Authors : World Economic Forum, Africa Regional Action Group & Deloitte

The World Economic Forum is the International Organization for Public-Private Cooperation. It was established in 1971 as a not-for-profit foundation and is headquartered in Geneva, Switzerland. The Forum engages the foremost political, business, cultural and other leaders of society to shape global, regional and industry agendas. It is independent, impartial and not tied to any special interests. The Forum strives in all its efforts to demonstrate entrepreneurship in the global public interest while upholding the highest standards of governance.

Auteurs: Le Forum économique mondial, le Groupe d’action régional pour l’Afrique et Deloitte

Le Forum économique mondial est l’organisation internationale pour la coopération public-privé. Il a été créé en 1971 en tant que fondation à but non lucratif et a son siège à Genève, en Suisse. Le Forum engage les principaux dirigeants politiques, commerciaux, culturels et autres de la société à façonner les programmes mondiaux, régionaux et industriels. Il est indépendant, impartial et n’est lié à aucun intérêt particulier. Le Forum s’efforce dans tous ses efforts de faire preuve d’esprit d’entreprise dans l’intérêt public mondial tout en respectant les normes de gouvernance les plus élevées.

Date of publication: September 2021

Link to the original document

Organisation’s site: World Economic Forum

Extracts from the document, pages: 3-4; 6; 9-10

Africa’s energy context

Globally, there has been a significant drive to reduce carbon emissions, specifically from energy-generating activities which, according to the Intergovernmental Panel on Climate Change, are estimated to contribute to 70% of global greenhouse gas emissions. The Kyoto Protocol mechanisms and Paris Agreement on climate change have made significant steps in providing awareness and targets and securing commitment from member countries to reduce emissions and combat climate change.

For many developed countries, effort and funding can be prioritized towards accelerated decarbonization as their financial, technical, infrastructural and institutional resources are stronger and low-risk funding is easily accessible given their advanced economies. For less developed countries, the inverse is the case. Due to stagnating economies and focus on other developmental mandates, there is limited focus on decarbonization and dealing with the impact of climate change.

Even with access limitations in most sub-Saharan African countries, there has been significant progress in others such as South Africa where universal access has been almost achieved.

Although the climatic impacts in Africa make the continent extremely vulnerable, this must be considered in the context of its developmental and economic mandate for growth; the continent aims to close the gaps within multiple development indicators. The first goal is to boost economic prosperity and growth, typically from a low GDP base relative to global averages (28 countries are classified as low-income). This is critical to increase standards of living and socio-economic stability in the region. These growth ambitions are currently hindered by a lack of universal energy access, with an estimated 54% of people living in Africa still without access to electricity.

This is largely driven by insufficient generation capacity and transmission network reach, as well as inability to afford off-grid and mini-grid alternatives. Even with access limitations in most sub-Saharan African countries, there has been significant progress in others such as South Africa where universal access has been almost achieved. On the World Economic Forum’s Energy Transition index 2021 the best- performing African nation is Ghana ranking 56th of 115 countries, with Namibia and Kenya following closely behind. This index benchmarks energy systems holistically on more than 40 indicators – measuring readiness for transition as well as current performance on sustainability, access and security and contribution to economic growth.

54% of people living in Africa still without access to electricity

As Africa continues to balance its developmental goals against the reduction of greenhouse gases, difficult trade-offs need to be made. The funding required to meet these goals is finite and allocating the capital required to bridge the substantial gaps needs prioritization. While the competing needs present a challenge on where investments should be directed, business and policy decisions to accelerate energy transition can be prioritized based on System Value, an approach which more holistically evaluates economic, environmental, social and technical outcomes of potential energy solutions within markets. Using this framework, which considers a variety of factors from cost and health benefits to jobs and CO2 emission reductions, business leaders and policy-makers can make decisions based on broader systemic value.

The energy demand in Africa is forecast to more than double by 2040 to over 1 600 TWh. As a result, preventing increased emissions in line with increasing energy consumption has become the key focus area for the path to zero emissions. The new wave of investment must be directed towards supporting African countries to leapfrog their existing technology and infrastructure towards more sustainable and digitally smarter utility platforms. This will help to secure larger investments as local and global capital flows are largely moving towards more ethical investing to realize the UN Sustainable Development Goals.

The future of the electricity landscape

The global power sector is estimated to currently contribute 30% to the total global carbon dioxide emissions. Given that, traditionally, the power utility has been the main supplier of electricity to consumers, this much-needed move to a carbon- neutral future cannot be successful without the power utility playing a central role in the transition from fossil fuel-driven power generation to a renewable energy-dominated energy mix.

The power sector transition to net zero is being driven by the 3Ds:

• Decarbonization: Moving away from fossil fuel energy sources to renewable energy
• Decentralization: While grid extensions and refurbishments remain an important driver of energy transition in markets, there is a noticeable shift from centralized power systems towards decentralized systems
• Digitalization: Leveraging digital technology to advance the transition

These drivers are redefining the power landscape by transforming the power utility from being the grid’s custodian that dominates the generation, transmission and distribution scene to being one of various critical stakeholders in an ecosystem of multiple small to medium-scale players that are involved in the generation and distribution of power. In addition, the role of the customer in the power value chain will radically change from one of only being a consumer of electricity to being a prosumer where customers will both consume and sell back surplus electricity to the grid in areas where the grid can handle such demands. Such could soon become a reality in countries such as South Africa where the threshold for embedded generation has been increased from 1MW to 100MW.

Financing

The total investment needed from the private sector in generation and transmission of electricity in all emerging markets to reach universal access by 2030 is an estimated $4.226 trillion. A recent report by the International Energy Agency (IEA) in collaboration with the World Economic Forum and the World Bank found that globally clean energy investments in emerging and developing economies need to increase from $150 billion in 2020 to over $1 trillion by 2030 to be on track for a net-zero scenario by 2050.

The same report found that the average cost of reducing carbon emissions in emerging markets and developing economies (EMDEs) is half the cost in advanced economies. But investments in clean energy are held back by costs of capital being up to seven times higher in EMDEs as well as real or perceived risks for investors. Finding ways to de-risk and unlock more investments is critical.

A recent report by the International Energy Agency (IEA) in collaboration with the World Economic Forum and the World Bank found that globally clean energy investments in emerging and developing economies need to increase from $150 billion in 2020 to over $1 trillion by 2030 to be on track for a net-zero scenario by 2050.

It is particularly more challenging for developing regions like sub-Saharan Africa to raise financing because the size of financing is too small for the underwriter and the cost of issuance is relatively high due to perceived risk for Africa. One financing instrument that promises to advance the clean energy agenda is the green bond due to its focus on green initiatives. In 2019, issued global green bonds constituted just over 3% of the total global bonds issued that year and have proven to be a feasible financial instrument.

However, it has not been able to grow rapidly. In Africa the trend has largely been driven by government and development banks, such as the African Development Bank (AfDB), the Development Bank of South Africa (DBSA) through the support of the World Bank, similarly in Nigeria via the Environment and Finance Ministry and in Kenya via the central banks.

Key considerations/options :for bigger impact with available finance

Through discussions with large developmental and commercial financiers, the World Economic Forum Regional Action Group for Africa was able to determine that sufficient funding levels, inclusive of private investment, are available to finance the future of energy in Africa. The deeper one engages on the financialization, the more apparent it becomes that several efforts need to be pursued to enable access to financing and an accelerated just transition, namely:

• Create the enabling environment for privatesector capital and operations to participate – one way of injecting massive amounts of capital and transferring much-needed skills. Areas of participation include laws, feed-in tariffs, legal protection and operating models between renewable energy independent power producers and utilities. This enabling environment will further support commercial models between interested stakeholders within government and the private and public sector. The outcomes of such support will reduce excessive bureaucracy, provide clear strategies, good governance and the right policy signals for subsidies/incentives for managing different types of customers.
• Incentivize partnerships and joint ventures to bring in technology and skills.
• Government to provide strategic support and enabling infrastructure.
• Maximize value/opportunities for local communities to benefit from this transition.
• Promote public-private partnerships as the mechanism to build infrastructure. Financiers and developers require increased collaboration during the project preparation stage to ensure bankability and fast-track project finance deals. These engagements should consider a holistic approach to support integration of the broader energy systems.
• Collaboration between multiple stakeholders such as governments, power utilities, financiers, business and civil society organizations is key in developing a detailed and practical plan for each country’s energy transition.
• More cost-reflective/innovative revenue models should be used to improve accessibility/while guarantee/minimizing payback finance risk.
• An integrated approach will be required to support large-scale industrialization in Africa. Such an approach could consist of renewable energy, affordable renewable energy storage technologies, strengthened power pools to drive effective crossborder interconnection and power trade. Development of affordable energy storage will enable renewables to serve as a baseload power solution, making it easier to limit/phase out fossil-fuelled technologies.
• Simplify/commodify financing needs such that it becomes easier to draw funds from the commercial bond markets. This focuses on aligning maturity periods and defining meaningful coupon payment similar to that of European banks.
• In line with the Paris Agreement, developed countries will need to partner with African countries to bridge the financing gap for the transition to the future of energy.
• The establishment of supporting procurement programmes that promote the sourcing of renewable projects, such as power purchase agreements, utility green procurement programmes, and energy attribute certificates can play an important role to attract investment in renewables and the overall economy.

Conclusion

To meet the financial requirements for Africa’s future energy needs, it is critical that existing finance continues to target cleaner energy solutions. If Africa is to sustainably meet its future energy needs, scaling-up awareness of financial instruments and stakeholder coordination backed by strong political buy-in is needed. More clean energy projects are required to support the rise of renewable capacity in the region as it shifts towards the decarbonization of the existing ecosystem.

The role of incentives cannot be ignored; fuel subsidies have enabled energy options to be more economically competitive and influence energy prices. While there are challenges in the way incentives are implemented and their impact to energy prices, in the interest of cleaner energy transitions and making a step change in adoption of cleaner solutions, it is valuable to consider how subsidies from non-renewable energy sources could be diverted towards increasing renewable capacity.

More clean energy projects are required to support the rise of renewable capacity in the region

Much of the enabling technical expertise required to support the greening of the grid, reduced reliance on a monopolized grid and cutting-edge, low-carbon technology disruptors are fairly known within the continent. Increasing the partnerships between educational institutions, multilateral international organizations and a fresh focus on R&D will continuously grow innovation to leverage Fourth Industrial Revolution opportunities.

Investment partners continue to serve the continent and play a critical role in the energy sector. The energy portfolio and infrastructure investments by Africa 50 showcases the success of private and public sector participation. Commercial lenders such as Absa are not left out in its support of mainstream renewable projects, and emerging development facilities as initiated by the DBSA through its recently launched €200 million green bond facility provide a clear integrated framework that supports climate neutrality.

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Source photo : Weforum.org