Accelerating Clean Energy Investment In Africa: Challenges And Opportunities For Sustainable Development – IEA

Energy is crucial for Africa’s long-term prosperity, enabling sustainable economic growth, improving human well-being, and supporting healthier and more productive lives. The recent energy crisis, exacerbated by the COVID-19 pandemic and global economic disruption, has significantly impacted many African countries. Modern energy services remain a pressing concern, particularly in sub-Saharan Africa, where half the population lacks electricity, and four out of five people do not have access to clean and healthy cooking methods. Rising energy prices and financial challenges faced by electricity utilities have reversed previous progress in expanding energy access. This situation underscores the urgent need for substantial investment in clean energy technologies to ensure universal access to modern energy, drive economic and social development, and eradicate persistent poverty across much of Africa.

However, achieving this investment on a large scale requires strong interventions by African governments, assistance from developed nations, international financial institutions, and development organizations. Financing Africa’s energy development is a massive undertaking with several hurdles, including the high cost of capital for investors and a lack of bankable projects. Although Africa accounts for around 20% of the world’s population, it attracts less than 3% of global energy spending, and energy investment in the continent has been declining in recent years. Mobilizing international funding, particularly concessional finance, is crucial to reversing this trend.

The report aims to provide an overview of the energy-related investments needed to meet the targets set by African countries in their nationally determined contributions (NDCs) under the Paris Agreement, their net-zero goals, the United Nations Sustainable Development Goal 7 (SDG 7) on access to affordable and clean energy, and the 2023 Nairobi Declaration on climate change. It also analyzes how clean energy projects should be financed and the supporting policies and measures required. The focus is on three key investment pillars: household access to modern energy, the electricity sector, and emerging industries, including manufacturing of clean energy technologies, hydrogen and related fuels, and critical minerals. Furthermore, the report identifies essential initiatives needed to build human and institutional skills and capabilities in Africa, which are necessary for financing clean energy projects.

This report on financing clean energy investments in Africa was requested by the Italian Presidency of the Group of Seven (G7). African development is a significant focus of Italy’s G7 agenda, exemplified by the Italy-Africa Summit held in January 2024, which was attended by high-level representatives from 46 African countries, major international organizations, international financial and development institutions, multilateral development banks, and leaders of the European Union.

Private sector spending needs to grow 2.5 times between 2022 and 2030 to meet Africa’s energy investment needs. In the Sustainable Africa Scenario, USD 190 billion of private capital is required by 2030, growing from around USD 75 billion today. Concessional capital from international sources will play a key role in mobilizing this increase, with an estimated USD 30 billion per year for clean energy projects needed to attract commercial funding over the 2023-2030 period.

Blended finance, a proven tool, can attract commercial financing up to seven times the level of concessional funding from donors. Blended finance involves donors, development finance institutions (DFIs), and philanthropies using their funds to improve the risk-return profile of projects, thereby attracting private capital. The number of deals using blended finance in Africa has grown since 2014, with the volume doubling from 2019 levels to more than USD 3 billion in 2021. Other instruments have also demonstrated their ability to improve the risk-return profile of energy investments, including green, social, sustainable, and sustainability-linked (GSSS) bonds, carbon credits and voluntary carbon markets, syndication platforms and pooled investment vehicles, and instruments to address currency risk.

Ongoing initiatives within the G7 can be reinforced with targeted technical assistance and improved coordination. G7 countries have reiterated their commitment to mobilize more energy and climate investment in Africa. Over the past 10 years, advanced economies have provided, on average, USD 2.4 billion of development assistance to Africa’s energy sector annually. Tracking shows that G7 members have programs operating in nearly every country in sub-Saharan Africa, aiming to deliver greater energy and climate-oriented investments. These include Global Gateway, Just Energy Transition Partnerships, and the Partnership for Global Infrastructure and Investment. Many of these initiatives face similar challenges, notably developing a pipeline of bankable projects and guiding them through the higher-risk development and construction phases.

To address these gaps, several effective approaches have been identified, such as capacity building with African governments and small and medium-sized enterprises (SMEs), and developing new financing vehicles that absorb early-stage development risk. Scaling these efforts will be key to unlocking more finance for Africa’s energy sector and ensuring these investments realize the full suite of economic, development, energy security, health, and climate benefits.