As the world focuses on energy transition and decarbonisation, there is clearly no shortage of ambition on the part of many African governments to play a key role in global efforts to tackle climate change. Meanwhile, the debate about the role of fossil fuels in Africa’s development is as lively as it is nuanced. We need a pragmatic approach because, vital though energy transition is, it will not happen overnight.

Hydrocarbons remain important to many African countries and, according to modelling by McKinsey, will continue to be a key source of revenue over the next 10 to 15 years. Projects already up and running are currently benefitting from the rise in oil and gas prices since Russia invaded Ukraine. Yet, attracting investment for new developments – even in Africa, where the economic and developmental case for it is strong – is becoming harder. While oil companies and national governments remain eager to capitalise on recent discoveries, international banks have seemingly closed their books to new oil and gas projects.

By contrast, investment in solar has taken off, helped by the falling cost of key components like photovoltaic panels and new, more efficient technologies. Although there is strong international support for African solar projects, there is still capacity for much more. The International Energy Agency (IEA) states that Africa has 60% of the world’s best solar resources, but currently accounts for 1% of installed capacity.

In all this, it is important to maintain perspective. Comparatively speaking, Climate Analytics affirms that the value of renewables investment on the continent remains a fraction of the amount being spent on fossil fuels – the latter being estimated at six to seven times greater than the former in recent years. However, as the IEA demonstrates, the trends also show that expenditure in oil and gas in Africa has declined in recent years, while spending on renewables has grown exponentially. Striking the right balance is critical and complex – not only in Africa, but the world over.

The growing use of carbon credits for clean energy projects

Since the inauguration of the Africa Carbon Markets Initiative at COP27, there has been significant interest in the potential to unlock billions through the carbon markets while also expanding energy access, protecting biodiversity and promoting sustainability and climate action. Carbon credits could form an important second source of revenue for clean energy projects alongside what the developers make from producing and supplying power – and, if adopted at scale, could transform the energy investment model for Africa.

Africa’s green hydrogen potential

Much has been made of Africa’s potential role in the green hydrogen revolution, but there are two sides to this. For Africa’s governments and its people, the priority has to be providing access to reliable energy for all. Developing green hydrogen predominantly for export should not distract from this goal. Nevertheless, it should be possible to do both, because creating a green hydrogen industry can bring important benefits domestically, even if much of what is produced is exported. It will create jobs, build important skills and know-how around renewable energy (vast amounts of which is needed to produce green hydrogen), and can be a valuable source of revenue as the use of oil and gas declines.

North African countries that are already very well electrified, like Morocco and Egypt, are undertaking some ambitious hydrogen projects, and the case for it in these countries is clear. However, the reality in other countries is that this will only be possible when the right level of reliable renewable capacity has been achieved, which may be a few years off for some.

The race for hydrogen will be intense, with many countries globally competing to be front-runners. A number of Western nations have launched generous subsidy schemes, with countries in the Middle East also investing heavily in first-of-a-kind mega-projects. African countries may not be able to provide the sort of support that other governments can offer. It will come to sub-Saharan Africa, but it may be more mid- to long-term, once the technology has matured and the cost of production decreases.

Africa’s initial role in the hydrogen economy could be rooted in the supply chain, particularly with regard to mineral resources such as cobalt, nickel and lithium, which are abundant in Africa and vital for key clean technologies. The race for these minerals will be intense and African countries need to prepare frameworks and regimes to allow and encourage investment in their mining industries and supporting infrastructure. The balance required to manage these resources is not unknown to African nations, but it will be important to apply the lessons learnt in the past from the extraction of precious metals, minerals and oil and gas.

The ideal scenario for Africa’s countries endowed with these resources would be to look further along the supply chain rather than focusing on mining, including refining minerals and, indeed, manufacturing clean-tech components. This would allow them to capture the maximum value from their natural resources. But of course, these industrial processes would require large amounts of constant and very reliable electricity.

So, in this case, as in everything else, the story comes full circle – back to how vital mass electrification is.

Urvi Gudka

Senior Associate: Projects, Energy, Natural Resources and Infrastructure

Allen & Overy

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