Billions in renewable energy investments in Africa can be unlocked through carbon credits, says Terje Osmundsen of Empower New Energy.
Terje Osmundsen, Founder and CEO of Empower New Energy, has 14 years of experience in developing and financing solar energy projects in Africa.
(Photo credit: Brian Inganga/AP/NTB)
“Tripling of renewable energy” and “Scaling up climate finance” are set to headline the agenda at the climate summit COP 28 in Dubai. A focal point of discussion will also this year be Africa, that represents 18 percent of the world’s population but according to latest available data receives less than 2 percent of global renewable energy investments (2021) and 0.5 percent of all new solar panel installations (2022).
Can this year’s COP meeting make meaningful progress in breaking down obstacles that impede private investment in Africa’s plentiful renewable energy sources?
Carbon credits could become catalytic incentive
Developers and investors in renewable energy across North America, Europe, China, and other regions benefit from tax credits, Renewable Energy Certificates, Feed-in-Tariffs, or other incentives. Conversely, in Africa, except for a few countries, no such incentives exist, despite the cost of capital which is at least 2-3x higher in Africa than in advanced economies.
Carbon credits could become the catalytic incentive Africa’s renewable market needs. But ensuring these systems are designed appropriately will be critical to their success or failure.
There are two types of carbon markets, voluntary and so called compliance markets, i.e. markets that are established by governments or multi-government bodies like the UN. Both stand among the key topics to be discussed at COP 28.
Integrity-related scandals hurt demand
Presently, Africa garners less than 3 percent of the world’s carbon credit revenues. Most of Africa’s carbon revenues have been directed towards forestry-based projects. Unfortunately, Africa’s market for carbon credits have been spoiled by some very serious integrity-related scandals revealed the last couple of years.
For example, it was recently revealed that most of the $100 million in “carbon revenues” earmarked for a forest-protection project in Zimbabwe had gone to the two partners rather than people in the rural communities who fight deforestation. Naturally, scandals like these have exacerbated the decline in demand for Africa-originated carbon credits.
To rectify this, the Africa Carbon Market Initiative (ACMI) emerged at COP 27, spearheaded by a broad alliance comprising the Global Energy Alliance for People and Planet, Sustainable Energy for All, The Rockefeller Foundation, and the UN Economic Commission for Africa.
ACMI's aim is to raise the quality and integrity of African credits and to mobilize more than US$6 billion in revenues for African carbon-abatement projects through the voluntary carbon market by 2030, equal to 12 per cent of McKinsey’s projected global demand, and $120 billion by 2050. ACMI estimates that such a market growth could save more than 300 million tons of CO₂ and support 30 million jobs by 2030.
Global demand for voluntary carbon credits measured in gigatons CO₂ per year. (Source: McKinsey 2021.)
Alternatives to forestry-based projects
However, for the carbon market to succeed in meeting such goals, forestry-based projects should not be the only focus area. Forestry-based projects take many years to develop, often encounter opposition from local communities and the results are difficult to monitor and verify.
Decentralized solar plants powering local businesses, communities and mini-grids on the other hand can be scaled quickly, face fewer regulatory barriers and their performance can be easily monitored and verified electronically throughout the contract period meaning that the additional CO₂ savings are clear and unambiguous.
As an example, let me illustrate with a recent $1 million solar investment in Ghana by Empower New Energy (the company I am working for). The beneficiary, Nuts for Growth, is a new Ghanaian business processing shea nuts and soyabeans for export. The company is completing its first factory in Tamale in Ghana (see photo), and will create 300 direct jobs and support an additional 20,000 women through improvements in shea and soya production, significantly increasing the women’s revenues.
Factory under construction in Tamale, Ghana, to be solar-powered. (Photo: Empower New Energy).
Empower will now start the construction of a 1,2 MW rooftop solar plant that will deliver clean and reliable electricity to Nuts for Growth at a price that is 20 % lower than the grid tariff and saving more than 800 tons of CO₂ equivalents per year. At the end of the 15-year contract period, the solar plant will be transferred to Nuts for Growth, providing electricity for free for yet another 10-15 years.
Projects serving new businesses with limited credit history, creates additional investment risks. But thanks to an 8-year contract with the DREC aggregator Powertrust to generate and sell so-called D-RECs (Distributed Renewable Energy Credits), which is a market mechanism affiliated with the International REC Standard, from the solar plant, Empower could manage the investment’s risk while keeping the competitive tariff for Nuts for Growth.
Higher prices for high-quality credits
Currently, only a handful of renewable energy projects in Africa generate RECs or carbon credit revenues due to lack of demand, resulting in low prices – typically less than US$5 per ton CO₂ equivalent for small-scale solar projects, compared to around $80 in the European Emission Trading System (ETS).
Increased demand could potentially drive the price for high-quality carbon credits in low- and middle-income countries to $25-$35 per ton, equal to about 15-20 percent of the cost of constructing medium-sized (1-5 MW) solar PV projects in Sub-Saharan Africa. A carbon credit price at this level would serve as an efficient incentive for developers and investors struggling to finance their renewable energy project, mitigating payment, currency, and other commercial risks. The incentive could result in gigawatts of new solar investments in Africa, significantly reducing CO₂ emissions, creating jobs, and expanding energy access.
But wouldn’t a carbon credit for renewables run the risk of also “subsidizing” projects that are profitable without a carbon credit, many will ask? The risk is always there, but the role of certification bodies like Gold Standard, VERRA and others is precisely to study the project and verify additionality. But it’s important to recall that the main purpose of the carbon credits is to unlock the tens of thousands of renewable energy projects across Africa that are NOT being financed today.
Corporations and governments who seek to contribute to the development of a high-quality carbon credits market in Africa, should follow the example of United Arab Emirates. At the Africa Climate Summit held in Nairobi this year, investors from the Emirates pledged to purchase $450 million of carbon credits through the African Carbon Market Initiative (ACMI). These “Advance Commitments” signals a future demand for high-quality African carbon credits, encouraging developers to invest in projects meeting these standards. Hopefully we will see many more such pledges at COP 28.
Article 6 and a new global carbon credits market
In tandem with fostering the voluntary carbon market, COP 28 aims to advance agreements toward establishing a global compliance market for carbon credits. Article 6 of the Paris Agreement outlines a pathway to create a market for UN-certified carbon credits, termed ITMOs (International Transferable Mitigation Outcomes). These can be exchanged bilaterally between developed and developing nations or via a centralized UN-managed trading platform.
Interestingly, some countries have already started with carbon market initiatives under Article 6. Ghana, Morocco, and Senegal are countries that have signed cooperation agreements with Switzerland and/or Sweden to initiate bilateral trading of ITMOs. Ghana and Sweden, as an example, have forged a bilateral agreement for Sweden to purchase carbon credits from impactful decentralized solar energy investments in Ghana. More than 20 African countries have expressed their intention to participate in such market initiatives under Article 6. Two new coalitions, the West African and Eastern Africa Alliances on Carbon Markets and Climate Finance, are established to promote implementation of Article 6.
In its report Financing Clean Energy in Africa (Sept 2023) IEA highlights the need to develop carbon markets: “Carbon markets can provide financial flows similar to results‐based finance for climate”. The organization estimates that ITMOs could generate USD 225‐245 billion in net financial flows to African countries and prevent the emission of 3 500‐3 850 Mt CO₂ over 2020‐30 (around 22‐24% of Africa’s total energy‐related CO₂ emissions over the period…This implies the implementation of Article 6 mechanisms could deliver financial flows that exceed 20% of investment in clean energy in Africa by 2030 and reach “roughly 30% by 2050”.)
Time is critical
For every billion dollars of carbon credits allocated to decentralized solar energy plants, Africa will gain around 1 Gigawatt of clean energy, and the world will save about 40 million tons of CO₂ equivalent. Both the voluntary market initiatives and the implementation of Article 6 markets are pivotal in unlocking new investments.
However, governments should not solely focus on the yet-to-be-established Article 6 market. Time is critical, and it is estimated that a tripling of investments are required for tripling renewable energy capacity in Africa by 2030. Advance commitments from governments and corporate buyers to purchase quality carbon credits from platforms such as the Africa Carbon Market Initiative can unlock thousands of renewable energy projects across Africa.
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