Some 600m Africans need urgent access to electricity, and resources to finance this are scarce. This fuels the debate on whether Africa – where some countries are rich in fossil fuels such as coal, gas and oil – should focus their energy investment in renewable and sustainable energy. However, Africa is also one of the best endowed continents for renewable and clean energy and finance institutions are willing to back ambitious projects that are bankable.
Bhavtik Vallabhjee, Head of Power, Utilities and Infrastructure at Absa, shared some insights. The bank has financed more than 34 renewable energy projects equating to around 3,300 megawatts
ACMN: Please explain what is meant by “equitable and just” transition?
BV: Ultimately, the goal is to transform the current energy system from an extractive fossil fuel-based economy to a renewable regenerative economy – but to ensure this is ‘equitable and just’ means to understand that different regions and markets require different solutions to achieve this goal.
It’s simple: we cannot paint emerging markets with the same brush as their developed counterparts.
It’s clear that many nations are acutely aware of the need for a ‘just’ transition. During COP26 in November last year, key nations such as Saudi Arabia, India and China refused to sign the agreement on the basis that they cannot achieve net zero as quickly as other countries.
It is important to remember that this is a long-term process, and the transition can’t happen overnight – and this is what makes a ‘just’ transition an essential element to driving real and tangible change globally.
ACMN: Is “equitable and just” different in Africa? Power generation and distribution are limited and that impacts education, health, businesses and jobs.
BV: As energy plays a major role in economic growth and development, transitioning to renewable energies rapidly may actually hinder developing economies’ potential.
In particular, renewable energies are often at the whim of environmental conditions, it is imperative for developing countries to rely on sources of energy that consistently provide baseload power. While a developed country can manage a fall in energy production, the same can’t be said for developing economies who simply don’t have the infrastructure in place to offset this dip.
Moreover, energy storage on a large scale is still very expensive. Emerging markets are not easily able to withstand this added cost of large-scale storage for ‘dispatchability’ of power. This added storage cost will find its way into the tariffs – further stretching the already constrained finances of many EM utilities.
This isn’t to suggest that an energy transition isn’t possible or desirable. In fact, over the last decade, there’s been a huge shift in mentality as many have begun adopting the clean energy thesis. Nevertheless, the reality is that energy is the backbone to many things, including healthcare, job creation, and industrialization, so it requires a sensible, a balanced well thought-through and holistic approach.
Additionally, when weighing up whether to finance a gas plant or not, it is important to consider all factors:
- On one hand, sticking to the green energy agenda can hamper the overall prosperity of the economy by restricting or reducing energy production if renewable energy is the only preferred generation choice. Poorer countries across Africa may not have competitive alternatives to baseload power, which can inhibit economic growth.
- On the other hand, middle-income countries across Africa –such as South Africa – can afford to transition away from coal or oil as they have the necessary alternatives to do so (and perhaps ‘deeper’ pockets); this means that they are more amenable to diversifying away more rapidly from extractive fuel-based projects (such as coal).
A well-planned energy mix should be all-encompassing: it should include baseload power (coal, hydro or nuclear where feasible), incorporate gas generation (as peaking or mid-merit power) and include renewable energy (such as wind or solar) – noting well that the latter is variable and intermittent in nature without storage.
Clearly, developing countries shouldn’t be treated homogenously either. In Africa there are 54 countries, all with varying linguistic groups, rules of law, and economic development.
Tanzania, for instance, has a heavy reliance on hydropower and diesel generation; mining, a sizeable contributor to gross domestic product (GDP), is very energy-intensive and requires constant, reliable, baseload power.
With the falling cost of renewable energy technologies, some mines have elected to self-generate their own power to ensure energy self-sufficiency using hybrid technologies such as solar + storage + diesel, with less reliance on purely diesel or the utility to provide all its power needs. Hence the term: ‘just’ and, quite literally, ‘sustainable’ transition.
ACMN: What are the key constraints to reaching net zero? Is Africa ahead of or behind the global curve at times when the transition is linked to fossil fuel prices?
Africa’s energy generation mix is broken down as follows:
Bioenergy – 39%, oil – 20%, natural gas – 14%, coal – 12%, hydro – 1%, other renewables – 14%
(International Energy Agency data of 2021).
The reality is that Africa is behind in the energy transition – but is now attempting to play catch-up. However, Africa is also the smallest contributor to emissions of greenhouse gases, which is broken down per region as follows:
East Asia & Pacific – 38.5%, North America – 14.7%, EU – 7.8%, Latin America & Caribbean – 6.9%, Africa – 7%.
(World Bank, 2020)
One of the biggest constraints in getting to net-zero is the framework for bankability of these projects. From conception to financial close, the average project in Africa can take anywhere upwards of 8-9 years. Amongst the many challenges, several power utilities in Africa are not financially robust, thus requiring appropriate credit enhancement (such as Political Risk Insurance, engaging with the likes of MIGA or the World Bank, other Multilateral Agencies or even ECAs) before the transaction achieves Financial Close. This adds significant lead-time to project development.
“One of the biggest constraints in getting to net-zero is the.. bankability of these projects.”Bhavtik Vallabhjee, Absa
What’s more, energy storage is expensive. African economies don’t have deep pockets like their Western counterparts, meaning that many are deterred from embracing and adopting renewable energies such as solar PV (photovoltaic) or wind with large-scale storage, which is expensive. The same goes for electric vehicles (EV). Although the adoption of EV is becoming second nature in Europe and North America, the high costs and lack of charging stations are increasingly the friction for its rapid adoption in Africa. The average EV is at least 25%-30% more expensive than the typical combustion energy vehicle, which further pushes the sustainability agenda to the back of the queue.
However, this is a short-term problem. Bloomberg New Energy Finance forecasts that the costs of lithium-ion battery storage will fall within the next 5 years; a function of more investment into the storage sector. As ‘supply’ of the technology increases, costs will fall.
ACMN: Is this something best handled by individual markets in competition, or do you see significant benefits from regional and cross-border approaches?
BV: This is something that is best handled by individual markets. This is primarily because each country in Africa is at a different stage of its growth trajectory and development.
We’ve already witnessed a number of cross-border projects struggling to achieve success quickly. When many governments collaborate, it is often the case that there’s an added level of complexity. The lead time of projects increases when you Involve a third-party – such as the World Bank and MIGA – to ensure political and economic risk insurance.
This issue isn’t exclusive to Africa but is a common theme among developing countries – evidenced by the complex make-up of cross border projects across Asia, particularly in Thailand and Laos, which is stymieing the progress of sustainable projects.
All things considered, cross-border collaboration has undeniable benefits but, in the case of a transitioning to renewable energies, I am of the opinion that an individual approach proves better as there is less ‘red tape’ and countries can focus on their own specific domestic requirements.
ACMN: South Africa has been a leader in encouraging sustainable finance and investments. What is the “secret sauce” that South Africa applies?
BV: The South African government has spent a lot of time, energy and effort onboarding the right consultants from the financial, legal, and technical perspectives. They formulated a bankable suite of project documents to appease key parties – namely the developer community and the financing community. This addressed the most concerning issue in Africa around the bankability of renewable projects and, in turn, enabled South Africa to solicit investment from equity providers and the developer community. This was time well-spent, culminating in a large number of projects being rolled out in quickly with a ‘copy & paste’ approach on the documentation and financing model. This is really the ‘secret sauce’ that South Africa has compared to its counterparts.
“South Africa has rolled out 112 independent power producers (IPPs) and secured over $13bn in investment”Bhavtik Vallabhjee, Absa
A few other factors played their roles. Many projects in South Africa benefitted from a government guarantee which ultimately fast-tracked projects and ensured a proper risk-allocation between the various key counterparties. On top of this, South Africa’s financial system is relatively advanced, meaning that most projects have not required a political risk insurance. This is often a precursor requirement in many other African markets and, in most cases, slows projects from achieving financial close quickly.
As a result of the above factors (amongst others), it comes as no surprise that South Africa has rolled out 112 IPPs in renewable energy and secured more than ZAR 210 billion of foreign direct investment (FDI) over the past 10 years.
ACMN: What is Absa able to do to support the just transition at a regional level?
BV: Looking at the plans for the next 5 to 10 years at Absa, there’s certainly a drive towards pushing the green agenda. Over last 10 years, we’ve already had 5 successful rounds of renewable energy procurement in South Africa alone.
There’s no doubt that Absa is at the forefront on financing renewable projects – we’ve financed more than 34 projects equating to around 3,300 megawatts across wind, solar PV or concentrated solar power (CSP), with many more projects in the throes of financial closure with our team currently.
Due to our regional presence across 14 markets in Africa, we are closely entrenched into these markets. We share our expertise with governments on best practice in terms of structuring and financing what we’ve done in other markets.
More importantly, we encapsulate sustainability more widely across sectors such as real estate, mining, oil & gas, water, power, etc – where we are looking at many innovative products and solutions to support the sustainability theme.
We are a responsible corporate citizen with aggressive targets to support sustainable projects (including energy) across Africa over the next several years.
(PHOTO CREDIT Matthew Henry, Unsplash licence)