Striking a balance
Africa faces a challenge: how to meet its soaring energy and infrastructure needs while reducing its carbon footprint and adapting to the severe realities of climate change. The continent contributes only 2-3% of global greenhouse gas emissions from energy and industrial sources and uses less than 6% of global energy, yet the international community demands rapid decarbonization. Africa is not blind to the urgency of the transition, as it suffers more than most regions from the devastating effects of a warming planet, with some suggesting that it is home to approximately seven of the ten countries most at risk.
As the continent continues to grapple with the huge gap between demand and supply in the energy and infrastructure sectors (which is only set to widen with continued population growth and accelerating urbanization), the long-standing challenge facing African governments looking to bridge the gap is more complex than ever with climate politics thrown into the mix. Policymakers in several African countries are having to strike a balance between utilizing and/or monetizing their abundant hydrocarbon resources and responding to the mounting pressure to embrace renewable technologies and decarbonization.
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. However, attracting investment for new developments – even in Africa, where the economic and developmental case for it is strong – is becoming much harder. While oil companies and national governments remain eager to capitalize on recent discoveries, international banks have seemingly closed their books to new oil and gas projects.
This has inevitably led to claims of environmental colonialism from some on the continent, pointing to the fact that most developing countries that decrease their poverty rates also have increased rates of per capita carbon emissions – in this context, asking African nations, where roughly one in three people still live in extreme poverty, to freeze or reduce their carbon emissions seems unjust. This injustice has been thrown into sharper contrast in the aftermath of the Ukraine war, given the reopening of coal-fired power stations in Europe and the renewed European interest in African oil and gas projects, which in some cases, had been actively discouraged by Europe and its institutions.
Nonetheless, with mounting domestic and international pressure for African nations to embrace decarbonization, and the vulnerability of many of these countries to the effects of climate change, it is clear that energy transition is, and will continue to be, a clear objective across the continent.
The role of renewables
Renewable technology is fast becoming more available, reliable and affordable across the globe. Africa holds enormous potential and opportunity across renewable resources, most notably hydropower and wind and solar power, giving rise to optimism about the potential to “leapfrog” fossil fuels and power development through green energy. Africa also has a strong track record of embracing and developing breakthrough technologies, as its leading role in the mobile communications revolution shows.
The proliferation of solar energy has been notable, helped by the falling cost of key components like PV panels and new, more efficient technologies such as (storage solutions). Although there is strong international support for solar projects, there is still capacity for much more. The International Energy Agency (IEA) states that Africa has 60% of the world’s best solar resources, but currently only accounts for 1% of installed capacity.
Renewable technology is being deployed on a utility scale, feeding into national grids, and for private as well as commercial and industrial (C&I) consumption. Smaller-scale renewable generation is also being developed in more remote areas, with investment in “mini-grids”, avoiding the need for (and associated cost of) connecting to national transmission infrastructure.
Across the continent there are many examples of the growing role of renewables:
- Some 77% of Mozambique’s power is currently produced by hydro projects and we are seeing continued investment in this technology. Although Mozambique remains highly climate challenged and susceptible to drought, making this heavy dependence on hydro potentially problematic. For that reason, there is growing interest in developing solar projects, both large-scale (including the proposed 300 MW solar PV and battery energy storage system project in the Tete Province) and relatively small off-grid solutions in rural areas to power schools, public buildings and homes.
- In Angola, we are seeing a big push to invest in renewables, with the government targeting 80% renewable power by 2025. Renewables currently account for 56% of the energy mix, with a number of big hydro projects either recently developed or under construction, boosting capacity. There is also a push to invest much more in solar under a national development plan that also includes wind, biomass and mini-hydro schemes.
- In South Africa, renewable energy and market reforms are helping to take the pressure off South Africa’s broken electricity system that is struggling to meet demand, with rolling blackouts now an uncomfortable norm.
However, 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. Furthermore, as the world seems to have reached a tipping point in clean energy spending, with the IEA having announced earlier this year that for the first time, more than half of global energy investment is now going into clean and renewable technologies. However, Africa’s share of the global green energy investment remains at only 2%, despite accounting for one fifth of the world’s population. Much more needs to be done to ensure that Africa is not left behind in the clean energy revolution.
Africa’s green hydrogen potential
The recent advances in hydrogen and green fuels technologies have also led to a significant interest in Africa’s potential to be a key player in the green hydrogen revolution, but this must be balanced with its own energy needs. Providing reliable power for all is the first and foremost priority for African governments and people. Exporting green hydrogen should not come at the expense of this goal. However, there may be a way to achieve both, by developing a green hydrogen industry that can also deliver significant domestic benefits through employment growth, transfer of renewable energy skills and expertise (which are essential for green hydrogen production) and providing a valuable alternative revenue stream as oil and gas demand falls.
Some North African countries that are already very well electrified, like Morocco and Egypt, are undertaking some ambitious hydrogen projects and the case for it in these countries is clear. But for other countries, this will only be feasible when they have enough reliable renewable capacity, which may take several years to build.
The race for hydrogen will be intense, with many countries globally competing to be front-runners. Some Western nations have launched generous subsidy schemes, with countries in the Middle East also investing heavily in first-of-a-kind mega-projects. African countries’ governments may not be able to provide the sort of support that other governments can offer. It will come to sub-Saharan Africa, but it may be more mid-to-long-term, once the technology has matured and the cost of production decreases.
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, which are abundant in Africa and vital for key clean technologies. 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, minerals, and oil and gas.
The ideal scenario for African 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 reliable electricity – highlighting how vital mass electrification of the continent is to all aspects of its development.
Ambitious targets
So far, countries accounting for 70% of global CO2 emissions have pledged to reach Net-Zero emissions by 2050. This includes 12 African countries that account for 40% of the continent’s total emissions, while nearly all African countries are signatories to the 2015 Paris Climate Accord and its overriding goal to limit global warming to 2°C above pre-industrial levels, or preferably 1.5°C.
However, the majority of African Nationally Determined Contribution (NDC) targets are conditional on receiving support from developed countries, most notably in the form of financial support but also technical assistance and transfer of technology. The total funding cost required between 2020 and 2030 to achieve Africa’s NDCs is estimated by Climate Policy Initiative to be USD2.8tn, representing more than 93% of Africa's GDP. National governments have committed to contribute approximately 10% of this cost from domestic public resources, leaving a USD2.5tn funding gap to be filled by international sources or the private sector. As this number far exceeds the funding pledges of developed economies under the Paris Accord, it will be imperative to leverage private sector investment towards climate finance.
Financing challenges
The challenge of financing Africa’s climate investment is heightened by the deterioration of the macroeconomic climate of many of its economies in recent years. Recent economic crises, including the Covid-19 pandemic and the spike in food and fuel prices following the Ukraine war have driven up the debt costs of most African governments and their public institutions. This means that the public capital available to fund the energy transition in Africa is more limited than ever.
In the meantime, the scale of private investment required on the continent continues to elude it. Despite having an abundance of resources, proven technologies and fundamentally positive project economics, private investment levels remain low. Investors are deterred by the perceived and actual risks, including lack of regulatory clarity, political risks and reputational concerns, and foreign exchange fluctuations. As a result, the cost of capital for clean energy projects in Africa is estimated by the IEA to be at least two to three times higher than advanced economies and China, which hinders investment by raising project costs.
In this respect, multilateral and development finance institutions continue to perform a vital role in helping to unlock the potential. Through a combination of capacity building (helping to build-up regulatory, technical and commercial understanding and encouraging sector reform), financial support, including direct lending to governments, public utilities and private investors and through offering partial risk guarantees and other credit enhancement structures, these institutions can address key risks and bring down the cost of, and barriers to, investment, thereby driving further private sector investment.
The growing use of carbon credits for clean energy projects
Since the inauguration of the Africa Carbon Markets Initiative at COP27, there has been significant interest in 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 transform the energy investment model for Africa.
Reason for optimism
We can be hopeful about energy transition in Africa by looking at the achievements so far and setting pragmatic goals about what can feasibly be achieved in the short, medium and long term.
Renewables will play an increasingly important role on the continent. We call it energy transition for a reason: it’s not something that will happen overnight. Renewables alone cannot meet Africa’s urgent power needs in the short term.
However, with the right support and investment, all the evidence, we believe, indicates that energy transition on the continent will inevitably accelerate, given time.
