Financing energy transition: Challenges and opportunities for local banks

By Odelia NTIAMOAH

Ghana, like many countries on the African continent, is at a pivotal juncture in its energy transition journey. With a growing emphasis on sustainability and reducing reliance on fossil fuels, the country is poised to embrace renewable energy sources as a key component of its energy strategy as it also works towards sustainable development Goal 7, which is, to facilitate universal access to reliable, affordable, and clean energy, further driving nations towards a sustainable energy future.

According to the World Bank, SDG goal 7 has synergetic effect on 125 targets out of the 169, making the transition agenda pivotal in realizing the 17 goals.  However, the successful transition to a greener energy future hinge significantly on effective financing mechanisms.

The current 4.5% renewable energy aside hydro both on and off the national grid has more than 90% of its financing from development finance organisations like the International Finance Corporation, leaving out local banks. Financing in the energy sector require long term funds.

Information from the Energy Commission indicates that the furthest the few local banks have contributed is to provide advance funding for development finance organisations. “The challenge is that once the development partner ends funding the project cycle, the particular project is not continued, like the rooftop solar project-the source says”

The recent inauguration  of the largest solar rooftop project for example was financed by the IFC, another project being worked on by the Ministry of Energy with the implementing agency being the Energy Commission is  the Ghana Scaling-Up Renewable Energy Programme (SREP) from the Climate Investment Funds (CIF) and other Multilateral Development Banks (MDBs) – the African Development Bank (AfDB), International Finance Corporation (IFC) of the World Bank Group (WBG) and other Development Partners (DPs) – with AfDB as the lead MDB for the implementation of this project.

CIF has approved a programme preparatory grant facility to be managed by the African Development Bank, to the tune of  US$1.51 million to finance technical assistance towards the Ghana SREP Program structured around four key projects:  renewable energy mini-grids and stand-alone solar PV systems; solar PV-based net metering with storage; utility-scale solar PV/wind power generation; and technical assistance to scale-up renewable energy.

The Need for Energy Transition in Ghana

Ghana’s energy sector is primarily fueled by oil and gas, with renewable energy sources contributing a relatively small share. The country’s energy policy aims to diversify the energy mix by integrating more renewable sources such as solar, wind, and hydro power. This transition is essential not only for environmental sustainability but also for enhancing energy security and fostering economic growth.

The government has set ambitious targets, including achieving 10% of the energy mix from renewables by 2030 which will be the second time the same target was set with the first expiring in 2020. Achieving these targets requires significant investment in renewable energy projects, infrastructure development, and technological advancements.

The role of local banks

Local banks should be pivotal in financing the energy transition. They could provide essential capital for renewable energy projects, including solar farms, wind turbines, and hydroelectric plants. These projects often require substantial upfront investment, which local banks can facilitate through various financing instruments such as loans, equity investments, and project finance.

Limitations faced by local banks

Despite their crucial role, local banks in Ghana encounter several limitations that hinder their ability to finance the energy transition effectively: Limited Financial Capacity, many local banks face constraints in their financial capacity, making it challenging to commit the large sums required for renewable energy projects. The high capital costs associated with these projects often exceed the lending capabilities of local banks, which are further exacerbated by limited liquidity and capitalization.

High Risk Perception: Renewable energy projects, particularly in emerging markets, are often perceived as high-risk investments. Factors such as technology uncertainties, project execution risks, and regulatory changes contribute to this perception. Local banks may be hesitant to finance such projects due to concerns over potential financial losses.

This could affect the length of time these loans could be given for the projects and these renewable energy constructions require mostly long gestation periods. Based on the afore mentioned factors, the Ghana Infrastructure and Investment Fund could be one of the few funding organisations locally and may not be able to take on many projects.

Lack of Expertise: Financing renewable energy projects requires specialized knowledge and expertise. Many local banks may lack the necessary technical and financial expertise to assess and manage the risks associated with these projects effectively.

Example one bank I Interviewed in 2020 indicated they had 50 million dollars ready for green projects, 12 companies applied six were selected and presented to the counterpart funding agency by the bank only to find that only 1 qualified, the rest flagged for green washing.  This gap in knowledge can result in cautious lending practices and missed opportunities.

Inadequate Policy Support: The regulatory and policy framework for renewable energy in Ghana is still evolving. Uncertainties around policy consistency, incentives, and support mechanisms can deter banks from financing renewable projects. A stable and supportive policy environment is crucial for encouraging investment and reducing perceived risks.

Limited Access to International Capital: While local banks are central to financing efforts, they often rely on international capital markets and development finance institutions for additional funding. Limited access to international capital can constrain their ability to provide the necessary financing for large-scale renewable energy projects.

Strategies to Overcome Limitations

Addressing these limitations requires a multifaceted approach:

Capacity Building: Banks need to invest in capacity building and training programs to enhance their expertise in renewable energy financing. This includes understanding the technical aspects of renewable technologies and developing robust risk assessment frameworks.

Policy Advocacy: Local banks should engage with policymakers to advocate for supportive policies and regulatory frameworks that reduce investment risks and provide incentives for renewable energy projects.

Partnerships and Collaborations: Banks can form partnerships with international financial institutions, development agencies, and private investors or form a pool to leverage additional funding and share risks. Collaborative efforts can enhance their financing capabilities and access to larger capital pools.

Innovative Financing Models: Exploring innovative financing models such as green bonds, blended finance, and public-private partnerships can help address the capital constraints faced by local banks. These models can attract diverse sources of funding and spread risks more effectively.

Strengthening Risk Mitigation: Developing risk mitigation mechanisms such as insurance products and guarantee schemes can help address the high-risk perception associated with renewable energy projects. These mechanisms can provide additional security for banks and investors.

Conclusion

As the SDG TRANSITION CAPTAIN OF THE YEAR 2024 AFRICA, put together by Think Energy and Deloitte, I propose a continuous advocacy by the media, knowledgeable individuals in the sustainable space especially energy transition experts continuously write to educate and create awareness. Perhaps this is the time to deliberately make sustainability a part of the academic curriculum at a wider and faster rate looking at the need in the sector.

The energy transition in Ghana is a critical endeavor that requires concerted efforts from various stakeholders, including local banks. While these banks face significant challenges in financing renewable energy projects, there are opportunities to overcome these limitations through capacity building, policy advocacy, partnerships, innovative financing models, and risk mitigation strategies.

By addressing these challenges and leveraging their role effectively, local banks can contribute significantly to Ghana’s transition to a sustainable and resilient energy future.

Odelia is a media consultant in sustainability (ON Media) and CEO of the Oxford Africa Women Leadership Institute and international NGO, which supports women led businesses with access to finance, market and technical support.

The post Financing energy transition: Challenges and opportunities for local banks appeared first on The Business & Financial Times.

Read Full Story