Credit Rating Rules Limit Financing for African Clean Energy Projects

Billions of dollars pledged for clean energy projects across Africa have not resulted in widespread construction as high financing costs continue to deter investors.

The costs are driven by a rule called the sovereign ceiling, which limits a project's credit rating to no higher than the rating of its host country. Of Africa's 54 countries, only Botswana and Mauritius currently hold investment-grade sovereign ratings.

Nearly 600 million people across Africa still lack access to electricity, according to the International Energy Agency. 5 billion annually in higher borrowing costs and lost opportunities.

Specific projects including Kenya's Menengai Geothermal project, Zambia's IFC-led Solar Scaling programme and Nigeria's Solar IPP pipeline have struggled to obtain adequate funding. "The financing environment is the problem," said Dr John Asafu-Adjaye, a senior fellow at the African Center for Economic Transformation.

Renewable energy projects in Africa often face financing costs two to four times higher than similar projects in Europe or North America. Dr Sibusisi Nkomo of the University of Cambridge Institute for Sustainability Leadership said the sovereign ceiling raises costs across all projects and limits scaling of clean energy deployment.

Maria Nkhonjera of the Stockholm Environment Institute said the rule penalizes commercially viable projects for sovereign risks.

Nkhonjera said expanding low-cost finance, local-currency lending and debt system reforms could lower borrowing costs. Multilateral institutions such as Afreximbank and the Trade and Development Bank could offer guarantees that partially separate projects from sovereign risk.