The Roles AfCFTA Can Play in Africa’s Energy Transition Agenda with the Institute for Energy Security (IES) Ghana.

The following text was written by the following authors:

Nana Amoasi VII, Executive Director at IES

Edmond Kombat, Director of Research & Finance at IES

Adle Ibrahim, Research & Policy Analyst at IES.

The 2020 World Bank report “The African Continental Free Trade Area (AfCFTA): Economic and Distributional Effects”, submits that the AfCFTA agreement will connect 1.3 billion people across 55 countries with a combined GDP valued at $3.4 trillion, with the potential to lift 30 million people out of extreme poverty by 2035.

According to the United Nations Economic Commission for Africa, the implementation of the agreement could increase intra-African trade by 52%, compared to 2010 levels, by 2022, thus reducing the gap with intra-regional trade quotas currently characterizing Asia (51%), North America (54%) and Europe (67%).

The World Bank’s analysis shows that full implementation of the AfCFTA agreement could boost income by 7%, or nearly $450 billion by 2035, in 2014 prices and market exchange rates. The agreement would also significantly expand African trade, particularly intra-regional trade in manufacturing; increasing employment opportunities and wages for unskilled workers and helping close the wage gap between men and women.

Regional output and productivity according to the analysis, would also be boosted, leading to the reallocation of resources across sectors and countries. And that by 2035, the total production of the continent would be almost $212 billion higher than the baseline. Output is expected to increase the most in natural resources and services (1.7%), with manufacturing seeing a 1.2% rise, the report indicates.

According to the World Bank report, AfCFTA would reduce tariffs among member countries and cover policy areas, such as trade facilitation and services, as well as regulatory measures, such as sanitary standards and technical barriers to trade. It will complement existing sub-regional economic communities and trade agreements by offering a continent-wide regulatory framework and by regulating policy areas, such as investment and intellectual property rights protection that have not been covered in most sub-regional agreements.?

Individually, African countries face challenges in areas such as infrastructure, policy, regulation, finance, human capital, technology, and off-take certainty; which must all be addressed to fully implement a green energy transition. Adeniran and Onyekwena (2020), and ESI Africa (2021) argue that through the consolidation of small, poor, and fragmented African countries into one strong market, backed by strong collaborations, the dynamics can be altered in terms of access to funding, infrastructure modernization, strong regulations and policies, human capital, and technology et cetera, for the renewable energy sector.

The AfCFTA secretariat can therefore work with member countries to accelerate Africa’s energy transition by for instance; helping with shaping joint policy and regulatory frameworks, strengthening dialogue between investors and governments, and promoting a single power market and infrastructure development growth.

Additionally, the AfCFTA platform can provide support for a ‘just and inclusive’ energy transition, assisting with reducing financing and off-take uncertainties, and facilitating the establishment of additional Pan-African Green Banks, among others.

1.???Strengthen dialogue between investors and member countries

Increased dialogues between industry and government are necessary for the formulation of effective policies, for fostering public-private partnerships for the dissemination of innovative technologies, and for the successful implementation of Africa’s renewable energy targets and broader climate objectives. Dialogues become more crucial in terms of strengthening local supply chains that support a dynamic renewable energy market.

The AfCFTA secretariat can assist with the enhancement of industry versus government dialogues, investment forums,?and other platforms for knowledge sharing, capacity development, and exploration of open-source agreements for projects in an emerging market like Africa; to ensure legal risks and barriers are mitigated.

Increased transparency and strengthened dialogues championed by the AfCFTA on best alternatives to de-risk investments would allow the renewable energy sector to plan better for and respond faster to policy demands and the needs of respective African countries. AfCFTA’s intervention in ensuring that inter-governmental institutions work collaboratively with industry in pursuit of shared sustainable development goals is more important than ever, because through collaboration; regulatory, legal, and administrative barriers to investment in renewable energy can be minimized.

2.???Push for joint policy and regulatory framework

It is widely acknowledged that developing countries face several obstacles from the policy and regulatory points. To make the African market accessible to the investor community, policy clarity, enhanced regulation, and transparent implementation strategies that establish Africa’s energy transition roadmap are indeed paramount. Also, a comprehensive review of existing regulatory frameworks for each member country with the intention of harmonizing the same is paramount to advance the transition agenda. Fortunately, under the AfCFTA, member countries are obligated to align local laws with broad regional plans.

In this instance, the AfCFTA secretariat can prioritize support for a joint policy and regulatory framework. The support could be in the form of ensuring policy coherence, long-term policy certainty, and stability for existing and planned projects in the renewable energy sector. The joint policy and regulatory framework must be one that for instance, outlines specific transmission grid infrastructure plans for future renewable energy developments, the interconnection of regional transmission lines, and the plan to have a higher share of variable renewable energy.

Also, the AfCFTA secretariat can assist with ensuring that member countries have a high-level commitment to the legal framework, a re-consideration of retrospective policy changes, and respect for approved contracts and agreements in accordance with the rule of law. This is necessary to establish investor confidence in respective African countries as it minimizes off-take risk.

3. Promote single market and infrastructure development growth

The AfCFTA has the potential to promote the harmonization of Africa’s national and regional electricity markets, to?form a single?market, and to promote the efficient development of electricity infrastructure and symbiotic electricity trading between members of its existing five regional electric power pools. Expanding and modernizing Africa’s transmission infrastructures, and increasing the grid capacities, particularly in countries best endowed with renewable resources, can further unlock the continent’s abundant renewable energy potential.

On that score, the AfCFTA secretariat can push for changes in respective national policies to adhere to the requirement of Africa’s single electricity market, centered on the organization of the sector and its regulation. It can promote and push for fair market access and a high level of consumer protection, removal of obstacles and trade barriers, a clear mechanism to secure and enforce trading contracts, flexibility in the power system, as well as high levels of interconnection and generation capacity among member states. Besides, it can assist with the coordination of technical and commercial endeavors of the regional power pools including; sharing mechanisms of best practices, harmonization of regulations and grid codes, and the promotion of electricity trading opportunities that will catalyze the development of inter-regional infrastructure projects.

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4.???Support a just and inclusive energy transition

There is a growing recognition of the importance of focusing on a ‘just and inclusive energy transition’ as countries across the globe seek to accelerate their energy transition drives, to address more strongly the equity and justice elements of the transition so the agenda avoids the danger of becoming another abstract idea.

The AfCFTA secretariat can take up the role of facilitating inclusive and participatory decision-making with respect to the energy transition through Multi-Actor Partnerships (MAPs) that reflect all relevant stakeholders (such as government, fossil fuel companies, labor organizations, workers, communities, and citizens) affected by the transition. Getting these stakeholders to become participative actors would help identify priority areas, establish concrete actions, and foster international collaboration to understand how to promote and support ‘just and inclusive energy transitions’.

Also, the secretariat can provide assistance for political decision-makers in Africa to put in place the necessary policies, regulations, incentives, as well as securities to guarantee continuity and sustainability for socio-economic development. And most importantly, the AfCFTA secretariat can promote the establishment of “Africa’s just transition fund” with member countries binding financial support measures, and dedicated to the just transition of countries heavily reliant on fossil economies.

5.???Assist with reducing financing and off-take uncertainties

Investors are cautious in committing capital to renewables and quite unsettled about the certainty of power off-takes, due to the perceived risk/return profile of investments, coupled with risk mitigation. This is so because the sector faces multiple barriers such as the front-loaded cost structure of renewable energy projects, project proponents’ often limited knowledge and experience, and the lack of reliable investment data in particular developing countries.

The AfCFTA secretariat can help bridge the energy transition funding gap via the provision of advisory to member countries on financing, and support the application of related mechanisms.?This may involve providing an understanding of investment risks and barriers, facilitating investments through appropriate tools and instruments, providing comprehensive renewable energy investment data, and assisting member states in building renewable energy project pipelines. The secretariat must be in a goal position to clear for investors the creditworthiness of state-owned power companies in Africa.

The AfCFTA secretariat can also partner with institutions like the West African Science Service Centre on Climate Change and Adapted Land Use (WASCAL), and the Southern African Science Service Centre on Climate Change and Adapted Land Use (SASCAL) to engage in case studies and research activities to develop practical proposals that could address some of the key financing and off-take uncertainties that have hampered the uptake of renewable energy investments in Africa.

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6.???Assist with the establishment of additional pan-African Green Banks

There is a need for Africa to have more home-grown financing markets, capable of sustainably holding and supporting long-term investments in green energy and resource efficiency through a combination of commercial and concessional financing.

The AfCFTA secretariat can facilitate the establishment of let’s say pan-African Green Banks, to augment the works of the likes of the African Green Infrastructure Investment Bank (AfGIIB) initiative. The mandate would be to provide sustainable support to renewable energy projects across the continent, just like the African Development Bank (AfDB) whose objective is to support economic development and social progress in Africa by promoting public and private capital projects that aim to reduce poverty and improve living conditions.

The Green Banks could also help divert private investments into sustainable green projects by offering credit lines and technical assistance to local companies, partners, inventors, and individuals; who seek financial support for green projects. The pan-African banks must definitely go beyond providing simple lines of finance, to include advisory services to help clients enhance their market practices. ?