NAIROBI, Kenya (AP) — Despite billions of dollars in pledges to support Africa’s shift to clean energy, countless renewable energy projects across the continent are failing to launch — and experts say a little-known financial rule is largely to blame.
The rule, called the “sovereign ceiling,” links the credit rating of any project or company to the credit rating of the country in which it operates. Analysts and development finance specialists say this makes perfectly sound renewable energy projects look far more dangerous to international investors than they actually are.
Of Africa’s 54 nations, only Botswana and Mauritius currently hold investment-grade sovereign ratings, meaning the vast majority of African countries — and the projects within them — are automatically viewed as high-risk borrowers under this framework.
The consequences are significant. The rule is hampering government efforts to bring electricity to more people and honor climate commitments made under the Paris Agreement. According to the International Energy Agency, close to 600 million people across Africa still have no access to electricity.
“The financing environment is the problem,” said Dr. John Asafu-Adjaye, a senior fellow at the African Center for Economic Transformation. “A project with strong fundamentals, a long-term power purchase agreement and predictable cash flow ends up being priced as if it were inherently dangerous. Not because it is, but because of where it sits on a map.”
In practical terms, analysts explain, renewable energy projects in countries with weak sovereign ratings absorb the perception of that sovereign risk — even when the projects themselves are financially solid and backed by international guarantees.
Several high-profile projects have already felt the impact. Kenya’s Menengai Geothermal project, Zambia’s IFC-led Solar Scaling programme, and Nigeria’s Solar IPP pipeline all struggled to secure adequate funding as investors raised concerns about sovereign guarantees, creditworthiness, and financing terms.
The United Nations Development Program estimates that subjective credit rating assessments cost African nations as much as $74.5 billion each year through higher borrowing costs and missed investment opportunities. Analysts add that renewable energy projects in Africa frequently face financing costs two to four times higher than comparable projects in Europe or North America.
“The sovereign ceiling functions as a binding constraint that raises costs across all projects and limits scaling of clean energy deployment regardless of fundamentals,” said Dr. Sibusisi Nkomo, program director of the University of Cambridge Institute for Sustainability Leadership’s Africa Program.
“Our recent work on private finance and investment in Africa shows that international credit rating systems often overstate risk relative to actual project fundamentals, leading to inflated risk premiums and higher costs of capital,” Nkomo added.
The outsized influence of major credit rating agencies — including Moody’s, S&P, and Fitch — along with other Western financial institutions, also shapes how investors view African markets, potentially cutting off access to bond markets as another source of financing, analysts say.
Many African nations see solar, wind, and transmission infrastructure as essential to their economies and industrial growth.
“Electricity is the backbone of all modern economies and is therefore essential for development,” said Malango Mughogho, managing director of ZeniZeni. However, she noted that much of the available project financing comes in the form of loans that countries simply cannot afford to repay.
Maria Nkhonjera, a climate and development finance specialist at the Stockholm Environment Institute, said international credit ratings and what she calls “risk mispricing” unfairly inflate borrowing costs — even though African clean energy projects have relatively low default rates.
“The sovereign ceiling rule is an outdated credit rule that penalizes commercially viable clean energy projects for sovereign risks,” Nkhonjera said.
Beyond the sovereign ceiling, clean energy projects also face hurdles from complicated approval processes, fragmented funding sources, and limited local institutional capacity.
“Africa does not lack investable opportunities,” Asafu-Adjaye said. “What it faces is a system in which risk is systematically overestimated.”
Nkhonjera suggested that expanding low-cost financing, increasing lending in local currencies, and reforming international debt systems could meaningfully reduce borrowing costs. Multilateral institutions such as Afreximbank and the Trade and Development Bank could also play a bigger role by offering guarantees and credit enhancements that help separate individual projects from sovereign risk.
“In many African countries, the cost of capital is now one of the most important determinants of the pace of economic transformation,” Asafu-Adjaye said. “Fixing that system is not peripheral to the development agenda. It is central to it.”
