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Renewable energy: Africa’s light at the end of the tunnel?

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The sheer scale of energy demand in Africa rather than the environmental impact of fossil fuels should be the crucial driver of energy policies on the continent.

FBN Capital Article-energy-600

Rolake-Akinkugbe FBN
By Rolake Akinkugbe,  head of energy and natural resources at FBN Capital

Energy deficient

Africa’s energy landscape is pretty perplexing. The continent’s oil producers are also amongst the largest petroleum product importers in the world. On average up to 70% of Africa’s energy consumption is imported, mostly in the form of refined products.

Despite accounting for around 9% of global oil production, energy access in Africa is limited to less than 20% of the continent’s entire population. The average access to energy for developing countries is 72%.

From an economic perspective, power outages also cost the continent a great deal in terms of GDP and economic efficiency. At least 30 countries on the continent experience daily outages, which can account for up to 3% of GDP in some of the worst-affected economies.

An African renewable-energy revolution is brewing

Now trending in African government policy circles is the theme of renewable and sustainable energy. Effectively, Africa is looking for a new ‘leapfrog’ sector.

Pretty much like its telecoms revolution, there appears to be a renewable-energy revolution brewing on the continent. But there are two key questions that needs to be asked: with the fossil fuel discoveries that Africa continues to make, is the pursuit of green energy a short-term realistic proposition; and would governments’ limited financial resources not be better focused on making the most of existing sources of conventional energy, before pursuing a green energy switch?

In Africa, renewable energy accounts for around 20% of installed capacity across the continent. Not bad, considering the position it started from, but still small relative to the abundant wind, hydro and solar energy resources the continent has.

If the truth be told, renewable-energy sources will not materialize quick enough to cope with Africa’s rising energy demand, estimated at least 3% annually over the next decade. The short-term need for power in Africa is around 74,000MW, and around $39 billion will be required annually in new investment to plug the energy gap.

Current investment in the sector is less than $5 billion annually. Countries, from Kenya to Rwanda, Ghana to South Africa, have all embarked on green energy plans, and have introduced new regulation including the much liked feed-in tariffs (FITs) that help to incentivize private-sector investment in off-grid and sustainable solutions.

But for rural communities, energy education will be crucial if household users of fossil-fuel energy sources are to be made to switch to solar power sources for heat and lighting.

Subsidies for fossil fuels distort the picture

A short-term and rapid switch to low carbon energy is also undermined to some extent by the existing subsidies that continue to distort fossil-fuel consumption in some African economies. Thus, as far as many household users of energy in rural Africa are concerned, the perception is that kerosene would be much cheaper than alternative energy sources.

With much of Africa’s power infrastructure being historically part of national grids, there is likely to be an argument to rehabilitate existing infrastructure, and eliminate transmission and distribution losses before focusing resources on green energy.

Notwithstanding, we continue to see the gradual introduction and uptake of solar technologies; certain governments, such as Kenya, have introduced regulation that will, over time, help to bring down the investment costs and, consequently, retail costs of these energy sources.

Kenya has FITs that include 20-year contracts that should provide a semblance of investment stability for investors. These renewable-energy policies are still being pursued alongside the extraction and development of hydrocarbons, though there is clearly an increasing emphasis on sustainability as far as the latter is concerned.

Support for projects that plug the energy access gap

A big challenge is access to finance for off-grid solutions. Equity investors and special funds, ring-fenced for this sub-sector, are likely to be the most ideal. Banks in many African countries, primarily due to lack of technical expertise, may be reluctant to lend into the sector. Meanwhile, some off grid solutions still do not qualify for state rebates, and can be up to 30% more expensive than grid tie-back systems.

However, Africa is clearly awash with green-energy entrepreneurs who are hardly short of tailor-made energy solutions for rural and urban communities. The key would be to identify the projects that are likely to help plug the energy-access gap and build the capacity of these SMEs and entrepreneurs to operate profitably and sustainably – and to create the right investment conditions that will attract funding domestically, or globally, for these projects.

Ultimately, governments need to create the right policy framework. It sounds like a cliché, but it can’t be overemphasized.

Finance is Africa’s biggest challenge

The Sustainable Energy Fund for Africa is a bilateral trust fund, administered by the African Development Bank, which started with a total capital of around $57 million provided by the Danish government. It’s a good model that should be built upon across the board.

Finance will be Africa’s biggest challenge, but with rapid urbanization and an exploding population, energy demand will likely double on the continent in the next decade, so the financing requirements will accelerate even faster.

One idea is to ring-fence pools of funds specifically targeting green-energy development, though these would need to align with national development priorities which may not always prioritize the green agenda.

Indeed, the debate also needs to be led in the west, since Africa’s contribution to global emissions is less than 3% of the global total. In fact, lobbyists for a switch to low carbon energy in Africa should be aware it is the sheer scale of energy demand in Africa itself, rather than the environmental impact or emissions debate, that should be a crucial driver of national policies on the continent.

For now, there has to be a short-term, long-term trade-off. The hydrocarbons that Africa has should be used in a much more sustainable manner, in relation to the environment or in relation to the extent of local value and jobs created from resource extraction. Revenues and the ripple effect of sustainable resource use can then provide a future platform for Africa’s transition to a green economy.

However, there’s a need to broaden the definition of ‘green’ in ‘green economy’. It should really be as much as about inclusiveness and development, rather than just the end goal of achieving low carbon growth.

There are at least 600 million Africans who need affordable, cheap and reliable power. Low carbon energy alone won’t be the panacea for the energy-access problem, but it will be one of the best future options Africa has.

TwitterRolake Akinkugbe is head of energy and natural resources at FBN Capital, Lagos, Nigeria.
You can follow her on twitter @rolakeakinkugbe

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