Bankability in Zambia’s Energy Sector: Bridging the Gap Between Financiers and Local IPPs and PPAs
- David Green
- Nov 20, 2025
- 9 min read
Introduction
Across the Zambezi River valley, lights flicker and businesses hum more than ever, but for over half of Zambian households, daily blackouts still happen. As electricity demand is expected to double by 2030, the stakes could not be higher. However, dozens of promising renewable projects remain stalled due to a lack of investment, highlighting a growing gap between financiers' expectations and local power producers' capabilities. Without bridging this divide, Zambia risks missing out on a transformative energy revolution just beyond its reach.
Bankability: What Does It Mean?
Bankability refers to a project's ability to secure financing on reasonable terms from commercial banks, development finance institutions (DFIs), and private investors. Fundamentally, a bankable project has strong technical assessments, a clear and commercially viable offtake arrangement (such as a signed power purchase agreement, or PPA), and legal and regulatory clarity.
This concept is the standard by which global capital allocates resources, especially in emerging economies like Zambia. Without sufficient bankability, even technically sound projects struggle to gain traction.
What Financiers Want
Lenders and investors in Zambia's energy sector seek the following qualities:
Creditworthy Offtakes: Financiers require confidence that the electricity buyer, often the national utility, can consistently meet payment obligations throughout the project's lifespan.
Strong Legal Framework: Clear, enforceable PPAs and government guarantees help shield projects from regulatory U-turns and payment risks.
Sound project economics rely on realistic assumptions in financial models: Competitive tariffs and proven technology choices to de-risk a project for financiers.
Experienced Teams: Investors seek developers and EPC partners with proven experience in delivering similar projects.
Bankable Documents: This includes due diligence on land rights, environmental and social impact assessments, and evidence of community engagement.
As one Zambian DFI executive said: "Many local projects show promise, but if they can't prove secure revenues and good governance, funding simply won't be available."
Gaps Faced by Zambian IPPs and Developers
Despite increased technical skills and numerous opportunities, Zambian IPPs continue to face obstacles on the path to bankability.
Capacity Gaps: Smaller developers might lack the legal, financial, and technical expertise needed to satisfy the strict requirements of international financiers.
Tariff Uncertainty: Recently, delays and disputes over tariff-setting have stalled projects and reduced investor confidence.
Currency and Payment Risks: The national utility, ZESCO, has struggled with dollar-denominated obligations, exposing projects to foreign exchange risk and causing payment delays.
Regulatory Bottlenecks: Complicated approval procedures and changing policies can extend project timelines by years.
For example, in 2021, the 50MW Ngonye Solar project experienced significant delays after negotiations broke down over tariff rates and land tenure issues.
Case Studies: Lessons from Successful and Stalled Projects
Examining Zambia's recent renewable energy initiatives reveals clear patterns that are forging a path toward bankability, as well as pitfalls that remain.
Scaling Solar: Delivering at Scale
Perhaps Zambia's most celebrated recent success is the Scaling Solar program, a partnership with the World Bank Group. In 2016, this competitive international tender resulted in the 54MW Bangweulu Solar Park, Africa's lowest-priced solar power at the time, and the 50MW Ngonye Solar Park. What set these projects apart was not only concessional finance but also strong risk-mitigation measures: government guarantees, standardized PPAs, and solid technical support from experienced partners. Transparent bidding, fair tariffs, and thorough international diligence attracted a mix of global and local investment, creating a model for future projects.
But these projects also revealed systemic challenges. Delays in tariff negotiations and grid connections, along with concerns about ZESCO's payment reliability, continue to require innovative solutions, prompting ongoing efforts to improve "bankability" across the sector.
Stalled Local IPPs: Lessons Learned
In contrast, smaller Zambian-led solar and mini-hydro projects, often in rural areas, have struggled to reach financial closing. In several cases, developers faced slow approval processes, shifting tariff standards, or unclear land rights. Even with promising feasibility studies, deals fell apart when off-taker credit risk couldn't be mitigated through sovereign guarantees, escrow arrangements, or political risk insurance.
In 2022, a 10MW solar developer in Southern Province spent nearly three years navigating the permitting process, burning capital, and losing investor patience due to shifting guidelines and disagreements over the tariff structure.
What Worked, and Why?
Success stories highlight three key factors: early involvement of experienced legal and financial advisors, proactive relationship-building with regulatory authorities, and complete alignment with international project development standards. Projects that stall often face capacity gaps, unclear risk allocation in the PPA, and insufficient support from local banks or DFIs.
For Zambia to achieve its energy goals, it will be essential to expand these best practices and systematically address known challenges as the next wave of projects comes online.
Bridging the Gap
There are specific steps Zambia can take to attract more investment for local IPPs.
Policy Reforms: The Ministry of Energy, in partnership with ZESCO and the regulator (ERB), should streamline project approvals and implement competitive, transparent tenders.
Capacity Building: DFIs and donor agencies can increase technical assistance and mentorship by pairing emerging Zambian developers with experienced international partners.
Innovative Financing: Local banks, supported by regional development banks, could pilot local-currency project finance instruments to reduce exchange risk for new IPPs.
If Zambia closes its bankability gap, it will not only power homes and businesses across the country but also establish itself as a regional leader in clean energy exports. Achieving this requires a coordinated effort: policymakers must create a stable investment environment; financiers should develop products suited to local conditions; and IPPs must enhance their governance and technical expertise. The time for bold, collective action is now. Zambia's energy future depends on it.
Citations for Bankability in Zambia's Energy Sector
· For a comprehensive discussion on routes to project bankability and the underlying challenges in Zambia's energy sector, see "Understanding routes to energy project bankability in Zambia" by Carew-Jones et al. (2024) (Oxford University Research Archive).
· Issues related to Power Purchase Agreements (PPAs) and their structure in Zambian renewables, including examples from the Scaling Solar program, are explored in "'Clean energy for all': the implementation of Scaling Solar in Zambia" by Stritzke (2018) (Emerald Insight).
· Tariff uncertainty, ZESCO's payment risk, and currency challenges for IPPs are documented by Batidzirai et al. in "Willingness to pay for improved electricity supply reliability in Zambia" (The International Growth Centre) and further contextualized in Carew-Jones et al. (2024) (Oxford University Research Archive).
For critical analysis of Zambian electricity sector developments and the intersection of regulatory, financial, and operational hurdles, refer to Bayliss & Pollen (2021) (World Development via ScienceDirect).
On DFI (Development Finance Institution) intervention, technical assistance, and blended finance for Zambian IPPs, see I. Solwa's "Renewable Energy IPPs in SSA–Effective use of Blended Finance" (University of Cape Town) and "Implementation of Renewable Energy Technologies in Zambia: Facilitators and Barriers" by Mhango & Mwanza (ResearchGate).
For further reading on the role of de-risking and green financialization in Zambia's renewable transition, consult Elsner et al. (2022) (Taylor & Francis).
Contact:
David Green
Founder & CEO
LUSAT Investments Limited
Ibex, Lusaka, Zambia
Phone/WA: 0766600799
Q/A:
1. What are grid code requirements, and why are they significant?
Zambia's grid code is a set of technical standards for connecting to and operating the national electricity grid, including minimum technical requirements for new connections and the reciprocal obligations of participants. They are crucial because they ensure the stability, reliability, and safety of the national power system by establishing engineering rules for all involved parties, from generators to service prov
iders. The Distribution Grid Code of 2016 further regulates the integration of power from renewable energy plants into the grid.
What are the grid code requirements?
· Technical standards: Grid codes set the minimum technical requirements that all equipment and facilities must meet to connect with the national transmission and distribution systems.
· Operating procedures: They establish the rules for running the power system, including guidelines for dispatching and managing electricity generation.
· Participant obligations: The codes define the mutual responsibilities of all participants, such as utilities and power generators, concerning the use and operation of the grid.
· Safety and reliability: They ensure that safety is maintained for personnel and the public, and that the system operates reliably and fairly.
· Specific regulations: Regulations like the Distribution Grid Code of 2016 specifically address the integration of renewable energy sources into the grid.
Why are they significant?
· System stability and safety: Grid codes are essential for maintaining grid stability and preventing blackouts by ensuring that all connected equipment and operations follow a consistent set of engineering rules.
· Facilitating renewable energy integration: Specific regulations like the Zambian Distribution Grid Code of 2016 are essential for enabling the secure and efficient integration of renewable energy sources, which is a crucial part of Zambia's energy policy.
· Ensuring fair market access: They help guarantee that all service providers operate transparently and without discrimination, offering reassurance to customers and generators in a more open electricity market.
· Attracting investment: A clear and stable regulatory framework, including grid codes, helps draw investment into the power sector, especially for renewable energy projects.
· Legal and regulatory compliance: They act as a regulatory tool, originating from the Electric Power Sector Reform Act of 2005, and ensure that industry participants follow national energy laws and policies.
2. You speak of project finance as more complex than corporate finance. Why is this necessarily the case?
Project finance is inherently more complex in Zambia than corporate finance because it depends on the future cash flows of a large, independent project, which faces higher risks than corporate finance, which relies on a company's established balance sheet. In Zambia, this complexity is increased by several factors, including high project-specific risks like construction and operational issues, significant country and currency risks (especially with the Kwacha's depreciation), a lack of specialized expertise within the government, and the need for complex, multi-party agreements and off-taker guarantees to mitigate these risks and attract investment.
Project finance complexity in Zambia
· Reliance on future cash flow: Project finance depends on the cash flow of a single project rather than on an entire company's assets. This makes it inherently riskier, especially for large infrastructure projects where cash flow has not yet been proven.
· Increased project-specific risks: Projects are exposed to risks such as construction delays, operational failures, market fluctuations, and environmental challenges. In Zambia, these risks are often heightened, especially for new, large-scale projects.
· Country and currency risk: Zambia's economic situation, such as a depreciating currency (the Kwacha), causes lenders to be hesitant about committing to long-term, local-currency loans. This risk significantly complicates project financing.
· Need for bankable off-takers: To secure financing, projects require dependable buyers of their output, such as large mining companies that can generate dollar-based revenue. This need narrows the pool of eligible projects and complicated deal structuring.
· Complex contractual structures: Project finance involves intricate, multi-party agreements to allocate risks and responsibilities between developers, lenders, and government entities. This is far more complex than the simpler balance sheet and credit-based agreements in corporate finance.
· Institutional and regulatory challenges: The government's lack of dedicated financial resources, unclear regulations for both authorities and private sector participants, and the need for high levels of technical and legal expertise in government departments add significant complexity.
· High transaction costs: The sheer complexity of project finance, even for deals under $50 million, incurs high professional fees for legal, financial, and technical advice, which can make the deals economically unviable.
Corporate finance is simpler by comparison.
· Based on existing assets and balance sheet: Corporate finance is simpler because it is backed by the company's entire asset base, existing revenues, and creditworthiness, providing a more stable foundation for borrowing.
· Lower risk profile: Loans are based on a company's established financial history rather than the future, unproven cash flows of a single project.
· Less complex agreements: They typically involve fewer parties and less complex contractual arrangements compared to project finance.
· Diversified revenue streams: Corporate finance is often supported by a company's diverse revenue streams, which reduces the impact of a single project's failure on the company's overall financial health.
3. When you speak of using SPVs, you refer to the use of financial derivatives. How are these derivatives used exactly?
SPVs use financial derivatives to assume specific risks, acting as a counterparty in transactions like credit swaps to protect the parent company. By transferring risk to the SPV, the parent can engage in complex projects or hedge financial exposure without risking its own balance sheet. For example, an SPV can enter into a swap contract with the parent, assuming the risk associated with the parent's assets.
How SPVs use financial derivatives
· Risk isolation: SPVs are formed as separate legal entities to segregate financial risk. They can assume the credit risk of derivative contracts, such as credit default swaps, which are often complex and risky. The SPV serves as a counterparty to these swaps, absorbing potential losses while the parent company remains shielded from default.
Securitization: SPVs are used to bundle and securitize assets like loans or mortgages. They then issue new securities, such as asset-backed securities, to investors, with the SPV assuming the risk of those assets. This enables the parent company to convert its illiquid assets into cash by transferring them to the SPV.
Hedging: Derivatives enable companies to hedge against financial risks such as interest rate or currency fluctuations. An SPV can be used to enter into these derivative contracts, effectively
assuming the parent company's hedging exposure and shielding its balance sheet from volatile market conditions.
Specific projects: For large or risky projects, an SP
V can be explicitly established to finance and oversee the project. This enables the parent company to avoid direct exposure to the project's risks. The SPV can utilize derivatives, such as swap contracts, as part of the project's financial structure to manage related financial liabilities.
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