Asset owners have increased appetite to support Africa’s clean energy transition, but traditional investment barriers remain.
Migration to renewable energy sources has profound social and economic consequences for any country or region, perhaps nowhere more so than in Africa.
The continent has contributed less than 3% to historical carbon emissions, which is unsurprising given almost half of its 1.4 billion residents do not have access to electricity.
If its plentiful resources can be harnessed rapidly, adoption of clean energy could transform Africa’s economies, not only benefitting millions of lives, through access to cheap, renewable power, but also giving its governments the revenue needed to effect climate adaptation.
The opportunity requires political will, structural reform and financial support from public and private investors. While Group of Seven governments are announcing grand plans, asset owners in developed markets are increasingly keen to play their part in this transition.
In April, a Principles for Responsible Investment (PRI) report acknowledged that the Paris Agreement and the UN Sustainable Development Goals (SDGs) can only be achieved via collaboration between developed and emerging market stakeholders, across governments, investors, multilateral organisations and local communities.
UK pension funds with £400 billion AUM recently committed to exploring new ways of supporting the climate transition in emerging markets economies and to developing their understanding of the practical barriers to investment.
But challenges, priorities and starting points are very different across a diverse continent spanning a fifth of global landmass. And there are different roles for public and private investors as Africa looks to bring renewable energy into billions of homes and businesses.
There are, however, some overriding themes. For the most part, “it’s not about mitigation: it’s about building new generation capacity,” says Nazmeera Moola, Chief Sustainability Officer at South Africa-based asset manager Ninety One.
This explainer looks into some of the background to Africa’s current energy situation and its future adoption of renewable sources, while identifying the ways in which private sector finance can have most impact.
What’s the scale and nature of Africa’s green energy challenge?
While there are vast underlying differences across Africa’s 54 countries (see below), the continent’s adoption of renewables should be viewed at least partly through the lens of electricity access.
With around 43% of its population currently without access to electricity, and a high proportion of the rest receiving intermittent or time-limited supply, Africa’s key energy priority is to achieve SDG 7 by 2030: access to affordable, reliable, sustainable and modern energy for all.
According to a recent report on Africa by the International Energy Agency (IEA), modern and affordable energy can be brought to the whole continent by the end of the decade through annual investment of US$25 billion, connecting 90 million people a year.
The report proposes a Sustainable Africa Scenario (SAS) in which renewables – solar, wind, hydropower and geothermal – provide more than 80% of new power generation capacity added by 2030, distributed by expanded and upgraded power grids.
This represents quite a shift. Around 20% of the electricity generated in Africa was from renewable sources in 2018.
The IEA blueprint involves unprecedented levels of change, the agency admits, and requires clear government strategies and policies. SAS would achieve all Africa’s energy-related development goals “on time and in full”, as well as meeting climate change commitments. But energy investment would need to double this decade to more than US$190 billion each year from 2026 to 2030 (equivalent to 6.1% of GDP), with two‐thirds going to clean energy.
According to modelling by IEA and IRENA, the International Renewable Energy Agency, investment will need to continue to grow, totalling US$80-120 billion per year on average between 2030 and 2050.
Africa’s situation is part of a bigger picture. To enable low-carbon energy transition in developing nations, the IEA has estimated investment needs to increase from US$150 billion to US$1 trillion per annum over the next decade
Where will Africa’s new power generation capacity come from?
A big part of the challenge is ensuring the new capacity is green, not brown.
Solar PV – already the cheapest source of power in many parts of Africa – can provide much of this, but requires a rapid redirection of resources, including investment. Africa has 60% of the best solar resources globally, says the IEA, but 1% of installed solar PV capacity. Some of this will depend on China – a major partner in building coal-fired power generation in recent decades – making good on its commitment not to fund further foreign coal capacity, and directing the world’s largest solar PV sector toward this burgeoning export market.
It will also depend on Africa’s electricity grid having the capacity and flexibility to handle a wider range of inputs and connections. Collaborative initiatives are helping, but further structural reform of domestic electricity markets is necessary to attract the investment that will address and alleviate the financial distress of state-owned utilities.
The IEA scenario still envisages a role for gas. Exploitation of recently discovered resources could fuel African industrialisation, driving domestic fertiliser, steel, cement and water desalination industries, while increasing its contribution to global emissions to just 3.5% by 2030.
Countries with reserves, including Tunisia, Nigeria, Tanzania and Mozambique are expanding their natural gas generation capacity. The IEA suggests two-thirds of African gas production should be used for domestic purposes, but will need investment in storage and distribution capacity to meet rising demand.
While a number of African countries are major oil and gas exporters, they are likely to fail to recoup investment in new facilities and exploration aimed at meeting short-term needs in reaction to the current energy crisis. Governments must realise that export revenues will decline over time, says the IEA, noting that efficiencies in existing capabilities could enable Africa to meet current global demand, without new supply infrastructure.
What are the key differences across Africa, in terms of current energy supply and future challenges?
Size, population density and existing resources are all relevant factors. Despite its many burgeoning cities, much of Africa’s population remains rural, meaning its electricity grid is likely to provide around 45% of future supply, according to the IEA, with mini-grids and standalone solar-based systems needed to deliver the rest.
Beyond countries with large populations such as Egypt and Nigeria, many African states are relatively small, meaning collaborative cross-border projects are needed to attract private investment. Access rates vary wildly. While north Africa has almost universal access to electricity, most other regions provide access to around half of their collective populations. For central Africa, it’s less than a third.
Present energy sources are diverse, with South Africa very reliant on coal, north African countries established as fossil fuel exporters, and east and central Africa making use of hydropower sources. As a result, CO2 emissions are concentrated: six countries – South Africa, Egypt, Algeria, Morocco, Libya and Nigeria – were responsible for 84% of emissions from electricity generation in 2017.
Transition opportunities also vary across Africa. Low-carbon hydrogen projects are underway or under discussion in Egypt, Mauritania, Morocco, Namibia and South Africa, while South Africa, Democratic Republic of the Congo and Mozambique are already well positioned to supply cobalt, manganese and platinum, all used for batteries and hydrogen technologies.
Future demand is likely to be significant, but again varied. Forecasts suggest electricity demand will be around 1,400-1600 TWh by 2030, representing a 5-6% estimated weighted average CAGR across the present decade.
Electricity demand in west Africa alone is forecasted to grow by more than 250% by 2030. The combination of multiple input sources and higher population and urbanisation levels will increase pressure on generating capacity and grid infrastructure across the continent.
How well can Africa’s current power infrastructure handle renewables growth?
In many cases, developing renewables-based generating capacity is less of a problem than connecting it to existing infrastructure. Under-investment in infrastructure is a common theme across most of Africa’s electricity supply. “Necessary public and private investment ramp-up can only be achieved if it is built on continued sector reform and improved financial viability in the sector,” says IRENA, in its 2021 report, ‘The Renewable Energy Transition in Africa’.
To handle increased demand and a greater and diverse supply from renewables, Africa’s power networks need to improve storage and demand management capabilities, including trading, as well as improving quality of infrastructure to improve the reliability of supply.
A key problem is that Africa’s power utilities are typically cash-starved, state-owned near- or actual monopolies. Operating at a loss, they have few resources to improve infrastructure or incentive to connect new customers.
Many countries are actively exploring structural reforms to improve efficiency and attract investment. Independent firms are increasingly present, but often serving niches as sub-contractors, operating power plants or offering new services such as mini-grid operators. IRENA says models for private sector involvement need to be further developed, but warns operators to heed the “challenging history of private sector concessions in African distribution systems”.
Regional pools are being developed to share capacity and expertise, also attracting investment through scale. Each region has developed its own ‘master plans’ focused on improving electricity generation and transmission through collaboration, complementing national efforts to ensure security of supply.
Under the aegis of the Economic Community of West African States (ECOWAS), all west African governments have developed national renewable energy action plans, which include targets on access and deploying renewable energy. The African Union Commission and the African Union’s Development Agency has developed a continental power system master plan.
How can international partners support African adoption of renewables?
According to IRENA, the foundations of universal access to renewably generated electricity across Africa rest on seven ‘energy transition enablers’. These include cost-reflective tariffs and financially sustainable service providers; an environment conducive to private-sector renewables investments, structures and technologies to support energy efficiency and system flexibility; strong policy and regulatory frameworks; affordable access and innovative business models; robust grids supported by effective operations and maintenance and decommissioning of fossil fuel generation.
If this delivers the high levels of electricity access that fuel economic growth by 2030, Africa’s electricity utilities will profit financially and may then be better placed to source finance for the 2030-2050 phase.
Some of the seven elements encourage investment, others are dependent on it. The agency breaks down required international support, largely from development partners, into four key areas: promoting access to energy; de-risking and promoting private sector investments; strengthening and modernising the grid; and supporting systemic innovation.
When it comes to encouraging private investment, much of the work revolves around development of the regulatory structures that support predictable and efficient risk and revenue sharing. But it also includes use of risk mitigation tools such as guarantee schemes which can reduce off- and mini-grid electricity costs, but also address liquidity, currency and other risks arising for investors from utility-scale projects. IRENA also proposes greater use of renewable energy auctions and renewable energy feed-in tariff schemes, which provide transparent, fixed tariff conditions for prospective private developers.
How are investors currently getting involved in Africa’s energy transition?
Given the diversity described above, it’s no surprise that many already see financing opportunity across the continent and its energy sector’s supply chain, as it embarks on its green transition.
“For a lot of Africa, they’re skipping that coal baseload and going straight into renewables. Of course, that requires battery development to come along fast enough as well, but that’s the trajectory,” says Moola at Ninety One. “New generation capacity will largely be green, but the question is: how do you fund it? Right now, most of it is being funded by debt finance from development finance institutions (DFIs) at concessional rates.”
Ninety One manages the Emerging Africa Infrastructure Fund (EAIF), an infrastructure fund set up as a public-private partnership by the Private Infrastructure Development Group, with funding from European and other governments, as well as the International Finance Corporation.
According to Moola, the recent evolution of its portfolio reflects the growth in renewables investment opportunities. When Ninety One took over as manager in 2016, around half of EAIF’s US$679 million portfolio was in electricity; with slightly more than a quarter in renewables. It now has more than US$1.3 billion in assets, with just under 60% invested in power – 60% of this in renewables.
EAIF lends to infrastructure projects mainly owned, managed and operated by private sector businesses in 48 countries. This ‘on the ground’ approach is mirrored by SunFunder, a Kenya-based investment firm, with a ten-year track record of investing in off-grid solar capacity in Africa, which has started to broaden out to cover other regions.
Co-Founder and CEO Audrey Desiderato says local knowledge supports deal flow. “A clear bottleneck is the relatively limited pipeline of bankable projects, which is why it has been so important to work hand in hand with the companies and take a real partnership approach to deploying capital and clean energy capacity,” she says.
Recently acquired by Mirova, SunFunder has directed finance to nearly 60 companies in 25 emerging market countries, the majority in Africa. Desiderato suggests flexibility is also critical, on the part of investors.
“The particular characteristics of the market mean investors need to tailor the right kind of financing structures, whether financing receivables for off-grid solar systems providing energy access to households or taking pragmatic approaches for managing risk in distributed project finance,” she says.
How will countries such as South Africa handle their fossil fuel legacies?
While countries aiming to “skip” past coal can concentrate on funding new renewable capacity (and upgrading infrastructure), decommissioning coal-fired power is a big part of the story in South Africa, one of the continent’s largest and most international economies.
“Overall, fossil fuel-based generation has been via either gas or heavy fuel oil, so there’s limited need for coal-based decommissioning [in Africa as a whole]. That’s a middle-income country story, e.g. South Africa, Indonesia, Colombia and the Philippines. It’s not a DRC (Democratic Republic of Congo), Ghana, Nigeria story,” adds Moola.
South Africa’s electricity utility, Eskom, is around 90% dependent on coal, meaning decommissioning its aging coal-fired capacity is a significant challenge, beyond the financial scope of its own finances. The solution, the Just Energy Transition Partnership announced at COP26, pledges funding and expertise from western governments including the EU, France, Germany, UK and US, to help South Africa meet its updated nationally determined contribution emissions goals.
The deal commits US$8.5 billion of first-phase financing, through mechanisms including grants, concessional loans and investments and risk sharing instruments, designed to attract private-sector investors.
It is also the template for other cooperation agreements flagged in the Group of Seven’s recent communique about climate clubs. This raises the prospect of both China and the west building green energy transition into their international development activities.
South Africa’s transition to renewable electricity generation has a number of layers, with differing types of funding implications, says Moola. The funding of new infrastructure offers a significant role for the private sector, largely because the decline in the cost of renewables globally brings such projects in line with internal rate of return calculations.
But there is still need governmental / concessional funding as a major part of the effort to enable electricity grids to connect to renewables, a live challenge in South Africa as it looks to harness the Northern Cape’s solar and wind. Concessional or grant financing will also play a major role in the just transition element of South Africa’s migration, supporting the workers and the communities dependent on income from coal-fired power generation.
Decommissioning offers perhaps the biggest challenge and one that needs to be resolved by governments across the emerging markets. IRENA says that Africa’s current and historically limited contributions to global climate change means that “the cost of decommissioning these fully functional stranded assets should not fall on African governments or consumers”.
Moola adds that the likelihood of European governments using coal to support their transition away from dependence on Russian gas adds another layer to the issue. “If you want early closure of coal-fired power generation, that needs to be financed. Neither emerging nor developed market governments are going to absorb that loss. If no one’s willing to pay for it, there will be no early decommissioning of coal,” she warns.
What is the future role of public and private partnership to channel investment to Africa and other emerging markets?
It is clear that public and private financial institutions both have a key role to play. Multilateral Development Banks (MDBs) and DFIs are already heavily engaged in Africa’s green energy transition through a multiplicity of initiatives.
In a paper published last year, the UN-convened Net Zero Asset Owners Alliance argued that public and private investors needed to work together more effectively if blended finance solutions were to play a significant part in transition finance in emerging markets.
The report argued that MDBs and DFIs needed to do more to share information on default rates and other metrics to help private investors better understand the ‘on-the-ground’ situation across markets. It also suggested that private investors may need to be more flexible in their approach, which has typically relied on de-risking, including first-loss protection. Scalability is also a challenge, the report said, given many investors’ minimum investment size and maximum participation rates.
Ninety One’s Moola agrees that perceptions and practices may need to change to increase the flow of funds from the developed markets private sector to emerging market climate-related projects. “For many, the continent is scary,” she says.
“The perception of risk is quite high, due to factors such as lack of data, but also their past experience in related areas. For example, some asset owners worry about currency volatility, due to their experience in the EM equity markets, but most of the debt instruments involved here are in hard currency.”
Development-focused institutions can do more, Moola argues, to improve understanding, but admits challenges remain.
“Investors from developed markets have a high perception of risk, and so expect a really high rate of return or de-risking, e.g., a 20% first loss,” she says. “Meanwhile, many DFIs and MDBs have been operating in these jurisdictions for a long time and have pretty low default rates. I have sympathy for both sides. The question is: how do you develop the instruments that reduce the risks so that you can create the familiarity?”
While improvements can clearly be made to public-private cooperation, SunFunder’s Desiderato believes they will be integral to future investment in Africa’s transition.
“Blended finance approaches – with public and catalytic investors helping to de-risk institutional capital at the fund or project level – have been fundamental to the growth of clean energy in Africa, and we expect that to continue,” she says.
According to Colin FitzRandolph, Director of Energy Infrastructure at sustainable infrastructure investor Actis, improvement is as important as innovation to accelerate investment flows from the private sector. “While some innovation or development in existing channels will be helpful, robustness of contracts and the appropriate risk allocation will be critical,” he says.
But he acknowledges that some prevailing perceptions on risk may have to evolve. “Experienced asset managers and owners do understand the risks. In some cases, risk perceptions do need to change, particularly where contracts have appropriate risk allocation and credit enhancements where necessary,” he says.
What are the key priorities for asset owners looking to support Africa’s energy transition?
The Church of England Pensions Board is one of 12 UK pension schemes looking to increase their support of climate transition in emerging markets.
Chief Responsible Investment Officer Adam Matthews says private investors should take a broad and deep approach, when it comes to exploring investment opportunities related to Africa’s migration to renewables and away from fossil fuels, by expanding their knowledge of the differences across the continent.
“It’s about owning that whole picture; you can’t just do a bit of it,” he says. “This is about the whole transition of that fossil fuel-based energy system. It’s about understanding the complexities within the country and then working out the investments that pension funds will be able to make in line with their own risk-return requirements, and how that enables governments to achieve their objectives.”
For Matthews, a key part of pension funds’ decision process will be the signals from governments and their development partners, including NDCs and related implementation plans, with explicit financing implications.
“It’s then a matter of working through where our contribution, in terms of investment, can be made. Some of that involves an understanding of the role of public money acting as an anchor, but also the role of banks as well as the point when pension funds need to come in,” he says.