Financing Africa’s pathway to net zero energy systems
Written by Abraham Mudasia
Starting November 30, the world will converge in Dubai, United Arab Emirates for the 28th meeting of the Conference of the Parties, popularly known as COP28. This momentous event is happening at a decisive time for international climate action, and is anticipated to be a milestone moment as the world takes stock of its progress on the Paris Agreement. As delegates and leaders head to Dubai, data from scientists is stark clear; the world is woefully off track on climate goals and urgent action is needed. The planet is ailing, and evidence from adverse weather conditions across the world show that Mother Nature is furious.
Ahead of the COP28, the latest Emissions Gap Report from the UN Environment Programme (UNEP) finds that the world is heading for a 2.5-2.9°C temperature rise above pre-industrial levels unless countries step up action and deliver more than promised in their 2030 pledges under the Paris Agreement. The report says that the world needs to cut 2030 emissions by 28% to get on track to achieve the 2°C goal of the Paris Agreement, with a 66% chance, and 42% for the 1.5°C goal.
For two weeks, more than 7,000 delegates from across the world will sit in meeting rooms and discussion halls that are cooled by air conditioning systems that consume as much as 70% of electricity in the United Arab Emirates, causing high carbon footprints. Cooling contributes to climate change by increasing demand for electricity, much of which is still generated from fossil fuels. The electric air con systems will serve to remind the delegates of the progress that humanity has made to improve the quality of life. But that has come at a costly price, the very reason they are in Dubai to deliberate on ways to save the planet from global warming.
Temperature rising from electricity generation
When Thomas Edison invented the practical lightbulb in 1878 to mark the beginning of the modern electric utility, he didn’t know that his innovation which spurred the demand for the novel invention that developed an entire power system would one day pose a threat to life on earth. More than a century later, the world is dealing with a climate catastrophe with the generation of electricity contributing huge amounts of CO2 emissions.
In its 2022 CO2 Emissions Report, the International Energy Agency highlights that the largest absolute sectoral increase in emissions was from electricity and heat generation, which increased by 261 Mt (1.8%) to reach an all-time high of 14.6 Gt.
Crucial climate negotiations will take place in Dubai, and energy transition is expected to be in the spotlight. A recent United Nations synthesis report on the technical dialogue of the first global stocktake has described scaling up renewable energy and phasing out all unabated fossil fuels as indispensable elements of the energy transition to net zero emissions. Released ahead of the COP28, the report underscores that electrification and energy efficiency as well as energy storage are important elements in net zero energy systems.
Amid the climate crisis, the world is not lacking in clean renewable energy resources that can help combat the menace. However, the world is struggling to take full advantage of its clean renewable energy resources, particularly in developing countries. In Africa for instance, there is a spectacular range and quality of renewable energy resources that largely remain untapped due to inadequate investment.
Africa is already a victim of adverse weather conditions because of climate change. With electricity generation being one of the main sources of CO2 emissions, how Africa generates its electricity is key to enable the global community to meet critical climate goals. To leap-frog the dirty fossil fuels, Africa needs to build a cleaner electric grid that is powered by renewables. Only then can Africa dramatically cut down on CO2 emissions from electricity generation and play its role in helping the world limit global warming to 1.5 degrees Celsius.
Investing in high impact, cost-effective energy solutions
The climate crisis we face is an urgent situation that calls for high impact, cost-effective energy solutions. It is clear that countries need to step up actions to reduce emissions. Such actions must include clear pathways to clean energy generation. Minigrids have emerged as a pragmatic solution to not only close the energy access gap on the continent, but also supply cities, communities, businesses and industries with clean electricity that powers economic growth and improves livelihoods. These generation systems offer a sustainable and innovative way that ensures a lower environmental impact and a high flexibility in energy production. However, the successful implementation of minigrid projects heavily relies on securing adequate capital investment.
Across the African market, there is a huge deficit in the capital needed for clean energy projects including minigrids. This is putting the continent at a risk of being left behind in the energy transition. Investors are not only taking minimum risk on both early and late-stage projects, but are also totally absent from ticket sizes that are needed to scale. This leaves a huge funding gap that is holding back the minigrid sector from scaling. The majority of minigrid developers are challenged with accessing capital for business expansion, and they will be most successful through funding programs that effectively lead to growth and expansion.
Clean energy investments on the continent face a myriad of challenges, top amongst them being the high cost of capital which prevents developers from pursuing commercially viable projects. Financing Clean Energy in Africa, a joint report by the African Development Bank and the International Energy Agency highlights that the cost of capital for utility-scale energy projects in Africa is two to three times higher than in advanced economies due to higher perceived or actual risks that are associated with the continent. This makes lenders charge higher interest rates which act as a deterrent to scaling up investment, negatively impacting the economics of clean energy on the continent.
The perceived risk level of the minigrid sector across Africa is quite high compared to traditional utilities. On the other hand, minigrids require long-term patient capital with a pragmatic approach to the risk assessments and attendant return expectations. This creates a mismatch which has made it difficult for minigrid utility companies to attract the needed capital for their clean energy projects. In this situation, it is critical that more impact-driven financial institutions offer the concessional financing required to de-risk the market and support the mobilisation of further private capital.
Growing the local financial systems
With Africa attracting only 3% of the global energy investment, the continent must fortify its domestic financial markets and reduce heavy reliance on foreign investments. Besides, most sub-Saharan African currencies have weakened against the US dollar, contributing to the region’s rise in public debt and pushing up inflation. This is jeopardising investment in clean energy projects. To eliminate currency risks and reduce exposure to external shocks, Africa must strengthen its local financial systems.
A stronger domestic financial system for Africa is necessary for the long-term success of clean energy investments. The mobilisation of local capital into Africa’s clean energy projects is particularly important for developers deploying off-grid energy solutions.
New political commitments to accelerate the energy transition
At the COP28, African leaders must speak with one voice and build on what started in Nairobi, Kenya during the inaugural Africa Climate Summit, which was held to address the increasing exposure to climate change and its associated costs, particularly on the continent. The leaders called for a significant overhaul of the global financial system to facilitate climate action financing. Their demands included improved access to concessional loans, the establishment of a carbon markets initiative to fund renewable energy infrastructure, and the fulfilment of the 2009 promise by developed nations to mobilise USD 100 billion annually for climate adaptation and mitigation.
Recent political commitments, if honoured, are expected to speed up the energy transition for the sake of the planet. In September this year, the G20 leaders meeting in New Delhi pledged to leverage the G20’s convening power and its collective resolve to implement the 2030 Agenda and accelerate progress towards the SDGs. In particular, the leaders committed to accelerating clean, sustainable, just, affordable, and inclusive energy transitions.
In New York, world leaders adopted a political declaration at UNGA78 to accelerate action for the Sustainable Development Goals. The UN Secretary General convened a Climate Ambition Summit, which sought to accelerate action by governments, business, finance, local authorities, and civil society to support a just transition to a more equitable renewable-energy based, climate-resilient global economy.
Africa must seize the moment and chart a way forward that will ensure clean energy supply on the continent.
COP28 must prioritise financing for clean energy transition
As delegates and leaders meet at the COP28 to deliberate on ways to save our planet from heating up, the Africa Minigrid Developers Association (AMDA) reminds the world that the war against climate change will be won or lost in developing countries, where emissions are growing daily. In particular, the African clean energy space represents a massive opportunity for meeting critical climate goals for the global community, but only if it is supported by the right investment in clean energy solutions.
As the voice of the decentralised utility companies and minigrid developers across Africa, our position is that for us to achieve SDG7 aim of ensuring access to affordable, reliable, sustainable and modern energy for all by 2030, “business as usual” cannot continue. We must take drastic and strategic steps to address challenges that are holding back the sector from achieving its full potential.
AMDA is committed to working with all stakeholders to support the radical scale of minigrids to provide clean energy on the continent. Under its revamped vision of AMDA 2.0, AMDA is strategically positioned to support the radical scale and sustainability of the minigrid sector and accelerate its contribution to the achievement of SDG7 through our cardinal pillars of Capacity Building, Access to Capital, Policy, Regulatory & Regional Coordination, Research, Data and Standards.
AMDA 2.0 aims to support minigrid developers to become sustainable businesses with strong corporate governance, assess and identify the sustainable business models for minigrids in Africa and attract deeper pools of patient capital to the sector, achieve universal acceptance by governments of minigrids as the most cost-effective solution to closing the electrification gap in Africa, and serve as a thought leader by promoting data-driven decision making in the minigrid sector.
In Dubai, deliberations at the COP28 on how to help developing countries must prioritise practical and pragmatic financing arrangements for the clean energy transition in the developing world. The COP28 President Dr. Sultan Ahmed Al Jaber has made clear that his top priorities include new financing arrangements for the energy transition in the developing world. Getting to net zero is possible if investments increase rapidly to help fast-growing economies meet their power needs with clean energy solutions.
This article was originally published by ESI Africa. Read the original here.