The US is getting out of the business of backing high-carbon energy infrastructure overseas. US Secretary of State Antony Blinken sent that message on Mar. 9 in a speech to the US Development Finance Corporation, the federal agency that finances industrial and infrastructure projects in low- and middle-income countries.
Development finance, Blinken said, “is a powerful tool for addressing the climate crisis,” and the US will use it to “help drive investment toward climate solutions.” His remarks came after a specific commitment by John Kerry, America’s top climate diplomat, at the World Economic Forum in Davos on Jan. 27 supporting US president’s Joe Biden plan “ending international finance of fossil fuel projects with public money.”
That marks a big change from the status quo: In the last five years, the U.S. International Development Finance Corporation (DFC) and the U.S. Export-Import Bank have approved more than $9 billion in support for various fossil fuel drilling projects, pipelines, and power plants around the world, predominantly in sub-Saharan Africa, according to the environmental group Friends of the Earth. The US Agency for International Development, while not a direct source of finance, is shepherding more than two dozen oil and gas projects to completion through its Power Africa initiative.
Is ending fossil fuel finance “immoral”?
Cutting off funding for such projects seems like an easy climate win for the administration. And it’s catching on with allies: In February, a group of senior European finance officials urged the World Bank to cut off finance for global fossil fuel projects. But in African countries with some of the world’s lowest rates of electricity access, there is an urgent need to grow and diversify the economy. Economists warn it’s too soon to pull the plug on all fossil fuels. To fight energy poverty in Africa and global climate change at the same time, the Biden administration will likely need to leave room for the targeted use of fossil fuels. That means looking beyond simply building more solar and wind farms toward fixing more deeply-rooted problems with the continent’s electric grids that are drowning in debt and dysfunction.
“There’s this idea that because Africa is lacking in legacy infrastructure, it’s a good canvas to paint the energy future,” said W. Gyude Moore, a senior fellow at the Center for Global Development and former minister of public works for Liberia. “But no African country has volunteered itself for that.” In 2020, because of the pandemic, the number of people in Africa lacking access to electricity increased to 592 million after having fallen every year since 2013. The continent, Moore said, “requires energy at a scale that renewables cannot meet. So it seems immoral to restrict options for energy sources.”
For now, US agencies are still studying their marching orders, and haven’t cut off the finance pipeline just yet. The Ex-Im bank and the DFC have not announced the cancellation of any existing projects or any specific changes to policy. Power Africa is moving ahead with projects that include natural gas and heavy fuel oil-based power plants in Nigeria, Mozambique, Ghana, and elsewhere, alongside several dozen wind and solar farms.
“Gas is clearly in the mix now” for the Power Africa program, a USAID spokesperson said. “Regarding how gas infrastructure fits into how [the US government] supports power development around the world is still being defined by the new administration. Power Africa remains technology agnostic.”
But if the US is interested in helping more people on the continent connect to electricity, carbon-free or not, it needs to change focus, said Katie Auth, policy director of the Energy for Growth Hub, a think tank, and a former senior official at Power Africa during the Obama and Trump administrations. Building more power plants of any kind will have a limited impact on energy access—and could actually impede it—because the grid itself is so underdeveloped.
“Even though they desperately need more power, they can’t bring it on until the grid system gets built out,” Auth said. “At this point in Africa what’s needed is not more investment in renewables, but in all the unsexy stuff that enables it—the grid, energy storage, and utilities that are able to cover their costs.”
Africa’s electric utilities are broke
A good example of Africa’s power quandary, and the US role in it, is Kenya. In 2019, the country switched on the continent’s largest wind farm, at Lake Turkana, which had been built by a group of private companies and international development banks, with technical support from USAID. The project, in addition to a large number of existing hydro and geothermal plants, made Kenya’s grid one of the cleanest in Africa—on weekends, up to 95% of the country’s power comes from renewables, said Murefu Barasa, managing director at EED Advisory, an energy consulting firm in Nairobi.
But the high volume of intermittent power from the new wind farm and other sources has made the grid very expensive to run reliably, Barasa said. Combined with the ongoing cost of expanding the grid into rural areas, the utility Kenya Power’s per-customer revenue and overall profit have nosedived, and the company now carries more than $1 billion in debt. The situation is untenable, and likely to result in less reliable service that many households won’t be able to afford. Barasa said it demonstrates that a clean grid isn’t necessarily a healthy one.
Across the continent, utility debt has become a key obstacle to bringing more power online. A 2016 World Bank survey of utilities in 39 African countries (the most recent comparable data) found that all but two, Uganda and the Seychelles, run at a severe deficit. Ghana’s utility debt is particularly notorious—over the last ten years, out of concern over power shortages, the government approved far more power plants than it really needed, and now the utility is locked into contracts for hundreds of millions of dollars annually for power it can’t use. That has, in turn, locked in emissions, because now the utility can’t afford to approve new renewables projects.
How the US can help fix African electric grids
None of this is a reason not to pursue clean energy, Barasa and Auth said. But the Kenya example is a reason for African countries to be cautious about the risks of chasing a fossil-free power sector at a scale that hasn’t even been tried in the US and EU. That’s especially true for countries like Nigeria—the epicenter of Power Africa’s gas work—that have bigger economies and/or less access to wind and geothermal natural resources than Kenya.
At the same time, the Kenya example highlights potential targets for future US assistance: Investment in transmission and grid management systems, and technical or financial support for utilities. Power Africa already does some work on transmission, and is halfway to its target of overseeing the construction of 3,100 miles of grid lines across the continent, the spokesperson said. But much more is needed: the International Renewable Energy Agency estimates that improving energy access will require Africa’s power sector to invest $25 billion per year for transmission and distribution between now and 2030.
That will be a challenge for the traditional US approach to development finance, which relies on roping in private-sector partners. While power plants, fossil or otherwise, tend to have a clear business model and guaranteed revenue, grid systems don’t make much money. So fixing them will require new forms of public-private partnerships and a willingness by institutional investors to accept lower returns.
If the US does pull financing for fossil fuels in Africa, the power sector could turn to even more polluting alternatives. China is supporting the construction of more than a dozen coal-fired power plants around the continent. Russia, too, is eyeing the continent for oil and gas drilling and LNG import-export opportunities.
Today, average per-capita emissions across the continent are less than one-fifteenth of the US. If that number needs to go up a bit in the interest of alleviating poverty and providing economic alternatives to climate-vulnerable industries like agriculture, US policymakers shouldn’t rule it out, Barasa said.
“There’s a lot of pressure from development agencies to say something like ‘no more fossil fuel projects,’ but that’s a horrible and sad way of thinking about the problem,” he said. “Countries need the autonomy to develop their own least-cost power plans, especially before they attain universal access. Babies die in blackouts. So the tradeoff of connecting the millions of people who don’t have power, versus doubling emissions, is well worthwhile.”