Although President Emmanuel Macron has chosen to name his climate event this week «One Planet Summit», cynics may be forgiven to discard the initiative as yet another number in a stream of climate summits these times.
For governments and developers in Africa seeking to finance much-needed clean energy power, little has changed since developed nations in 2009 pledged to commit $100 billion annually by 2020 to lesser developed countries to address climate change, a promise reiterated at Paris in 2015. In fact, recent data from Bloomberg reveals that renewable investments in developing countries fell by 50 pct in 2016, the first year after the signing of the Paris agreement. Rolling out mini-grids to secure energy access to all can lead to more than 2 gigaton of additional carbon emissions by 2030. A «new deal» is required to «Scale-up finance for climate action», one of the two main aims of the Paris event.
- Climate finance is a main theme of the «One Planet Summit» in Paris December 12.
- The author will present the ideas outlined in the article at an International Energy Agency (IEA) event later the same week.
Three recently published studies cast light on the nature and scale of the challenge of delivering sustainable energy for all:
- Investments in renewables in sub-Saharan Africa dropped to mere 2 billion USD in 2016, down from 4,9 billion USD in 2015 and an average 5 billion USD the six years from 2010, see figure. (Climatescope 2017)
- With current trends, sub-Saharan Africa will in 2030 still have 600 million people living in rural areas without access to electricity. Providing sustainable electricity for all Africans by 2030 in line with the Sustainable Development Goals would require annual investment of $46 billion per year, more than twenty times the level invested in 2016. Mini-grids can play a key role in extending electricity services in rural Africa. (IEA Special Report: Energy Access Outlook)
- The average electricity generation capacity in the Least Developed Countries (LDC), of which 3/4 are in sub-Saharan Africa, is only 50 watts per capita, compared to 600 watts per capita in Other Developing Countries. Businesses in LDCs pay high tariffs, but experience more than 10 blackouts a month of more than 1 hours average. Expensive and polluting diesel stand for more than 30% of power consumed by businesses compared to 4% in developing countries, and count for a major share of the LDC‘s $26 billion annual petroleum import bill. Nevertheless, the LDC share of international finance mobilised through guarantees, syndicated loans and shares is only 8 percent. (UNCTAD: The Least Developed Countries Report 2017)
The numbers above highlights that the alternatives facing developing countries is not between «sustainable energy» and status quo. If finance for investments in renewables are not available or accessible, developing countries will continue to do more of what they do today, i.e. produce and consume more unsustainable energy. In the electricity sector, this means sustained growth in the use of fossil fuels.
This can also be illustrated by figure 1 below: Of the 86 GW of estimated power capacity additions in 2015 in developing countries, 22 were solar, wind or other low-carbon. Regarding decentralised generation, i.e. behind the meter or off-grid, diesel generators accounted for 29 of the 30 MW of capacity added in 2015.
Fortunately, sub-Saharan Africa has unlimited renewable resources to fuel the needed electrification. Renewables are getting cheaper, year by year. Already today, electricity from utility-scale wind and solar PV plants are cheaper than building new thermal power in most parts of Africa. Looking towards 2030, a low-cost mix of solar, wind, geothermal, hydro and biomass can meet most of Africa’s needed capacity additions, in combination with some natural gas turbines and new transmission lines. As we approach 2030 and beyond, with batteries and other forms of storage being deployed, low-cost solar PV and wind can further replace fossil fuels in the electricity generation.
The energy access challenge
From 2000 to 2016 nearly all of those who gained access to electricity worldwide did so through new grid connections, mostly with power generation from fossil fuels. Adding utility-scale renewables to the grid is a challenge by itself, but it does not solve the problem of rural electrification. Today, mini-grids is considered to be the key to reach energy access for the rural populations.
According to Climatescope:
«diesel generators have long been the technology of choice in areas where reliable grid electricity is unavailable. In 2015, developing countries bought and installed about 600,000 units annually, totalling an estimated 29GW of capacity. About half of this is in units smaller than 0.3MW. There is a mature market and supply chain to sell, fuel and maintain this kit. Despite usually being competitive with diesel, solar currently has less than 3% of the market for distributed energy capacity in developing countries, well short of its potential».
Most mini-grids are diesel-powered only, but they can also be powered by renewables, or a combination of sources («Hybrids»). Mini-grids as they are built today represent a potential carbon bomb. I will illustrate with a simple calculation: Let’s assume that 100% of the estimated 600 million Africans will be connected via mainly diesel-run mini-grids in the period to 2030, and that their electricity consumption per capita is equal to the minimum EnergyforAll threshold of 250 kWh/year. Diesel-generators of the size most common in Africa emit about 1,5 ton CO2/Mwh per year, more than double that of the average emission factor for grid-connected power in Africa.
The calculation shows that the additional CO2 emissions from meeting the EnergyforAll target with today’s energy mix would lead to an additional 225 million ton CO2 per year, equal to more than 2 gigaton carbon by 2030. These emissions will come in addition to the projected growth in carbon emissions from grid-connected power generation across the continent.
A «New Deal» for climate finance
There are several barriers against faster uptake of renewables in Africa as there are everywhere, many of which can only be solved at the national level. Bureaucracy, subsidised tariffs, bad governance and insufficient transmission infrastructure are among the hurdles all too familiar to developers across the continent. However, climate finance can if designed properly play a critical role as «a carrot» for reversing the current trend in Africa, and speed up the deployment of renewables.
The main reason today for the slow uptake of utility-scale renewables in sub-Saharan Africa is the lack of bankable off-takers. In too many countries the government-owned utilities suffer from years of high debt, suppressed tariffs, weak revenue-collection and bad governance. This again becomes a vicious circle, because the lack of credit-worthiness makes it impossible to procure cheaper renewable energy to replace the costly fossil fuel on which so many utilities rely.
Climate and development finance can address this barrier by improving the credit-worthiness of utility-companies in Africa, or by mitigating the investors’ and lenders’ credit risk through improved risk insurance and risk instruments. A good example of the former is the US Millenium Corporation $498.2 million «compact financing» to support the restructuring and refinancing of the utility Electricity Company of Ghana. A recent example of the latter, is the initiative by KfW, the German Development Bank, and the African Trade Insurance Agency to fund a new instrument that offers liquidity guarantee support to small- and medium-sized independent power producers selling power to less credit-worthy utilities.
Rural electrification is a challenge that requires special solutions. Running mini-grids on mainly diesel-generated power is two to three times more expensive than solar PV, but the difference is the upfront investments. Diesel generators are cheap and easy to move to another place if the users don’t pay. Small hydro, solar and wind generators are relatively costly to build and have no fuel costs. Once made, the investments are «sunk costs» leaving the investor little room for mitigating non-payment.
If the Paris summit shall meets its expectations, it must lead to a new cost- and carbon-efficient instrument to support decentralised renewable electricity generation across Africa. Payments based on results in the form of carbon credits, Sustainable Development Mechanisms (SDMs) or Mitigation Outcomes as they are called in the Paris climate agreement, can become such an instrument. As a possible way forward, the industrialised countries could for example declare its willingness to pay 10-20 dollar per ton CO2 per year over a 10 year period for all electricity generated by small-scale and rural renewable energy plants in sub-Saharan Africa and the other Least Developed Countries, 10 dollar to small grid-connected plants and 20 dollar to off-grid plants.
In nominal terms, 10 doller per ton CO2 over 10 years, and 20 for the more expensive mini-grids, could equal about 20-25 percent of the investment costs, and about 15-25 percent of the the yearly revenues. For many developers and investors, such an additional and secured carbon payment would be seen as a risk mitigation sufficient to make the needed investment.
10-20 dollar per ton would amount to max 3-5 billion dollars per year if we optimistically assume that all of the «remaining» 600 million people would obtain energy access in the program period.
3-5 billion dollars is a lot of money, but still only a fraction of the the $100 billion pledge made in 2012 and reiterated in Paris two years ago.
How could such a program be organised without creating too many barriers for developers and utilities seeking to access the funds? One possibility would be to build upon The World Bank-managed $500 million Transformative Carbon Asset Facility, launched with an initial $250 million funding from Norway, Germany, Sweden and Switzerland. The TCAF-team have started working with a few pilot countries like Morocco and Sri Lanka to lay the groundwork for paying for these countries’ «additional» carbon mitigation within the framework of the Paris agreement. If there is a will, the Paris summit could for example expand the TCAF mandate and funding to work with governments in LDCs and sub-Saharan Africa to set up and implement carbon finance schemes tailored to incentivise the construction and operation of green mini-grids and behind-the-meter plants in the countries most in need of it.
To sum up: In order to address the sustainable energy challenge, climate finance should be refocused to:
1) reduce or mitigate credit-risk currently suppressing private sector investments in the utility-scale renewable energy sector
2) introduce a carbon payment for all new small- and medium sized renewable projects in the target countries
Hopefully the «One Planet Summit» can deliver some concrete results along the lines outlined here, and thereby contribute – as said in the invitation from President Macron – to «accelerate our common efforts to fight climate change».