Africa holds the key to global energy transition, says AFC

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Africa is not like another continent in the case of international internet zero – and we’d like a blueprint for a typical negotiating stance that displays this,” says Samaila Zubairu, president and CEO of Africa Finance Company (AFC). The organisation is taking part in a number one function in constructing capability and elevating finance to drive the continent’s vitality transition whereas sustaining a realistic view of easy methods to leverage nations’ current sources for financial development. However additionally it is dealing with the problem of coping with priorities outlined by a few of the greatest international emitters positioned in different areas, that are setting the principles for targets and techniques.

Africa’s expertise is exclusive, says AFC in its white paper launched final yr, Roadmap to Africa’s COP: A Pragmatic Path to Internet Zero. “It has borne the brunt of essentially the most devastating impacts of local weather change – from frequent floods to droughts and extreme heatwaves, costing lives and livelihoods. In contrast, the continent contributes lower than 4% of greenhouse fuel emissions, reflecting Africa’s crippling vitality deficit.”

Zubaira  argues that the continent wants to guide and chart a brand new improvement path. Africa must undertake new financing fashions, to “finnovate”, because it says within the white paper, in order that it could possibly unlock native capital from sources similar to its pension and insurance coverage funds.

This may be finished by way of revolutionary options similar to de-risking mechanisms, first-loss ensures and credit score enhancement instruments. AFC has used these instruments to encourage native investments and make institutional buyers snug sufficient to take calculated dangers. AFC has finished this to nice impact, but it surely must be finished at a lot higher scale throughout our continent.

Zubaira  believes that to scale up impression, there must be a lot stronger partnerships between private and non-private sector. Knowledge is essential. Higher information helps de-risk initiatives and can encourage higher investments.

He says that we have to change our mindset when it comes to how we method worth chains at a continental stage. Batteries and electrical automobiles present a novel alternative for the continent to assume in a different way about worth chains and creating and capturing huge wealth in a sustainable method on the African continent. However this will solely occur by way of concerted efforts and deliberate insurance policies. This is the reason AFC has financed feasibility research on this house which have demonstrated a transparent aggressive benefit to its friends.

Defining a simply transition

Zubairu argues that the continent must harness its sources to generate the vitality for improvement. He maintains that Africa’s local weather challenges put the continent’s GDP in danger by as much as 35%, a quantity that can continue to grow so long as the area lacks infrastructure that’s resilient to the impression of local weather change. However there’s additionally a possibility for the continent to grab the second and construct ecosystem of adaptation, he says.

“The simply transition for us is entry to vitality that’s inexpensive and doesn’t compromise financial improvement, and vitality entry that permits for the important thing challenges round financing and adaptation to be resolved similtaneously financial improvement.

“After we have a look at initiatives and alternatives, we are attempting to see how we are able to construct an ecosystem alongside worth chains that permit for carbon neutrality as we go alongside. However the focus is on financial improvement.”

The pan-African organisation, headquartered in Lagos, has referred to as on African leaders to interact in a unified narrative with the remainder of the world to outline the continent’s function in combating international warming. This engagement has moved centre stage because the world strikes in the direction of the COP28 assembly to be held in Dubai earlier than the top of 2023.

A 3-pronged method

AFC, by way of its investments and challenge advisory operate, has a three-pronged method to local weather change help for Africa.

It’s localising manufacturing to minimise emissions from transport and different types of transport; rebuilding infrastructure in a means that might be resilient to altering local weather situations and that anticipates, prepares for, and adapts to local weather danger; and utilizing monetary innovation to crowd-in funding to help every part from reforestation to renewable energy vegetation.

AFC is transferring rapidly to develop renewable sources, boosting its footprint with the acquisition, with its companions, of Africa’s greatest renewable firm, Lekela, and it has a pipeline of 10 GW of recent initiatives. Whereas renewable sources are the final word purpose, Africa wants to maneuver ahead with the sources it has, says Sanjeev Gupta, AFC’s Government Director for Monetary Companies.

The continent’s ambition to make use of its huge fuel reserves as a transitional supply of vitality to help industrialisation has been given impetus by the European Fee’s resolution to categorise pure fuel as a type of inexperienced vitality and as an important transition gasoline within the path in the direction of decarbonisation.

On condition that important swathes of Africa are already at internet zero, industrial improvement utilizing pure fuel could be completed with out substantial contributions to international carbon emissions, the AFC white paper states.

Nevertheless, says Sanjeev Gupta, the acceptance of fuel as a transitional gasoline is just not universally accepted and this will have an effect on funding for initiatives involving this useful resource.

“We’re doing what we are able to to develop renewable vitality in nations that don’t have oil and fuel, thereby serving to to cut back their import payments. With oil and fuel, the controversy is extra sophisticated,” he stated.

The inexperienced technique

Sameh Shenouda, Government Director and Chief Funding Officer of AFC, says that whereas the Company has funded vitality initiatives that pundits might not see as inexperienced initiatives at face worth, it really works to a broader technique on this regard. One instance is the deployment of $300m of senior debt to Dangote Industries Restricted to part-finance the development of its 650,000 barrel per day crude oil refinery. “African nations have completely different sources, and we have a look at what’s on the bottom and what it is sensible for the nation to spend money on. The place there’s ample solar and wind, renewable vitality is sensible.” However, he says, there are other ways of taking a look at this subject. “The west coast of Africa is fuel wealthy so there isn’t a good cause to not spend money on fuel. Nigeria is wealthy in oil and fuel, so it is sensible to spend money on these sources and we’ve invested in constructing refining capability.”

For Nigeria to refine its personal gasoline relatively than exporting the crude oil and importing gasoline saves important emissions from transport,

Equally, AFC backed the $335m Cabinda oil refinery in Angola, partnering with Gemcorp and Afreximbank. Angola additionally exports crude oil and imports gasoline. Backing the refinery will considerably scale back these imports, saving each laborious forex and transport emissions.

Says Zubairu, “Import substitution is an efficient strategy to scale back greenhouse emissions related to transport and it permits extra jobs to be created within the native financial system. It additionally creates a possibility to scale up with a purpose to meet not simply native demand however that of its neighbours.”

The oil refinery offers are one side of this. Transport is one other. The Lobito rail challenge, wherein AFC is the lead developer, goals to offer a direct route from Zambia’s copper mining space to Lobito’s port in Angola. It can allow the motion of exports to the US instantly west to the Atlantic Ocean relatively than east to the Indian Ocean earlier than being routed round Southern Africa.

Disrupting Africa’s typical commerce patterns – uncooked supplies out and manufactured merchandise in – can also be on AFC’s radar. Altering this can require growing native industries by placing processing and manufacturing on the centre of sustainable round economies.

Presently, not even 20% of Africa’s meals manufacturing is processed earlier than being exported. AFC is backing particular financial zones in numerous African nations to spice up worth addition to African commodities earlier than export.

Says Shenouda, “Briefly, we’re discovering essentially the most applicable useful resource of every nation and in search of non-traditional, adaptive and artistic methods to handle carbon emissions.

“We’re in a position to do that as we all know the terrain, what’s required, and the potential in addition to the restrictions of every nation. We’re on the bottom and perceive Africa.

Derisking initiatives

AFC is ready to derisk its initiatives by utilizing its personal fairness capital upfront for initiatives, searching for debt funding as soon as the challenge is commercially viable.

Says Shenouda, “It takes a very long time to undergo the challenge finance course of, and it could possibly take greater than a yr to lift debt. It’s laborious simply to carry three or 4 banks right into a room for a gathering. So it’s faster to carry our fairness upfront to start with to get initiatives transferring.” He makes use of the instance of AFC’s 60 MW Djibouti wind challenge, inaugurated in October 2023, the place AFC did an all-equity deal.

As soon as the challenge had reached industrial operations, it went to the market to lift debt finance. Now lenders are queuing as much as carry capital into this de-risked operational asset.

Gupta says, nevertheless, that borrowing from the market places the establishment beneath stress to satisfy the expectations of economic lenders. This requires adhering to accepted coverage path and regulatory compliance and dwelling as much as environmental, social, and company governance (ESG) requirements.

He stated the truth that AFC has 42 member states beneath its umbrella provides it preferential entry to these markets but it surely nonetheless has to make sure that initiatives are structured in methods which are politically untouchable and the place coverage is constant. “In any other case we might not be capable to function.”

AFC’s steadiness as a public personal partnership is a crucial assemble. Whereas any improvement finance establishment wants public sector help, it additionally relies on personal sector rigour, he maintains.

Nevertheless, elevating capital stays difficult due to perceptions of excessive danger in Africa. Says Shenouda, “It will be actually useful if worldwide sovereign funds and pension and insurance coverage funds would put ahead even 1% of their sources into Africa. That isn’t taking place. Even African funds will not be doing so.

One cause is a lack of awareness in regards to the continent, and undue perceptions of danger, which reduces the urge for food for funding for Africa’s improvement, he maintains. AFC, then again, understands the place there’s danger in Africa and is ready to keep away from or mitigate it. “From the skin, it’s simple to say one thing is just too dangerous. And we’re cautious about which sectors we spend money on.”


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