De-risking Africa's renewable energy agenda

Zawya

2 days ago

Every driver starts a long journey with the same question: am I prepared for potential issues? The spare tyre is checked, fluids topped up, and the route carefully mapped. Preparation is built in from the start, not improvised when conditions change. What ultimately determines the success of the journey is whether the vehicle is structurally equipped to withstand the road ahead.
Investing in renewable energy infrastructure in Africa follows much the same principle.
The underlying proposition is clear: there is demand, resource abundance, and long-term value, all warranting the investment journey. However, viability is determined by design. Currency risk, offtake uncertainty, construction timelines, and political transition are embedded features of the landscape. Yet, the financial and risk mitigation tools needed to manage these – like hedging instruments, risk guarantees, liquidity buffers, or blended capital, are not consistently used. Often, they are misaligned with market realities: too costly, too late, or designed for risk profiles that don't match local conditions. The result is exclusion, with projects stalling not for lack of merit, but for lack of structural readiness to carry risk from origination to execution.
Additionally, when the probability of adverse events that impair investment value is perceived to be high, investors respond in predictable ways: either by walking away from the opportunity or by demanding higher returns to compensate for the anticipated volatility. Both responses create a widening gap between capital availability and project viability.
This becomes particularly consequential when measured against the continent's developmental objectives.
The African Union has set a target of 300 gigawatts of renewable energy capacity by 2030 – more than four times the 72 gigawatts installed as of end-2023, according to BloombergNEF. The International Energy Agency estimates that achieving this scale will require annual energy investment across the continent to rise from USD 110 billion today to over USD 200 billion by 2030, with clean power generation and enabling infrastructure absorbing the bulk of that increase.
The cost of capital becomes a defining variable here. Most African governments face fiscal constraints that limit their ability to directly fund clean energy infrastructure, with high debt servicing costs further narrowing fiscal space. This has entrenched a reliance on external capital – from DFIs, which may offer lower or concessional rates, and from local and international financiers, who must price in elevated risk. Even in markets with clear policy signals and successful project track records, the cost of capital remains materially higher than global benchmarks.
Overcoming these barriers will require innovative financing solutions, and more importantly, risk mitigation that is embedded from the outset.
In an ideal context, regionally integrated policy interventions would create durable, investor-aligned regulatory environments – reducing the likelihood of project disruptions linked to permitting delays or sudden legislative shifts. Yet such reforms are complex, resource-intensive, and slow to take hold. By contrast, financial risk mitigation instruments can be deployed more rapidly, offering immediate support to project structuring while longer-term reforms take shape.
Hedging is one of the most critical instruments in this regard.
It functions as a shock absorber – protecting returns in the event of unanticipated rate hikes, currency depreciation, or inflationary pressure. It reduces exposure to financial volatility, helping improve bankability by lowering perceived risk. And by stabilising cash flows, it supports investor confidence in the long-term viability of a project.
However, traditional financial hedging tools are not always viable or cost-effective for managing financial risk in African energy markets – particularly in relation to foreign exchange volatility. Currency convertibility constraints, thin derivatives markets, and limited availability of long-tenor instruments make it difficult to secure protection against depreciation or payment delays. Local currency financing, while structurally desirable, remains limited in scale, expensive in cost, and often unavailable at the tenors required for infrastructure. These dynamics expose both developers and lenders to significant valuation and repayment risk, especially in jurisdictions where power purchase agreements are denominated in local currency but backed by dollar- or euro-based financing.
Beyond mitigating translation risk, hedging has increasingly played a pivotal role in supporting currency convertibility – particularly in markets with intermittent foreign exchange liquidity. In some jurisdictions, these instruments are facilitated directly by central banks or structured through commercial banks with central bank backing, offering a critical layer of protection where capital markets cannot. Where even these tools are unavailable, developers often turn to tailored contractual structures – aligning pricing, payment terms, and currency exposure – to create natural hedges that offer stability through design rather than financial engineering.
As renewable investment scales across the continent, conventional risk tools will need to be complemented by market-responsive strategies that reflect the institutional and financial realities of each context. These questions are likely to shape the agenda at the Africa Energy Forum 2025 – where, under the theme 'Africa United', stakeholders will be called to develop coherent approaches to risk that align ambition with executable design.
Investors often point to a shortage of bankable projects on the continent, signalling the need for more equity at early stages, where risk is highest and structure is most consequential. Early-stage support – whether in the form of catalytic equity, concessional finance, or targeted risk-sharing mechanisms – deployed with greater risk appetite and paired with relevant policy reform, can help anchor project design and absorb volatility.
But to build a truly investable environment, these inputs must be matched by innovative financing and risk management strategies designed for the realities of African markets. To support this, financial institutions with deep market presence and structuring expertise play a pivotal role in translating ambition into bankable execution.
For example, in South Africa, Absa provides clients with access to a full spectrum of risk management instruments – from long-tenor interest rate and inflation-linked swaps to foreign exchange forwards and options, enabling more predictable financial outcomes across multi-year horizons.
Across the continent, Absa's multi-asset structuring teams work with sovereign, financial, and corporate clients to design tailored hedging, secured financing, and balance sheet solutions that respond to local market conditions while meeting institutional investment standards.
When markets offer credible instruments, capable institutions, and solutions aligned to real-world risk, investment decisions become less speculative and more strategic.
The driver, in this case, sets out not because the road is guaranteed to be smooth, but because the destination holds promise – and the vehicle has been set up to endure the journey.
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