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Renewable energy in Africa: Risk considerations

A solar power station near Clanwilliam in the Western Cape Province of South Africa

How to harness Africa’s vast renewable energy resources — including hydropower, wind, and solar — to drive economic growth has become a prominent issue, with insurance often cited as key part of the solution. Battery energy storage systems (BESS) are already used to alleviate intermittency and increase the reliability of solar and wind power. Reconfiguring some of the continent’s existing assets to produce renewable energy is on the agenda, while governments are identifying opportunities to become contributors in industries, such as hydrogen, geothermal power, and recycling, as well as exploring opportunities to export power from renewable sources to drive economic growth.

These topics were discussed at the 2021 Africa Energy Forum (AEF) and will be among the themes at this year’s event, titled “Africa for Africa: Building Energy for the Just Transition”, to be held 21-24 June 2022 in Brussels, which is sponsored by Marsh. Ahead of the conference, we will examine some of the risk considerations in the push for renewables on the continent.

1.     Insurance of reconfigured assets

One key topic involves the reconfiguring of existing infrastructure to increase energy production or make energy generation cleaner. For example, use of alternative cleaner fuels on coal fired power plants, or improvements to the operating efficiency of existing solar farms.

If a structure can be reused, a project is likely to be less costly, as savings can be made in such areas as land preparation. Substations and transmission and distribution technology may be available. And by using what is there already, developers could potentially enhance the environmental credentials of a project.

However, where existing infrastructure is being upgraded, insurers will want to determine the site’s condition, how old structures are, how they were built, whether they are structurally sound, and whether the location is polluted. As insurers will likely require more detailed information in respect of the existing site, developers are advised to start the insurance process early.

2.     Battery energy storage risks

A diverse range of operations across Africa — from mines to microgrids — are now using battery energy storage systems to convert solar and wind into energy sources, circumventing the need to rely on less reliable or more expensive grid-supplied electricity. The question of whether much needed investment in local infrastructure across Africa will be reduced as a result of the proliferation of captive power was discussed at AEF. However, the view was widely held that batteries are one of many components of Africa’s energy transition towards a carbon-neutral future, and as such, demand for systems on the continent is likely to only grow.

There are significant challenges associated with this new technology that need to be overcome in order to make projects bankable. Fire risk caused by thermal runaway and the availability of spare parts, for example, need to be examined by any operation seeking to switch to captive power. The question of how to recycle the components of these systems and others associated with renewable energy production was raised at AEF, with the suggestion that African countries could play a part in this emerging industry.

3.     Decrease in government appetite for PPAs

A number of African countries face rising debt-to-GDP ratios that will constrain their infrastructure spending in the years ahead. World Bank lending also constrains the ability of governments to fund and guarantee infrastructure and power projects beyond certain limits. As a result, many African governments are reaching capacity in providing guarantees supporting Power Purchase Agreements (PPAs) that backstop the payment and performance obligations of state utilities, which can impede investments. Investors, however, do have alternative solutions that could be structured to manage the lack of government guarantees supporting off-taker obligations. Multi-lateral liquidity guarantees and well-structured investment political risk insurance, both from private and multilateral institutions, can potentially provide adequate risk mitigation for investors to overcome the lack of government guarantees supporting the PPA.

4.     Ever changing regulatory environment 

In many countries across Africa, risk can be transferred to reinsurers, or retrocessionaires, but often regulation is in place that requires a retention in country. In some countries — where governments have increased retentions — industry, lender, and project requirements are increasingly harder to align.

For example, the Conférence Interafricaine des Marchés d’Assurances (CIMA) came into effect in 1992 to harmonise insurance regulation for a group of mainly Francophone countries in sub-Saharan Africa. The code enables local insurers to benefit from economic development. However, many do not have an international credit rating required by lenders.

5.     Insurance aids financing

In many cases, insurance is a deciding factor in whether a project will proceed, as lenders usually require cover to be in place in order for plans to be approved. Insurers are increasingly asked to advise in the design phase of infrastructure in order to optimise risk mitigation. And as African governments reach capacity in providing guarantees on PPAs, developers are turning to the insurance market for similar assurances. In the next article of our renewable energy in Africa blog series, we will look at the alternatives for project developers on the continent, given the decline in PPAs.

To find out more about insuring a renewable energy project in Africa, please contact your Marsh advisor.

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