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Finance for renewable energy in Africa follows colonial roots

Investments into renewable energy in Africa are critical. But they need to take local ownership and participation seriously.

Steffen Haag
10 February 2020
Image: Lollie-Pop, CC by 2.0

This article is part of ourEconomy's 'Decolonising the economy' series.

The role of renewable energy has drastically changed in recent years. Just a few decades ago, it was only on the agenda for few ecologically conscious visionaries. Today, our future is unimaginable without a tremendous expansion of renewable energy. This is especially true for Africa, where, firstly, climate conditions are evidently favorable for renewable energies, most obviously for solar technology. Second, the technology is especially convenient for the challenges the continent is facing in energy provision.

Only every second person has access to a reliable and stable supply of energy, with a much lower rate in rural areas. Grid extension to connect every remote village in Africa is very expensive. Technical solutions such as Solar-Home-Systems that provide energy at household levels or so-called ‘off-grid’ solutions like insular energy grids in villages are instead offered as more viable and cheaper alternatives. The global community has pledged to guarantee energy access for everyone. This will only be possible if renewable energy plays a crucial role. In this sense, renewable energy contributes to social justice. The 2018 report of Poor People’s Energy Outlook shows how especially poor people are affected by a lack of access to energy supply.

The United Nations Development Program calculates a sum of 51 billion US Dollars that are needed per year until 2030 to guarantee energy access for everyone. Today, only half of this amount is invested. Governments have reacted and initiated transformation processes with respective policies. Feed-in-tariff mechanisms, auction programs or subsidies are promoted in line with renewable energy policy frameworks. However, the construction pace is slow, and even more, the funding is scarce. Public funding as well as the private sector is required to accelerate energy transition in African countries. However, investors shy away from these investments for two reasons: they fear political or economic risks in Africa and they fear unknown renewable energy technologies.

The set-up of new financial programs

The international community has reacted by initiating numerous programs to spur investments in renewable energy in Africa in recent years so that a diverse and complex landscape of financing programs has developed. Within the UNFCCC climate negotiations, the green climate fund has recently started operations to channel climate finance that is being made available to Global South countries for climate change adaption and mitigation strategies.

The World Bank has developed its own program – Scaling Solar – pursuing the goal of creating viable markets for solar projects. Another program, GET FiT, can be traced back to a Deutsche Bank initiative and is now being realized with the help of several European donors. The driving idea behind this program is to assist African governments in providing an institutional and regulatory framework to attract investors for renewable energy projects.

The impact has been remarkable. In Uganda, GET FiT has mobilized USD 450 million in investments directed at increasing national energy production by around 20%, which guarantees energy supply for roughly 200,000 households. Within the Scaling Solar program, two solar plants are being built in Senegal with a capacity of 30MW each, which makes it the cheapest energy source in the country.

The driving idea behind these projects is to establish an institutional and regulatory framework so that reluctant investors feel secure enough to invest in renewable energy in Africa. This is what finance experts call derisking: a guarantee for returns on investments against possible risk scenarios, e.g. expropriation, the non-payment of financial obligations or civil unrest. The concept of derisking is considered to be the key component of every financing program in the renewables sector in Africa.

Following colonial roots

Taking a closer look at the idea of derisking, we can trace the concept back to the financial industry during colonialism. Private businesses were crucial in the subordination of the foreign territories, in the extraction of natural resources and the exploitation of labor. These companies did not rely on their capital alone. It was common for corporations to receive state assistance in their overseas market expansion. Governments provided public guarantees with fixed rates of return so that private investors were insured against risks in the colonies. Britain’s colonial government, for example, guaranteed private investors a return of minimum 5% on their investments in railway construction in India. In other words, tax payments were used to pay off investors, if a certain rate of profit had not been reached by the investment itself. Derisking is based on a shared perspective viewing Africa as a bleak, backward and savage place. The Congolese philosopher Mudimbe, author of the seminal book ‘The Invention of Africa’, holds the view that this idea of Africa was invented by the West and has colonial roots.

But not only does the idea of derisking appear in colonial disguise. The current financing landscape represents the global financial hierarchical order traced back to colonial times. The established financing landscape follows a clear distribution of roles. The provision of funding comes from the Global North and flows to the Global South. This bears several problems. First, the unilateral flow of money creates dependencies and forces African countries into a subordinate position. Returns from the renewable energy projects are expatriated rather than being reinvested in the continent and the profits flow back to the investors in the North.

Second, contemporary finance creates extensive negative impacts for energy markets in Africa. Lamine Ndiaye is a pioneer in renewable energies in Senegal. During field research on renewable energy for small enterprises in Senegal, I had the chance to meet him and discuss the role of global finance for the local energy market. He welcomes the recent extension of renewable energy in Africa. “However”, he continues, “Scaling Solar will sell electricity at a price of less than 4 eurocents/kWh, which will kill the sector. No other actor will be able to sell at that price and it risks becoming the referential price.” Local actors will be priced out of the market.

Indeed, developers of renewable energy projects based in the Global North import almost everything, from the technology used, to the skilled workforce to construct the plants. This risks excluding African enterprises and preventing value creation on site. Boniface Mabanza, a development expert and political activist for socio-economic justice in southern Africa, argues that African perspectives are neglected in the latest initiatives, which discover the African continent as a profitable investment location. He thinks that African countries need to reject the programs that promote private investments in Africa until they are able to regulate them. According to Mabanza, the current regulatory environment benefits foreign investors rather than leading to substantial transformation on the continent.

The current programs aimed to strengthen private investments in the renewable energy sector in Africa are at a deadlock. While funding for the much needed energy transition is urgently needed, the present programs do not seem to respond to local needs. We therefore need financing that seriously includes local actors and their views. Ownership and participation should not be just empty words on policy papers. The affected local population needs to be heard and must materially benefit from the investments.

Why not give each household of the local population a share in the renewable energy plant and let a local democratic body decide upon the reinvestments? As long as renewable energy financing prioritizes profit returns over climate change mitigation, the continent will bear the consequences of the climate crisis.

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