Africa’s state-run networks need a financial overhaul and cost-reflective tariffs

by MMC
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Financing and investment in Africa’s electricity grids must more than triple by 2030 to achieve the Sustainable Development Goals, including universal access.

And while global investment in clean energy has increased 40% since 2020, reaching around $1.8 trillion in 2023, almost all of the recent growth has been concentrated in advanced economies and China.

In contrast, other emerging and developing economies account for less than 15% of total investment, despite being home to 65% of the world’s population, according to a new report from the International Energy Agency (IEA). and generate around a third of global GDP. product.

“Capital flows to clean energy projects in many emerging and developing economies remain extremely weak,” the IEA said.

The vast majority of network investments in Africa today – almost 90% – are made by Public companies.

Today, 760 million people do not have access to electricity (80% of whom live in sub-Saharan Africa) and more than two billion people do not have access to clean cooking, mainly in developing countries. Asia and sub-Saharan Africa.

Providing access to these homes requires spending of around $38 billion per year – which, while small in terms of overall energy investment, reflects a five-fold increase in spending levels compared to today, the agency said. ‘OUCH.

“The spending gap is particularly acute in Africaespecially when it comes to clean cooking: around half of people without a clean kitchen are in Africa, but the region only accounts for 7% of clean cooking investments over the past five years.

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The IEA said investments are essential to improve the reliability of existing infrastructure and support the growth of renewable energy production.

“However, this requires a major change from the past, with investment in Africa’s electricity networks increasing by only 5% between 2019 and 2022.

“While strategies to reduce the cost of capital will play an important role, a comprehensive approach is needed to improve the financial health of utilities, protect vulnerable consumers while introducing market-based pricing signals and improve the regulatory environment.

Investments in networks are sorely lacking in Africa

The vast majority of network investments in Africa today – almost 90% – are made by Public companies.

“Many of these utilities are highly indebted, have low liquidity and rely on budgetary support. Only one in three electricity companies in Africa recovers its operating and debt servicing costs, including central government subsidies; excluding these subsidies, the ratio falls to one in four.

“High debt levels are often due to low recovery rates, lack of cost-reflective tariffs and expensive electrification projects. Strengthening the financial situation of these public companies would be one of the effective measures to increase spending on networks.

Measures to this effect may include the introduction of cost-reflective tariffs – currently in force or under discussion in 26 African countries – and the expansion of decentralized approaches, such as mini-grids and standalone systems, to energy access projects in rural areas. which are costly to achieve with a grid connection and often end up being loss-making for a utility due to low demand.

The private sector can also begin to play a larger role in the sector.

“Today, although 30 countries allow private participation in production, only four allow private participation in transport. Many utilities in Africa also do not have access to capital markets to raise private debt because their credit ratings are below investment grade.

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The IEA report says many emerging and developing economies are missing out on the global wave of clean energy investments because the high cost of capital for new projects deters developers and stifles opportunities in new energy economy, particularly for some of the world’s poorest countries. .

“To be on track to limit global warming to 1.5°C, clean energy investment in emerging and developing economies outside China must increase more than sixfold, from $270 billion today to $1.6 trillion by the early 2030s.”

The report says the availability of concessional finance – mainly from international development finance institutions – is also expected to triple over this period.

What is needed in the renewable energy sector

Almost half of total clean energy investment Over the next 10 years, emerging and developing economies outside China will need to focus on large-scale solar and wind projects, power grids, and spending on more energy-efficient building designs and appliances.

Some clean energy technologies, such as solar photovoltaics and onshore wind, are already cheaper than fossil fuel alternatives in many parts of the world.

However, the report highlights that the cost of capital, defined as the minimum financial return expected to justify an investment, for large-scale solar PV projects in emerging and developing economies was more than twice that of advanced economies.

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The report finds that closing the cost of capital gap between emerging and developing economies and advanced economies by 1% could reduce clean energy financing costs by $150 billion. dollars per year.

“There are huge cost-effective opportunities for emerging and developing economies to meet their growing energy needs through clean technologies, but financing must also be affordable,” said Fatih Birol, Executive Director of the IEA.

Access the International Energy Agency website Report Reduce the cost of capital.

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