Energy transition in Africa: How effective are restrictions on hydrocarbon financing? (By Ahmadou Aly Mbaye and Mbayang Thiam)

For several years now, most international development banks have been reluctant to finance the hydrocarbon sector in Africa. The stated objective is to promote the transition to more sustainable sources than fossil fuels. While the feasibility of such an approach remains debatable, it also has the drawback of pushing African countries to rely almost exclusively on major oil companies to exploit their hydrocarbons; this increases financing costs and negatively impacts revenue sharing. Our view is that, in addition to being inequitable, these restrictions are unproductive. By enabling the continent to exploit its hydrocarbons more efficiently, it would be better positioned to develop its vast renewable resources and, consequently, accelerate its progress towards net zero.

The dual constraint of access to energy and climate change

Developing Africa's industrial base and reducing poverty are two objectives of Agenda 2063 and the SDGs (Sustainable Development Goals), both of which are hampered by the continent's limited access to energy. 85% of the global energy deficit is currently concentrated in Africa, compared to 50% in 2010 (Global Carbon Project, Global Carbon Budget 2024). In West Africa, only 42% of the population has access to electricity, and barely 8% in rural areas (4% in rural areas of Sierra Leone), with significant disparities between countries, ranging from 13% in Burkina Faso to 96% in Cape Verde. With approximately 180 kWh per capita per year, the average African consumes about 5% of the average global citizen's consumption (estimated at 3,500 kWh/year) and 1% of the average American's (estimated at over 12,500 kWh/year). At a time when artificial intelligence and blockchain technologies, which are particularly energy-intensive, are developing while excluding the continent, this already vast disparity risks becoming truly scandalous.

This inequity is compounded by an equally glaring inequality in emissions. Africa contributes only 3.8% of global emissions for 17% of the population, while warming approximately 1.5 times faster than the rest of the world. Floods, prolonged droughts, and other disasters resulting from climate change contribute to severe food insecurity affecting more than 60 million people. Despite a far smaller contribution and far greater impacts, the continent faces a double burden with the restrictions imposed on financing its hydrocarbons. These restrictions also ignore the enormous disparities between countries, with, for example, a single country like South Africa accounting for 40% of the continent's emissions. They make no further distinction between oil and gas, even though the latter contains 45 to 50% less carbon than coal and 30% less than oil, without producing smoke, dust, or soot.

Fossil reserves as a financing lever

While the African continent is far from holding the world's largest hydrocarbon reserves, it possesses enough to alleviate the enormous financing constraints it faces and, at the same time, initiate its energy transition. For example, with proven natural gas reserves representing 8% of the global total, the continent could, at the current rate, ensure 56 years of production, even though more than 80% of African gas comes from just three countries (Egypt, Nigeria, and Algeria). Renewable resources are considerably more substantial. Approximately 60% of the world's best solar resources are located in Africa; the Sahel alone receives more than 2,000 kWh/m²/year of sunshine, and the 350 GW hydroelectric potential is only 11% exploited (IEA, Africa Energy Outlook 2022). Moreover, the continent has already made significant progress in its energy transition, despite its financing constraints. For example, Kenya achieves nearly 90% renewable energy through geothermal power, the Ethiopian GERD has built 5,150 MW primarily with its own funds, and Morocco has built one of the world's largest concentrated solar power complexes with Noor.

Financing remains the main bottleneck for Africa, where even climate change, considered a global public good whose effects spare no country in the world, is a concern. Indeed, climate finance, which currently stands at $44 billion per year, is a drop in the ocean compared to the scale of the needs. By 2030, the expected gap between the level of financing and the needs is estimated at $2.5 trillion (Climate Policy Initiative and FSD Africa 2024). The few available mechanisms—the Green Climate Fund, AfDB commitments, AFD climate finance, green bonds, climate debt swaps, and the carbon market—remain surprisingly limited. Furthermore, access to them is highly concentrated. Only ten African countries capture 50% of climate finance and 76% of private financing, with South Africa, Egypt and Nigeria alone taking half of the latter.

It is important to note that climate finance encompasses both mitigation (aiming to help countries reduce their emission levels) and adaptation (aiming to help countries properly manage the effects of climate change on their economies and societies). Clearly, given its very low emission levels, which contrast sharply with the devastating effects of climate change on its economies, the African continent reasonably needs more financing for adaptation than for mitigation. Moreover, developed and emerging countries, the main culprits behind the climate crisis humanity currently faces, seem to have grasped this. They have, in fact, consistently made very firm commitments to finance adaptation in order to prevent the additional burden of climate change on the development efforts of low-income countries from falling solely on them. However, these promises have never been fulfilled. Consequently, while climate finance, in general, mobilizes very small amounts, financing for adaptation constitutes a tiny fraction of it.

Beyond climate finance, the continent faces far greater challenges in financing its economies, with an average investment rate of only 22% of GDP compared to 35% in Asia. This contrasts sharply with national savings that have fallen from 30% to 20%, debt servicing that has more than doubled since 2010, and debt exceeding 60% of GDP (132% for Senegal). Given the immensity of these needs, it is difficult to envision a decarbonized economy within fifty years, all other things being equal. On the contrary, more efficient use of fossil fuels, supported by better-suited financing mechanisms, would significantly boost investment in renewable energy.

The case of Senegal

Thanks to massive investments made in recent years, Senegal has significantly improved its access to electricity, with a national average access rate of 84% and peaks of 96% in urban areas (World Bank and Senegalese Ministry of Energy, Petroleum and Mines, 2023). However, strong demand growth and dependence on imported fuel oil are weighing heavily on a sector whose subsidies recently peaked at over 2 trillion CFA francs. Renewables already account for 30% of the energy mix, and the country's gas potential places it among the leading producers. The "gas-to-power" strategy aims to increase the share of gas in electricity production from 1% in 2025 to 30% in 2030, which would reduce dependence on heavy fuel oil, lower energy costs, and support industry, from fertilizers and petrochemicals to cement and steel production. More importantly, with the JETP (Partnership for a Just Energy Transition) negotiated with its partners, Senegal hopes to mobilize 2.5 billion euros to increase renewables to 40% of its production by 2030.

The weakness of this strategy lies in the fact that gas-to-power primarily targets heavy industry, which is capital-intensive and generates few jobs, within a highly strained national and international financial context. Furthermore, while the objective of rebalancing the distribution of oil revenue between major oil companies and the state remains commendable, the method deserves to be revisited. Renegotiating contracts, even if profitable in the short term, risks exacerbating the reputational damage that is already so costly for the continent, as the instability of the legal framework is the greatest deterrent to private investment. A more systematic use of diplomacy, involving international development banks more closely in financing the hydrocarbon sector, would allow for a diversification of financing options, the development of sector management capacity, and access to the necessary international expertise at a lower cost.

Ahmadou Aly Mbaye and Mbayang Thiam