Addressing Issues Around Climate Change

Authors: Lana Nwosu – Energy Advisor, Deloitte South Africa;  Harsha Desai – Senior Manager, Deloitte South Africa,  and Chido Munyati, Head of Africa Division, World Economic Forum

Much has been stated around the energy needs in Africa currently and in the future. The continent is also extremely vulnerable to climate change shocks. These turbulent effects cannot be left unchecked, yet the realities within the continent are such that, Africa must deal with climate shocks while upholding its developmental mandate and stimulating economic growth. Improving energy access now will lift Africa’s socio-economic activities, alleviate the impacts of climate change and help ensure sustainable energy security for all in the future. Africa’s sustainable path in securing its future energy needs is reliant on strong commitments and practical implementation of funding. This will improve energy access and accelerate clean energy solutions that will reduce the climatic shocks to the region.

The continent is diverse, and its energy needs across various sectors are different and complicated. Although these energy needs are varied, there are a few common themes that bind most of Africa’s developing countries together. For example, universal energy access is far from being achieved in most countries, and socio-economic outcomes are not yet mature enough to lift most Africans out of poverty.

In addition, Africa has fewer financial opportunities, thanks to the continent’s structural issues, risk profile, and political uncertainties. The impact of the ongoing COVID-19 pandemic has heightened the uncertainties around Africa’s risk profile, which has had a knock-on effect on Africa’s ability to play on the global stage. Safeguarding Africa’s future energy needs is dependent on the choices made today to set a path towards sustainable and cleaner energy solutions. Traditionally, power utility companies have been the main supplier of electricity to consumers, which means that the efforts towards a successful carbon-neutral future will be dependent on the role played by these companies in managing the transition from fossil fuels to a renewable-energy-dominated mix. African countries need to rethink and review the balance of choices that are needed to ensure that the continent successfully arrives at a carbon-neutral future.

Some of the constraints

Even though there are fewer financial opportunities in Africa, developmental and commercial financiers have established that sufficient funding levels are available to finance the future of energy in Africa. The challenges faced are as follows:

• Lack of effective collaboration to support project bankability to fast-track finance deals. This slows opportunities to improve energy access
• Ineffective planning due to lack of integrated engagement from multiple stakeholders from, government, to financiers, business, and civil society organizations
• Payback risk is extremely high. A rethink of the revenue models is necessary to ensure return-on-investment is beneficial to stakeholders
• The maturity duration of financial instruments is sometimes burdensome for African markets
• Slow implementation of developed country partnered agreements in line with the Paris Agreement
• Lack of stable procurement programmes to promote the sourcing of renewable energy projects to induce local supply from non-traditional producers

Accelerating cleaner energy solutions

The power utility as the primary supplier of electricity will enable the migration to a more carbon-neutral future and help safeguard energy security. To shape and commit to the energy transition pathways, financing provisions must be made easily available. This will support improvements in the renewable energy mix. The pace of transition in Africa needs to be affordable. It also needs to run in alignment with the continent’s developmental mandate and socio-economic focus. All participants in the energy eco-system must come together as Africa tackles its net-zero ambitions. This can be achieved through decarbonization, decentralization, and digitalization.

Decarbonization: Moving away from fossil-fuel energy sources to renewable energy will not be a one-size-fits-all solution; Africa’s strategies and goals will need to consider its unique energy security scenarios.

Decentralization: The energy transition in Africa is dependent on the state of its electricity grid. Historically, power utilities have held centre stage in managing the grid, which enables the generation, transmission, and distribution of electricity. Reaching non-grid consumers requires a scaling up of decentralized systems.

Digitalization: The continent has immense opportunities to leverage its digital skills and capabilities to enable the energy transition; the uptake of mini-grid and off-grid solutions within Africa’s rural communities continues to support improvements in energy access. But it cannot be ignored that affordability remains a heavy burden in most communities and high-cost energy services may not be attainable for many Africans.

An enabling framework to integrate financial solutions

Development finance institutions and commercial financers play a key role in supporting the electricity supply ecosystem by providing much-needed finance. Actionable interventions can still be made to accelerate and scale up the existing funding efforts. A systematic approach towards a well-integrated financial framework is one way of setting up countries for success as they accelerate their clean-energy projects and solutions.

Deloitte has carried out a high-level assessment of what such an integrated framework could look like. After engaging with several financiers and stakeholders, the company designed a Renewable Energy Investment Facility (REIF). This is an integrated framework that will facilitate the acceleration of renewable-energy financing for African countries. The REIF facility can be amplified and customised based on specific country needs.

Africa’s energy transition requires complex coordination, solutions tailored for the local energy supply context, as well as modern digital technologies that support the energy requirements of Africans and those living on the continent. These efforts will not only drive innovation but also ensure that any funds and financial facilities deployed are best suited to the unique requirements within the continent. The successful roll-out of the REIF facility will depend on the availability of policy, regulatory and governance structures to support its systematic implementation.

The way forward

The financial solutions for Africa’s future energy needs must continue to target cleaner energy solutions that are aligned with the continent’s different needs and sectors. These solutions must not only address issues around climate change but must also be implemented in a manner that uplifts the continent’s developmental mandate and socio-economic aspirations. Further insights on how Africa’s future of energy needs can be financed, can be found in Financing the Future of Energy, a white paper launched on 23 September 2021, by the World Economic Forum in collaboration with Deloitte.