Promises of cooperation on low carbon and renewable energy were highly visible in the China Africa relationship at the end of last year. The 8th Ministerial Conference of the Forum on China Africa Cooperation (FOCAC8) held in Dakar at the end of November 2021 made explicit mention in Chapter 7 of its Action Plan that China will help increase the share of clean energy in the continent’s energy mix, point 7.3.9 specific singling out solar PV as an area to strengthen cooperation.
The FOCAC also concluded for the first time ever a Climate Declaration, Point 8 of which stated that China will “further increase” investments in low emission projects such as wind, solar and other renewables. The commitment echoes President Xi’s comment at the UN General Assembly in September that China will “step up support for other developing countries in developing green and low-carbon energy.”
With the exception of large and sometimes controversial hydropower projects, China’s investments in renewable energy technology in Africa to date has been limited, with far more investment dollars flowing into fossil fuel projects. Since the start of the Belt and Road Initiative in 2013, the largest single construction contract for a non-hydro renewable energy project in Africa was the US$ 548 million deal signed by Power China and Zesco in May 2020 for 3x200MW solar PV plants in Zambia. In contrast, the largest construction contract for a coal related project was for the expansion of the Hwange coal power plant in Zimbabwe, signed by Power China in 2018, with a value of nearly USD 1.5 billion.
So, the main question in the wake of the FOCAC8’s commitment to renewable energy cooperation is how the two sides will turn around the current flows of energy investments. On the opening day of the FOCAC8, a report by researchers from the Institute for Development Studies, the Open University and the Africa Climate Foundation dug into precisely these issues, looking at South Africa and Ethiopia as two case studies. At the end of last year, we had the opportunity to speak to one of the report authors, Dr Shen Wei, research fellow at the Institute of Development Studies.
Panda Paw Dragon Claw (PPDC): A number of researchers (including yourself) have identified the potential for large scale Chinese investments in solar and wind power on the African continent. But this potential has not yet transformed into reality. What are the major obstacles to increased solar and wind investments in Africa?
Dr. Shen Wei (SW): From the China side, timing is the major reason. Over the past decade Chinese companies and policy makers were focusing on developing China’s domestic wind and solar market and only a few companies were interested in testing the water overseas. Secondly, investment risks in the African market are notably higher compared to other markets, which has further deterred the investment impulse.
Relatively low interest in the African renewable market is not unique to Chinese energy companies, indicating a broader issue with investment opportunities on the continent. In general, the deployment rate of renewable energy in Africa is much lower than other regions. Some non-Chinese companies have been more active in the African market, however, primarily due to the relative maturity of their domestic market.
PPDC: How could decision makers in both Beijing and Africa overcome such hurdles?
SW: Now the policy signal from Beijing to encourage more investment in renewable energy overseas, including in Africa, is clear. But policy banks and export credit agencies need to develop supportive procedures to prioritize wind and solar energy projects over conventional energy projects. This is something they have never done before, as all project types were treated rather equally by these institutions as long as they stimulated Chinese exports. China should also find ways to scale up its involvement in off-grid or mini-grid systems in Africa via its newly reformed foreign aid system. To date, Western companies have been more active than Chinese entities in these types of distributed renewables projects.
African governments also need to give more support to renewable energy projects by prioritising project development in these sectors, giving preferential treatment in providing guarantees and foreign exchange services, and streamlining the project approval process. Strong market potential and clear policy signals are always the most crucial pull factor for foreign investment. For individual African countries, domestic market potential is limited, so some coordinated efforts at regional level are needed to create economies of scale. For example, the renewable energy market in South Africa and Ethiopia has tremendous implications for the potential regional opportunities in Southern African and Eastern African, which is one of the added values for potential Chinese investors to consider.
Sectoral reforms are also needed, particularly for those monopolized state-owned energy systems that are inefficient, less competitive and heavily in debt. Renewable energy Independent Power Producers (IPPs) can be developed amid these reforms and can to some extent help break the gridlock of vested interests.
PPDC: The FOCAC8 Action Plan identified a need to work on exploring “innovative ways of financing” (3.8.1). What are the most common modes of financing and investment in renewables projects in Africa? And what might the latest Action Plan’s call for innovation mean for renewable energy project development?
SW: For Chinese projects, EPC + financing (EPC+F) is still the dominant model. China’s government has been encouraging Chinese companies to move down the supply chain and get involved in project development and equity investment, but with limited success so far. It is hard to predict what new financial models can emerge, but possible routes may include the use of green bonds, carbon offsets, and climate finance. Whatever the instrument, de-risking remains the largest challenge for all the potential models.
EPC+F model: This project development model adds a financing element to the standard Engineering, Procurement and Construction (EPC) contractual arrangement, essentially making the contractors of a turnkey project responsible for raising funds for the project too. Many Chinese engineering firms, particularly state-owned enterprises with strong connections and access to Chinese bank loans, offer potential financing to host country developers. With securing financing often the most complicated of steps required to get a project off the ground, the potential of financing and EPC services coming in one bundle is a major asset for Chinese companies bidding for project deals around the world.
PPDC: Do solar and wind investment opportunities in Africa present themselves more in the form of utility projects or off-grid and localised projects? Do Chinese companies have strengths in both? And if we are to see a scaling up of investments in utility scale projects, would that also require large scale investments in grid infrastructure in Africa?
SW: Both utility and distributed systems have tremendous potential in Africa. But distributed systems are particularly challenging, and Chinese companies are less experienced in distributed systems as they became popular domestically only in the past few years. Where Chinese companies do have notable domestic experience promoting distributed systems is via state-led initiatives combining poverty alleviation with the promotion of distributed solar. Such experience may work well in some African contexts too, though some creative institutional arrangements would be needed to get such initiatives off the ground.
In terms of the grid, in general, coordinated development of generation facilities and grid infrastructure is always desirable. But constructing or upgrading transmission lines and transformation facilities would often be un-bankable as many areas are geographically remote and sparsely populated, meaning that the projects needed are large in scale but will connect relatively few customers. In some cases, Chinese funded power generation projects would be complemented by the construction of transmission lines if they are needed between the project sites and existing grid networks. China has been an active promoter of regional and cross-border grid connectivity and could play a more active role in cooperating with regional and multilateral organizations such as African Development Bank. In particular, China’s world leading ultra-high-voltage (UHV) electricity transmission technology could be a fruitful area for international cooperation.
PPDC: It was noticeable that the Climate Declaration that came out of the FOCAC8 included support for access to green investment and financing for gas projects. For China-based observers, this was somewhat surprising as gas is not considered “green” in China’s domestic taxonomy of projects eligible for green financing. A number of African governments have argued for the inclusion of gas as a transition fuel and essential for economic development, however. How do you think this wording makes its way into the Climate Declaration? Do you think gas is a viable transition fuel for African economies?
SW: Gas is not green for sure, but to completely stop investment in this sector, particularly among those countries sitting on significant natural gas reserves, would be unrealistic. To be frank, hydro and gas are both becoming less viable energy options and face the risk of being stranded assets in the coming decades. Yet their phase out depends on how the above mentioned challenges in the renewable energy sectors can be solved first. Otherwise, the moral ground to convince African countries to stop all these suboptimal energy options completely, in my view, is not that solid.
For most African countries, the lack of baseload energy is still the major problem and, currently, renewables cannot solve that on their own. Geothermal may be an exception, but not all countries have sufficient geothermal resources, and it is still expensive to develop. Of course, new gas power capacity needs to be carefully planned. Once battery and smart grid technology is more readily available, then we can talk about phasing out gas and hydro in Africa. For any serious policy makers and researchers, sequence and pace matters.