The Key to Africa’s Energy Transition? Governments Need to Enable Investment

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The Key to Africa’s Energy Transition? Governments Need to Enable Investment

When it comes to energy access, specifically regarding renewables, Africa can be described as a rough diamond. Despite enough solar, wind and geothermic power to generate up to 24,000 TWh of electricity – which is approximately 90 percent of electricity produced worldwide in 2018 – the world’s fastest-growing continent saw the implementation of only 2 percent of the renewable energy solutions installed worldwide in the last ten years. This contradictory prelude lays the ground for what we could define as the ‘African Paradox.’

The African Paradox can be attributed to several factors. Namely, development and investment opportunities for local utilities being hampered by underpricing, lengthy tender-to-construction processes, and non-cost-reflective tariffs. Additionally, uncertain financial viability of utilities, inadequate de-risking instruments and weak regulatory frameworks have strongly discouraged major international private investments. However, one clear solution to the lack of investment has been made clear: Governments should establish an enabling environment for international investors. An adequate, inclusive and effective energy transition cannot be initiated without an enabling environment for scaling up investments. As a matter of fact, what is deeply needed is a new, broad ‘ecosystem’ for private investments, specifically, one that comprises the tools, measures and strategies to not only make investments more profitable, but that also prove transparent and relevant to the developmental context. Additionally, and in terms of profit for investors, a new ecosystem would need to be impactful for the local communities and daily end-users.

So, what strategies should African governments and institutions implement to attract international investors? Effective strategies such as tax exemptions for solar photovoltaic projects, well-constructed production-based supporting schemes – such as feed-in tariffs or renewables-dedicated public tenders – and the availability of discounted financing or concessional grants are proven examples of the measures that African governments could take. However, in addition to these measures, other tools complementary to an increase in market attractiveness, in which investors can be confident in their investments, are vital. This could include an environment where long-term financial commitments are possible due to financial and regulatory warranties throughout all the phases of a project, as well as the back-up of effective de-risking tools such as public-private agreements’ tariff inflation indexing or expression in hard currency.

Additionally, measures concerning transparency and reliability are essential. With the presence of a detailed national energy policy, strong regulation for independent power producer market participation and non-discriminatory grid access clauses, as well as the establishment of an independent regulatory authority with clear and defined responsibilities and independency, these goals can be achieved.

What’s more, an enabling environment can be achieved through the fragmentation of existing instruments, tools, forms and tender procedures. By reassessing standardized processes for different countries, non-exclusion clauses for specific investors’ categories and deploying the financial resources necessary for the creation of a skilled network within the local workforce – achieved through capacity building and cross-border sharing of best practices – an enabling environment can be achieved. Additionally, by calling all relevant stakeholders together to contribute to a shared consensus around recommendations for policies and reforms, and defining jointly agreed roadmaps and national and regional renewable energy source targets with carbon dioxide emissions reductions that correspond with national legislations and policies, governments can create an investment-attractive environment.

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