Grant Thornton Renewable Energy Discount Rate Survey 2018

23 Oct 2018

By Jade Palmer, Manager, Corporate Finance - Grant Thornton

Grant Thornton, in collaboration with Renewables in Africa and Clean Energy Pipeline, launched its first Africa Renewable Energy Discount Rate Survey earlier this year and the results are now available on our website here.

A lack of transparency across Africa has to date, has consistently been one of the largest inhibitors to investment across the continent, including;

  • Transparency of incoming foreign direct investment (FDI) (e.g. China)
  • Transparency of government incentives (e.g tax exemptions)
  • Transparency of contracts and counterparty obligations

As a result, investors are often relying on their own experience and advisory teams for their evaluations.

The aim of this survey has been to support investor decision making across the continent by sharing views on the cost of capital associated with various renewable technologies across Africa. As the pricing for renewable assets is competitive and unique to the specific aspects of the asset, the implied cost of capital (or IRR) from comparable transactions can be a strong indicator for valuing projects.

Whilst we have seen an increase in investment across the continent as well as investor confidence, this has largely been attributable to greenfield development with limited M&A transaction activity. This was to be expected in such emerging markets.

Our analysis has therefore focussed on the three most developed markets for renewable energy technologies in Africa: Kenya, Nigeria and South Africa.

As anticipated, South Africa observes the lowest unlevered cost of capital. This can be largely attributable to the success of the Renewable Energy Independent Power Producer Programme (REIPPP) over the last decade. Whilst all outstanding power purchase agreements (PPAs) are said to have been signed, further development of these projects has been slow. We’ll be keeping a close eye on Q4 2018 to gauge interest in the fifth bid window under the REIPPP to see if investor sentiment remains positive.

We observed a lower unlevered cost of capital for renewable energy projects in Kenya versus Nigeria. Whilst the Nigerian renewable energy market is fairly nascent, it has received support from the Nigerian Electricity Regulatory Commission (NERC) to promote adding renewable energy into the grid, the country still attracts a fair amount of country risk. Conversely, Kenya is a leader of renewable energy in East Africa with the government aiming to introduce an auction process for all projects above 10MW.

The future is bright for renewable energy in Africa given the continent’s increasing demand for electricity and its unrivalled access to a diverse range of renewable energy sources from hydro to solar and geothermal.

With a lack of transparency causing trepidation for many investors across the continent, there is a clear need for platforms such as AVCA and other information-sharing forums to promote investor confidence - our survey is a step towards breaking down these barriers.

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