Europe in perspective: Clearing the way for more green electricity in Africa

Booming demand for energy is expected in Africa once the COVID 19 pandemic is over. But investors often avoid the risk of financing energy projects south of the Sahara. This is now to come to an end. The African Energy Guarantee Facility (AEGF) offers a new type of reinsurance for investments in green energy, in which KfW is also involved.

Europe does not end at the front door. Many of the challenges Europeans face are global in nature - and so are the solutions. The goals of climate and energy policy as set out in the Paris Climate Agreement and Agenda 2030 can only be achieved through a joint effort. One approach to help renewable energies take off in Africa is the AEGF, which reinsures investments in sustainable power generation. It also covers political risks such as non-payment, breach of contract, expropriation or violent conflicts. In a capital-scarce region such as Southern Africa, comprehensive coverage of this kind is what makes it possible for local banks and other financial intermediaries to provide funds for investments or to secure them in turn.

High demand, many resources

The AEGF already has a longer history. It was founded in 2018 by a subsidiary of Munich Re, the European Investment Bank (EIB) and the African Trade Insurance Agency (ATI) and has a volume of up to one billion US dollars. In 2020, KfW joined and contributed a further USD 50 million, which can be claimed pari passu with those of the EIB. KfW's entry was made possible by a cover commitment to secure its participation under the EU's European Fund for Sustainable Development (EFSD) - the keystone of an innovative, tailor-made concept designed to clear the way for much-needed, lucrative but hitherto risky investments in renewable energy in Africa. Europe is setting an example here.

The concept should help mobilise the huge potential for investment in green energy projects that is currently still blocked by risk aversion. The need for funding for green power and increased energy efficiency is enormous. An estimated USD 150 billion will be needed by 2030 to provide energy access, improve energy efficiency and expand renewable energy in Africa. This is only possible if private funds are mobilised. Africa has the best prerequisites for this. It has many resources for renewable energies, but lacks the development of infrastructure. Demand is high and will increase with post-pandemic growth. But knowledge of the market is needed.

Relaunch with new conditions

AEGF is currently involved in 18 sub-Saharan African countries. But there is still room for improvement. An evaluation by the consulting firm PwC has shown the advantages of the AEGF concept in its new form: not least due to KfW's entry and the doubling of funds, reinsurance has become even more attractive. As a joint product of the Team Europe family, it is suited to position Europe as a pioneer of innovative guarantee concepts for sustainable projects, even in fragile contexts. In order for the reinsurance to unfold its benefits in the best possible way, it was presented to a broad audience of representatives from the international energy industry, politics and institutions at the end of September.

Babette Stein von Kamienski, team head in KfW Development Bank's Southern Africa Division, said: “The investments required to meet Africa´s growing demand for sustainable energy based on renewables is far greater than the funds available from public sources. But African governments and their development partners can facilitate the private sector investments necessary to bridge this gap. Together, we can build stable, predictable enabling frameworks. We can identify a pipeline of viable projects. And we can offer targeted de-risking instruments. KfW’s accession to the AEGF demonstrates our commitment to this process, and to the development of a sustainable energy market in Africa. Only with that in place can we address the fundamental challenges of energy access, energy security and climate change.”

Marjeta Jager, Deputy Director-General at DG DEVCO in the European Commission, said: “The EU is proud to be using the External Investment Plan to back KfW’s EUR 46 million guarantee to the AEGF. This will double the value of projects which the Facility can insure and help to generate over EUR 740 m in new investment in renewable energy in Sub-Saharan Africa. It will ensure many more people have access to energy, cut the region's carbon emissions and increase energy efficiency. Our backing demonstrates our commitment to partner countries to help them develop their economies in a green, just and inclusive way – a key part of the European Green Deal.”

African Energy Guarantee Facility