www.IFC.org/ThoughtLeadership Note 17 | September 2016 HOW TO SCALE SOLAR POWER GENERATION IN EMERGING MARKETS Solar power is an increasingly affordable, quick-to-build solution for countries in need of additional electricity generation. Yet many emerging markets face challenges to developing photovoltaic projects, as small project sizes and lengthy negotiations increase costs and timelines. Scaling Solar, launched by the World Bank Group in 2015, addresses these issues by providing an easy-to-follow process to plan, procure, and launch grid- connected solar projects using private sector financing within two years of engagement. It offers governments the tools to quickly increase energy generation at stable low tariffs and allows developers to bid on well- structured, standardized projects through a competitive, transparent process that reduces risk and costs — making new markets easier to navigate. Solar energy is ideally positioned to address the energy needs merits. These are the conditions that Scaling Solar seeks to of countries with strong demand, high irradiation levels, and create. political commitment. Solar power plants can be constructed more quickly than alternative renewables and can deliver Partnerships begin with an expression of interest and a electricity with lower long-term tariffs relative to diesel fired commitment by the government through the identification of a power plants. In Sub-Saharan Africa, with high irradiation champion to lead the engagement, as well as a positive levels continent-wide, most countries can accommodate utility- assessment of stakeholders in the ministries of energy and scale solar solutions and diversify their energy production finance, in regulators, and in an off-taker. Most prospective towards renewables. countries have small, unstable grids that cannot simply absorb new generating capacity. A technical and economic analysis is Nevertheless, the region has not seen meaningful, privately- therefore carried out by Scaling Solar to determine the optimal funded commercial solar development outside of South Africa. size and location for development. This is complemented by a As with emerging and frontier market infrastructure more legal and regulatory analysis and environmental, social, and broadly, solar development in the region suffers from a lack of governance assessments. These free prospective investors from bankable projects as potential investors confront a series of costly exploratory work and allow them to focus on optimizing small, idiosyncratic markets with higher perceived risks that their financing structure and bid preparation. work in tandem to increase development costs and deter financing. Standardized Bidding and Tailored Solutions At the same time, Scaling Solar works closely with the host At the same time, investment and financing flows—in the government to prepare the bidding process. This involves the context of low long-term interest rates in much of the OECD— use of standardized tender and project documents with a degree are searching globally for the types of returns that bankable of localization for the country context. Project and bid solar projects in Sub-Saharan African can provide. The key to preparation set the stage for a competitive, transparent tender unlocking this financing is to standardize projects and markets and awarding process that is overseen by Scaling Solar and the and eliminate avoidable layers of risk, thereby allowing government. investors to assess projects by their core financial and economic As developers prepare their bids they now encounter a energy sector, underdeveloped capital markets, and little dramatically different process. Engagement with Scaling Solar experience in solar. While a partial risk guarantee helped provides them with a tailored solution, with much of the mitigate off-taker risk, Zambia’s example demonstrates that background analysis and necessary due diligence already market solutions and private sector financing for low-cost completed, all of which reduces development time and costs. renewables in low-income countries are not only theoretically And as the program grows, the consistent use of templates and possible but actually feasible. standardized documents and processes also creates opportunities for investors to scale across markets. This in turn can make such projects more attractive to larger developers who can access capital more cheaply but are less interested in small- scale projects. Advisory work is only part of a Scaling Solar engagement. Once bidders are pre-qualified they can draw upon an array of World Bank Group financing and de-risking instruments to address remaining uncertainty and speed up bid preparation. These instruments include risk guarantees against off-taker credit risk, political risk insurance, and foreign currency hedging. As with project and bid preparation, bidders need only focus on preparing their tenders. Scaling Solar sets ambitious targets for each phase of engagement to ensure that a country’s needs are met in the near- term. From expression of interest to winning proposal to financial close, the time frame is expected to be 12-14 months. Zambia’s auction results compared to other results worldwide – IFC As a result, in little over a year ground is broken on construction of a new solar power plant. For governments and developers this is a tangible win. Zambia’s first engagement is expected to reach commercial close in the fall of 2016 and, from there, to progress rapidly to financial close within three months. Every expectation is that From Drought to Cheap Power Scaling Solar’s debut will meet its targets and deliver 73 Zambia was wracked by daily blackouts stemming from megawatts of solar power capacity to Zambia within two years. drought that had crippled its hydroelectric capacity when it This powerful demonstration is all the more exciting as it is the became the first country to sign up for Scaling Solar in 2015. region’s first utility-scale solar project outside of South Africa. The government is seeking to build two large solar plants as part of its long-term strategy to generate 600 megawatts of New Markets capacity from solar. In May 2016, the program completed its first auction, choosing from seven pre-qualified bids. The Senegal and Madagascar signed up for engagement in early lowest arrived at 6.02 cents per kilowatt hour (kWh, US 2016 and are expected to launch tenders by the end of the year Dollars), which is fixed for 25 years, roughly equivalent to to develop 100 and 40 megawatts of solar capacity, around 4.70 cents per kWh if the tariff were subject to partial respectively. Meanwhile, Zambia has already committed to a indexation over the life of the project, as is the case in some second tender through the program. As Scaling Solar grows and other independent power project markets. This would be the strengthens cooperation between governments and private cheapest solar power to date in Sub-Saharan Africa and among sector developers, it will look to harness economies of scale, the lowest tariffs worldwide. By comparison, diesel fired power continue to drive down costs, and expand beyond Sub-Saharan can cost upwards of 20 cents per kWh and is subject to price Africa. volatility stemming from global oil prices.  For Zambia, success came in the context of a difficult Jordan Pace, Research Assistant, Office of the Chief Economist – macroeconomic situation, weak institutional capacity in the Thought Leadership (Jpace1@ifc.org) This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. 