to make solar projects more viable.
The International Finance Corporation (IFC), which is part of the World Bank Group, has introduced an interesting programme aimed at speeding up and simplifying the process. This new approach, the Scaling Solar initiative, seeks to (i) standardise the transaction documents; (ii) provide financing support and (iii) provide government credit enhancement mechanisms. It could present a solution for African governments and private investors that are committed to develop solar power in Africa.
The Scaling Solar initiative is designed to be a "one-stop-shop" approach to provide governments several services under a single engagement.
The package includes:
- Advice: concerning initial feasibility studies, site selection, legal due diligence and the implementation of a simple, fast, fair and transparent tendering procedure.
- Standardized project documents: aimed at reducing drafting and negotiation time. The standardized project documents provided include a Power Purchase Agreement (PPA) and a Government Support Agreement (GSA).
- Competitive financing: IFC provides financing solutions to all bidders, to ensure a rapid financial close through a detailed project finance term sheet to be offered to all prequalified bidders. However, bidders are free to seek alternative financing solutions. This financing offers governments the insurance that their project is bankable.
- Risk mitigation instruments: IDA provides an IDA Partial Risk Guarantee and MIGA provides a Political Risk Insurance and investment guarantees.
Although "stapled" financing from the IFC is included in the pathfinder projects, developers are free to source their own financing, and in due course the World Bank Group would like financing to come from other sources.
One of the key elements of the Scaling Solar programme is that the transaction documents are provided on a "take it or leave it" basis whereby bidders are required to sign the documents when returning their bids. This is clearly a challenging proposition but one which the World Bank hopes will short circuit the very long lead times with these projects.
As of today, two African countries have signed the Scaling Solar programme, Zambia in July 2015 and Senegal in February 2016. 11 consortia pre-qualified in the Zambian process and were due to submit bids in early April. It remains to be seen whether the programme will achieve its goals.