High capital costs are stalling clean energy investment across Africa, new report finds
As countries gear up for climate finance negotiations at COP29, a new report from Clean Air Task Force (CATF) finds that high capital costs are slowing investments in clean energy projects across the continent. As African nations strive to expand energy access to fuel economic growth, the study reveals that the average Weighted Average Cost of Capital (WACC) in Africa stands at an alarming 15.6% – over three times higher than in developed regions like Western Europe and the U.S., where rates typically range between 2% and 5%.
“The steep cost of capital continues to be a major barrier to financing new energy projects in Africa, especially for financially constrained and heavily indebted governments,” said Lily Odarno, Director of Energy and Climate Innovation – Africa. “If we want private capital to fill this financing gap, we must urgently lower these costs. Achieving universal energy access and fostering economic growth in Africa requires coordinated action to make financing more accessible and affordable.”
The report provides a comprehensive analysis of the WACC – a key metric used to assess project financing costs – across 48 African countries and five sub-regional groupings from 2023 to 2070. It warns that relying on generalized capital cost estimates, which many studies use due to limited country-specific data, risks misguiding energy policies and hindering investments essential for building modern electricity systems and promoting low-carbon development across the continent.
“This analysis underlines the importance of using country-specific financial metrics when planning and developing energy projects in Africa,” said Prudence Dato, Lead Energy Economist at CATF. “Standardized assumptions often overlook critical local factors, which could result in misguided policies and missed opportunities for effective energy transition pathways.”
Key findings from the report include:
- WACC levels in Africa significantly higher compared to global averages: Although the continental WACC value is expected to drop from 18% to 13% from 2023 – 2070, the average rate of 15.6% for African countries remains significantly higher than the 10% rate often used in uniform assumptions.
- Significant sub-regional variations exist across Africa: Northern Africa shows the lowest WACC (8.6%) while Eastern Africa shows the highest (15.88%). Notable differences also occur within sub-regions; for example, Ghana’s WACC in Western Africa is much higher than Côte d’Ivoire’s.
- Equity costs outweigh debt costs across the continent: On average, equity is twice as expensive as debt across Africa, reflecting greater perceived risk by equity investors compared to lenders. However, some regions, like Central Africa, show a higher cost of debt than equity, indicating higher default risk perceptions.
- Risk premiums projected to decrease with economic growth: As African economies grow, their risk-free rates and equity risk premiums are expected to decrease over time. However, they will still remain higher than those of developed regions and only surpass those in Central and South America by 2070.
- Impact of debt-to-equity ratios on capital costs: Higher equity proportions (e.g., 80% equity) lead to higher capital costs. As African economies expand, the impact of debt-to-equity ratios on total capital costs will diminish, reducing the differences between financing scenarios.
With COP29 finance negotiations on the horizon, the report emphasizes the importance of localized financial data to accurately capture the capital dynamics in each country. It also outlines strategies for African governments, financial institutions, and international stakeholders to collaborate in reducing investment risks. Recommended measures include government debt guarantees, tax incentives, currency swap agreements, and other financial instruments designed to attract investment and alleviate the high costs associated with energy projects.
Read the full report and the executive summary.
Press Contact
Natalie Volk, Communications Manager, [email protected], +1 703-785-9580
About Clean Air Task Force
Clean Air Task Force (CATF) is a global nonprofit organization working to safeguard against the worst impacts of climate change by catalyzing the rapid development and deployment of low-carbon energy and other climate-protecting technologies. With more than 25 years of internationally recognized expertise on climate policy and a fierce commitment to exploring all potential solutions, CATF is a pragmatic, non-ideological advocacy group with the bold ideas needed to address climate change. CATF has offices in Boston, Washington D.C., and Brussels, with staff working virtually around the world. Visit catf.us and follow @cleanaircatf.
