Investors in African energy projects often incorrectly view the continent as a single, uniform market. This approach leads to significant challenges in risk assessment and project execution, according to a recent analysis published by BFTOnline. The analysis highlights that local conditions widely vary, influencing project success or failure.
The El Niño-linked drought in 2024 offers a clear example. This drought severely impacted Lake Kariba, a key energy infrastructure component for Zambia and Zimbabwe. While Zambia faced disruptions to its copper mining, Zimbabwe struggled with an already weak power system. This single event had different consequences in each country, illustrating the diverse risks across African energy projects.
Africa’s energy sector presents a significant long-term investment opportunity. However, discussions often presume a uniformity that does not exist. Projects operate within individual countries, each with distinct realities. For instance, a renewable energy investor in South Africa worries about grid connection capacity. In Nigeria, the same investor grapples with tariff policies, unstable foreign exchange rates, and weak collection systems for distribution companies. These factors destabilise project economics.
Vuyo Mafrika, Head of Global Markets, Client Solutions – Africa Regional Offices, Chewe Chumanya, Bank Manager at Absa Zambia, and Opy Ramaremisa, Head of Client Solutions at Absa CIB, authored the analysis. They stress that risk assessment cannot be done at only a country or continental level. It requires deep understanding of individual markets and their interactions. This means adopting 'jurisdiction-specific risk management' for each project.
This tailored approach means structuring projects based on the unique regulatory, financial, political, and operational conditions of each market. It impacts project financing, currency hedging, and how investors engage with local institutions. This level of localisation has not always been common among investors. However, financial market risks are changing this perception.
Foreign exchange (FX) risk serves as a prime example. While it appears as a universal challenge, it differs significantly across markets. Its impact depends on currency liquidity, access to local funding, and rules on convertibility. In strong financial systems, investors can manage FX exposure predictably. In thinner markets with restricted convertibility, hedging becomes difficult or impractical.
Interest rate risk presents another specific challenge. It relates to the maturity of local benchmark rates. Where reliable, long-dated benchmarks exist, investors can price projects confidently. Without such benchmarks, managing financing costs becomes difficult, adding uncertainty to project viability. These specific financial hurdles underscore the need for differentiated risk strategies. Investors must adapt their conventional hedging tools to these distinct market characteristics. Ignoring these specific risks across Africa will continue to undermine potential investment returns.