What should Africa do with its gas? It’s a question that will be central to proceedings at COP27 in Egypt in November. And since the invasion of Ukraine, the issue has come into even sharper relief, as European leaders scrabble to work out how to ween their economies off cheap Russian oil and gas.
And while they, at least in private, still express their enthusiasm for African economies to “embrace a rapid transition to renewable energy”, a new caveat has emerged in private: “Just perhaps not quite yet…”
This pragmatism to secure alternative sources of gas is completely unsurprising. Faced with double digit inflation and a looming recession, why would European governments not look to African nations that are rich in natural gas that is largely still to be exploited?
Given recent developments, it is entirely legitimate for African political leaders to question whether they should change their energy transition timetable as well. Why shouldn’t African nations exploit gas to accelerate the pathway to industrialisation and prosperity?
And they would be perfectly entitled to have that thought. The question then becomes: “Is investment in gas a good bet or not?” My view is that it is not.
Up until now it has been easy to say African nations should avoid investments in fossil fuels because of the major cost of transition and the issue of stranded assets – the infrastructure and from a finance perspective, the accompanying accumulation of debt. But the current situation in Ukraine has made the debate much less clear cut, so additional explanation is required.
Firstly, Africa has immense renewable energy potential. If you must choose your energy source, choose the one to project you into the future. For the majority of African nations, renewables are readily available. So fossil fuels will always be the wrong choice when you have alternatives.
Secondly, gas is never a good bet because fossil fuel dependency establishes an economy based in stocks. Renewables are based in “flows” rather than stocks. When it comes to any commodity “stock”, Africans are always at the receiving end of any trade regimes. Africans don’t refine, Africans don’t transport fossil fuels so, you are creating a whole economy based around commodity export, at the very point when everyone is thinking about just transition.
And thirdly, Western private investors in gas are largely not interested in the stranded asset argument. They will be covered by sovereign guarantees that minimise their risk.
All that said, African leaders are, by and large, pragmatists. The climate emergency is not their fault, and they know that significant investment in gas in their countries will barely move the dial in terms of total global emissions. That means they will opt for fossil fuels unless certain conditions for renewable development are met.
Primarily, there needs to be a significant pivot towards financing for renewables. And that will take a wholesale underwriting of the risk for private investors to plough capital into such projects. Multibillion commitments need to be made into risk compensation schemes and risk insurance to awaken investment markets. That includes sovereign guarantees, but not necessarily from the African governments.
That will significantly improve the number of projects that come to market and alleviate the current situation where you risk seeing development capital competing for the relatively few “bankable” projects that emerge.
The promised billions for green finance from rich nations to developing countries have been a disappointing story that diverted attention from the real financial needs. The gap between the promises and the reality is getting wider and African leaders simply do not believe what they are being told any more.
And there needs to be a shift in the mindset of Western governments and investors towards renewables in Africa. For example, take green hydrogen. Western actors see investing in green hydrogen in Africa just like investing in any other commodity such as coffee beans or lithium or any other product that is destined for export to satisfy the need of rich markets. African leaders would be more agreeable towards renewables if investment deals were designed to develop corridors of industrialisation in their own countries. This premise is mostly not even part of the narrative at the moment.
In such an environment, the clamour for gas grows louder. COP27 is not going to change the above trends in the short run. But it can be used to change the narrative – to accept the current framework for the debate is wrong. We need to revisit how we define comparative advantages that seem to only comfort commodity exports, or regulatory systems that penalize latecomers. Only then can we fully appreciate why the case for African gas is so fundamentally flawed.
African leaders want renewables, but the business case must make sense. After all they are as pragmatic as others.
Professor Carlos Lopes is a development economist and a Professor at the Mandela School of Public Governance, University of Cape Town. He is the former executive secretary of the UN Economic Commission for Africa.
The views expressed in this article are the contributor’s own and do not necessarily reflect BII’s investment policy or the policy of the UK government.