The Regional Liquidity Support Facility (RLSF) and its 4-year impact on

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The Regional Liquidity Support Facility (RLSF) was launched four years ago to address the short-term liquidity risk faced by independent power producers (IPPs) who sell electricity to utilities electricity from sub-Saharan Africa. Obbie Banda, underwriter with the African Commercial Insurance Agency (ATI) assess the impact four years later.

The RLSF was jointly launched by ATI and KfW Development Bank and they wanted to create a sustainable and sustainable collateral product for the benefit of small and medium-sized renewable energy projects, building on their respective experiences in supporting PPIs through insurance products and procurement initiatives. for such projects.

KfW’s total funding commitment of $ 37.3 million for RLSF, split between technical assistance for its implementation and the cash guarantees that underpin the unique product structure, was provided by the ministry. German Federal for Economic Cooperation and Development (BMZ).

How it works and general expectations at the start

The RLSF comprises cash collateral and guarantees worth up to $ 71.7 million, made available to Absa South Africa which in turn issues stand-by letters of credit (SBLC) to the profit from PPIs. SBLCs cover up to six months of income for the PPI and can be issued for terms of up to 10 years – with the option to renew afterwards. Some of the unique features of the RLSF are that it allows PPIs to submit multiple claims over the 10 year period due to its renewable nature, and the host government is not required to provide any counter guarantees prior to issuance. of the police.

After entering into a Memorandum of Understanding with ATI, projects in the following countries may benefit from the RLSF; Benin, Burundi, Côte d’Ivoire, Madagascar, Malawi, Uganda and Zambia in the hope that more of ATI’s nineteen member countries will sign up. In November 2021, ATI issued and finalized three RLSF guarantees in support of flagship solar projects in Burundi and Malawi – the very first solar PPIs in these countries. Two additional guarantees are expected to be issued by the end of the first quarter of 2022.

At the time of its launch, the assumption was that the availability of such a guarantee product would lead to a greater number of renewable energy projects reaching financial close and that the deadlines that these projects had to face to reach this milestone. would be considerably reduced – the former has been largely achieved, the latter not so much. While the RLSF and similar liquidity instruments are imperative in addressing the bankability gaps in grid-connected power projects, they do not serve as a magic wand. Larger macroeconomic, sectoral and project specific challenges need to be adequately addressed in each country for projects to move forward more quickly.

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The tsupported transactions

The first RLSF policy was published in January 2020 to support the 7.5 MW solar photovoltaic system at Mubuga in Burundi, a project developed by Gigawatt Global with the financial support of a consortium of lenders, including the Renewable Energy Performance Platform (REPP ), the United States International Development Finance Corporation. (DFC) (formerly OPIC) and the Inspired Evolution II Fund. The second and third RLSF policies were published in November 2020 to support the 21 MW solar PV plants in Nkhotakota and 60 MW in Salima in Malawi; these two projects are owned respectively by Serengeti Energy (formerly responsAbility Renewable Energy Holding (rAREH)) / Phanes Group and JCM Power / InfraCo Africa Limited.

The three projects will cumulatively add 88.5 MW to the grid, in turn giving access to electricity to more than one million people. RLSF guarantees, with a total value of $ 7.8 million for the 3 projects, made it possible to finance a total of $ 119.4 million. The first two RLSF policies were jointly recognized as Offer of the year – Energy at the African Banker Awards 2021 – illustrating the impact and positive recognition of RLSF.

Lessons learned

Much has changed in the power sector in Sub-Saharan Africa since 2017 – the need for liquidity guarantees and political risk insurance has evolved. As buyers increasingly meet their obligations to operational PPIs and investors gain a better understanding of the real political risk in some countries (correcting past perceptions), the demand for collateral products has gradually declined (bad news for political risk insurance underwriters but a good sign).

Good examples are markets such as Kenya and Uganda where developers are increasingly comfortable with not only country risk but also liquidity risk on buyers in these countries.

RLSF was no exception to this trend. While there remains a constant demand for such liquidity instruments, especially in markets at an early stage to attract PPIs, there has been a noticeable shift in some more developed renewable energy markets.

In order for ATI to continue to respond effectively to this demand, improvements to the RLSF have been identified – to make its contractual structure simpler, less expensive and to make the product easily deployed. With alternative liquidity instruments under development and likely to become available in the coming years, these envisaged changes will ensure that RLSF continues to be competitive, relevant and responsive to market needs.

A new RLSF structure

The existing structure of the RLSF operates as follows: ATI and KfW jointly provide guarantees to Absa South Africa; Absa then issues SBLC to beneficiary IPPs. ATI, working closely with KfW (as well as other donors who are on track to provide additional funding), will make fundamental changes going forward – instead of providing a guarantee to an LC issuing bank. , ATI will potentially also be able to provide renewable guarantees directly. to beneficiary IPPs. The guarantees will cover an extended occupancy period of up to 15 years and potentially cover up to 12 months of income. The additional funding will also extend the eligibility criteria to larger projects up to 100 MW (from 50 MW).

These new changes are quite exciting for ATI and should be for all stakeholders! The new structure will allow IPPs to benefit from ATI’s positive credit rating of A / A3 (S&P and Moody’s respectively), an improvement over any current limitation due to ratings of most African banks, which is capped at the rating of their sovereign. The new contracts to be signed between ATI and the IPPs will be simpler – reducing the existing delays in negotiating such agreements. In addition, the cost of RLSF coverage will become more affordable, as the fees currently charged by the SBLC issuing bank will no longer be taken into account. This new structure will be in place from January 2022.

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Impact of COVID-19

The COVID-19 pandemic has had a huge effect on every country in the world. The effect of the pandemic on people’s lives and livelihoods has already strained health infrastructure and the economy has been devastating. Its effect on the electricity sector has also been evident, although the full impact may not be fully appreciated for a year or two. Electric utilities faced greater financial hardship due to a combination of factors such as reduced demand as economies slowed and lockdowns were put in place, and collections increased. low among end users as amnesties were introduced by various governments. All this means that the solvency of several utilities has been strongly affected – given that the starting point before the start of the pandemic was not very positive.

Due to these negative effects of the pandemic, the need for additional liquidity instruments and insurance against political risks that can cover the risk of termination should continue in the years to come.

Digitization and the role of the transparency tool

RLSF MoUs signed between ATI and African States allow ATI to collect information on buyer’s payment behavior and share this information with other participating PPIs in each country – from time to time, the information will be made available to the public through aggregated reports. The information collected is recorded and accessed through the Transparency Tool, a digital platform launched by ATI in 2019. Over time, the hope is that the availability of such verified and reliable payment trends will help align the risk of poor payment received from electric utilities. with reality. The transparency tool’s first report was released in April 2021 – showing that Malawi power company ESCOM was meeting its payment obligations to the country’s only PPI on time.

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Conclusion

By all accounts, RLSF has been a success since its launch four years ago – it has come a long way to further illustrate ATI’s role as a valuable partner in supporting renewable energy projects in across the African continent. With ATI’s growing expertise in this unique guarantee space, the aim is that such success will enable the development of additional guarantee instruments that can also stimulate and encourage private sector financing towards a just energy transition – potentially supporting commercial and industrial power projects, mini-grids and other off-grid initiatives.

The relative success of RLSF has shown that mobilizing finance for small and medium-sized renewable energy projects is possible and achievable, and that while the challenge of electrifying the entire African continent is enormous, cooperation continuing between governments, multilateral institutions, donor agencies and the private sector can have a significant and lasting impact.

Obbie Banda is an underwriter with the African Commercial Insurance Agency (ATI)

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