Clear existing obstacles for private sector to inject funds for clean energy transition
By Edmond Kombat, IES
The shift from fossil fuels to clean renewable energy as the corner stone to the global energy transition has been at the tip of governments’ policy discussions across Africa and the world, with developed countries investing massively in renewable energy as part of efforts by their respective government’s energy security and climate action goals (ESI Africa, 2021).
Gielen D. and Boshell F. (2021), observe that while climate change mitigation remain a powerful driver behind the shift away from fossil fuel-based power generation, another factor influencing the shift is the fact that, renewable power has become the cheapest form of electricity generation and the costs continue to fall thanks to improvements in technology and economies of scale. No wonder the International Energy Agency (IEA), found that the share of renewable energy sources (including hydropower) within the global electricity generation mix has jumped to 28 percent of the power mix in 2021, up from 27 percent in 2019.
Growth in renewables, according to the U.S. Bureau of Labor Statistics (BLS), presents many direct and indirect sustainable economic benefits (with less or no negative effects on the environment) through job creation, reduced energy cost, stable energy prices, energy independence, and avoidance of climate impact et cetera. The International Renewable Energy Agency (IRENA) estimates the expected increase in human welfare from the deployment of renewables as close to 4 percent, far exceeding the 0.8 percent rate of improvement in gross domestic product (GDP). The agency suggest, savings from reduced health and environmental externalities, which are not fully reflected in conventional economic accounting systems, far offset the costs of the energy transition.
Africa missing in the Game
The World Economic Forum (WEF) estimates that by 2050, Africa will have roughly 2 billion inhabitants, and two in five of the world’s children will be born on the continent.
However, the continent which is home to the world’s youngest population, is still energy poor. According to data captured in the IEA Africa Energy Outlook 2022, some 600 million people in Sub-Saharan Africa still don’t have access to electricity, when in global terms only 768 million people lack access to electricity. Again, the data shows that today 970 million Africans lack access to clean cooking. Liquefied petroleum gas (LPG) remain the leading solution to urban population, but recent price spikes are making the commodity unaffordable for 30 million people across the continent, forcing many to revert to traditional use of biomass. This makes the need for clean energy for both consumption and production more crucial; for purposes of socio-economic and human development.
The World Bank (2018), argue that lack of access to energy represents a fundamental barrier to progress, and has impacts on a wide range of development indicators, including health, education, food security, gender equality, livelihoods, and poverty reduction. Renewable energy has therefore been found to play a critical role in closing Africa’s energy gap, which remain a massive obstacle to advancing development continent-wide. IRENA’s paper “Scaling up Renewable Energy Deployment in Africa” shows that Africa has the potential to install 310 gigawatts (GW) of clean renewable power— or half the continent’s total electricity generation capacity, to meet nearly a quarter of its energy needs by 2030.
In another paper Renewable Energy Market Analysis: Africa and its Regions, IRENA and the AfDB (Africa Development Bank) estimate the continent’s solar PV technical potential at 7,900 GW, additional hydropower potential at 1,753 GW, and wind energy at 461 GW; suggesting that the continent possesses a respectable renewable energy potential.
Ironically, a recent paper titled The Renewable Energy Transition in Africa, jointly prepared by Germany’s KfW Development Bank, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), and the International Renewable Energy Agency (IRENA), reports that most inhabitants of sub-Saharan Africa face severe energy poverty, with less than half of the population found to have access to electricity in 2018.
The paper found that in 2018, only 20 percent of the electricity generated in Africa came from renewable sources, a very low investment figure compared with the rest of the world. Further the paper notes that even though in 2019 two-thirds of all newly added energy capacity for supplying electricity worldwide was based on renewable sources, only a mere 2 percent of this new generating capacity was in Africa; confirming IRENA’s report that only 2 percent of global investments in renewable energy in the last two decades were made in Africa, with significant regional disparities.
This is a continent that has vast resource potential in wind, solar, hydro, and geothermal energy, with Central and Southern Africa holding abundant mineral resources (IRENA 2022) essential to the production of electric batteries, wind turbines, and other low-carbon technologies. Furthermore, IEA (2022) finds that Africa is home to 60 percent of the best solar resources globally, yet only 1 percent of installed solar PV capacity. Also, the continent possesses vast resources of minerals that are critical for multiple clean energy technologies. The continent accounts for over 40 percent of global reserves of cobalt, manganese and platinum; and other key minerals such as lithium, graphite, and copper; critical for batteries and hydrogen technologies.
In spite of the immense benefits of renewable energy to the continent, coupled with the resource potential of the African continent, IRENA (2022) finds that the factors that would help accelerate green energy deployment in Africa have not yet been realized, because of exiting obstacles.
In IRENA’s estimation, Africa will requires an annual investment of US$70 billion in renewable energy projects until 2030 to effectively transition from fossil fuels to clean energy. But it must not be lost on us that countries within the African continent are largely low-income economies whose capacities are not yet up to the task of funding this emerging form of energy in large-scale. Aside investment and policy related challenges, several economic, institutional, technical and socio-cultural barriers hinders countries from moving from the high to the low emission pathway (Seetharaman et al. 2019; Adeniran and Onyekwena 2020).
The African Development Bank Group asserts that the private sector is key to mobilizing green energy investment and sustainable development in Africa, and that climate change presents a US$3 trillion investment opportunity in Africa by 2030, of which 75 percent of the investment is expected to come from the private sector to complement public sector financing. However, there are few hurdles to surmount if the private sector would inject that level of funding expected of it.
The first hurdle, is the willingness of the private sector to maintain its commitments in accelerating climate related investments in particularly an emerging economy like Africa. Fruman (2016), argues that the willingness would require an enhancement of cooperation between governments and the private sector; to help build trust, close knowledge gaps, spur action, generate a sense of combined ownership of agreed-upon actions, and promote collaboration. Moreover, it is widely acknowledged that developing countries like Africa face obstacles from the policy and regulatory point. To make the Africa market accessible to the private sector investor, policy clarity, enhanced regulation, and a transparent implementation strategies that establishes Africa’s energy transition roadmap is indeed necessary. Additionally, IRENA (2022) finds that investors’ willingness to commit capital to the renewable energy sector is driven by the perceived risk/return profile of investments, combined with risk mitigation— given that the sector face multiple barriers such as front-loaded cost structure of renewable energy projects, project proponents’ often limited knowledge and experience, and the lack of reliable investment data, particularly in developing countries.
Aside private sector investors’ willingness to inject capital in climate related technologies, it is well documented that the regional power pools across the African continent are faced with insufficient investment in infrastructure and network grids designed to accommodate conventional energy sources, resulting in high electricity losses and low supply quality, among other issues (Medillina et al. 2019). Germany’s KfW Development Bank, GIZ & IRENA joint paper The Renewable Energy Transition in Africa, found inadequate grid infrastructures as another barrier to introducing and up-scaling inexpensive variable renewable energy, such as solar and wind. Improving the planning, operation and maintenance of electricity grids is of paramount importance for any form of energy transition and grid stabilization, the report noted. This according to the report, needs to be combined with significant investments in the modernization and expansion of distribution and transmission infrastructure, as well as energy storage and other technology and market solutions that improve system flexibility, reduce greenhouse gas emissions, strengthen national and regional power systems, and reduce technical and commercial losses.
Additionally, there are some African governments and industry players’ unwillingness to change as quickly as required, or introduce incentives to support clean renewables, which often slow the progress we need to see in the energy space (Okafor J. 2020). This is so because the global effort to accelerate the clean energy transition risks dwindling export revenue for Africa’s oil and gas.
McKinsey’s 2022 analysis on ‘The future of African oil and gas: Positioning for energy transition’ found that most African countries are highly exposed to the global energy transition, as their economies depend on oil and gas exports for more than 50 percent of their total export revenues.
The resentment from industry players and government in emerging economies such as Africa is that abandoning their oil and gas resources for clean renewable energy would affect badly their macroeconomic and socio-economic progress. As such Africa wants that space to exploit their fossil resources, earn revenue from exports of same, and ultimately deploy the revenue into infrastructure and services that raise living standards today, while transitioning to renewables and a lower-carbon future.
Written by Edmond Kombat, Director of Research & Finance, Institute for Energy Security (IES) ©2022. Email: email@example.com