The falling cost of renewable energy is cause for celebration and much needed optimism in the fight against climate change. However, as project costs have fallen and governments have adjusted their approach to project procurement, competition has risen. This is putting returns under pressure for private equity investors in infrastructure projects. Indeed, the average return in emerging and frontier market renewable energy private equity investments has been falling steadily for about a decade. But the same is not true for the credit portion of infrastructure project finance.

Where is the pressure on equity coming from, why is credit less affected, and where are the best opportunities?

The roll-out of renewable energy in emerging markets has increased rapidly over the last decade. During that time, the cost of installing the infrastructure, and consequently the cost of producing power from it, have declined materially. The impact of the renewable energy programmes across Africa has been significant. In South Africa, the energy mix in 2010 consisted of 85% coal fired power generation and 4.9% renewables. Today this mix has changed to 74% coal with the renewables portion now more than three times higher, at around 16%. Furthermore, the South African Minister of Energy, in October 2021, announced the winners of the fifth round of the renewable energy auction process. This will add a further 2,583 MW of clean energy to the grid*.

Table 1: Energy capacity by source, South Africa (megawatt hours, or “MW”)**

Source: Eskom Annual Integrated Report, 2010 and Eskom Annual Integrated Report 2020.

In Asia, similar trends are under way. In the year 2000, the region had circa 157GW of renewable energy installed capacity, 95% of which was generated by large hydropower plants. By 2018, installed renewable energy capacity had grown to 988.9GW, 51% of which was generated from solar photovoltaic (PV) and wind power plants.

Pressure on costs and equity returns

As these renewables markets have matured, capital costs have been falling and the unit cost per kilowatt hour of renewable energy – the tariff – has generally declined. Developers have been able to leverage economies of scale, negotiate improved terms from suppliers, and apply financial structuring to achieve low tariffs. By way of example, over the last 10 years the wind tariff in South Africa has reduced by around circa 37% and the solar PV tariff by circa 70%, in local currency terms. Indeed, South Africa has now scrapped tariff caps in its auction process, given the competitiveness of the market. In the aforementioned fifth renewable energy procurement round, South Africa achieved record low tariffs, with a weighted average price range of just USD 2.7-3.1cents per/kWh (across wind and solar PV). A major outcome of the market’s maturation and competitiveness has been its rising autonomy. This has meant auction processes are being overhauled in a growing number of emerging markets.

  • South Africa, Egypt and Morocco have implemented significant renewable energy procurement programmes run via “open tender” processes.
  • The International Finance Corporation has formulated and implemented an auction process called “Scaling Solar” in conjunction with the governments of Zambia, Senegal and Ethiopia, among others. The programme seeks to reduce the procurement risk and implementation risks for both governments and independent power producers (IPP’s) when procuring solar PV capacity.
  • Lastly, many governments have rolled out their own auction processes to increase participation by IPPs, resulting in installed capacity and generation mix shifting in many other African countries too.

Renewable energy auctions have also become popular in Asia, with some countries dispensing with feed-in-tariff programmes in favour of auctions. The Philippines, Malaysia, Thailand and Vietnam are relative newcomers to the renewable energy auction process, while the likes of India continue to run multiple auctions each year.

Table 2: Renewable energy auction capacity results in India, 2012-2020***

Source: India PV auction results, 2012-2020 – Charts – Data & Statistics – IEA

As discussed, the progress is positive in its implications for the goals of 2015 Paris Agreement, but has squeezed equity returns for investors. To tackle the problem, some investors have taken on development risk. For large utility-like developers and investors, their vertically integrated structures (procurement, operations and maintenance services, management services etc.), help with diversifying risk and increasing effective returns. Some developers though, make aggressive assumptions on the key project inputs which may not materialise. This can stack a project with additional risk and increase the likelihood of forecast equity return not being achieved.

Opportunities in debt

The debt market, meanwhile, has not been exposed to the same level of contraction. Senior infrastructure debt spreads in the emerging markets range between 400-650 basis points (bps) over the base rate. This represents a premium of circa 200-400 basis points over senior infrastructure debt in the developed markets. Emerging market mezzanine infrastructure debt follows a similar pattern. Spreads of between 600-1,000 bps over the base rate – around 200-400 basis points over the equivalent instrument in developed markets – are not uncommon.**** In contrast, the loss rates in emerging markets ranges from 1.3%-2.2%, compared to developed markets rates in the range of 0.9%-1.7%. Emerging market infrastructure debt offers a material premium over the developed markets, but with a similar or marginally greater risk profile.

On balance, we believe debt is more appealing

Overall, we believe this backdrop means investing in the emerging markets renewable energy sector via debt delivers a more appropriate risk-adjusted return for our investors, currently. Being a debt provider offers priority in the capital structure, security over assets, corporate guarantees, among other things, which contribute towards reducing the risk profile of the investment. The additional 200-400 basis point spread achievable in the emerging markets, whilst taking similar or marginally higher risk than similar investments in the development markets, supports this strategy.


* Announcement by the Minister of Mineral Resources and Energy, 28 October 2021,
** Eskom Annual Integrated Report, 2010 and Eskom Annual Integrated Report 2020
*** Table: 2020 data represents January to August 2020
**** Mercer 2018, infrastructure debt spreads

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For further information, please contact:
Tahmina Theis
+41 44 441 55 50


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