By Ajay Mathur
Solar economics has transformed over the last decade, as the overall cost of solar deployment including price of modules, technology, and availability of land has fallen dramatically. Global installed capacity has expanded in response to the cost reduction and policy support and reached around 900GW by the end of 2021 from only 44GW in 2010. Member countries of the International Solar Alliance have played a significant part in this growth story. However, there is still work to be done.
Africa has the potential to be one of the significant markets in terms of solar power deployment. It is home to over 1.3 billion people but only half its population has access to electricity around 79% in urban and 35% in rural areas. Energy access is as low as 21 kWh per person per annum in some countries and in some others access ranges between 60-80 kWh per person per annum. This is significantly lower than the basic energy needs of 300 kWh per person p.a. It is estimated that power shortages cost the continent about 2% – 4% of GDP a year.
The African continent will need to double its capacity to 497 GW between now and 2030 to meet the rising energy demand. It cannot be based on fossil fuels because of climate change reasons, but also because of rising energy import bills. Solar and renewables offer the most viable alternatives, with prices now almost in the same range as those of fossil fuel. In addition, conditions for solar energy are excellent in Africa, where sunshine is not only abundant but also much more reliable than elsewhere. Solar also has the advantage of being modular and, therefore, being able, together with batteries, to supply electricity needs in remote areas thus postponing the need for investment in long, under-loaded transmission lines.
Africa needs USD 70 billion of investments in the solar sector in the next 5-7 years. Energy access interventions such as solar home systems and mini-grid alone constitute ~50% of this investment requirement. However, existing investment in the solar sector is approximately USD 13 billion and focused on few regions; even these existing investment pools largely remain un-deployed. Therefore, solar energy sector in Africa will need about six to ten times more capital to be deployed in the sector in the next 8-10 years.
The global climate financial flows, though increasing, were a meagre 632 billion USD in 2020 as against the required of 4.35 trillion USD annually by 2030. The challenge therefore is that of attracting finance to meet energy needs of today and tomorrow, while also addressing climate change, the pre-eminent global crisis of our times. Solar is a globally acknowledged remedy, but investment inflows that can build large shares of solar and deliver a massive scale-up of clean power to underpin widespread electrification remains a challenge. One way of mobilizing investments is to go beyond traditional financing approaches. Innovative climate finance structures can be deployed to improve capital efficiency and overcome the barriers to finance which have stifled investment to date. Traditional financial instruments, such as concessional debt and grants, are widely used in Africa, but create a situation in which growth is limited. This concessional debt and grants could be deployed more efficiently to target specific barriers to finance and thence result in pulling in commercial investment capital, which would greatly enhance the total solar investments. More nuanced solutions like structured finance and capital market instruments have been incorporated into innovative financial structures in markets, such as Egypt, South Africa, and Kenya, and hold great potential for further deployment to catalyze local private investment in climate solutions.
For under-represented segments and geographies which have unmet investment needs, the International Solar Alliance is designing a blended finance facility aimed at stimulating high potential solar technologies, by attracting private capital to flow in such technologies. This Facility’s current geographical focus is Africa, with potential expansion to other regions of the world. The Facility is open for all countries to join to maximize its impact across regions. The ISA is creating a relatively small pool of concessional capital and grants (about USD 700 million) which would mitigate risk and thus attract around USD 10 billion in follow-on investments, and will enable energy access in 35–40 million African households by 2030, and thereby impacting 200 million people in the region. It will also offset more than a million tonnes of CO2 emissions in intervention countries.
Government action is essential if we are to tackle climate change. Given their catalytic role, it will be important for governments to take initiatives to address specific barriers that are most salient to the private sector. Better communication with local private investors and political institutions around the main barriers to investments in a specific country can help raise awareness and inform targeted action by governments to improve investment conditions. Measures like capacity building, risk mitigation instruments, policy interventions, and simplification of regulatory processes have all evidently benefitted many African countries.
Although this interest of the private sector has come in late, it is better late than never. There have been substantial challenges in attracting private investments, given the perception of risk linked to investments in the African continent. A limited understanding of national contexts by private investors often aggravates it. It will be important to trust and harness the power and ingenuity of market. Markets are the self-generating sources of financing that shape business models and transform economies. Properly harnessed, they can deliver solutions at scale.
Ajay Mathurv (PhD) is Director General of International Solar Alliance