As the world grapples with the urgent need to address climate change, the upcoming COP29 climate talks in Azerbaijan present a critical opportunity for Africa to push for ambitious climate finance targets. However, a new analysis reveals a significant barrier to the continent's clean energy transition: the average cost of capital for power projects in Africa is triple that of other regions. This disparity poses a formidable challenge to mobilizing the necessary investments to drive sustainable development and energy access across the continent.

Bridging the Climate Finance Gap: Africa's Urgent Call to Action

The Imperative of COP29 for Africa

The COP29 climate talks in Baku, Azerbaijan, are set to be a pivotal moment for Africa's climate action agenda. As negotiators from the continent gather, they will be pushing for the establishment of a New Collective Quantified Goal (NCQG) on climate finance, which will replace the 2009 pledge by developed countries to mobilize $100 billion per year for climate action in developing countries. This new target will be crucial in determining the future direction and effectiveness of global climate finance.

Overcoming Barriers in Climate Finance Negotiations

The ongoing negotiations for the NCQG have been plagued by numerous disagreements, including the size of the fund, the types of funding to be included, the contributors, and the allocation of resources for adaptation, mitigation, loss and damage, and accountability. These complex issues must be addressed to ensure the NCQG's long-term success and impact.

The Persistent Shortfall in Climate Finance

Historically, the climate finance pledged has fallen far short of the amount needed to meet the scale of the challenge. Even when funds are available, structural barriers have prevented them from reaching the countries that need them most. According to the Independent High-Level Expert Group on Climate Finance (IHLEG), emerging and developing countries, excluding China, need to mobilize $1 trillion per year through 2030 from international sources to support climate action, with half of this amount coming from the private sector.

The High Cost of Capital: A Barrier to Africa's Clean Energy Transition

One key factor contributing to the ineffectiveness of climate finance in Africa has been the high cost of capital. The International Energy Agency estimates that over 70% of global clean energy investment will need to come from the private sector, a reliance that may be even higher in Africa, where median public debt has reached 65% of GDP and 20 countries spend over 10% of their revenue on debt servicing.

Uncovering the True Cost of Capital in Africa

A comprehensive assessment by the Clean Air Task Force reveals that the average cost of capital for power projects in Africa is over three times that of other parts of the world, such as Western Europe and the US. In fact, some African countries see capital costs exceeding 25%. The study also finds that the cost of equity is twice the cost of debt in Africa, indicating a significant risk premium for investors.

The Implications of High Capital Costs

This country-specific data offers crucial insights into the challenges facing the transformation of energy systems in Africa. Despite the continent's abundance of renewable energy resources, it has received a meager 2% of global clean energy investments and accounts for less than 2% of global renewable energy capacity. These trends suggest that clean energy investments continue to be directed to countries where the cost of capital is lower, leaving Africa behind.

Addressing the High Cost of Capital: Strategies for COP29 and Beyond

To unlock Africa's clean energy potential, the discourse on climate finance must move beyond just target setting and address the structural barriers that hinder investment. This will require several key interventions:

Deploying Public Finance to Derisk Markets

It is essential to deploy more public finance as grants, concessional loans, and guarantee instruments to lower the cost of capital in low-income countries. The predecessor to the NCQG was primarily disbursed as loans, some with interest rates as high as 18%, resulting in the majority of funds ending up in middle-income countries. The NCQG must intentionally deploy financing instruments that derisk markets in low-income countries, attracting private sector investments into regions like Africa.

Leveraging Granular Data and Insights

More granular data and insights into the factors that influence clean energy investment readiness across Africa are needed. With country-specific data on the cost of capital, policymakers can design targeted policies to reduce capital costs, and investors can make investment decisions with greater confidence. The application of uniform indices across Africa impedes a nuanced understanding of the challenges and leads to ill-designed policy and finance interventions.

Addressing Systemic Poverty and Underdevelopment

Confronting the fact that systemic poverty across Africa is limiting climate progress is crucial. The analysis reveals a decline in the cost of capital as economies grow and thrive. Improvements in living standards and thriving economic activity signal the existence of financially viable demand, making these markets more attractive for investments, including in clean energy. With greater economic development and fiscal discipline, African governments can boost domestic revenues and increase the fiscal space for climate-positive investments. A more prosperous Africa can only be better for our global climate, and climate action in Africa must go hand-in-hand with targeted interventions to address poverty and underdevelopment.COP29 presents a pivotal opportunity to renegotiate a new climate finance goal, but the work must not end there. To ensure these funds reach the countries that need them most, the climate community must nurture strategic partnerships with national governments, the private sector, international development agencies, and multilateral development banks to address critical barriers such as the high cost of capital, poor data, and underdevelopment in Africa.