Oil Report

Limited finance seen hurting African energy projects

* Nuclear power, clean energy initiatives lack capital

* Commercial banks prefer debt to equity support

BASEL, Switzerland, June 30 (Reuters) - Large-scale nuclear and renewable energy projects in Africa are stalling as adequate financing proves scarce, investors and legal advisors said on Wednesday.

Tarun Brahma, senior investment officer at the Dutch development finance company FMO [NFMO.UL], said that while big commercial banks like Standard Chartered STAN.L and Barclays BARC.L are willing to provide loans for the power sector, equity and other sorts of capital are harder to come by.

“The lack of this type of financing is causing projects to stall,” he told an African energy conference in Switzerland.

“There is a lot of debt out there but there are other types of financing that is needed to make these projects workable,” Brahma said. “There is too much focus on senior debt within institutions.”

Africa’s growing population is placing increasing strains on electricity grids, leading to power outages estimated to cost up to 4 percent of its gross domestic product. [ID:nLDE65S1U7] Some companies have taken to generating their own power to ensure continued supply. [ID:nLDE6510TG]

Private investors are seen as key to solving the continent’s power supply woes and bringing much-needed capital into the energy sector. But fragmented regulation and concerns about corruption, vandalism and bureaucratic hurdles often discourage investment. [ID:nLDE63J2AF] [ID:nLM455410]

Clare Rhodes James, an expert in renewable power at British engineering and development consultancy Mott MacDonald, said the upfront costs and long lead-time to build hydro-electric power plants were a further disincentive to many would-be investors.

She said it was important that project leaders emphasise the potential longer-term commercial and social gains from hydro projects that could make electricity more consistent, create jobs, avert carbon emissions and offer flood protection.

For now, she said it was more likely that smaller projects gain traction than “really grand” ones. “In the short term, the big regional initiatives are not necessarily the things that are going to make a difference,” she told the Basel conference.

Nuclear power, another carbon-free energy form, is also capital intensive and its long lead-up time can witness big changes in financing and political conditions, said Lynne Gedanken, a partner at the law firm Chadbourne & Parke.

But assistance from the International Atomic Energy Agency (IAEA) and government guarantee programmes like the one at the U.S. Department of Energy may encourage nuclear investment around the world, and eventually to Africa, where only South Africa currently has nuclear generators, the legal expert said.

Namibia, Senegal, Algeria, Tunisia, Morocco, Egypt, Uganda and Nigeria have expressed interest in this energy area, but currently lack financial backers, according to Gedanken.

“Given the size and costs of (nuclear) projects, there are not many sponsors or contractors that want to bet the firm on a single project,” she said. But the expansion of the power sector abroad could come to benefit Africa, she added.

“With reduced costs and more cost certainty after the first new power plants are completed in Europe and Asia and the United States, there will be governmental and commercial lenders as well as capital markets that are likely to be more willing to lend to these projects,” she said.

FMO, which is involved in a debt and equity ethanol deal in Sierra Leone with Addax, a unit of China's Sinopec 600028.SS, said it was important to also keep propelling the development of coal-fired and thermal power in Africa alongside green projects.

“Shifting focus to get a good energy mix between renewable and non-renewable is good. However, if a majority of time is spent on renewable projects, we are forgetting there is a major need for baseload power in Africa,” Brahma said.

Editing by Keiron Henderson