Pathway to Sustainable economic development in Africa
Do you know that Africa accounts for nearly one-fifth of the global population and has some of the world’s highest-quality renewable resources, yet the region attracts only 3% of global energy investment? How lop-sided is that?
To be able to harness Africa’s massive renewable energy sources, Climate finance and energy investments need to be scaled up.
Recently at an event hosted by the International Energy Agency, the meeting was chaired by Michel Heijdra, Vice Minister for Climate and Energy Policy of the Netherlands. Speakers and participants in the discussions included ministers and high-level officials from Egypt, Kenya, Senegal, Belgium, European Union, Italy, Japan, Portugal, Switzerland and Sustainable Energy for All.
The discussions centered around how maximizing and accelerating investments in renewable energy and hydrogen, could stimulate and pivot sustainable development in Africa. Doing so will help the country balance industrial development with economic growth, expand access to electricity and help it meet its climate goals.
The levers
To make this happen the key levers could be:
policy certainty, innovative partnerships between suppliers and end users, infrastructure, and financing in local currency.
Financing Clean Energy in Africa, a World Energy Outlook Special Report, builds on the key findings from the Africa Energy Outlook 2022, and charts innovative investment solutions that are critical to scale up energy investment. It develops a theory of change based on the positive spillover effects of increasing the availability of affordable capital for clean energy projects. Currently, the cost of capital for energy projects in African countries is at least 2–3x higher than in advanced economies and China, which hinders investment by raising project costs.
An insightful report, the World Energy Outlook Special Report highlights a few interesting aspects:
The analysis pays close attention to how to scale up private investment, including the role of de-risking support from development finance institutions (DFIs) and donors. By 2030, USD 28 billion of concessional capital will be necessary to mobilize the required USD 90 billion in private investment in clean energy. Increasing the role of the private sector could allow DFIs and donors to scale up support to enabling environments, unproven technologies and conflict-afflicted states.
This requires a step change in investment, shifting away from fossil fuel projects designed to supply foreign countries towards clean energy projects. This requires opening up a range of new capital sources and financing approaches. However, many private investors are reluctant to enter African markets because of high perceived and actual risks.
It is disconcerting to note that more than 40% of the population in Africa live without access to electricity, and 70% without access to clean cooking fuels. The lack of clean cooking contributes to 3.7 million premature deaths annually, disproportionately affecting women and children. While USD 25 billion is only a small amount in the context of global energy spending it requires a very different type of finance. Investment is needed in small-scale projects, often in rural areas, by consumers who have very limited ability to pay.
It has been reported that affordability constraints make it less likely that projects will be commercially viable, but there is a strong case for concessional financing given their social impact. Grants therefore play a key role both to fund access programmes for the poorest households, as seen with the mini-grid programme for rural communities in Nigeria, and to provide early-stage financing for local companies, such as women-led off-grid companies.
It is noted that there is a mismatch between the type of capital available and the needs of Africa’s emerging clean energy sector, with a particular lack of early-stage and equity financing. In the Sustainable Africa Scenario, significant investment is needed across all areas of the clean energy spectrum. This requires a broad range of instruments to move projects through the development cycle.
Renewable power projects represent a major investment opportunity, accounting for 80% of capacity additions across the continent. Many projects commissioned to date have required multiple credit enhancements, including guarantees and risk sharing with development finance institutions.
Unreliable Electricity Grids
Many African state-owned utilities struggle with poor financial health and high losses. As a result, they are unable to finance the necessary expansion and modernisation of grids that the influx of renewables requires. Apart from efforts to improve the financial health of utilities, spending increase is likely to rely on grants and highly concessional capital to develop and pilot models that shift some of the financing to private players.
Energy Efficiency is a constraint
Energy efficiency needs to play a key role in Africa’s energy economy as demand expands, but it is not yet getting enough priority. Financing efficiency projects is challenging, with investment in efficiency covered by less than 15% of concessional funding instruments.
Increasing public capital is essential to raise awareness, as will the creation of consumer finance schemes such as green mortgages . Affordable low-cost debt, through instruments such as green bonds, can also prove impactful.
Private Sector’s role
The global private sector can play a significant role in mobilising finance for the development of clean energy supply chain projects.
African countries with critical minerals can take advantage of growing global demand for clean energy to drive domestic industries. Much of this critical mineral development can occur via the balance sheet of major mining companies, and increasingly depend on both the regulatory situation and the strength of environmental, social and governance (ESG) data and policies. Most low-emissions hydrogen projects will rely on public support, including creating common standards for hydrogen trade and a pool of buyers willing to underwrite supply projects with long-term commitments.
Concessional Capital as a Catalyst
Concessional capital of around USD 28 billion per year is needed to mobilise the USD 90 billion of private sector investment by 2030 in the Sustainable Africa Scenario. This is a more than tenfold increase from today and requires a significant change in how concessional finance providers operate.
Guarantees and concessional equity can come with high mobilisation ratios and add greater flexibility to the financing sources available.
With the right regulatory environment and support in reducing risk, the global investment community could be mobilised to play a larger role, including in financing existing assets.
Institutional investors can invest in brownfield projects, either via government-sponsored asset recycling programmes — as seen in The Gambia, Zimbabwe and Togo — or by providing refinancing via green or sustainable bonds, as seen in Egypt and Nigeria. Governments can develop taxonomies to help these markets grow — and use a sovereign bond programme to help develop the corporate bond market, as has been done in India and Colombia.
Role of Local finance
Local Finance removes currency risk, reduces exposure to external shocks, and can price risk more effectively due to familiarity with the local markets. It comes primarily from commercial banks and institutional investors, notably pension funds. However, most of these institutions lack the familiarity with the industry to participate or provide affordable capital. Governments can stimulate this involvement via the creation of public green finance facilities, supported by concessional funds from development finance institutions.
Summary
The current state of play demonstrates energy investment needs are achievable but challenging. Scaling up and replicating existing innovative financing solutions requires a coordinated approach from African governments, development finance institutions, donors and private capital.
Concessional finance providers may need to take on more risk, including for pre-development stages, and to increase support in fragile and low-income countries. African governments need to create the right enabling environment, ensuring stable regulation and financially reliable utilities. The private sector must nsure it accurately prices risks and works in tandem with concessional providers of blended finance instruments.
The African clean energy space represents a massive opportunity for growth, employment and innovation. All stakeholders will need to play their part to move the continent towards a sustainable energy future.
