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A Behavioral Economics Approach

If 2017 could be summed up in a word, “uncertainty” would be a fitting one. Yet, decisions still need to be made, and businesses are looking for the most solid investment environment and vehicles to achieve returns. This explains the increasing attention given to macroeconomics, with political stability providing players a beacon of light in a long tunnel of unknowns.

With aggregate growth expected to rise to 3.2% in 2018 and 3.5% in 2019, Africa has scaled up the ranks of the preferred investment destinations. However, with over 30 million sqkm and 54 recognized states, narrowing down the focus is a necessary step to determine where to allocate resources. To do so, traditional economics manuals teach complex mathematical rules and formulas based on one basic assumption: best decisions are based on rational selfishness.
Dubbed as the “Three S” of Africa, Ghana is acclaimed for being a smiley, secure, and stable country. The new administration, led by HE Nana Akufo-Addo, has thus been relentlessly inviting foreign players to invest in the country. Opportunities are multiple, and looking at the wide array of resources, agri-business and energy undoubtedly represent the two sectors most in need of FDI with the prospect of higher returns. Solar power presents itself as a vehicle capable of linking high returns with low exposure. Ghana’s strategic geographic location around the equatorial belt offers unparalleled potential. If a 1-MW, grid-connected solar PV power plant is developed on every 4-acre piece of land, the effort could generate over 240,000MW of energy, assuming 80% of this land surface is used to harness solar power. Then what is holding financial commitment back? Unfortunately, investing in solar energy implies a preconception of a future too far in time for players to actually collect yields. Additionally, economics is often defined as the study of scarcity in a world where all resources are finite; the bounds of solar energy are only the limitations on the infrastructure used to harness it, in large part contradicting the foundation of economic theory with a limitless energy source.
But behavioral economics, as opposed to traditional, may offer a better approach to fully understand and benefit from the enormous opportunities of solar power. Proponents of this school of thought argue that decisions under uncertainty are not a result of a rigid process, but rather individuals will often rely upon heuristic and reciprocal altruism strategies. Solutions are found through exploratory means such as experimentation and willingness to temporarily forgo purely selfish motivations, with the expectation others will do the same from time to time.
The behavioral economics approach implies that analyzing data, arranging a couple of meetings, and trusting developers in a country like Ghana from far away is not enough to guarantee high returns. An investment decision in solar is a proper full-time commitment that requires constant follow-up with feet on the ground. This is especially true now that the industry is witnessing a fall in cost of capital, which brings its own wave of challenges. While investors should be more and more willing to underwrite long-term debt positions for solar, developers want a dependable way to liquidate higher-cost equity capital to reinvest it in the next project.
According to a McKinsey estimate, the global weighted average cost of utility-scale solar PV fell by 62% between 2009 and 2015 and could decline by 57% from 2015 levels by 2025. This trend asks for investors to follow behavioral economists’ dogma of experimenting, evaluating, and working together with developers to find innovative solutions. Indeed, long-term solar contracts allow this experimentation and cooperation to take place.

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