Africa’s power demand is surging, with renewables projected to contribute 80% of new capacity by 2030, primarily from solar PV, hydropower, and geothermal sources. To meet climate and energy access targets, annual energy investments must double from $110 billion to over $200 billion by 2030, focusing on clean power projects and supporting infrastructure.
However, financing remains a significant hurdle. Limited public funding, high debt servicing costs, and underdeveloped financial markets constrain investment, leading to heavy reliance on external financing from development finance institutions (DFIs) and private investors. While DFIs provide lower-cost capital, private financiers account for higher project risks, driving up capital costs and reducing project bankability.
Overcoming these financial barriers is crucial for expanding clean energy access, ensuring affordability, and supporting Africa’s long-term economic growth.
The Role of Concessional Capital in Reducing Financing Costs
In 2024, the International Energy Agency (IEA) added Kenya and Senegal to its Cost of Capital Observatory, tracking financing trends in renewable energy. Both countries benefit from clear government policies and an expanding renewable energy sector. Kenya has advanced its solar and wind power capacity, including the Lake Turkana Wind Project—the largest onshore wind farm in Africa. Senegal has secured over $1 billion for independent power producer (IPP) projects, financing 310 MW of wind and solar power, including the Ten Merina solar PV (30 MW) and Taiba N’diaye wind plant (159 MW).
Despite growing investor interest, financing costs remain high. The weighted average cost of capital (WACC) for clean power projects in Kenya and Senegal ranges from 8.5% to 9%, significantly higher than the 4.7%-6.4% seen in North America and Europe. Concessional capital from international financial institutions plays a critical role in reducing these costs. Without such funding, local businesses face borrowing rates exceeding 15%, making large-scale energy projects difficult to sustain and underscoring the urgent need for improved financing mechanisms.
Macroeconomic and Technology-Specific Risks Drive Up Costs
Many African renewable energy projects rely on concessional financing backed by political risk insurance or guarantees. However, broader macroeconomic and country-level risks continue to inflate borrowing costs.
The cost of capital comprises a base rate, reflecting national risks, and a premium for sector- and technology-specific uncertainties. In Africa, the base rate contributes 60%-90% of the WACC for solar PV projects, compared to 35% in China and just 10% in advanced economies.
In Kenya and Senegal, sector-specific risks—including regulatory uncertainty, off-taker reliability, and weak transmission infrastructure—add 5%-7% to the base rate. In contrast, South Africa, with a more developed solar market, sees lower risk premiums of 3%-4.5%. Strengthening regulatory frameworks and improving grid reliability can significantly reduce financing costs.
Addressing Risks to Lower Financing Costs
A major challenge for clean energy investment in Kenya and Senegal is currency risk. Most financing relies on foreign currency, increasing capital costs. Off-taker risk remains a concern, as state-owned utilities like Kenya Power and Senelec struggle with high debt, raising the risk of non-payment to power producers. Power Purchase Agreements (PPAs) in both countries are denominated in hard currency—euros in Senegal and US dollars in Kenya—exacerbating financial strain due to currency fluctuations. In 2023, Kenya’s state utility faced delays in payments due to difficulties securing foreign currency. Addressing off-taker risk through external guarantees and financial health reforms, such as cost-reflective tariffs and debt restructuring, can help lower capital costs.
Regulatory stability is another critical factor. Despite Kenya and Senegal ranking high on Africa’s Energy Regulatory Index, investor caution persists. In Kenya, uncertainty surrounding a new auction system stalled project development, while in Senegal, investors seek more transparent auction designs and streamlined approval processes.
Broader economic factors also contribute to high financing costs. As of January 2025, only Botswana and Mauritius hold investment-grade credit ratings, leaving most African nations with high borrowing costs. Reassessing credit rating methodologies could improve investment conditions. Expanding local currency lending, as seen in South Africa, can mitigate currency risks, though high domestic interest rates remain a challenge.
Lowering the cost of capital requires comprehensive policy reforms, increased concessional finance, and a stronger mix of equity and grant funding. These measures will help attract private investment, scale clean energy deployment, and support Africa’s transition to a sustainable energy future.
