The war in Ukraine and the effects of the Covid-19 pandemic may lead African countries to seek alternative sources of funding for their clean energy projects.
A new report by the African Development Bank (AfDB) shows that most African countries are recovering from the economic downturn caused by the pandemic.
However, tough times lie ahead due to Russia’s invasion of Ukraine earlier this year, which has seen a sharp rise in prices of basic commodities and oil.
The impact on prices, and by extension the cost of transiting to renewable energy, could have the strongest effects. Countries that have key transition projects such as natural gas, solar and wind must find funding away from the traditional sources to avoid debt or breaking the changeover to cleaner energy.
The Africa Economic Outlook 2022 report shows that half of the most affected countries by climate change globally are in Africa, citing Somalia, Kenya, Mozambique and Ethiopia that have been recently impacted by drought, desert locusts and unusual storms.
The East African region was set to transition from fossil fuels and coal to renewables such as solar, but the crises across the globe mean that funding for the projects may not come soon. In the EAC, six of the seven partners need at least $120 billion between now and 2030 to finance their nationally determined contributions, the globally agreed national efforts to tame climate change as per the Paris Agreement.
In Kenya and Uganda, that means planting more trees, installing solar plants, shutting down diesel power generators, connecting villages to the national electricity grid and as adopting cleaner forms of public transport.
“The Sustainable Development Goals have, as a key goal, energy access. Because energy access is fundamental to achieving all other goals that we have for 2030,” said Kevin Urama, AfDB’s acting chief economist, at the launch of the report in Accra, Ghana, on Wednesday.
“Financing a just energy transition then becomes important for countries fighting climate change. If we are able to do this in Africa, we will be a leader in building a new inclusive paradigm shift that is being looked at,” he said.
Under a carbon credit system, Africa should receive $4.8 trillion by 2050, or $173 billion annually. However, regional countries received a paltry external funding for these projects under climate financing.
Kenya needs $64.9 billion by 2030, Tanzania $60 billion and Rwanda $11 billion. Kigali has launched a local Green Fund that has raised $217 million, and Uganda’s climate budget has only received $94 million in the past 20 years. These countries are all energy deficient. In the region, Kenya has the highest number of people connected to the national grid at 75 percent of households. The other EAC partners, save for Uganda, are below 50 percent and have high electricity tariffs, with a kilowatt-hour costing about $0.20 in Kenya.
The region however faces a dilemma: Prof Urama said any country that will simply cut off one energy source without first installing an alternative will hurt its GDP growth.
“[Energy] transitions take time. It is not something that happens quickly. The countries that have managed it used gas as a transition fuel,” he said. “Natural gas is a central aspect of being able to decouple from coal. This is why we continue to see this call by the AfDB that gas must remain a central part of the energy mix of the continent, while not compromising the Paris Climate Agreement.”
AfDB estimates that there are at least 4.7 trillion cubic metres of natural gas in Mozambique and Tanzania. The Bank has provided some funding for the projects. The report says completion of these and other climate-related projects may need alternative sources.
Kenya and Rwanda have explored green climate funds.
The Bank suggests more instruments such as green bonds and loans, sustainability-linked bonds, and debt-for-climate swaps.
AfDB president Akinwumi Adesina said the African Development Fund (ADF), the concessional lending arm of the Bank, should use its accumulated equity of $25 billion as a key source of funding for climate-related projects.
“The Fund will provide greater leverage for donor contribution; a great value for money for taxpayers from donor countries. The Fund will be more sustainable, as it will generate more income. The Fund will reduce debt of countries, as it will deliver much lower concessional lending rates compared with the high interest rates the countries get on global capital markets,” he said.
The ADF may be taking the route of the International Development Association (IDA), the concessionary lender of the World Bank. Last year, it floated a 10-year Sustainable Development Bond that raised $2.14 billion, enabling its lending ability to almost double from $5 billion in 2020.
“With an ADF equity of $26 billion, the prospects could be an additional $8 billion to 10 billion, which could drive sustained transformation, especially for both fragile and states in transition on this continent,” said Ghanaian President Nana Akufo-Addo, one of the proponents of alternative funding. “Such is the demonstrated power of the market beckoning the ADF.”
AfDB and the African Union have been calling for the reallocation of Special Drawing Rights (SDRs) due to rich countries for lending to countries to deal with economic crises, as well as support energy projects. Allocated by the International Monetary Fund (IMF), SDRs are special units equivalent to cash reserves that countries may draw to cushion themselves in situations where alternative revenues plummet. The IMF released $650 billion in the wake of the Covid-19 pandemic. Africa was allocated just $33 billion, and the AfDB is targeting the $277 billion allocated to the G7 countries.
“We are working actively, together with the IMF, to provide practical solutions to these. We should use the SDRs in more pragmatic ways, to support countries,” said Mr Adesina. “Providing the SDRs also through the multilateral development banks has several benefits. First, the multilateral development banks can leverage the SDRs. At the African Development Bank, we can leverage the SDRs by a factor of four times.”
He said the SDRs can form part of the hybrid capital of the Bank, as equity paid through long-term loans.
“The leveraged SDRs will be used to provide additional capital and financing to the development banks in Africa. The SDRs can also be provided as concessional loans to the African Development Fund,” he added.