DEG - PATIENT, LONG-TERM INVESTORS FOR AFRICA

Andreas Cremer, Director of Infrastructure and Energy at DEG, leads the debt financing of renewable energy, green hydrogen and infrastructure projects in Africa and Latin America, with a loan portfolio of over US$ 1 billion. He spoke to EnergyNet about challenges, de-risking, innovations in financing and moving towards a self-sustainable energy sector for Africa.
 

What would you say are the biggest challenges when it comes to financing power projects in Africa?

 

The biggest challenge is attracting private capital institutional investors into the African energy market due to the big gap between the perceived risk and the actual risk that we take in our financing. The perception comes from critical bankability issues like political instability, regulatory environment and risks, currency risk, governance and corruption problems as well as underdeveloped bankable IPP frameworks, which all affect investor confidence and thus capital inflows capital for power financing into the continent.

Another huge challenge is access to capital. The energy market is a local currency market. Many African countries have an underdeveloped financial infrastructure with few large local banks. South Africa is an exception, but in other countries, local currency funding is often very limited, which poses a big threat to the viability of energy projects as a result of exchange rate fluctuations, availability of foreign currency that both make attraction of hard currency funding a challenge. This is a problem that has to be solved on the ground. One innovation we are making is to structure different currency tranches into the financing, including shorter, local currency tranches alongside the long-term hard currency financing.

Other challenges often encountered include inadequate power demand due to low electricity access rates, insufficient transmission infrastructure to evacuate power and lack of local expertise to support the development and operation of power projects. Non-cost reflective tariffs also often presents a huge challenge as the electricity tariffs have a direct impact on the financial viability of the project. This is often mitigated by the support of governments through explicit guarantees to the projects companies; however, we have over the years seen a decline in Governments putting up guarantees in Africa due to fiscal pressures, which further necessitates the need for sustainable energy sector, which can only be achieved with cost-reflective and sustainable energy tariffs to attract investments.

Despite these challenges, DEG has a focus on Africa, has successfully done business in Africa and has substantial track record in Africa. We have been active on the continent for over five decades and have financed or co-financed more than five gigawatts of electricity over the last 20 years. We can demonstrate that any losses that we have experienced are very, very limited and that the actual risk in the African energy market is not as high as it is perceived.

 

DFIs are playing a critical role in supporting Africa’s infrastructure needs – how are you able to move forward and assist where others can’t?

 

DEG as a DFI, is a patient long-term financing provider. Infrastructure projects take time to materialise, construct and operate during which a lot of changes in the operational environment can occur. We believe that our additionally is in our ability to walk through the highs and lows of infrastructure project development and operation in order for all stakeholders to derive the highest and fullest benefit from the projects.

DFIs are crucial to the whole infrastructure financing ecosystem mainly because they can risks that a commercial bank might be unable or unwilling to take on – including political, regulatory and currency risks as they typically do not need guarantees because the financing is provided on our balance sheet. Furthermore, DFIs, typically have access to funding sources and instruments that allow them to take on risk in difficult markets. For example, DEG has access to the European Fund for Sustainable Development Plus (EFSD+) which is an instrument that supports sustainable renewable energy investments in select countries in Sub-Saharan Africa. The EFSD+ guarantee allows DEG to finance renewable energy projects in more challenging markets by assuming the risks of more unstable environments while avoiding market distortions and the guarantee is competitively priced in support of least developed countries’ SDG achievement goals. This guarantee is a game changer not only for DEG as it makes our offering competitive, but for the developers, as well as, the host countries for the renewable energy projects we will support with this instrument, as they are able to deliver energy at the least cost to these underserved market on the continent. The EFSD+ guarantee will help DEG as mandated lead arranger to attract more institutional / private capital into these challenging markets.

DFIs also play a critical role in infrastructure development as they have the capacity to catalyse private investors both in the local markets and externally. DEG often seeks partnerships with local pension funds in the target countries to get them involved by in power projects by providing the much needed local currency financing. There are some big and wealthy pension funds across Africa and sub-Saharan Africa, which often invest outside Africa. We want to support and catalyse local pension funds so that they invest African money in Africa projects. With our track record and structuring expertise on the continent, we can demonstrate that the returns are risk-adequate for pension funds and institutional investors too.

Through our sister company, the public arm of the KfW Group, KfW Development Bank we also finance local development banks via concessional and grant funding providing much needed liquidity so that they can play a stronger role in facilitating financing for energy projects in their respective countries or regions in Africa. For instance, KfW Development Bank recently closed a grant funding line for Green Hydrogen feasibility with IDC in South Africa.

Policy and Regulatory Advocacy is another key DFI role that’s DFIs and DEG does its fair share of this through its local presence in 3 countries in Africa covering Southern, East and West Africa. With a significant number of experienced and knowledgeable colleagues on the ground, we also understand the local IPP frameworks very well. This means we can sit down with the sponsors, the off-takers, and the institutions that provide the regulatory framework and use our expertise to find a structure that mitigates risks and benefits all three parties – the equity provider, the debt provider, and the government.   As with other DFIs, DEG also offers technical assistance in support of equity sponsors both during construction and operational phase of the projects to ensure environmental and social compliance in order to align with sustainable development goals (SDGs) and thus maximise social, development and environmental impacts of infrastructure projects on the continent. We also offer technical feasibility funding assistance for high risk new technologies such battery storage projects and green hydrogen.

Our goal as a DFI is to support the governments and countries across Africa to drive down the cost of generation and create a self-sustainable energy sectors. We therefore try to fulfil our mandate of addressing the financing gaps for energy development in Africa by leveraging our resources and expertise to support sustainable growth and development of the energy sector across the continent.

 

Enabling infrastructure in energy – what part do you anticipate hydrogen will play and what are the opportunities?

 

Transitioning to a CO2-neutral world is essential for the combating of global warming. Globally we have seen almost all industries including aviation, manufacturing/production mining, transport, power generation looking to significantly reduce CO2 emissions by exploring other non-fossil energy sources and we at DEG believe that green hydrogen is one of the solutions that can make a difference. This applies not just to Europe, but across the African continent too.

In the energy space for instance, we are seeing some projects that we think are viable, making use of local green hydrogen to some extent. Battery storage in combination with green hydrogen is one example, in this case, energy is stored for use when solar and wind is unavailable in order to ensure low-cost availability.

Green hydrogen  has a lot of other applications including production of  green ammonia for agricultural fertilizer, as a fuel cell for motor vehicles and  marine and aviation transportation, production of green steel as well as heating and cooling applications for residential, commercial and industrial buildings,

Given its widespread applications we at DEG believe that green hydrogen can be an effective support mechanism for economic growth and we foresee more industries using it for different applications in countries where it can be produced cost-efficiently. We have seen countries like Namibia, Egypt actively pursuing the development of multi-billion green hydrogen projects which if successfully realised will have a significant economic growth impact.

Unfortunately, there is still a long way to go to make green hydrogen economically viable, given its challenges such as high production costs, storage and transportation infrastructure development but I believe it was Warren Buffett who said the best time to plant a tree was 20 years ago. And the second-best time? Today. I think that is very true in the context of green hydrogen. The time to support this industry that has the potential to enable/accelerate the transition to cleaner energy systems is now!

The German government is supporting various initiatives around green hydrogen and KfW via its public arm KfW Development Bank is leading the way in catalysing the growth of this nascent industry via development funding, whilst DEG and KfW IPEX-Bank are keen to support bankable, commercially viable green hydrogen projects with long term debt funding.

 

What would you say is your biggest achievement at DEG? Which projects are you particularly excited about?

 

I'm very excited and proud to work for an institution like DEG which, as part of the KfW Group is making a big impact across the globe, especially in Africa. The DEG infrastructure and Energy team continues to successfully implement its mandate by supporting the private sector in Africa through our innovative financing solutions to energy and infrastructure projects, supporting projects that address sustainable development goals and mobilisation of private capital to projects and countries in need of financing.

We have financed over 5GW of electricity capacity power production on the continent, which is substantial. In addition to our long-term debt financings, we are also active as an equity investor in a number of funds in the energy sector across Africa. 

I would say I am proud of all the projects we have financed on the continent as they all have a great impact story behind them - be it energy provision, social community development, job creation because as a DFI impact is a key requirement for all of our investments. That said it is always great to be part of projects that really make a difference, especially large projects that provide base load electricity. One such project is the 100MW Redstone Concentrated Solar Power (CSP) project in South Africa, which is looking to reach COD this year.

DEG has been active in a number of large hydro projects, such as Bujagali in Uganda and Nachtigal in Cameron alongside other DFIs. We are proud of these projects as they too provide base load at least during wet season and are long lasting generation asset meaning the impact is for a prolonged period of time.

And we are actively engaging in the challenging yet rewarding sector of off-grid and mini-grid solutions and very proud to be part of the part of the SIMA debt fund. This fund focuses on small and medium enterprises in Africa's C&I sector and will support smaller companies in gaining affordable access to electricity through off-grid solutions. The small and mid- sized companies in the C&I solar sector find it relatively difficult to get access to finance for their business requirements. The debt fund is expected to broaden the financing options available to SMEs in the C&I space.

Lastly, I take pride in working for DEG, an institution that takes pride in delivering an efficient financing process and being a long-term, patient capital partner to its clients and in addition providing non- financial support to its clients in order to improve their performance, growth and developmental impact.
 

What are you most looking forward to at aef24?

 

aef is one of the few conferences marked on our calendar that we always attend with a big team. It’s a gathering that brings together experts from leading companies, and we are looking forward to networking and collaboration opportunities with clients, co-financiers, and other energy stakeholders. We are keen to explore the latest innovations and developments in the energy space, on both the financing and the technical side. Last but not least, the social events surrounding the conference are also highly anticipated by my team and myself – after all, it's not only work, but also a lot of fun.

DEG - more than finance: We shape transformation.

DEG is a sponsor of the Africa Energy Forum 2024, where Andreas will also be speaking.