Last week we welcomed our partners from ISSER, KIPPRA, Durham University and The Policy Practice, for the kick-off meeting of our project Green Growth Diagnostics for Africa 1.
We had three days of stimulating discussions about the methodological and practical challenges of using a growth diagnostics (pdf) approach to promote inclusive green growth and applying it to Kenya and Ghana, with a particular focus on the electricity sector.
High Risks, Low Rewards
It is widely agreed that underinvestment in renewable generation in developing countries derives from a risk-reward problem. Risks are too high, which translates into high costs of financing. Renewable energy investments are particularly sensitive to high interest rates due to high investment costs and lower operational costs, opposite to fossil fuel alternatives. Rewards are often too low to make up for this, as a result of low and distorted electricity prices, high transaction and infrastructure costs or lost revenues due to long delays in setting up the project . Consequently, in the global competition for scarce financial resources, renewable energy projects in Africa often don’t pass the test.
High risks and low rewards are caused by multiple constraints: technical, institutional, economic, political, financial, human capital. Suites of policies are recommended on all fronts. Among these, feed-in-tariffs (FiT) have emerged as cornerstone policies and have rapidly diffused internationally. They promise investors a guaranteed access to the electricity system and secure future revenue streams, thus mitigating the risk associated with long-term, fixed cost investments. Many African countries have already implemented FiT, including Kenya, Tanzania, Nigeria, Rwanda, Uganda and South Africa. Others are planning to do so very soon, such as Ghana which has been in discussions
with the EU to obtain technical and financial support for its FiT.
A Slow Progress
And still, the flow of renewable energy investments in Sub-Saharan Africa is painfully slow. Its renewable energy markets remain the least developed globally, even though its resources and its need are the greatest. Recent oil and gas discoveries are making things worse.
Many constraints remain after the implementation of FiT. Public funds are limited and cannot address all of them. Also, very often policies that have worked elsewhere are not politically viable because they clash with the interests of powerful groups. Furthermore, they can have unintended macroeconomic effects, affecting the structure of domestic prices with repercussions for the growth prospects of different production sectors and the income growth of different socio-economic groups. Even if new renewable generation capacity is eventually added to the electricity system, this may not deliver inclusive growth if the increased quantity and reliability of supply do not reach the poor.
With this project, our research team seeks to support policymakers in cutting through this complexity in their pursuit of inclusive green growth. Our work will:
- systematise the search for the most significant constraints on increased private investment in specific green energy technologies in a particular country at a given moment in time;
- identify the reforms that can deliver the greatest impact for effort;
- assess the political feasibility of these reforms and test their macroeconomic implications;
- take into account the distributional impacts from both a technical and economic perspective.
And as evidenced by our lively meeting, we can talk!
1.This Project runs until June 2016 and is funded by a grant from the Engineering and Physical Science Research Council (EPSRC).
Ana Pueyo is a research fellow on the Globalisation Team at the Institute of Development Studies. She is currently working on Green Transformation, low carbon growth and pro-poor access to electricity.