Accelerating clean energy investment in Africa: challenges and opportunities for sustainable development – IEA

Energy is crucial to Africa’s long-term prosperity, enabling sustainable economic growth, improving people’s well-being and supporting healthier and more productive lives. The recent energy crisis, exacerbated by the Covid-19 pandemic and global economic disruptions, has had a significant impact on many African countries. Modern energy services remain a pressing issue, especially in sub-Saharan Africa, where half of the population has no access to electricity and four out of five people do not have access to clean and healthy cooking methods. Rising energy prices and the financial challenges facing energy companies have hampered progress to date in increasing energy access. This situation underscores the urgent need for significant investment in clean energy technologies to ensure universal access to modern energy, boost economic and social development, and eliminate persistent poverty across much of Africa.

However, implementing this investment on a large scale requires decisive intervention by African governments, assistance from developed countries, international financial institutions and development organizations. Financing Africa’s energy development is a huge undertaking that presents several obstacles, including the high cost of capital for investors and a lack of projects eligible for financing. Although Africa has about 20% of the world’s population, it attracts less than 3% of global energy spending, and energy investment on the continent has been declining in recent years. Mobilizing international financing, particularly concessional financing, is crucial to reversing this trend.

The report aims to provide an overview of the energy-related investments needed to achieve the targets set by African countries in their Nationally Determined Contributions (NDCs) under the Paris Agreement, net zero targets, UN Sustainable Development Goal 7 (SDG 7) on access to affordable and clean energy and the 2023 Nairobi Declaration on Climate Change. It also examines how clean energy projects are financed and the supporting policies and measures required. The focus is on three key investment pillars: household access to modern energy, the electricity sector and emerging industries, including clean energy technology production, hydrogen and related fuels, and critical minerals. Additionally, the report identifies key initiatives needed to build human and institutional skills and capabilities in Africa that are essential to finance clean energy projects.

This report on financing clean energy investments in Africa was commissioned by the Italian Presidency of the Group of Seven (G7). Africa’s development is an important focus of the Italian G7 agenda, as exemplified by the Italy-Africa Summit held in January 2024, which brought together high-level representatives from 46 African countries, major international organizations, international financial and development institutions, multilateral development banks , and the leaders of the European Union.

To meet Africa’s energy investment needs, private sector spending must increase by 2.5 times between 2022 and 2030. In the Sustainable Africa scenario, $190 billion of private capital will be needed by 2030, up from about $75 billion today. Concessional capital from international sources will play a key role in mobilizing this growth – it is estimated that $30 billion per year for clean energy projects will be needed to attract commercial financing from 2023 to 2030.

Blended financing is a proven tool that can attract commercial financing up to seven times higher than the level of concessional donor financing. Blended finance involves donors, development finance institutions (DFIs) and philanthropic organizations using their funds to improve the risk and return profile of projects, thereby attracting private capital. The number of transactions using blended finance in Africa has increased since 2014, with volume doubling from 2019 levels to over $3 billion in 2021. Other instruments have also demonstrated their ability to improve the risk-return profile of energy investments, including including green, social, sustainable and sustainability-linked bonds (GSSS), carbon credits and voluntary carbon markets, syndication platforms and joint investment vehicles, as well as instruments mitigating currency risk.

Ongoing G7 initiatives can be strengthened with targeted technical assistance and better coordination. G7 countries reaffirmed their commitment to mobilize greater investment in energy and climate in Africa. Over the past 10 years, advanced economies have provided an average of $2.4 billion in development assistance to Africa’s energy sector annually. Tracking shows that G7 members have programs operating in almost every sub-Saharan African country aimed at securing greater energy and climate-focused investments. These include the Global Gateway, the Just Energy Transition Partnerships and the Global Infrastructure and Investment Partnership. Many of these initiatives face similar challenges, in particular developing a pipeline of projects eligible for funding and guiding them through the higher risk development and construction phases.

To address these gaps, several effective approaches have been identified, such as building capacity with African governments and small and medium-sized enterprises (SMEs) and developing new financing instruments that absorb development risks at an early stage. Scaling these efforts will be key to unlocking more finance for Africa’s energy sector and ensuring that these investments deliver the full set of economic, development, energy security, health and climate benefits.

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