Kenya and Senegal are leading Africa’s shift to renewable energy, with ambitious goals and strong interest from investors.
But high financing costs are threatening to slow their progress. Despite having plenty of renewable energy resources and rising demand for electricity, expensive financing is holding back development and could stop the growth of clean energy in these countries.
The International Energy Agency(IEA) has highlighted this issue by including Kenya and Senegal in its Cost of Capital Observatory, which tracks financing costs globally.
The data shows a big gap: the cost of capital for large solar projects in Kenya and Senegal is between 8.5% and 9%, while similar projects in North America and Europe have rates between 4.7% and 6.4%.
This makes renewable energy more expensive in Kenya and Senegal, deterring investors and driving up electricity prices for consumers.
While financing is cheaper in Kenya and Senegal compared to South Africa (where rates are between 9.5% and 11%), this is mainly due to concessional capital from international financial institutions.
However, local businesses often face interest rates over 15%, with short payback periods. Several factors contribute to these high costs.
A large portion of the cost in Africa is due to political and economic risks, which are much higher than in countries like China or advanced economies. In Kenya and Senegal, issues like regulatory uncertainty, high debt levels at state-owned utilities (like Kenya Power and Senelec), and weak transmission networks add 5-7% to the financing costs.
Currency risks also play a big role. Many clean energy projects rely on financing in foreign currencies, which increases costs.
Power Purchase Agreements (PPAs) are often in US dollars or euros, and currency devaluations make it harder for utilities to pay off their debt.
These high financing costs affect more than just developers and investors. Delayed electricity access, especially in rural areas, slows economic development and keeps many people in energy poverty.
Higher capital costs make electricity more expensive, making it harder for low-income households to afford, and limits access to essential services.
Businesses and industries also struggle to grow without reliable, affordable energy, which impacts employment and economic opportunities.
Furthermore, slow growth in renewable energy could lead to more reliance on fossil fuels, with negative effects on health and the environment.
The renewable energy industry suffers too. High financing costs scare off private investors, limiting funding for new projects.
Complex regulations, risks with state-owned utilities, and currency fluctuations cause delays, raising costs and creating uncertainty.
Relying too much on international financial institutions for concessional capital distorts the market and makes it harder for local financing systems to grow.
This creates barriers for new businesses and reduces competition, which could raise costs and lower quality in the renewable energy sector.
High financing costs could also prevent Kenya and Senegalfrom meeting their renewable energy goals and addressing rising electricity demand.
To tackle these issues, Kenya and Senegal need tailored solutions. This could include reducing risks with external guarantees for utilities and improving their financial stability.
Expanding local currency financing would help reduce currency risks. Streamlining regulatory processes and making auction designs more transparent could also attract private investors.
Senegal has already shown its potential by exceeding its renewable energy goals for 2030. By 2021, about 81% of Kenya’s electricity came from renewable sources.
With the right policy changes and more international support, Kenya and Senegal can overcome these financing challenges and unlock the full potential of renewable energy, boosting economic development and improving the lives of their people.
