Foreign green energy investments brighten Africa amid challenges

Investing in Africa’s energy transition necessitates dramatic shifts; around US$2.9 trillion of cumulative capital expenditure would be required between 2022 and 2050, most of which would be dedicated to green energy sources.

Renewable energy is expected to account for 65% of installed capacity in Africa by 2035 and 95% by 2050. Solar and wind power will grow faster than hydropower, with 70% of capacity sourced from solar, 20% from wind, and 10% from hydropower by 2050.

Green hydrogen will also play a key role in the global push to net zero, especially in African countries in the north and south-west of the continent, where plenty of wind and solar resources are available. This will stimulate immense competition among African countries in supplying green hydrogen for both global and local markets. McKinsey notes that by 2050, the continent could supply its own full domestic demand potential of between 10 and 18 megatons of hydrogen, whereas hydrogen exports could amount to 40 megatons.

Now Africa requires between US$35 billion and US$50 billion in energy finance to reach the United Nations’ seventh Sustainable Development Goal: access to affordable and clean energy for all. African governments and international financiers have played a role in contributing energy investments to address these needs. However, the continent attracts less than five percent of global energy investment.

At the G7 Summit in 2022, a US$600bn lending initiative, the Partnership for Global Infrastructure and Investment (PGII), was launched to fund infrastructure projects in the developing world, with a particular focus on Africa. The aim was to address the infrastructure gap in developing countries, with a focus on sustainability and green energy.

Foreign direct investments

The African Energy Transitioning Programme was also established by the African Energy Commission (AFREC) under the banner of the Africa Union to accelerate the energy transition of member states from fossil fuels to green energy. In the same avenue, to foster inclusive economic growth, wealth creation, poverty eradication, and inequality reduction in a sustainable climate-compatible manner. Realising the policy implements of this programme among member states has attracted significant foreign direct investment steered towards green energy.

Foreign direct investments in the form of greenfield and mergers and acquisitions (M&As) towards renewable energy projects in Africa have expressed various interests with countries across the globe. Greenfield investment, whereby foreign investors build a new productive unit from scratch, and M&As, whereby foreign investors acquire existing assets. Greenfield foreign direct investment (FDI) announcements by Middle Eastern investors in Africa have boomed in recent years due to ambitious plans to produce renewable energy like green hydrogen and develop infrastructure such as ports, warehouses and data centres. But recently, western countries have made large M&A green investments, which is expected to be one of the major contributors to sub-Saharan African markets.

The private equity ecosystem in Africa is maturing but also expected to boost investment in the renewable energy sector, with several reports noting that major industry players are looking to leverage regional platforms to extend their African footprints. Funding avenues such as the Sustainable Energy Fund for Africa (SEFA), which is a multi-donor trust fund administered by the African Development Bank – anchored in a commitment of US$95 million by the governments of Denmark, the United States and Norway – to support small- and medium-scale renewable energy (RE) and energy efficiency (EE) projects in Africa.

In many African countries, smaller clean/renewable energy projects are potentially viable from a commercial perspective, but the initial development costs often prevent these projects from accessing the necessary financing.

SEFA is founded on the premise that reliable, clean and affordable energy can contribute to African economies and have a positive impact on creating employment opportunities across the continent.

Another green energy investment initiative is Power Africa, which is a US government-led programme that focuses on addressing Africa's access to electrical power and has also provided momentous support for the African energy transition. Recently, more than 170 companies have joined forces with the Power Africa fund, committing over US$40 billion in investments in African energy markets.

Finance gaps

However, energy finance gaps remain, where US$277 billion is needed annually between 2020 and 2030 for African countries to fully implement their plans under the Paris Agreement, known as nationally determined contributions, to reduce greenhouse gas emissions and adapt to climate impacts as recorded in the Climate Policy Initiative.

African governments have committed 10 percent to this amount through domestic financing, leaving about US$250 billion needed from external sources. Roughly US$35 billion of the US$277 billion is required for energy development and access. Underscoring this amount, the AfDB estimates that Africa’s annual finance gap for energy and power projects ranges from US$35 billion to US$50 billion needed to reach the seventh UN Sustainable Development Goal: access to affordable and clean energy for all.

Another challenge present is skewed green energy investments in Africa where Egypt, Mozambique, Nigeria, Angola, South Africa, Morocco, Ghana, Uganda, Kenya and Ethiopia received 77 percent of all energy finance between 2012 and 2021, leaving 23 percent of finance for Africa’s remaining forty-four countries. This impedes the effective and fair transfer of financing commitments to the majority of African countries. When financing is only directed to a small pool of countries, the countries that receive less support are unable to close their energy finance gaps, which slackens the energy transition process.

To drastically reduce the finance gaps, foreign direct investments should direct more financing to regional banks and investors such as AfDB, the African Export Import Bank and the African Finance Corporation via on-lending or equity investment that is quota-based to ensure that each member state has fair green investment financing access subject to the energy goals of the respective African country that will uphold regional renewable energy priorities.

*Quinton Amen-Ra Chinuru Adolf is a Namibian published author of two books: Social Entrepreneur and Thought Leader of Green Economy 4 Africa.