Africa’s energy challenges and themes across the continent
When looking at Africa’s energy challenges, the starting point is that the region remains severely under-electrified, particularly across most of sub-Saharan Africa. The statistics are staggering. According to the World Health Organisation, it is estimated that over 700 million people across the globe have no access to electricity and that nearly eight out of ten of those live in Africa. Looking across the region, if you exclude South Africa with its far higher level of installed (albeit regularly stressed) capacity, some one billion people living across 48 African countries have roughly the same access to installed electricity capacity as Germany’s population of just 83 million, states the International Energy Agency (IEA).
Electrification is an acute concern for the continent given that it has the fastest-growing population in the world. It will take a mammoth amount of investment to keep up with population growth, and to connect the large proportion of the population that is still unable to reliably access energy. That’s estimated to be some 568 million people in sub-Saharan Africa today, and the World Bank has said, at the current rate of progress, that number could rise to 600 million by 2030.
These figures are in stark contrast to other regions. The IEA notes that access to power in the Middle East and North Africa region stands at around 97%, in Latin America and the Caribbean it’s over 98%, and in South Asia nearly 96% – all far ahead of the 50% in parts of Africa.
Many African countries have set ambitious plans to connect the population to electricity in the coming years – and those plans need to be ambitious. Increasingly, access to energy is considered to be a human right and universal access to energy is enshrined in the UN’s Sustainable Development Goals. It’s not a want, it’s a need.
Studies continue consistently to show that improving access to power will accelerate development, speed up economic growth and help lift people out of poverty. Africa has no option but to set ambitious targets and to follow them through.
The widening spectrum
Electrification is a common theme across the region, but beyond that there is a wide spectrum in terms of access to energy, both within and between countries. Some countries have been incredibly successful in making use of international investment to add large amounts of new capacity from different generating sources to the point where some countries, like Ghana, have surplus capacity.
There has been a tremendous increase in Independent Power Producers (IPPs) entering the market, something that is growing fast now, for instance, in South Africa and some other jurisdictions. In addition, the size of renewable projects being developed is growing. Where once they rarely reached triple-digit megawatt capacity, they have now multiplied in size and often developers look to build whole complexes of solar plants rather than individual facilities, following a trend that we have seen for some time in the Middle East. However, the reality is that some countries are still struggling to add capacity and to get the IPP model off the ground. So, in effect, there are many different Africas, with different countries on different parts of the spectrum.
Key trends across Africa
There has been some slowdown in recent years thanks to the impact of the Covid-19 pandemic, and the economic fallout from supply chain disruptions and the Ukraine war. In 2021, investment in renewables across Africa accounted for just 0.6% of total global investment in solar and other clean energies, marking its lowest level for ten years, according to research by BloombergNEF.
However, things are beginning to accelerate again now, and they need to. There also has been a clear shift in mindset in recent times as the world has focused on sustainability and on tackling climate change, particularly where international investment appetite is concerned. We have really felt this in our practice as the move away from fossil fuels grows. It started with coal, but in more recent times we have noticed a real cooling where oil and gas are concerned as well.
Energy transition and decarbonisation
As the world focuses urgently on energy transition and decarbonisation, there is clearly no shortage of ambition on the part of many African governments to play a key role in global efforts to tackle climate change. Meanwhile, the debate about the role of fossil fuels in Africa’s development is as lively as it is nuanced. We need a pragmatic approach because, vital though energy transition is, it will not happen overnight.
It is evident that for now, hydrocarbons remain important to many African countries and, according to modelling by McKinsey, will continue to be a key source of revenue over the next 10-15 years. Projects already up and running are currently benefitting from the sharp rise in oil and gas prices since Russia invaded Ukraine. Yet attracting investment for new developments – even in Africa, where the economic and developmental case for it is strong – is becoming harder. While the oil majors and national governments remain eager to capitalise on recent discoveries, lenders and other financiers have seemingly closed their books to new oil and gas projects.
By contrast, investment in solar has taken off, helped by the falling cost of key components like PV panels and new, more efficient technologies. Although there is a strong and growing amount of international support for African solar projects, there is still huge capacity for much more. Another statistic puts that reality into perspective. The World Economic Forum and ESG Investor state that Africa has 60% of the world’s best solar resources, but currently accounts for 1% of installed capacity. So the potential for more is virtually unlimited.
Investment in wind is also growing, although higher costs of investment compared with solar could act as a barrier. Hydro remains an important renewable energy source across large parts of Africa and there is continued investment in it.
In all this, it is important to maintain perspective. Comparatively speaking, Climate Analytics affirms that the value of renewables investment on the continent remains a fraction of the amount being spent on fossil fuels – the latter being estimated at six to seven times greater than the former in recent years. However, as the IEA demonstrates, the trends also show that expenditure in oil and gas in Africa has declined in recent years – while spending on renewables has grown exponentially. Striking the right balance is critical and complex, not only in Africa, but the world over.
From generation to transmission and distribution
There has recently been a shift in focus from merely investing in generating capacity to also investing in transmission and distribution grids and in managing energy supplies more efficiently as Africa tries to get to grips with its electrification challenges.
In particular, countries are beginning to look at how best to leverage private capital to invest in transmission and distribution, with some governments looking at whole or part privatization of their grid systems with a focus on improving both access and reliability.
Linked to this, one of the really interesting trends is the way construction of mini-grid or other off-grid solutions has taken off in remote regions that are far away from the main electricity network, particularly in rural areas and village communities.
The World Bank calculates that the number of mini-grids across sub-Saharan Africa has risen from 500 in 2010 to more than 3,000 today, with a further 9,000 planned over the next few years. It has also said that the cost of producing electricity from solar mini-grids could fall to as low as USD0.20/kWh by 2030. That would make it the least costly solution for much of the population, easily out-competing wind and gas. Several countries are at the forefront of this trend, including Nigeria, Ethiopia, Zambia and Kenya.
Last year we saw the launch of the Africa Mini-grids Programme, covering 21 countries. Backed by the UN Development Programme, it aims to develop low-cost models and the financial credibility of mini-grids to attract extra private investment, of which some USD65bn will be required.
Financing change is a significant challenge
There are challenges in attracting private capital and international investment, but it certainly does not boil down to a lack of potential projects, rather it is a lack of bankable projects. The biggest concern centers on whether the offtakers from these projects – national utilities and public authorities – are creditworthy and will remain so over the lifetime of the project.
Historically, these offtakers have operated at a loss due to a variety of factors, including transmission and distribution-related losses and under-pricing of electricity. After the economic turmoil of recent years, public finances have been strained even further. This remains an issue even in countries that have been successful at expanding their generating capacity and energy access, because they end up selling more electricity at an even bigger loss. In our conversations with clients, we find that this remains one of the concerns, if not the principal one, for those looking to invest in African energy projects.
There is a lot that multilateral agencies can do to build capacity and resourcing to help these entities operate more efficiently and cover the cost of operations. Given the increasing role of intermittent, renewable electricity, their assistance with capacity management practices and technologies will be key to ensuring that countries make the most of what they have.
Such agencies can also help in providing credit support – effectively acting as a backer of last resort on projects should an offtaker default. By doing this, they can help investors look beyond the credit risk to provide much-needed capital. We are experiencing this more often on our transactions, with institutions like the World Bank fulfilling this role and through the work of organizations like the African Trade Insurance Agency, an Africa-focused credit risk insurance provider.
One of the biggest challenges is giving commercial banks the confidence to invest the huge amounts of capital they have at their disposal to deploy. So again, this is a key role for multilateral development banks and international financial institutions to find ways to leverage desperately needed capital from commercial banks.
The growing use of carbon credits for clean energy projects
We are starting to see the use of carbon credits materialise in the projects we advise on, including the team’s recent work with NSIA on the establishment of a joint venture with Vitol to invest in the development of a range of carbon avoidance and removal projects in Nigeria.
Since the inauguration of the Africa Carbon Markets Initiative at COP27 in Egypt last year, there has been a huge amount of interest in and commentary about the potential to unlock billions through the carbon markets – while also expanding energy access, protecting biodiversity and promoting sustainability and climate action. Carbon credits could form an important second source of revenue for clean energy projects alongside what the developers make from producing and supplying power, and, if adopted at scale, could truly transform the energy investment model for Africa.
Africa’s green hydrogen potential
Much has been made of Africa’s potential role in the green hydrogen revolution, but there are two sides to this. For Africa’s governments and its people, the absolute priority has to be providing access to reliable energy for all. Developing green hydrogen predominantly for export should not distract from this goal. Nevertheless, it should be possible to do both, because creating a green hydrogen industry can bring important benefits domestically, even if much of what is produced is exported. It will create jobs, and build important skills and know-how around renewable energy, given the vast amounts of solar or wind power needed to produce green hydrogen, and can be a valuable source of revenue for local economies as the use of oil and gas declines.
North African countries that are already very well electrified, like Morocco and Egypt, are undertaking some very ambitious hydrogen projects and the case for it in these countries is clear. However, the reality in other countries is that this will only be possible when the right level of reliable renewable capacity has been achieved and it may be a few years off for some African countries.
In addition, the race for hydrogen will be intense, with many countries around the world competing to be front-runners. We have already seen a number of Western nations launch incredibly generous subsidy schemes, with countries in the Middle East also investing heavily in first-of-a-kind projects. African countries may not be able to provide the sort of support that other governments can offer. It will come to southern Africa, but it may be more mid to long term, once the technology is more mature and the cost of production decreases.
Interestingly, Africa’s initial role in the hydrogen economy could be rooted in the supply chain, particularly, with regard to mineral resources such as cobalt, nickel and lithium, all of which are abundant in Africa and vital for key clean technologies and decarbonisation. The race for these minerals will be intense and African countries need to prepare frameworks and regimes to allow and encourage investment in their mining industries and supporting infrastructure. The balance required to manage these resources is not unknown to African nations – but it will be important to apply the lessons learnt in the past from the extraction of precious metals and other minerals, and, of course, oil and gas.
The ideal scenario for Africa’s countries endowed with these resources would be to look further along the supply chain rather than focusing on mining, including refining minerals and indeed manufacturing clean-tech components. This would allow them to capture the maximum value from their natural resources. But of course, these industrial processes would require large amounts of constant and very reliable electricity. So, in this case, as in everything else, the story comes full circle – back to how vital mass electrification is.
Africa’s energy transition – a reason for optimism
The challenges are immense, but so are the opportunities. As we have seen in other industries, it is possible to harness the unique African creativity together with global investment and expertise in order to ensure access to clean, secure and reliable energy on the continent.
Urvi Gudka is a Senior Associate in Allen & Overy’s Projects, Energy, Natural Resources and Infrastructure practice based in London. Find out more about her here.
Urvi’s article draws on the experience of our projects, energy and infrastructure team working across Africa and statistics from a range of sources including the World Bank, the International Energy Agency, Power Africa, BloombergNEF, the University of Manchester Global Development Institute, Reuters, Climate Analytics and McKinsey.
