Driving private investment in Independent Power Production

Governments must prioritise investment in strengthening transmission and distribution networks, ensuring that new generation capacity can be effectively integrated into the grid and electricity can reach underserved communities, say the authors.

Governments must prioritise investment in strengthening transmission and distribution networks, ensuring that new generation capacity can be effectively integrated into the grid and electricity can reach underserved communities, say the authors.

Published Jun 29, 2024


By Chris Green; Olivier Fille-Lambie, and Thomas Hechl – Hogan Lovells

Africa stands at a critical juncture. Its vast energy potential, while brimming with promise, remains largely untapped, hindering economic growth and societal development.

Independent Power Producers (IPPs) are critical to unlocking this potential, but they face a complex web of challenges that require a collaborative and strategic approach to overcome. Attracting private investment is not just about capital; it’s about fostering an environment where innovation can flourish, and sustainable solutions can power a brighter future for all Africans.

One of the most significant roadblocks for IPPs is the regulatory uncertainty that pervades many African countries. Opaque local ownership requirements, coupled with restrictive licensing regimes and bureaucratic processes, create an unpredictable and often frustrating environment for investors.

South Africa's experience with various rounds of the Renewable Energy Independent Power Producer Procurement (REIPPP) programme provides a valuable case study. REIPPP has historically been plagued by, among other things, uncertainty surrounding local ownership requirements and the related impact on pricing.

This has created significant hurdles, highlighting the need for a holistic approach to regulatory reform. Again, in this regard, South Africa is an interesting example. As the government has progressively relaxed licensing requirements in relation to independent power projects over the last four years, significant activity and investment has taken place in this space, limited primarily by grid availability, rather than any concerns relating to the deployment of capital.

To truly unlock private investment, governments must go beyond piecemeal solutions and establish clear, stable, and long-term policy and regulatory frameworks. Predictability is paramount. When investors can accurately assess risks and develop effective mitigation strategies, they are more likely to commit capital, even within challenging environments. A consistent and transparent policy and regulatory environment sends a powerful signal that a country is open for business and committed to sustainable development.

However, navigating the regulatory landscape is only one part of the equation. Securing financing for large-scale energy projects, particularly in the absence of widespread sovereign guarantees, also presents a significant hurdle. The increasing reliance on private capital and blended finance models, while promising, necessitates a more sophisticated approach to project development and risk mitigation.

Governments have a critical role to play in developing bankable projects that attract private investors. This requires clear project structures, transparent procurement processes, and robust risk mitigation strategies that provide comfort to financiers. Engaging Development Finance Institutions (DFIs) is also crucial. DFIs bring not only financial resources, but also technical expertise and a wealth of experience in navigating the complexities of emerging markets.

They can act as a bridge between governments and private investors, facilitating dialogue and building trust. In this regard, public-private partnerships have emerged as a successful model for developing energy infrastructure in Africa, leveraging the strengths of both sectors.

Projects such as Scaling Solar in Senegal demonstrate the value of engaging experienced DFIs (like the International Finance Corporation) to provide technical expertise, risk mitigation instruments, and access to financing. These partnerships not only deliver vital infrastructure, but also build local capacity and transfer knowledge, contributing to long-term sustainable development.

Beyond traditional financing mechanisms, exploring innovative solutions such as green bonds, climate funds, and results-based financing can unlock new sources of capital and attract investors seeking both financial returns and positive environmental and social impact.

While attracting capital is essential, we cannot overlook the foundational role of infrastructure. Inadequate grid capacity, transmission constraints, and logistical bottlenecks can cripple even the most promising IPP projects.

These infrastructure gaps increase costs, reduce project viability, and ultimately hinder the delivery of affordable and reliable electricity to those who need it most.

Governments must prioritise investment in strengthening transmission and distribution networks, ensuring that new generation capacity can be effectively integrated into the grid and electricity can reach underserved communities. Improving port facilities and transportation networks is equally critical, as efficient logistics are essential for transporting equipment and materials for power projects, reducing costs and minimising delays. Furthermore, investing in digital infrastructure, such as smart grids and advanced metering systems, can optimise grid management, improve efficiency, and reduce technical losses.

However, attracting private investment should not come at the expense of affordability and accessibility. Governments must strike a delicate balance, ensuring that the benefits of increased energy access reach all segments of society. This requires creating a level playing field through transparent and competitive procurement processes that prevent market distortions and ensure fair pricing.

Targeted subsidies and social safety nets can protect vulnerable households from high energy costs, while promoting off-grid solutions like decentralised renewable energy systems can provide affordable electricity access in rural areas beyond the reach of the grid.

Engaging local communities is not just good practice; it is fundamental to the long-term success of any IPP project. Early and meaningful consultations, coupled with transparent benefit-sharing mechanisms and skills development programs, can foster trust, minimise conflicts, and ensure that projects contribute to local economies and improve livelihoods. When communities are treated as partners rather than passive bystanders, they become valuable allies in the development process.

Finally, transparency and accountability are not mere buzzwords; they are the bedrock upon which trust is built and maintained. Implementing robust regulatory frameworks, disclosure requirements, and independent monitoring mechanisms helps ensure that investments are responsible, sustainable, and benefit all stakeholders.

Chris Green, Managing Partner, Johannesburg; Olivier Fille-Lambie, Partner & Co-Head of Africa Practice, Thomas Hechl, Head of Finance – Africa, Hogan Lovells