Computation of weighted average cost of capital (WACC) in the power sector for African countries and the implications for country-specific electricity technology cost

Prudence Dato, Michael Dioha, Hélyoth Hessou, Boris Houenou, Brian Mukhaya, Michael Adu Okyere and Lily Odarno

Applied Energy, 2025, vol. 397, issue C, No S0306261925010633

Abstract: African countries seeking transformative economic growth and a transition to a low carbon future need access to finance. The high cost of capital—attributed to perceived and real risks—has made it difficult for these countries to attract investment in projects, especially for capital-intensive electricity infrastructure. The Weighted Average Cost of Capital (WACC) is a composite of the equity and debt costs that is vital for assessing risks in investments, especially in the electricity sector. However, it remains difficult to access crucial information about the WACC for African countries. This lack of information on WACC hinders investments, strategic planning, efficient resource allocation, competitiveness, and infrastructure development on the continent. This study projects the costs of equity and debt for 48 African countries and five regional groupings between 2023 and 2070 by employing country-specific data, including GDP and population projections, equity risk premiums, sovereign default spread rates, commercial lending rates, and corporate tax rates. We find that the WACC values for African countries in the electricity sector consistently exceed global and other regional benchmarks. We also find significant disparities in regional values. Additionally, our research reveals that, on average, the cost of equity in Africa is nearly double that of debt. To unlock the full electricity potential of African countries, it is imperative to systematically address inherent risks and create an environment conducive to attracting investments.

Keywords: Weighted average cost of capital; Cost of equity; Cost of debt; Cost of capital; Energy transition (search for similar items in EconPapers)
JEL-codes: C82 F34 G12 Q40 (search for similar items in EconPapers)
Date: 2025
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Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.apenergy.2025.126333

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