Energy transition: How can Africa finance this switch over?

The 2009 Copenhagen Accord was not a binding promise but set up a durable framework for future talks.
One of these solutions is for African countries to use crude oil, natural gas, and other hydrocarbons to develop their resources and use the revenues to finance energy transition.
In the process, they should also seek to meet several other complementary goals, such as building gas-fired plants that can provide cleaner power than existing coal.

From an African perspective, one of the most important things to come out of COP15, the 2009 United Nations Climate Change Conference in Copenhagen, was the formal recognition of the fact that lower-income countries were not in a position to bear as much of the cost of the energy transition as their higher-income counterparts.

That recognition was spelt out in the section of the Copenhagen Accord that included a pledge from the world’s highly developed states to provide the developing world with at least US$30 billion a year in financing for energy transition and climate change mitigation projects. Under the accord, funding was supposed to remain at that level for three years and then rise, reaching US$100 billion annually by 2020.

This sounds wonderful, right? The Copenhagen Accord wasn’t a binding promise, but it set up a durable framework for future talks. If nothing else, it served to establish US$100 billion per year as the long-term target the UN would keep trying to hit after 2009 with respect to mobilizing climate financing for lower-income countries. Nevertheless, the developed world missed that target.

Too little, too late

And the UN—quite rightly—criticized it for that. I’ll quote the organization’s own webpage, using words that appear to have been published in mid-2023: “So far, the $100 billion goal has not been reached … and the distribution of funds has not been equitable. In 2020, based on the latest OECD (Organization for Economic Co-operation and Development) data, developed countries provided $83.3 billion. Only 8 per cent of the total went to low-income countries and about a quarter to Africa.”

Since then, the OECD has published more up-to-date data. And while it shows encouraging signs, it also shows total financing has continued to miss the mark after the deadline. It said: “In 2021, total climate finance provided and mobilized by developed countries for developing countries amounted to US$89.6 billion, showing a significant 7.6 per cent increase over the previous year.”

The OECD also stated that it expected the US$100 billion annual target to be met in 2022. At this point, though, the organization hasn’t been able to confirm whether its forecast was correct.

In the meantime, the figures I’ve listed here should at least raise questions about the ability (and perhaps about the willingness) of the world’s most highly developed countries to keep their promises to their less-developed counterparts. These questions are worth considering as we approach the opening date of COP28, the 2023 UN Climate Change Conference in Dubai.

The UN’s answer: More of the same

They are also worth considering given that the UN’s response to the failure of this approach is to double down—that is, to assert that even more money must be made available, above and beyond the original commitments.

According to the organization’s webpage, Secretary-General Antonio Guterres is now calling for developed countries to provide double the amount of funding for climate adaptation programs. More is needed, he says, because the cost of mitigation work is rising and because the number of people living in high-risk areas is rising.

“Countries may need to spend up to $300 billion a year by 2030 and $500 billion by 2050, according to the United Nations Environment Programme (UNEP),” the UN’s webpage explains. “Yet these estimated costs are five to 10 times greater than current funding flows. The Climate Policy Initiative found that today’s world spends under $50 billion on adaptation a year, less than 10 per cent of climate investments overall. This disparity is less acute but still evident in the $100 billion commitment.”

That’s true, as far as it goes. Costs are rising. Populations are growing. But given what has happened so far, does anyone believe this approach is actually going to work?

Does anyone actually think that the world’s most developed countries will start handing out more money rapidly because the UN says they should? I’m not counting on it. And I don’t think Africa should count on it.

Time for Africa to create its own market-oriented solutions

I’m not just basing my opinion on the developed world’s poor track record with respect to keeping promises and meeting deadlines. I’m also relying on the UN’s own data, which show that the majority of the climate financing—more than 60 per cent of climate adaptation funding to date, with nearly all of that figure coming from public-sector sources—provided thus far by higher-income countries to middle- and lower-income countries have taken the form of loans.

No grants are given freely, but credits that must be repaid will increase the debt loads of countries already facing financial strain. So what’s the alternative? What’s the solution? I believe it is time for Africa to create its own market-oriented solutions—and it already has the foundations to start doing so.

Drill, Baby, Drill

One of these solutions is for African countries that possess crude oil, natural gas, and other hydrocarbons to develop their resources to the greatest extent possible and use the revenues they receive to help cover the cost of the energy transition. In the process, they should also seek to meet several other complementary goals:

Minimize emissions: It is possible to reduce the carbon emissions intensity of oil and gas development, as Eni is doing offshore Côte d’Ivoire. In August of this year, the Italian major started production at Baleine, Africa’s first Scope-1 and -2 emissions-free project. Its example can and should be emulated.

Domestic gas and power development: African states that possess natural gas should seek to promote the formation of domestic gas markets and infrastructure, either by reserving a portion of their hydrocarbon revenues for this purpose or enlisting their foreign partners’ help.

They need to build gas-fired plants that can provide cleaner power than existing coal- and petroleum product-burning plants; liquid petroleum gas (LPG) plants that can replace traditional biomass fuels such as wood and charcoal, which contribute to health problems and deforestation; and compressed natural gas (CNG) plants that can produce fuel for vehicles.

Additional pipelines and fuel distribution networks

They must establish additional pipelines, fuel distribution networks, and electricity lines to ensure that rural and urban consumers can access these new resources and escape energy poverty. As they do so, they will establish the transmission and distribution infrastructure needed for renewable energy facilities. (They will also build pipelines carrying hydrogen or a mixture of natural gas and hydrogen.)

Invest in local capacity: African oil and gas producers should also seek to maximize their capacities as they develop their subsurface resources. The development process should focus on training for local workers, technology transfers, and investment in related sectors of the economy—including those that can add value to the natural resources themselves, such as refining and petrochemicals.

In these steps, African oil and gas producers will spend their money wisely. They’ll be investing in the future, using their earnings to build a base for something bigger and better.

African Energy Bank

But this isn’t just a task for the continent’s oil- and gas-producing states. It’s something we’ll all have to work toward together.

And as it happens, the work has already started. In May 2022, the African Export-Import Bank (Afreximbank) signed an agreement with the African Petroleum Producers Organization (APPO) on the joint establishment of a special multi-lateral financial institution (MFI)–the African Energy Bank (AEB)–to provide support for the shift away from fossil fuels.

The agreement calls for APPO’s member states to provide equity for the new institution and serve as its founding members, with Afreximbank acting as co-investor and providing organizational support.

The new bank will be able to reach more countries than either APPO or Afreximbank could do on its own, as their rosters are not identical. (APPO has 15 member states, while Afreximbank has 51; there is a significant amount of overlap, as Algeria and Libya are the only APPO members that are not also Afreximbank members, but the point remains that if the two institutions join forces, their combined efforts will go further.)

Professor Benedict Oramah, the president of Afreximbank, explained it as follows in May 2022: “For us at Afreximbank, supporting the emergence of [AEB] will enable a more efficient and predictable capital allocation between fossil fuels and renewables. It will also free human and other resources at Afreximbank that will make it possible to support its member countries more effectively in the transition to cleaner fuels.”

And this isn’t merely an abstract plan. Afreximbank has said it is committed to launching the new financial institution next year. Speaking during the Inter-African Trade Fair (IATF) 2023 in Cairo in early November 2023, Rene Awambeng, the bank’s director of client relations, said that AEB was due for launch in June 2024.

“We are in the final stage of getting all the approvals [for AEB], and it is going to be an organization set [up] by treaties,” Awambeng explained. “We will have three classes of shareholders. The first will be the African oil-producing countries, national oil companies and African investors as well as the international investors from all walks of life.”

Helping Africa navigate energy transition

With each member organization paying US$5 million per budgeted share, he stated, the bank will be able to help cover the cost of establishing regional energy infrastructure. “The AEB will then be able to help African oil-producing member-states to take advantage of the over 125-billion-barrel reserves of oil and that of the over 75 trillion cubic feet of gas that we have on the African continent,” he commented.

Awambeng was speaking just a few days after the conclusion of APPO’s most recent meeting in Benin. Perhaps not surprisingly, that organization’s members are also excited about the contribution the bank may make to helping the African continent navigate the energy transition while also optimizing economic development and reducing energy poverty.

For example, Ghana’s Energy Minister Matthew Opoku Prempeh said those present at the APPO meeting had focused on how to “use our God-given resource—hydrocarbons—for the growth and prosperity of our citizens without hindrances.” He also said it was necessary for Africa and APPO to “decipher” the differences between Africa’s actual energy requirements and the “politics of climate change” as a global energy issue. Under these circumstances, Prempeh said, AEB could serve as “a lifeline for the African continent.”

I agree with Prempeh. I think it’s time to grab that lifeline. I think it’s time for Africans to create their own solutions and use their resources as the basis for those solutions. No more waiting for the rest of the world!

The author, NJ Ayuk, is the Executive Chairman African Energy Chamber.