Finance RE

Surging Covid-linked borrowing costs poses threat to Africa’s clean-energy transition

Surging Covid-linked borrowing costs pose threat to Africa’s energy transition

IEA executive director Dr Fatih Birol

24TH NOVEMBER 2020

BY: TERENCE CREAMER
CREAMER MEDIA EDITOR

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The surge in borrowing costs affecting most African countries in the wake of the economic and fiscal harm that has accompanied the Covid-19 pandemic poses a serious risk to the much-needed recovery in energy investment across the continent, which is set to collapse by 30% in 2020.

International Energy Agency (IEA) executive director Dr Fatih Birol, who together with African Union Commission (AUC) infrastructure and energy commissioner Dr Amani Abou-Zeid co-chaired the AUC-IEA Second Ministerial Forum on Tuesday, stressed that a strong investment recovery was urgently required to improve energy access across the continent, which was poised to retreat for the first time in seven years in 2020.

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The virtual event was co-hosted by South Africa’s Mineral Resources and Energy Minister Gwede Mantashe, owing to the country’s currently holding the position of African Union (AU) chair.

The number of Africans lacking access to electricity peaked at above 600-million in 2013, but fell to about 580-million in 2019, owing to investments in grid and off-grid power systems.

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In 2020, however, the trajectory turned negative again, partly owing to the sharp contraction in investment amid falling demand and pandemic-linked supply-chain disruptions.

In addition, some households with connections were no longer able to afford electricity, with the IEA estimating that up to 30-million Africans may no longer be in a position to buy power by year-end.

IEA chief energy modeller Laura Cozzi also warned that the average 25% rise in African financing costs since the onset of the pandemic could undermine the benefits associated with falling renewable-energy technology costs, as well as the resource advantages that many African countries had over other territories, particularly in the area of solar.

“The rising cost of financing has significant implications for investment in energy in Africa – it makes the cost of energy projects go up,” she cautioned.

“If we take solar, which is the area of the largest potential, this means that, over the past six months alone, the cost of electricity generated by solar has gone up by 25% because of the cost of financing. This is completely in conflict to what we are seeing in other parts of the world, where solar is becoming the cheapest source of electricity, because technology costs are falling and financing costs are going down,” Cozzi added.

The international community, including banks and donors, needed to take a careful look at the problem, “because it is just not possible that we are wiping out the technology cost advantages and the resources advantages just because of the higher cost of finance”.

The AUC’s Abou-Zeid said efforts had been intensified since the onset of the pandemic to secure debt relief for African countries, as well as to change the “inaccurate” perception that investing in infrastructure and energy on the continent represented a high-risk activity.

In addition, initiatives were under way to unlock new sources of finance, including domestic finance, by improving project preparation.

Abou-Zeid also highlighted recent innovations in small-scale solar solutions that were making it possible for individuals and households to invest in self-generation.

‘KING SOLAR’ COMING HOME?

Birol argued that solar represented a major opportunity for Africa, home to 40% of the world’s solar resource, but only 2% of global solar investment.

“Solar is the new king of electricity and Africa represents the king coming home,” he quipped.

Most of the participants, which included high level government representation from 20 African countries, including 16 Ministers, representing 75% of the continent’s energy consumption, agreed that higher levels of energy investment, particularly investments in renewable energy, would be needed if the continent was to recover rapidly from the effects of the pandemic.

Egypt’s Electricity and Renewable Energy Minister Dr Mohamed Shaker El-Markabi reported that coal had been removed entirely from the country’s energy investment plans and replaced by renewables, which would comprise 42% of its energy mix by 2035.

Egypt was also moving to pilot green hydrogen production and would revise its 2035 energy plan to include green hydrogen.

South Africa’s Mantashe, by contrast, continued to make the case for a “systematic” transition away from carbon-intensive generation technologies and defended the country’s plan to add new coal to its mix on the basis of creating space for clean-coal innovation.

High-level participants from Europe, Asia and the US all expressed their willingness to support Africa’s energy recovery, but all also linked that support directly to clean-energy and climate-resilient solutions.

UK Business and Energy Minister Kwasi Kwarteng, a central figure in preparations for the upcoming United Nations Climate Change Conference in Glasgow, Scotland, noted that the UK and the AU had recently jointly endorsed a “green recovery action plan for Africa”.

“To support this work, we in the UK, have proposed an AU-led taskforce on climate change to bring together political, financial and technical actors in order that we can build and increase momentum for climate finance solutions,” Kwarteng said.

He added that the UK was a willing and eager partner in unlocking the potential of clean energy to drive economic growth on the continent. 

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