The East African nation of Djibouti has inaugurated its first-ever wind farm near Lake Goubet, built for an investment of US$122 million. The wind energy facility named the Red Sea Power (RSP), has a power generation capacity of 60 megawatts (MW).
The launch of the Red Sea Power (RSP) wind power plant has resulted in the country’s overall power generation capacity being boosted by 50%. Before the launch of RSP, Djibouti had an installed power generation capacity of 123MW, mostly from outdated diesel plants. The country imports energy from neighbouring countries like Ethiopia to supplement its energy shortfall.
The project is the first significant international investment in the energy sector in Djibouti and created the country’s first Independent Power Producer (IPP). The investment in RSP is expected to set a template for further private investment in the country’s energy sector.
The wind farm will supply power to the state-owned utility, Electricité de Djibouti (EDD), under a long-term power purchase agreement (PPA), and will help power 38% of the country’s 1.1 million people that are currently without access to electricity.
Milestone investment for Djibouti
The project was built by a consortium of investors led by pan-African development finance institution, Africa Finance Corporation (AFC) as the lead developer. The Dutch development bank FMO, the Climate Fund Managers (CFM) and Great Horn Investment Holding (GHIH), an investment firm owned by a unit of the Djibouti Ports & Free Zones Authority and Djibouti Sovereign Fund were also involved in the consortium.
“We congratulate the President and people of Djibouti along with our Partners on this significant milestone towards advancing energy access in Djibouti through renewable wind energy,” said Samaila Zubairu, President & CEO of the Africa Finance Corporation (AFC).
“The equity bridge construction finance solution that we deployed has mitigated construction and completion risks, clearly demonstrating AFC’s solutions-focused, de-risking and execution capabilities, as well as introducing a pragmatic way to fast track financial close for projects in Africa,” added Zubairu.
Using the project as a template for future IPPs, the Government of Djibouti is already working on several other plants for additional geothermal and solar capacity.
Furthermore, the project stands out as a demonstration of the use of innovative equity financing to accelerate development impact through de-risking, while showcasing the commercial viability of transformative projects in Africa, thereby crowding-in diverse capital sources, and enabling replication of similar projects at reduced financing costs.
“Djibouti has abundant renewable resources for sustainable and clean energy production,” said Aboubaker Omar Hadi, Chairman of Great Horn Investment Holding (GHIH).
“Our aim is to be the first country in Africa to be 100% reliant on green energy by 2035. Investment in renewable energy infrastructure is the key to enabling our ambitions, and the inauguration of the groundbreaking Red Sea Power wind farm today is a major milestone,” Hadi added.
Blended finance played a key role in the project’s success
AFC highlighted that innovation in the RSP wind farm transaction structure itself has the potential to create systemic impacts by encouraging more investments in the region. The transaction structure substantially reduced the risk associated with the investment. EDD’s payment obligations under the power purchase agreement (PPA) were backed by a government guarantee, and in turn the government’s obligations were also backed by political risk cover provided by the World Bank’s Multilateral Investment Guarantee Agency (MIGA).
“It is testimony to the power of blended finance,” added Andrew Johnstone, CEO of Climate Fund Managers. “Groundbreaking transactions like this are immensely challenging to fund with traditional project finance as the territory is uncharted and there is no track-record, making it almost impossible for lenders and equity partners to get comfortable with the risk.”
“Blended finance combines both concessional and commercial capital, enabling investors to take a higher share of risk and providing a single source of funding from development to operations. In this case, we believe the project simply would not have been possible without a blended approach,” concluded Johnstone.