Why France Is Investing Billions In East Africa’s Green Projects

Christian Yoka, AFD regional director Eastern Africa.

The French Development Agency (AFD) has been promoting sustainable development in the region through green projects financing, including geothermal and hydropower power plants alongside high-voltage transmission lines.

Kenya represents the single biggest AFD investment portfolio in energy with €1 billion (Sh116 billion) funnelled in Kenya’s power projects, over the past 20 years.

The Africa Sustainability Matters (ASM) caught up with the AFD regional director Eastern Africa Christian Yoka in his Nairobi office to shed more light on the agency’s mission.

Here are the excerpts:

What’s the role of AFD in sustainable investment in eastern Africa?

The French Development Agency has been quite active in the region for the past 30 years, largely in three strategic sectors – energy, water and private sector support.

We believe these three pillars hold the key to socio-economic transformation by supporting growth and development alike.

Our total portfolio within eastern Africa is around €4.5 billion (Sh522 billion) invested in energy, water, urban development and private sector support.

Our footprint covers 11 countries throughout eastern Africa. This includes EAC (East African Community) countries and Horn of Africa countries – Ethiopia, Djibouti, Somalia and Eritrea.

People and planet goals, more than anything else, drive our investments in the region.

The region’s electricity sector has particularly received special attention from the French agency. Why?

Electricity is a powerful tool to deploy in boosting society’s socioeconomic fortunes. Improving access to electricity has already been one of the key pillars in poverty reduction strategies among countries in the region.

That’s why it’s also one of our top priorities in development financing throughout the world. Note that electricity represents 20 percent of AFD development financing.

To this end, our role is to help countries to build modern, efficient renewable energy infrastructure to boost growth and anchor socioeconomic development. That’s precisely why we’ve made electricity one of our focus areas. And thanks to recent and ongoing projects, Kenya’s electrification rate has jumped from slightly a third of the population six years ago to 75 percent, an impressive run.

The AFD has mainly focused on green energy financing. But some countries in the region, including Kenya, plan to build coal and nuclear power plants in coming years. Will these plans receive the same level of support from AFD?

When it comes power generation, we have some sectors that we can support, and those that we won’t.

Our focus on renewable energy sector is important in light of ongoing global efforts to fight climate change. It has become quite imperative to look at investment decisions from all points of view, not only in terms of tariffs and the diversity of the country’s energy mix, but also environmental impact.

Remember not so long ago in 2015 we had the Paris conference on climate change. And France took some commitments. Those binding commitments, therefore, guide AFD actions. To this end, the French Development Agency has strong commitments that all the projects we support have to be 100 percent in line with Paris agreement.

In that respect, for instance, financing coal power plants won’t be something we’ll do. We equally won’t finance nuclear plants; this is something we simply cannot do.

Is Kenya, therefore, better off without coal and nuclear in its power mix?

If we look at Kenya, for instance, we see a lot of unexploited potential in terms of renewable energy available to it – solar, geothermal and wind. We, therefore, don’t feel going into fossil fuel power plants is necessary. This applies to other regional economies too.

I definitely think that Kenya has huge potential worth exhausting before going to other areas.

Is this the global trend, shunning coal?

Oh yes, this is now a global commitment. You cannot choose electricity source mix without considering the resultant impact on environment.

Another consideration to take is that when a country makes an investment, it’s going to have an impact on the end tariffs. And from an investment point of view, geothermal has had a huge impact on reducing power tariffs, with Kenya being a good case study.

That’s why we don’t feel there is need to go for coal, and yet there’s enough room for other renewable energy sources. Remember studies indicate that Kenya’s Rift has a potential of 10,000 MW waiting to be exploited. That’s five times more than Kenya’s current total power capacity.

But government officials reckon that wind and solar are intermittent sources and cannot be relied upon. And with geothermal, there’s no guarantee future wells exploration will yield enough steam to develop electricity. Plus geothermal plants sit along the volcanic belt in Rift Valley and there’s need for diversity in power mix as a contingency measure.

I’m not in the driver’s seat when it comes to final decisions. If the government says we’re going for coal, fair enough. But the question is will the AFD finance them? No.

Because of green energy commitments we have, this is something we won’t be involved in.

Taking stock, what are the major successes of the AFD campaign in the region’s electricity sector?

Indeed, there are several successes to talk about in financing energy projects in the region. In Kenya, for instance, geothermal is clearly a real success.

Because of investment in geothermal (additional 280MW in Olkaria, Naivasha in second half of 2014), tariffs have significantly dropped for end users. This is a double-win since tariffs are down while the energy source is clean.

The second aspect is that by financing geothermal, we have enabled skills transfer and human resource development locally.  People have been trained and employed in the energy sub-sector.

And today, throughout Africa and indeed throughout the world, Kenya is recognised as major player in geothermal. That is a reason for us to be proud, as the financiers.

How about the successes in other countries in the region?

Let’s now take a look at Ethiopia. In Ethiopia, we financed the country’s first wind farm, the 120MW Ashegoda wind farm in 2013. Note that it was the first of its kind, the largest even, in sub-Saharan Africa. That’s something we take pride in.

In Uganda, the AFD financed the Bujagali hydropower project with a capacity of 250MW. Before that project, there was no cheap energy. The plant is now producing half the production capacity of the country.

What are the challenges?

Well, some challenges still remain, i.e rural electricity provision

What new projects is the AFD looking to finance in future?

I won’t go into too much detail in terms of figures; but I’ll talk about different segments, not only in Kenya but in other countries in the region as well.

I earlier mentioned the challenge of rural development through electricity access.  To this end, mini grids are becoming very pivotal. This is an area that we will work heavily in countries like Uganda, for instance.

In Kenya and Tanzania, we’ll focus on transportation of electricity from points of generation. Here, we’re talking of transmission and distribution lines. This will be given priority.

Besides, when it comes to off-grid energy solutions in Kenya, our subsidiary Proparco, which has specialised in financing private sector, will be heavily involved.

In Djibouti, we’re working in geothermal alongside the World Bank and African Development Bank while in Ethiopia we’re already involved in geothermal in Tendaho area. Proparco, our subsidiary, is also looking at other private geothermal projects in Ethiopia.

The AFD equally runs a programme in which the agency offers lines of credit through commercial banks to green projects owned by private entrepreneurs under the Sustainable Use of Natural Resources and Energy Finance (SUNREF). Tell us a little bit more.

This programme is quite innovative in the sense that we’ve channeled a line of credit directly to local commercial banks for onward lending to strategic green energy projects.

It’s a powerful tool. Before SUNREF, our funding was limited to public sector projects. We then quickly realised private sector players could equally be key players in the energy space, hence rollout of the scheme.

Under SUNREF, which local banks are you working with and how much funds have been issued?

So far, we have 30 SME (small and medium-sized) projects financed to the tune of $75 million (Sh7.5 billion) in Uganda, Tanzania and Kenya. When it comes to local banks, we’re working with Co-operative Bank, CBA, Bank of Africa and DTB bank, especially in Uganda.

What are the lending terms to private investors and what’s the eligibility criteria?

We have two components to our financing. First,we have long-term financing. We understand most of these projects have long gestation period, turnaround takes some time before revenues start trickling in. To this end, we’re bringing in long term financing to local banks.

The second component is that our lending is on concessional terms, lower than market rates.

On the second question, to be eligible obviously the project must be green.

But over and above that, the project in question must demonstrate measures taken to ensure energy efficiency. This is crucial, not only because of the resultant impact on the environment but also as a factor of cost of production and end retail prices.

What have been the successes of SUNREF loans to private projects through local commercial banks?

I would say the success has been two-fold; we’re not only bringing financing. We also have another component attached to the financing aspect and that’s technical support.

The programme has facilitated local banks to develop their technical capacity in financing analysis of green energy projects. Beneficiaries have equally benefited from technical and financial expertise through training.

This two-pronged approach is quite powerful in bringing about long-lasting impact on the society.

The AFD is the implementing agency in the financing of the green mini-grids project in off-grid remote villages in the region. What’s the overriding objective of this drive?

The main one is toimprove electricity access rate in rural areas. Our role is to go and support that objective. But it should be noted from the outset that tariffs on mini grids are expensive compared to those on the national grid. When it comes to pricing, the variation becomes a social injustice to rural customers on mini grids. And not only that. It’s also an economic question. For instance, we should ask, can rural homes afford to pay for the expensive power made available to them through mini grids?

To this end, we finance mini grids through grants to private developers, not loans, because we realise these projects need subsidies in order to reduce consumer tariffs.

In the region, we run the green mini-grid project in two phases. The first phase is financed by DFID of UK and the other by the European Union, but they’re being implemented concurrently by the AFD. We come in as the implementing agency.

As you earlier indicated, households on mini grids currently pay a lot more for electricity than those on the national grid, disfavouring village folks. How can this be harmonised?

Indeed that’s true. We’re having talks with the government on how to smooth out the disparity. We feel village folks shouldn’t be discriminated against through higher pricing and yet it’s a group that needs heavy subsidies due to their low incomes and subsequent low purchasing power.

The AFD is helping to design a solution to ensure tariffs come down on mini grids.

Amid all these projects, how do you ensure there’s skills transfer among local sector players?

Technical assistance is at the heart of our operations. Remember I mentioned earlier that in geothermal development in Olkaria which we funded, there was skills transfer. Same thing with the wind farm in Ethiopia, it was the first one. Now, thanks to technical lessons learnt from the Ashegoda wind plant, Ethiopia is using it as a spring board to finance and develop more projects.

The thing is, in every project we’re financing, we make sure to include technical assistance. Notice that the ownership of the projects we finance belongs to the beneficiary, not us. And hence the benefitting parties need the technical know-how to operate it.

We’re not an implementing agency, but a financing agency. So we have to make sure our beneficiaries have the needed skills to implement these projects. And when we notice the beneficiaries have inadequate skills we do provide technical skills that comes along with our financing. That’s very important to us.

Still on the issue of skills transfer, remember I mentioned that we have our private sector financing subsidiary Proparco. To be complete, soon the AFD will have another subsidiary, Expertise France, which will be completely dedicated to provision of technical assistance. This means we’ll have a holistic group which can bring different solutions to the table. That is financing of private side, public side and also bringing in expertise through Expertise France.

The AFD has equally financed regional transmission lines. Why this focus?

We noticed there’s a disconnect between the surplus power capacity that several nations in the region have and what is transported to consumers. Customers in far-flung areas simply don’t have access, partly due to lack of transportation lines.

But even more important is that we’re financing and look to finance more interconnection lines among countries in the region. Why?

In the region, we’ve observed, many economies rely on hydros, and this poses a challenge whenever rains fail. During such dry periods for a country that relies on hydropower, the only choice is to turn to expensive thermal plants to bridge the deficit caused by the dip in hydros or to resort to load shedding.

To this end, interconnections will give such countries more options to better manage their power resources, even during adverse conditions. That way, tariffs will remain low and power supply steady and reliable. Interconnector lines will also facilitate regional integration through creation of a power pool and trade.

You have hardly mentioned investment in biogas and waste-to-energy projects. Is this an area you’d wish to venture into?

We’re actually open to that and it’s something we’re seriously considering.

Read also: Rural Kenya Reaping Fruits Of Solar Power

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