By: Dr Rahmat Poudineh, head of the Electricity Research Programme, Oxford Institute for Energy Studies (OIES)
Two identical solar plants: one in Spain, one in Kenya. Same panels, similar sun, similar engineering. Yet one produces cheap electricity while the other struggles to deliver affordable power. The difference is not technology, labour, or resource endowment. It is the cost of capital.
Across Sub-Saharan Africa (SSA), electrification and power-sector decarbonisation are often framed as technology or resource challenges. In reality, they are finance-architecture challenges. Solar and wind costs have fallen dramatically worldwide, but the cost of money required to build, connect, and operate electricity systems in SSA remains persistently high. This financing premium affects not only renewable generation projects, but more importantly, the grids, distribution networks, and utilities that determine whether electricity becomes affordable, reliable, and widely accessible.
This distinction matters. In SSA, the cost of capital problem is not primarily a renewables problem- it is an electricity system problem.
The common misunderstanding: “renewables are capital-intensive”
A widely accepted narrative is that renewables are especially sensitive to financing costs because they are capital-intensive and fuel-free. This is true in principle. However, focusing only on generation economics misses the central issue in SSA.
The International Energy Agency (IEA) has repeatedly highlighted that Africa receives a disproportionately small share of global energy investment relative to its population and needs, and that financing costs are a critical barrier to scaling clean energy. But the obstacle is not simply the financing of solar or wind farms- it is the financing of entire electricity systems that struggle with weak balance sheets, currency risk, and under-investment in networks.
As a result, even where renewable generation is technically and economically attractive, electricity remains expensive and unreliable for end users.
Cheap renewable technology does not mean cheap electricity
Generation costs (LCOE) are only one component of delivered electricity prices. In many SSA countries, the dominant cost drivers are high transmission and distribution losses, weak revenue collection, under-investment in grid infrastructure, currency risk embedded in power purchase agreements, and sovereign and offtaker risk priced into tariffs.
World Bank analysis shows that many African utilities do not recover their operating and capital costs, with significant losses stemming from poor collection rates and technical inefficiencies. A subsequent study confirms that both revenue-side problems and cost-side inefficiencies drive poor utility financial performance across the region.
These weaknesses translate directly into higher perceived risk for investors. Developers price this risk into required returns. Lenders shorten tenors or increase margins. The result: even low-cost renewable generation does not translate into low-cost electricity for consumers.
This is the core paradox: SSA can have cheap renewable energy sources and expensive electricity at the same time.
Why this is an electrification problem
Electrification is fundamentally a distribution and network investment challenge. It requires expanding and reinforcing grids, financing transformers, substations, and meters, funding connections for new customers, and maintaining a reliable supply. All of this requires long-tenor, low-cost capital. Yet the institutions responsible for these investments – distribution companies and utilities – are often financially fragile.
High financing costs, therefore, constrain electrification directly. Utilities cannot borrow cheaply to expand networks. Governments face fiscal limits in providing guarantees. Mini-grids and off-grid systems can help but often require high tariffs unless concessional finance reduces their cost of capital.
This dynamic also creates investment bias. Developers prefer commercial and industrial customers (mines, telecom towers, data centres) with hard-currency revenues and strong payment discipline. Capital flows toward self-supply solutions and away from mass electrification.
Why this is also a decarbonisation problem
Many SSA systems rely heavily on diesel and heavy fuel oil generation. In principle, these could be displaced by solar, wind, storage, and grid upgrades at lower system cost and lower emissions.
In practice, these projects require long-term finance backed by credible offtakers. When utilities are weak and currency risk is high, investors demand high returns or avoid projects altogether. Governments must then provide guarantees that strain already limited fiscal space.
The region remains locked into expensive, carbon-intensive thermal generation-not because renewables are costly, but because financing clean alternatives is risky.
What sits inside the SSA “risk premium”?
Financing costs for renewable power projects vary widely across countries. IRENA documents substantial differences in the weighted average cost of capital across markets, with many African countries facing significantly higher financing costs than OECD markets.
Several factors drive this premium: offtaker risk (utilities with poor cost recovery and weak balance sheets), currency risk (local-currency revenues versus hard-currency costs), sovereign risk (debt stress limiting government guarantees), shallow capital markets (limited long-tenor local-currency finance), and policy and contract risk (concerns about enforcement and predictability).
Climate Policy Initiative highlights currency mismatch as a particularly important constraint, arguing that FX risk management is central to unlocking private capital for climate investment in EMDEs.
The key insight for policymakers and industry
Sub-Saharan Africa does not primarily face a renewables financing problem. It faces an electricity system financing problem.
Until the cost of capital for grids, utilities, and local-currency infrastructure falls, electrification and decarbonisation will both remain slower and more expensive than they should be, regardless of how cheap solar panels or wind turbines become.
Tariff reform, utility governance, FX risk solutions, and credible contracting frameworks are not just sector reforms. They are climate policy and electrification policy at the same time.
The bridge between electrification and decarbonisation in SSA is the cost of capital.
