30 Aug 2022 / Report

Six Key Recommendations on Climate Finance for African Growth

 

How can climate finance expand universal access to electricity and Africa’s energy transition? Entitled “Six Key Recommendations on Climate Finance for African Growth”, the first edition of the report co-produced by the AFRICA CEO FORUM and PHILAE ADVISORY unveils a series of pragmatic recommendations. Based on a series of exclusive interviews with key decision-makers – Dr. Kevin Kariuki, Vice President, Power, Energy, Climate and Green Growth, AfDB; Linda Munyengeterwa, Director, Public-Private Partnerships & Corporate Finance Advisory, IFC; Vuyo NtoI, Deputy Managing Director, AIIM; Jonathan Hoffman, Chief Development Officer, Globeleq; Mathieu Peller, Partner, Meridiam; etc. – the report is also enriched with in-depth analysis and case studies.

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Recommandation 1 : Realistic planning and comprehensive regulation

On the continent, national plans for universal access to affordable, quality electricity are still too flimsy and unrealistic. Moreover, it is essential that national plans cover the entire value chain from generation to transmission, distribution, and off-grid. Integrated planning, which accurately and realistically identifies potential demand, should lead to an increase in Renewable Energies  (RE) share, improved reliability of supply and lower costs. Alongside rigorous planning, a fit-for-purpose regulation is essential. With almost 70% of future rural electricity generation coming from off-grid solutions, sector-specific regulation is required.

 

 

As the AfDB’s annual Electricity Regulatory Index shows, average regulatory performance is improving marginally. 33% of countries surveyed do not have methods for setting tariffs, while 40% have no simplified frameworks or authorisation procedures for smaller-sized off-grid systems.

 

Recommendations 2 & 3 :  Structure projects upstream and mitigate risks to attract private investors

Increased mobilisation of global savings is needed to meet the financing requirement for Africa’s electrification, estimated at $25 billion per year up to 2030. But only 10% of infrastructure projects in Africa make it to the financial close stage. There are several reasons for this: the absence of realistic long-term planning, incomplete feasibility studies and business plans, etc. DFIs must ramp up assistance to governments to enable the latter to invest in the upstream phase of project preparation. They must also foster growth in blended financing vehicles, for example by offering first loss guarantees. They would thus act as an investor-catalyst capable of boosting returns and mitigating risks, thereby attracting private finance.

 

The over-representation of public financing (governments, DFIs and state public services) in climate funding streams also reveals a lack of private investment in Africa – the public/private ratio is 8.5.

 

Recommendation 4 : Maximise the potential of carbon credits

Carbon credits are assets that value the avoidance, reduction and absorption of greenhouse gases, which buyers typically use to offset their own CO2 emissions. They are a key additional source of financing for the necessary investments in decarbonised growth. Global demand for carbon credits is expected to increase 15-fold between 2020 and 2030, from around 100 million to 1.5 billion tonnes of CO2eq reduced or avoided. Better integration into the international voluntary carbon markets is therefore needed. Facilitating the certification process and prefinancing carbon credits are ways of supporting project developers’ access to these markets.

 

Africa lags far behind in terms of carbon credit volume from renewable energy sources. The continent must tap into the revenue streams associated with these credits in order to increase its electricity access rate.

 

Recommendation 5:  Make gas part of the just energy transition

Gas-fired baseload power generation can compensate for intermittent RE-based power generation and thus increase its share in African power systems. Given that natural gas generates about half the carbon emissions of coal, gas should be considered as a transitional energy in Africa.

 

The continent has many gas resources that are under- or unexploited, with major gas discoveries in all regions in recent years. But financing gas production projects or electricity generation via gas- fired power plants have become increasingly difficult in Africa.

 

Recommendation 6 : Invest now in electricity storage and green hydrogen

Large-scale electricity storage solutions, powered first by battery and later by green hydrogen, can provide energy systems capable of mitigating the variability of renewable resources, thereby increasing their penetration.  Governments must accelerate the emergence of a hydrogen industry based on renewable energy sources by establishing appropriate and predictable regulatory frameworks. They should also help to overcome initial economic barriers, in financing of production and transmission infrastructure. Of key importance will be a set of policies such as facilitating granting land rights, environmental permits and approvals.

 

Bloomberg New Energy Finance predicts that low-carbon hydrogen, known as green hydrogen, could account for up to 22% of global energy consumption by 2050. The African continent has the potential to provide large-scale hydrogen production at a competitive price, thus playing a major role in the European Union’s strategy of diversifying its low-carbon energy supply.

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