As 600 million Africans still lack access to electricity, renewable energy offers the continent a chance to address energy poverty while meeting climate goals. However…
Despite its abundant solar and wind resources, Africa captures only 3% of global renewable energy investments. This is largely due to the high capital costs associated with exorbitant borrowing rates, stemming from a negative risk perception, according to a report released on June 3 by Olivier de Souza for Ecofin Pro, the professional platform of the Ecofin agency.
Titled “Why Africa Isn’t Attracting Enough Investment in Renewable Energy,” the report notes that Africa has one of the world’s largest potentials for renewable energy. The continent enjoys high levels of sunlight.
According to the World Bank, countries like Namibia, Egypt, Botswana, Morocco, Sudan, and Niger have some of the highest solar irradiation rates globally.
Africa boasts a 59,000 GW wind potential, 90 times the current global capacity (Global Wind Energy Council).
This potential could meet the continent’s energy demand 250 times over, where 600 million people still lack electricity access. Yet, only 0.01% of this capacity is currently developed, as the continent attracts only a tiny fraction of global renewable energy investments, despite a continuously growing energy demand amid rapid population growth.
Average annual renewable energy investments in Africa have increased from less than $0.5 billion during 2000-2009 to $5 billion during 2010-2020, then to $10 billion between 2019 and 2023.
However, the continent’s annual investment needs in renewable energy are estimated at $100 billion between 2024 and 2030, according to the German institute Climate Analytics.
Internal Obstacles Hinder Green Energy Investments
The report also highlights several obstacles within African countries that hinder green energy investments. Chief among them is the unfavorable political and regulatory environment.
While African countries traditionally focus on fossil fuels for electricity generation, national policies on renewable energy are generally ineffective.
Even when political will exists, national energy companies lack technical and financial capacities and incentives, making them reluctant to develop new clean energy capacities.
Additionally, public electricity production and distribution companies suffer significant financial losses due to illegal grid connections, unpaid consumer bills, and degraded infrastructure.
African states also fail to provide incentives to encourage the adoption of new energy sources. In many countries, renewable energy technologies do not benefit from customs and tax exemptions, for example.
The lack of specific quality assurance standards for equipment and the shortage of skilled labor to install and maintain the equipment further undermine consumer confidence and deter the adoption of clean energy technologies.
The lack of precise market data also deters private investors and leads banks and other financial institutions to view green energy investments as particularly risky.
External Challenges and High Capital Costs
Moreover, renewable energy investments in Africa face external obstacles such as high capital costs resulting from exorbitant interest rates on foreign loans while the continent’s countries are already heavily indebted.
Interest rates on sovereign loans in South Africa, Kenya, Ghana, and Nigeria range between 7.75% and 29.5%. In OECD countries, the average interest rate on sovereign loans has risen from 1% in 2021 to 4% in 2023.
According to the think tank Energy For Growth Hub, unsubsidized solar energy costs up to 140% more in Ghana than in the United States, solely due to capital cost differences. This finding is corroborated by the International Energy Agency (IEA),
Investment Risks and Solutions for Renewable Energy in Africa
The International Energy Agency (IEA) identifies investment in renewable energy in Africa as particularly risky due to several factors. Unlike large-scale fossil fuel plants with extensive distribution networks, renewable energy projects are often smaller, localized, and serve consumers with limited payment capacity.
Additionally, the rapid advancements in renewable technologies create uncertainties about the long-term viability and competitiveness of projects.
However, the report suggests that solutions exist to encourage renewable energy investments on the continent.
A crucial step is establishing a favorable political framework and business environment. Governments should prioritize unlocking public funding for research and development (R&D) through tax incentives or financial support to foster innovation in renewable energy technologies.
Incentivizing Renewable Energy Deployment
Supportive policies for deploying renewable energy solutions are also essential. These policies fall into two main categories:
Price-Based Policies:
- Feed-in tariffs (FITs) and premium mechanisms incentivize investment in new production capacities by guaranteeing a purchase price, ensuring profitability and stability.
Quantity-Based Policies:
- These policies set targets for renewable energy integration and utilize auction systems or flexibility mechanisms like green certificates.
Public-Private Partnerships (PPPs)
Public-private partnerships (PPPs) are highlighted as a significant avenue to stimulate investment in the renewable energy sector. PPPs can provide substantial financial backing and foster collaboration between government and private entities, mitigating risks and unlocking capital for renewable energy projects.