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The economic dilemma in Africa’s energy transition

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The Kenya Petroleum Refinery Limited in Changamwe. FILE PHOTO | NMG

When policymakers, financiers, and environmentalists converge in Egypt in November for the UN Climate Conference or COP 27, a key issue will be how to handle Africa’s delicate transition to clean and renewable energy and avoid colossal economic disruption in a region reliant on its vast hydrocarbon fossil fuel reserves.

Presently, almost half of sub-Saharan Africa’s export value is composed of fossil fuels and this may surge further amid rising discoveries of oil and gas reserves in countries such as Mozambique, Tanzania, Mauritania, Senegal, Kenya and Uganda.

Some of the top oil and gas producers in Africa derive up to 25 percent of government revenue from these resources.

The decades-old oil and gas bonanza, however, stands threatened by a gradual global shift toward renewable and clean energy technologies — a development that is expected to trigger a swift reduction in global demand for hydrocarbon fossil fuels, such as coal, oil and natural gas.

Africa is home to about a tenth of the world’s oil reserves —an indication of the likely economic impact of a radical shift toward clean and renewable energy.

Priority

Already, some financiers such as the European Union (EU) and multilateral lenders including the World Bank and the International Finance Corporation (IFC) have slowed down or ended financing high-emission fossil fuel projects in favour of renewable energy.

For example, the World Bank Group — which has been ramping up its finance for renewable energy for several years — in the fiscal year 2021 did not finance any new fossil fuel project financing.

The World Bank Group stopped investing in upstream oil and gas in 2019 and has not made any investments in coal for over a decade.

“On systems transitions, we are focusing on the highest emitting systems — energy, manufacturing, transport, agriculture and land use, and cities. With energy responsible for three-quarters of global emissions, our CCAP (Climate Change Action Plan) places emphasis on the energy transition, where we are supporting countries and private sector clients to move away from high-carbon energy systems via a just transition,” said World Bank President David Malpass last November when he outlined the multilateral lender climate priorities.

The bank’s sister organisations, the IFC and Multilateral Investment Guarantee Agency have also indicated that they will align 85 percent of their direct financing with the Paris Agreement by July 2023 and 100 percent by July 2025.

The Paris Agreement, adopted in 2015 by nearly 200 countries, pledges to stop global average temperatures from rising more than 2˚ Celsius above preindustrial levels and aims to cap warming at 1.5˚ Celsius.

Experts say meeting the 1.5-degree goal, which would prevent the most catastrophic climate impacts, would require the world’s net greenhouse emissions to drop to zero by 2050.

Insincere

The fossil fuel financing decisions by the EU, the World Bank, and the IFC among others have ruffled many countries in Africa eyeing to reap economic dividends from their new oil and gas discoveries and steady their respective electricity supplies.

Critics of the radical shift towards clean energy argue that western countries are insincere in their push to drop fossil fuels just yet. They argue that the developed nations have benefited from hydrocarbon fossil fuels to industrialise their economies and should not frustrate African countries seeking to take a similar path.

The African Development Bank (AfDB), which is a leading multilateral lender in Africa, is among those that have broken ranks with parties such as the EU and the World Bank and maintains that it will continue financing natural gas projects in the continent despite criticism by some lobbyists.

“Renewable energy alone cannot power Africa…natural gas must remain part of Africa’s stable energy system,” its boss Akinwumi Adesina said on May 22 during the bank’s annual general meeting in Accra.

Although natural gas produces about half as much carbon dioxide when burned like coal, some critics say that rising production of the commodity is emerging as one of the biggest contributors to climate change and that plans for industry expansion could stifle efforts to stabilise climate.

Dr Akiwumi, however, downplayed the concerns about the impact of natural gas on the environment and maintained that AfDB, which finances diverse renewable energy projects including wind, solar and geothermal would continue financing such projects.

“Even if you triple the current amount of gas, it will still account for less than 0.3 percent of global emissions….we must however stop flaring,” the AfBD boss added.

Dr Akiwumi said Africa should not be rushed on the climate change initiatives and revealed that the bank plans to launch an African Just Energy Transition Facility to support the continent to easily transition from heavy fuel oil and coal power plants to renewable energy baseload power systems.

Analysts, however, urged Africa to ready itself for a transition from fossil fuels in light of the shifting global order.

Mineral

A World Bank report on Africa’s resource export opportunities and the global energy transition says although hydrocarbons will remain a significant source of export revenues for sub-Saharan Africa (SSA) countries in the short to medium-term, their contribution will wane in the long term.

“As global oil and gas demand may begin to decline permanently as the global energy transition progresses, SSA hydrocarbon producing countries will need to adapt to these new market conditions. For the moment, however, they still have some time to manage an orderly transition away from fossil fuels” the authors of the World Bank report said.

Economists propose that SSA nations shift their focus to mineral energy materials (MEMs) as mitigation to the projected economic disruption.

“As renewable and clean energy technologies become more affordable and implementable, meeting the evolving global demand for MEMs will mediate the ability of sub-Saharan African economies to adapt to such a colossal economic disruption” Leo Holtz and Chris Heitzig, economic researchers at the US-based Brookings Institute said in a commentary.

Energy technologies

The World Bank’s energy transition report says that SSA economies have a comparative advantage relative to the rest of the world in terms of benefiting from a global shift to renewable and clean energy technologies that rely heavily on MEMs.

“This transformation is expected to increase the demand for certain materials required in clean energy technologies and may have a dramatic effect on mineral-exporting countries,” the Bretton Woods institution pointed out.

MEMs such as cobalt, nickel, and copper are expected to play a critical role in Africa’s energy transition.

The rising uptake of electric vehicles (EVs) as part of the transition to a low carbon economy through decarbonisation of transport and energy generation has triggered a sharp demand for minerals including aluminium, copper, nickel, cobalt, and lithium.

The International Energy Agency projects that demand for lithium may increase up to forty-fold in 20 years, and demand for cobalt could increase by a factor of 20-25 if governments across the globe reach the goals set out in the Paris Agreement.

Cobalt and lithium are important to meet growing EV demand and satisfy large-scale efforts to move from the internal combustion engine to battery-powered transportation.

According to the IEA, electric car sales more than doubled between 2020 and 2021 — an indication of the growth potential of both metals amid strong sales of EVs in key global markets led by China.

A review of the futures market showed that in March Cobalt traded at $34(Sh3, 971) per kilogramme, more than twice the level it was launched in the auction system in 2020. This creates an opportunity for future export revenue growth for the region’s cobalt exporters, particularly the Democratic Republic of Congo.

Lithium prices have increased even faster, from $13 (Sh1, 518.32) per kilogramme in May 2021 to above $40 (Sh4, 671.75) in February 2022.

Forecasts by the World Bank show that between 2019 and 2029, nickel prices are expected to rise by 94 to 139 index points for nickel — a position that would benefit top producers such as Zimbabwe and Côte d’Ivoire.

“Countries with significant MEM reserves have an opportunity to expand their exports and capture the potential of the global energy transition and the recovery from Covid-19,” the multilateral lender says in its report.

Presently, the main importers of Africa’s energy resources (both MEMs and hydrocarbons) include China, the European Economic Area, Japan, India and the United States.

The export structure of MEMs and hydrocarbons has changed noticeably over the past two decades, both in absolute terms and across trading partners.

“While hydrocarbon products remain the largest source of SSA’s exports to other regions, their value has fallen sharply in recent years. By contrast, the value of MEM exports has risen steadily, growing seven-fold since 1995” said the World Bank.

“The export destinations have also changed over time. While the European economic area is a consistently large importer since 2009 China has come to play a large and growing role in MEM imports.”

China has overtaken the EU since 2009 as the largest importer of MEMs.

China’s fossil fuel imports have also been rising since 1999 although the EU and China seem to import an equal share of the import value of fossil fuels since 2009.

Data by the World Bank shows that MEMs and associated products (23 percent), together with hydrocarbons (48.5 percent), made up more than 70 percent of the value of SSA’s exports to the rest of the world between 1995 and 2018.

Exports of crude oil, natural gas, and metals accounted, on average, for 25 percent of revenues in the region in 2014.

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