War, High Tariffs and Nationalisation – their Cost to Africa’s Climate
- Africa’s political instability, its armed conflicts and regulatory issues are placing at risk investment needed to tackle climate change and reduce greenhouse gas (GHG) emissions on the continent.
“A renewable energy developer or investor faces increased risk that their returns and earnings could decline as a result of political change, such as terrorism, expropriation (dispossession of property for public use), and sovereign breach of contract,” Dereje Senshaw, the principal specialist at Global Green Growth Institute (GGGI), told IPS. He added that credit, market and technological risks were also obstacles towards reducing GHG emissions.
According to International Monetary Fund and Organisation for Economic Co-operation and Development papers, green investment refers to the investment necessary to reduce GHG and air pollutant emissions without significantly reducing the production and consumption of non-energy goods. It covers both public and private investment.
Senshaw’s explanations come against the backdrop of several armed conflicts that are tearing the resource-rich continent apart. Millions of people have been uprooted from their homes and the instability has dealt a blow to development projects and poverty-eradication programmes.
This month, the Norwegian Refugee Council listed the world’s 10-most neglected crises. Six were from Africa. In the Central African Republic, conflict began in 2013 after a coup. The country held elections three years later but peace has been elusive. The Democratic Republic of Congo is listed as having the world’s second-most neglected crisis as the central African nation has experienced almost two decades of conflict. Sudan, South Sudan, Nigeria and Somalia are also on the list.
Tariffs too high
Apart from political risks, green investments could also be compromised by regulatory issues or tariffs, Senshaw said.
“Some African countries set tariffs at very high rates, making it very unattractive to investors as they may not have the chance to recover their incurred costs in the future,” he explained.
Another major risk is the delay of utility contracts. Circumstances could change during the lifetime of a project in many sub-Saharan Africa countries and even essential services, like the provision of electricity, may stop. In addition, risk arises when regulatory agencies start to interfere with the operations of private companies.
“Similarly, there is the risk of the nationalisation of utilities and policy changes. In addition there are various regulatory risks related to biddings, procurements and hiring, and contracts,” Senshaw said, explaining that bids are frequently cancelled, postponed or disputed. “This discourages interested private actors from spending time and money on these bids. Also, some African countries put in place bureaucratic procurements and hiring procedures that hamper operations of private energy companies,” he said.
He added that corruption was another risk.
“However, I think corruption has not been overlooked by investors, rather it is still considered as one of the potential investment risks,” he said.
Senshaw said African governments needed to establish an enabling environment for private investors in renewable projects, which he described as the main driver for accelerating the deployment of renewable energy in Africa.
USD225 billion by 2030
The search for money to fund these green projects continues unabated.
Tokiashi Nagata, an expert from the International Renewable Energy Agency (IRENA), said recently that Africa would need USD225 billion by 2030 to implement energy targets set out in national determined contributions (NDCs), of which 44 percent are for unconditional targets. In the Paris Agreement, a global agreement to tackle climate change, countries declared their NDCs, which are outlines of the actions they propose to undertake in order to limit the rise in average global temperatures to below 2°C.
Unconditional targets, Nagata explained, are the targets that countries are committed to meet without international support, while conditional targets are the ones that countries would only be able to meet with international support in areas of finance and technology, among others.
Nagata, who made the announcement in Burkina Faso’s capital, Ouagadougou, at a GGGI capacity building summit, told IPS that the amount applied to African countries that have quantified renewable energy targets.
Virtually all African countries mention renewables in their NDCs and 85 percent of them include quantified renewable energy targets, Nagata said. He said 23 countries in Africa have renewable energy action under adaptation, while 15 have targets with off-grid renewables.
USD470 billion to fund NDCs
Currently, USD470 billion is available to fund the implementation of NDCs globally, according to IRENA. However, the agency warned that barriers to investment could come in the form of insufficient or contradictory incentives, limited experience and institutional capacity and immature financial systems.
NDCs, Nagata pointed out, provided an opportunity to capture the benefits renewables offer for climate resilient infrastructure.
“Some renewables, especially solar, can bring electricity in a cost-effective manner to those areas where electricity cannot be brought otherwise. This will enhance their resilience. In many cases, remote areas use diesel for power,” he said, adding that it was costly and therefore not environmentally sustainable.
While the commitment of African governments plays a role in countries reaching their NDCs, the major investment driver for establishing renewable energy projects remains the attractiveness of financial returns, says Senshaw.