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ISSN 2753-7757 (Online)

Accessing finance for the development of clean energy projects in emerging markets

28/9/2022

4 min read

Head and shoulders photo of Chinenye Ajayi Photo: Olaniwun Ajayi LP
Chinenye Ajayi, Solicitor, Power and Infrastructure Practice at Olaniwun Ajayi LP

Photo: Olaniwun Ajayi LP

It is critical for the clean energy transition that emerging markets do not become locked into relying on fossil fuels. But this requires significant capital investment and attractive policies and legal frameworks in these markets, as Chinenye Ajayi, Solicitor, Power and Infrastructure Practice at Olaniwun Ajayi LP, discusses.

Clean energy provides a seamless pathway to deliver on the promise of the UN’s Agenda 2030 Sustainable Development Goals (SDGs) and the Paris Agreement, not least because access to clean energy can unlock sustainable economic growth, improve human health and wellbeing, and enable people to lead more productive lives.

 

However, there is no disputing that the implementation of large-scale clean energy technologies requires huge capital investments which many emerging markets on their own may not be able to afford. For instance, the International Energy Agency notes that Africa would need an enormous yearly investment of up to $120bn until 2040 in order to achieve a reliable electricity supply for all.  

 

Key considerations
To attract much-needed financing, policies and legal frameworks must be consistent, clear and predictable whilst assuring investors of adequate return on their investment, security of their investment and ease in repatriation of profits, as well as providing investment incentives and benefits. Such incentives could include tax waivers, exemptions and the elimination of import and export duties on clean energy components.

 

For instance, the Nigerian government exempted renewable energy equipment from the payment of Value Added Tax (VAT) through its Value Added Tax (Modification) Order, 2021. Tax credits that allow consumers to recoup the capital expenditure on their consumption of clean energy can catalyse demand, and indirectly boost the inflow of funds to scale supply.

 

Energy pricing and bankability of clean energy products play a vital role in enabling the inflow of funds. To facilitate investment, energy pricing, though regulated (as is the case in most emerging markets), must necessarily guarantee investors a good return on their investments. It is important to adopt a transparent tariff revision formula that takes into consideration factors like inflation and foreign exchange fluctuations. A robust framework for Renewable Energy Certificates (RECs) will open new streams of income and incentivise investments into renewable energy. This means that in addition to energy charges, project developers can earn income from the sale of the positive environmental attribute from the clean energy generated.


Furthermore, reliable data is key in driving investment decisions. Financiers and project developers require quality data to determine the appropriate financial structure or technology for projects such as grid extension, solar home systems or mini grids. The data required for consumer enumeration, evaluation of market performance, electricity consumption, metering, load shedding and others must be readily available in the right format to aid local and international investors.

 

Attractive policy decisions

With the pressure to curb climate change, some investors focus on green projects and will only deploy capital to countries that adopt climate friendly policies that support low carbon infrastructure or renewable energy sources. Emerging markets seeking to attract such investment must align accordingly and make bold policy decisions that reflect their unequivocal stance for sustainable energy solutions. For instance, Chile passed a binding decommissioning schedule for coal-fired power plants, engaged with private power plant owners to develop coal phase-out schedules and implemented a tax on carbon for larger coal-fired power plants. 


The right business model enables investors to create social value and maximise profit while helping to create new markets or further developing markets. Recent trends have shown that affordable long-term finance is fundamental to the deployment of clean energy projects. However, for emerging markets, access to long-term finance is, in many cases, constrained by shallow and illiquid financial markets as well as a limited number of financial products. Likewise, public and philanthropic financing alone will not suffice to meet the huge investment needs. 


Accelerating finance for clean energy projects will therefore entail the innovative use of catalytic capital from public or philanthropic sources to increase private sector investment for clean energy projects. These can be structured as concessional capital (equity or debt investment below the market rate), credit enhancement (guarantees), technical assistance facility and design stage grants. Other creative models include the use of synthetic power purchase agreements, as well as energy transition mechanisms that give investors the opportunity to buy high carbon-emitting assets, retire them and replace them with renewable energy.


In the words of Kevin Kariuki, Vice President for Power, Energy, Climate & Green Growth at The African Development Bank Group, whilst discussing the availability of funds for clean energy transition at the last UN High Level Dialogue in 2021: ‘Just as power follows the path of least resistance, capital also follows the path of least resistance.’ In essence, the adoption of favourable legal, regulatory and financial frameworks by emerging markets is critical to attracting investment in clean energy.

 

The views and opinions expressed in this article are strictly those of the author only and are not necessarily given or endorsed by or on behalf of the Energy Institute.

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