Africa's clean energy projects face financing barrier from credit rating rules

Nairobi, KENYA (AP) — Billions of dollars have been pledged for Africa’s clean energy transition, yet many renewable energy projects across the continent are still failing to get off the ground as countries struggle with soaring financing costs driven by a financial rule known as the “sovereign ceiling," experts say.

Analysts and development finance specialists say the rule, which ties the creditworthiness of projects to the sovereign rating of the country where they operate, is making commercially viable renewable energy projects appear far riskier to international investors than they actually are.

Sovereign ratings hinder financing

Of Africa’s 54 countries, only Botswana and Mauritius currently hold investment-grade sovereign ratings.

So the rule is hindering governments' efforts to expand access to electricity and meet climate commitments under the Paris Agreement. Nearly 600 million people across Africa still lack access to electricity, according to the International Energy Agency.

“The financing environment is the problem,” said Dr John Asafu-Adjaye, a senior fellow at the African Center for Economic Transformation. “A project with strong fundamentals, a long-term power purchase agreement and predictable cash flow ends up being priced as if it were inherently dangerous. Not because it is, but because of where it sits on a map.”

The sovereign ceiling rule prevents companies or projects operating within a country from receiving a credit rating significantly higher than the country’s sovereign rating.

In practice, analysts say, that means renewable energy projects in African countries with weak sovereign ratings inherit the perception of sovereign risk even when projects themselves are commercially sound and backed by international guarantees.

Kenya’s Menengai Geothermal project, Zambia's IFC-led Solar Scaling programme and Nigeria's Solar IPP pipeline all struggled to get adequate funding as investors raised concerns over sovereign guarantees, creditworthiness, and concessional financing terms.

The cost to African development is steep

According to the United Nations Development Program, subjective credit rating assessments cost African countries up to $74.5 billion annually through higher borrowing costs and lost investment opportunities. Analysts say renewable energy projects in Africa often face financing costs two to four times higher than similar projects in Europe or North America.

“The sovereign ceiling functions as a binding constraint that raises costs across all projects and limits scaling of clean energy deployment regardless of fundamentals,” said Dr Sibusisi Nkomo, the program director of the University of Cambridge Institute for Sustainability Leadership’s (CISL) Africa Program.

"Our recent work on private finance and investment in Africa shows that international credit rating systems often overstate risk relative to actual project fundamentals, leading to inflated risk premiums and higher costs of capital.”

International credit ratings limit African access to bond financing

The dominance of credit rating agencies such as Moody’s, S&P and Fitch and other Western financial institutions also shapes how investors perceive African markets, potentially limiting their access to bond markets, another important source of financing, analysts say.

Many countries view solar, wind and transmission projects as vital for their economies and industrialization.

“Electricity is the backbone of all modern economies and is therefore essential for development,” said Malango Mughogho, managing director of ZeniZeni. But she added that much of the financing for projects is in the form of loans that countries cannot afford.

Maria Nkhonjera, a climate and development finance specialist at the Stockholm Environment Institute, said international credit ratings and “risk mispricing” disproportionately inflate borrowing costs, despite relatively low default rates for African clean energy projects.

“The sovereign ceiling rule is an outdated credit rule that penalizes commercially viable clean energy projects for sovereign risks,” Nkhonjera said.

Clean energy projects are also hindered by complex approval systems, fragmented funding and limited local institutional capacity.

“Africa does not lack investable opportunities,” said Asafu-Adjaye. “What it faces is a system in which risk is systematically overestimated.”

There is room for improvement

Expanding low-cost finance, increasing local-currency lending and reforming international debt systems could significantly lower borrowing costs, said Nkhonjera.

Multilateral institutions such as Afreximbank and the Trade and Development Bank could play a larger role by offering guarantees and credit enhancements that partially separate projects from sovereign risk.

“In many African countries, the cost of capital is now one of the most important determinants of the pace of economic transformation,” Asafu-Adjaye said. “Fixing that system is not peripheral to the development agenda. It is central to it.”

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