Investments in Africa's energy sector have to more than double to over $200bn/yr by 2030, with nearly two-thirds going to clean energy, if the continent is to meet its energy-related development and climate goals, the IEA said today.
For this to happen, urgent action is required to lower the continent's financing costs and boost its access to capital, according to the IEA's report Financing Clean Energy in Africa launched today with the African Development Bank Group (AfDB) at the Africa Climate Summit in Nairobi, Kenya.
Even though Africa accounts for almost 20pc of the world's population and has ample resources, it receives just 2pc of global clean energy spending.
The cost of capital for utility-scale clean energy projects on the continent is at least two to three times higher than in advanced economies and China, the report said. This prevents developers from pursuing commercially viable projects that can deliver affordable energy solutions.
A range of real and perceived risks affecting projects in Africa, as well as higher borrowing costs following the Covid-19 pandemic and the Russia-Ukraine war, mean there is limited affordable capital for energy developers in Africa, it says.
Many African countries are in a debt crisis which limits public finance available, including for state-owned utilities. Private capital therefore needs to play a key role, but many private investors are reluctant to enter African markets because of perceived and actual risks.
"The African continent has huge clean energy potential, including a massive amount of high-quality renewable resources. But the difficult backdrop for financing means many transformative projects can't get off the ground," said IEA executive director Fatih Birol.
African countries pay interest rates [around] eight times the level of the richest European countries, which makes investment in renewables practically impossible, he said.
The report explores innovative ways to lower barriers to investment and allow African countries to pursue their clean energy ambitions. It is based on a review of more than 85 case studies across Africa and more than 40 interviews with key stakeholders.
A range of instruments, including early-stage financing and tools that can reduce perceived investment risks, need to be scaled up to lower the cost of capital and support the creation of investable projects, according to the study.
This will require strong engagement from both the public and private sectors, as well the support of foreign and domestic institutions, it said.
Currently, there is a particular lack of early-stage and equity financing, according to the report. "Grants and equity tend to play a larger role in the early, riskier stages, while affordable debt becomes more important once a project moves into construction or operation," it said.
Across all clean energy sectors, investors often cite a lack of investable projects, indicating there is not enough funding going into the pre-bankability stages, for example to support feasibility studies, it said.
Africa requires a very different type of finance, given the need for small-scale projects, often in rural areas and for consumers with limited ability to pay, the report points out.
Concessional capital — or funding from development finance institutions and donors — needs to increase by more than tenfold from today to around $28bn/yr to mobilise $90bn/yr of private sector investment by 2030, it says.
The study also highlights the vital role of local financial institutions over the long term. To meet energy and climate goals, finance originating from or disbursed through local channels must increase nearly threefold by 2030, it said.
The African clean energy space represents a "massive opportunity" for growth, employment and innovation, the report said.
"Renewable energy could be the African miracle but we must make it happen. We must all work together for Africa to become a renewable energy superpower," Birol said.
