Solar energy in Africa

Structure of a solar power purchase agreement



Across Africa, power projects are moving from traditional thermal to solar PV and CSP. Governments accustomed to procurement of thermal and hydro power projects are now encountering unfamiliar issues in the negotiation of solar power projects. This note, first published in June 2014, summarises the differences between a typical thermal PPA and a solar PPA as used in Africa.

Solar energy has most definitely arrived in Africa. CSP plant projects have completed in South Africa (Khi and KaXu) and Morocco (Noor I). There are solar PV projects seeking finance in Nigeria, Ghana, Senegal, Kenya, Namibia and Zambia; in Rwanda and South Africa, projects have already reached financial close.

Incentives in solar energy in Africa

The rapid growth in the solar industry in Africa is due in part to a continued trend in cost reduction of solar projects and to government initiatives in renewable energy (South Africa’s REIPP programme and Morocco’s Solar Plan). The sector is likely to reach grid parity with fossil fuel-generated power in the near future. This cost competition is critical to the continued success of the solar energy industry. 

The basic structures of financing this type of project are developing in line with the growing interest shown by investors and financiers in solar energy. Given the capital costs and intermittent nature of renewable energy, most solar power projects are financed through a long-term offtake agreement, in the same way as a thermal power project.

From an investor’s perspective, clear policy is as important as cost reductions. Investors are looking for a stable, transparent energy policy in the investment country, with clear policy drivers and appropriate government support.

It takes time to build capacity to the required levels in a fast-developing industry, but there are incentives to make this a priority for many countries in sub-Saharan Africa.

The benefits of solar energy over fossil fuel-based electricity generation

  • a reduction of greenhouse gases
  • security of supply
  • availability of energy sources
  • suitability for off-grid application
    (attractive in fast-developing economies where grid development and rural electrification may otherwise lag behind)
  • minimal operating expenses in comparison to thermal power plants
  • speed of construction
    (a 10MW PV plant can reach commercial operation within 3-6 months, depending on grid constraints and
    location; even large CSP plants could reach completion earlier than a thermal power plant).

Primary differences in the PPA for thermal and solar power projects

There is a significant amount of crossover between PPAs in a thermal power project (TPP) and solar power project (SPP), particularly for the larger-scale projects. There are also fundamental areas of difference.  The intermittent nature of most renewable electricity generation and of solar power as an energy source is the starting premise for the negotiation of a solar PPA (in contrast to a thermal power PPA).

The primary differences in the PPA for a SPP and a TPP arise for the following reasons.

Available capacity

Although there is no cost of fuel for an SPP (unlike coal or gas for a TPP), the availability of solar radiation (the ‘fuel’) is often seasonal and the irradiation levels vary at different points of time. This affects the time and quantity of generated electricity and the available capacity to dispatch to the grid.

Guaranteed output

Closely linked to available capacity is the concept of guaranteed output. In a TPP, electricity can be generated and dispatched to the grid consistently (and in line with forecasts prepared before the plant is built), allowing the TPP to act as baseload supply. An SPP can only sell the quantum of electricity generated at that point of time in the day, which will depend on the actual levels of irradiation and may not match forecasts.

Operational issues

The lack of certainty over electricity output from an SPP and the constraints of under-developed grids to manage unpredictable quantities of electricity (which could surge at certain times in the day or year), affects the operations of an SPP and consequently the terms of a solar PPA.


The time and complexity of construction, operation and maintenance of a TPP and SPP vary significantly. NB The construction and operation of CSP (concentrated solar power) projects is significantly more complex than for solar PV projects.

Differences between a thermal PPA and a solar PPA in Africa



Solar PPAs

Take of pay/capacity and dispatch

Flexible and capable of responding to dispatch instructions as power generated can be varied and controlled depending on demand.


Offtaker assumes fuel supply risk.


Generator makes available contracted capacity and generates and sells energy. Offtaker pays for dependable power capacity and electrical energy delivered in response to dispatch instructions.

Power generated on a ‘must run’ basis – i.e. output will be delivered when the renewable energy source is available.


Generator assumes energy source risk (i.e. risk arising from fluctuations in irradiation levels).


Generator delivers and Offtaker accepts and pays for all electrical output produced by the plant on a take-or-pay basis. Failure to take electricity when the plant is capable of generating results in deemed delivered energy payments.


Offtaker is responsible for all payments under the PPA.


‘Economic procurement’ – i.e. lowest cost having regard to quality of supply.


Structured as capacity and energy payments, with capacity payments covering fixed costs and return. Generally structured on a pass-through basis.


Capacity/availability charge to cover fixed cost and return, calculated according to availability of plant.


Energy charge to cover variable costs of operating, calculated according to quantity of electricity generated.

Tariff may be set or determined by economic procurement.


Grants/subsidies may be required to make tariff economically viable.


Tariff usually includes no direct pass-through and may have full or partial inflation indexation or escalation.


Some jurisdictions operate a feed-in-tariff system for renewable energy projects (e.g. South Africa, Uganda and Kenya).

Offtaker credit risk

Market practice is to include a termination payment covered by government guarantee/credit support.

Depending on the size of project, Offtaker credit risk may be supported or backed up by government guarantee/credit support.

 Fuel risk

Fuel is either tolled through the plant by the procurer or procured directly by the generator.

Generally no heat rate test post completion.

Generator takes fuel conversion risk through the calculation of fuel payment/fuel adjustment.

No fuel, so no price risk or procurement issues.

Performance testing

Failure to meet dependable capacity test requirements results in reductions in capacity payments and, in the extreme, LD payments to Offtaker.


Continued under-performance below a certain threshold may result in a termination right.

As no capacity payments, traditionally risk of poor performance assumed by Generator through reduced revenues.


Some Offtakers are now imposing performance LDs if capacity/availability/ performance ratio falls below guaranteed levels, to incentivise optimal performance.

Construction, commissioning & COD

No partial completion allowed. If contracted capacity not achieved, termination right.


LDs for delay secured by development bond.

Partial completion may be permitted with an extension of time to reach full capacity or reduction in contracted capacity to match installed capacity.


Scalability of the plant is useful for developers to commission the project in stages and generate early revenues.


Mixed approach to delay LDs, but a number of markets are moving to usual thermal norms. Recent precedent was US$3,000 per day of delay for a 10MW project.

Force majeure

Offtaker will continue to pay capacity payments (on the basis of available capacity) and energy payments for any electrical energy actually delivered during political force majeure or natural force majeure event affecting the Offtaker. The Generator takes its own natural force majeure risk.


Generator has relief from performance during force majeure.

Same approach as thermal but deemed energy payment determined by reference to forecast output or historical solar irradiation levels throughout the year – some jurisdictions require periodic updating of irradiation data.


Depending on the size of the plant, there may be no deemed payments for natural force majeure where this affects the Offtaker.


Extensive events of default including standard events such as failure to pay, material breach, delay in achieving COD, credit events of default etc. and project specific ones which vary depending on the size, location and technology deployed to construct the plant.

EoDs reflect take-or-pay obligation and remuneration on actual output generated rather than capacity.


Market practice is moving towards thermal PPAs, but it remains unusual to have termination rights relating to performance testing. There may be events of default linked to prolonged underperformance.

Termination payment

Offtaker responsible for the termination payment.

Offtaker or the government would make termination payments.

O&M arrangements

Fee: PPA often includes pass-through or indexation for variable O&M costs, through the energy payment.


Maintenance & outages: regular annual scheduled maintenance and payment allowance for longer ‘C’ inspections during term of PPA.

Fee: no O&M charge in tariff; fee may be structured in a number of different ways but against MWp/kWp is usual. Additional/ specific services may be carved out and provided at fixed rates, e.g. security.


Maintenance & outages: shorter and less frequent maintenance periods scheduled with Offtaker, subject to system/RPO parameters. Often no payment allowance in PPA as Generator bears all risks and there are no capacity payments.


Lower maintenance costs.