Optimizing Innovative Finance in Africa’s Energy Sector

“Africa is simply tired of being in the dark” – Akinwumi Adesina, President of the African Development Bank.

Africa is energy rich. Its solar, wind, hydro, and geothermal power resources offer a remarkable opportunity to build low-carbon energy systems for all. Yet more than 640 million people, or two-thirds of the continent’s population, live without electricity.

Lack of energy and inefficiencies in the energy supply have huge costs. Power shortages reduce economic growth by 2-4% annually and badly affect key economic sectors. Between 2010 and 2015, for example, Ghana’s economy lost approximately US $24 billion due to an energy crisis.

The need to act on energy is more urgent today as populations expand and urbanization grows. The Sustainable Development Goals (SDG) bring additional impetus to act. SDG 7, which is about ensuring access to affordable, reliable, sustainable and modern energy for all by 2030, is critical to the continent’s ability to meet a wide range of needs, including powering homes and driving manufacturing activities.

How to Finance this Transformation

Innovative finance is one of the key solutions to Africa’s energy deficit, for three reasons having to do with how much African governments generate in revenues, how much they spend on extending energy access, and how the energy services are structured to be paid for through end user fees and tariffs. Domestic financing on the continent is on the rise, with finances coming from government budgets, sovereign bonds, and pension funds. However, resources mobilized from taxes and utility charges account for approximately 80% of total energy spending. In 2016, African governments allocated $6 billion to finance energy projects.

The gap between allocations and actual expenditures is often large, however. The overwhelming bulk of public spending – approximately 75% – goes to operations and maintenance rather than to investment. African governments invest just 0.5% of gross domestic product on energy, or an average of US $8 billion, annually. This is insufficient to power homes and boost businesses. Some governments, however, have ventured into sovereign debt financing to mobilize new resources for energy infrastructure: In 2014, African governments issued a total of US $14 billion in sovereign debt in which finance for energy infrastructure features prominently.

Power-sector inefficiencies, which result from underpricing electricity and under-investing in operations and maintenance, reduce African governments’ ability to finance a broad array of energy projects. Linked to political patronage and institutionalized corrupt practices, these inefficiencies cost the region US $8.2 billion annually.

Corruption and opacity in utility management remain very high and are a major challenge that needs to be addressed urgently. Illicit financial flows are another major challenge. African governments lose billions of dollars in revenues each year: Africa lost US $69 billion from illicit financial flows in 2012, which is more than the total annual financing, estimated at US $66 billion, needed to meet its energy and climate adaptation needs.

There are also enormous opportunities for change. About 138 million households living on less than US $2.50 a day spend US $10 billion annually on energy-related products, including charcoal, candles and kerosene. Access to modern energy systems would not only cut household costs, releasing resources for productive health and education investment, but also boost renewable energy businesses.

What Future for Africa’s Energy?

African leaders need to make hard choices to harness the opportunities in solar, geothermal, and wind power that are available in the region. To meet demand and achieve universal access to electricity, they need to invest more resources in these sectors, increasing the current energy investment of US $8 billion to about US $55 billion, or 3.4% of GDP.

Africa also needs to unlock private finance. Africa’s premier development financing institution, the African Development Bank, has made solving Africa’s energy challenges and unlocking its huge energy potential a number one priority in its Ten Year Strategy 2013-2022. The Bank also launched the New Deal on Energy for Africa to increase on-grid transmission and grid connections. Its goal is to create 130 million new connections by 2025, an increase of 160%. Over the last three years, the Bank has installed an average of 540 MW per year of new total power capacity, of which 41 MW is generated by new renewable power capacity. This has delivered new electricity connections to 364,800 people. These investments have brought new or improved electricity connections to 3.3 million people, of whom 1.7 million are women. Bank financing is critical for Africa’s energy transformation.

Africa must reform its fiscal regimes and administration to make way for energy investment. A more robust and just tax system is one of the most sustainable sources of financing for development, and governments need to improve their domestic resource mobilization systems.

Africa needs a dedicated energy policy that reverses the highly centralized energy systems that tend to benefit the rich at the expense of the poor. It also needs dedicated energy-sector governance and financial transparency. These will depend on strong political leadership.

By investing in renewable energy, Africa is well positioned to lead the global energy revolution, unlock the potential for skilled jobs, create economic transformation, and reduce inequality.

This article was originally published by the African Development Bank and co-authored with Kwabena B. Adom-Opare.

Stephen Yeboah is a Digital Development Communications Consultant, at the African Development Bank. He is also the co-founder of Commodity Monitor, a tech-based business that uses data analytics to generate exchange of information on sustainable production, supply and consumption of commodities in Africa. He has about eight-year experience in research and policy analysis in Africa’s extractive sector, agriculture, energy and climate. He was a Research Fellow at the Africa Progress Panel (APP), a non-profit chaired by former UN Secretary General Kofi Annan. He has published more than 100 articles, blogs and papers on energy and climate, finance, agriculture, natural resources governance and sustainable development in Africa.

Kwabena B. Adom-Opare has over the last 7 years he has been specializing on West African energy policy and transaction issues, with a particular focus on regional power pooling, renewable energy integration policy and energy finance solutions. He is currently a Technical Consultant for the World Bank-ECREEE Regional Off-Grid Electrification Project (ROGEP), a regional standalone solar program to improve access to finance and improved environment for private sector investment.