How Effective Regulations can Smoothen Energy Investments in the Transition of the African Energy Market

INTRODUCTION

According to Philip Selznick, Regulation means ‘the sustained and focused control, exercised by a public authority over activities valued by the community.’[1] Moving away from definitions of Regulation in legal theory, the world has become inter-disciplinary with economists defining it as the ‘imposition of rules by the government, backed by the use of penalties that are intended specifically, to modify the economic behaviour of individuals and firms in the private sector.’ [2] In simple terms, it can be said to be the intervention of the government using rules and their attendant penalties to affect market conditions.

The move from conventional energy sources to renewable energy sources allows Africa to skip the issues associated with fossil fuels. It also allows Africa to create a more sustainable future with a focus on green energy, in accordance with the United Nation’s Sustainable Development Goal 7 of 2030 which aims to;

  1. Ensure universal access to affordable, reliable and modern energy services;
  2. Substantially increase the share of renewable energy in the global energy mix and;
  3. Double the global rate of improvement in energy efficiency.

Inadequate government investment has necessitated the participation of the private sector in the energy sector. In order for this to be effective, there is a need for partnership between state actors, multilateral organisations and the private sector.

Regulations in the energy sector have far-reaching implications which affect the economy of any country on both a macro and micro level.

To this end, this paper seeks to examine the advantages of Regulation over investments in the transition of Africa’s energy sector, from conventional energy sources to clean renewable energy, by examining the relative competitiveness of Africa’s energy markets.

Africa’s Energy Markets in 2022

According to a report commissioned by Germany’s KfW Development Bank, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), and the International Renewable Energy Agency (IRENA) on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ), there is a considerable gap in Africa’s electricity supply when compared with that of its peers. The lack of access to sustainable modern energy services and products is a severe problem facing most people in Sub-Saharan Africa.

Additionally, African nations are far behind other countries in terms of the deployment of renewable energy, when compared to nations with similar sizes and populations. The percentage of electricity generated from renewable energy sources in Africa in 2018 was 20 per cent. This is in comparison to the rest of the world, where two-thirds of all newly added energy capacity for supplying electricity worldwide was based on renewable resources. Africa’s investment in the renewable energy sector is low.[3]

Notwithstanding the above, as Africa’s population continues to grow, there is a need for considerable investments in renewable sources of energy, in order to avoid the challenges of overreliance on fossil fuels. However, moving from conventional energy sources is less about replacing fossil fuels with a few isolated examples of green energy, as it is more about creating systems in place that lets Africa create new sustainable energy systems.

The move from fossil fuels to cleaner sources of energy is seen as important in reducing rising global temperatures over the last few decades, and its attendant effects. It is important to note here that Africa contributes very little to the exploitation of fossil fuels for industrial development. This is done mainly by more industrialised countries. In fact, combined emissions from fossil fuel use in Africa made up only 3.6 per cent of global total in 2017, even though the continent hosts nearly 17 per cent of the world’s population.[4]

The transition to clean and renewable energy sources is driven by several factors, such as supply and demand issues regarding fossil fuels, issues of sustainability, activism around climate change, socially driven ambitious targets for Renewable Energy, cost-competitiveness, investor priorities in Environmental, Social, and Governance issues (ESG) by stakeholders and investors, etc.

Although Africa’s contributions to global emissions from fossil fuels a significantly low, the effects of climate change are being recognized, perhaps, unevenly in the continent. For example, the Horn of Africa’s pastoralist areas (Ethiopia-Kenya-Somalia border), has been severely impacted by recurrent droughts.

Carbon emissions are shaping the portfolios of the world’s biggest energy companies, who are “screening assets for divestment” since oil price risks and carbon-neutral goals are shrinking the pool of buyers for oil and gas (O&G) assets.[5] The exit of major international oil companies in Nigeria including Royal Dutch Shell, ExxonMobil, Total and Eni show the shift from a focus on oil and gas to other energy sources.

According to IRENA[6], Africa’s estimated potential to generate renewable energy from existing technologies is 1,000 times the projected demand in 2040. They also project that renewables would create 45 million jobs by 2050, and global GDP would rise 2.4 per cent. This shows the transformative power that the transition to renewable energy sources can have on the continent.

It is worthy to note that the African Energy sector has in recent times benefited from investments, such as the African Development Bank (AfDB), the Korean Ministry of Economy and Finance, and the Export-Import Bank of Korea’s provision of $600 million on renewable energy solutions. This is definitely going to push the sector forward because investments such as this will bolster the market, and create confidence in the African energy sector.

The World Bank announced a $465 million fund to improve renewable energy integration in West Africa, and $168 million financing towards Burkina Faso’s efforts to increase access to electricity in rural areas, and support the country’s transition to clean energy. Similarly, the International Finance Corporation (IFC) and The Rockefeller Foundation (RF), a partnership that aims to mobilize $2 billion of private sector investment in distributed renewable energy solutions, including scaling a mini-grid program and battery energy storage. Africa Renewable Energy Fund II (AREF II) raised €130 million to finance renewable energy in sub-Saharan Africa. The European Investment Bank (EIB) also approved $95 million for funding geothermal energy projects in East Africa and so many others. With all these investments and proposed investments, we can be rest assured that the future of the African Energy sector is heading to the promised land.

REGULATORY BENEFITS

Many organizations, particularly in the business sector often criticize government regulation, rules or policies as irrational impediments to profits, economic efficiency, and job creation. Unsurprisingly, many firms have leveraged loopholes in the regulations, moved operations to another jurisdiction with seemingly favourable laws, or violated the laws altogether in an attempt to deal with the regulations.

However, it is important to mention here that regulations are just as important as profit-making in any industry. This is because, effective regulations help to create an enabling environment for businesses to thrive, and ensure compliance with international best practices, as well as customer satisfaction.

There is no doubt that without effective regulations, the marketplace would experience chaos, as companies will do anything to dominate the market. From our understanding of Economics, we know that monopoly is more disadvantageous for business. Competition helps create that enabling market. This can only be achieved if and when we have the regulations, which will dictate how business should be run. Furthermore, Regulations strengthen competition when it tackles information irregularities, especially with complex products.

In the same light, we can safely state that effective regulations protect consumers.

CONCLUSION

While the African Energy market continues to grow, it is worthy to put into consideration, the huge impact played by the implementation of Regulations, while acknowledging alternative mechanisms such as dissemination of information through proper education; and incentive/market-based structures, which will further enable the economy to grow exponentially.

  1. Selznick, P. ‘Focusing Organisational Research on Regulation’, in R. Noll (ed.), Regulatory Policy and the Social Sciences, Berkeley: University of California Press. (1985).
  2. Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.
  3. KfW Development Bank & IRENA, “The Renewable Energy Transition in Africa – Powering Access, Resilience and Prosperity” (2021) < https://www.irena.org/publications/2021/March/The-Renewable-Energy-Transition-inAfrica#:~:text=A%20renewables%2Dbased%20energy%20transition,jobs%20and%20boosting%20energy%20security.> assessed on February 15 2022
  4. IEA, Africa Energy Outlook 2019, IEA, Paris (2019) available at < https://www.iea.org/reports/africa-energy-outlook-2019 > assessed on February 15, 2022.
  5. African Energy Chamber, “The State of African Energy 2022” (2022) available at https://energychamber.org/report/the-state-of-african-energy-2022/ assessed February 15, 2022.
  6. KfW Development Bank & IRENA (Supra)

Newsletter Updates

Enter your email address below and subscribe to our newsletter

Leave a Reply

Your email address will not be published. Required fields are marked *