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What the AfCFTA means for the energy sector

Mining Review | 27 August 2019

What the AfCFTA means for the energy sector

by Dimitri Papaefstratiou

Major new opportunities for cross-border energy collaboration arise from the signature of the African Continental Free Trade Area (AfCFTA) agreement.

The AfCFTA agreement, which has now been signed by 54 of the 55 African Union member countries, envisages the establishment of a massive free-trade zone with the potential to generate an estimated US$3.2 trillion worth of inter-country trade across Africa.

The African Union (AU) says that the AfCFTA will create the world’s largest free trade area estimating that its implementation will lead to around a 60% boost in intra-African trade by 2022.

Launched July 2019, the AfCFTA agreement is aimed at driving up the historically low levels of trade in Africa by reducing barriers to trade on the continent.

Only 16% of international trade by African countries currently takes place between African countries, according to research by the African Development Bank in 2014.

Yet there is widespread consensus that, in order to realise the envisaged benefits of the AfCFTA, there needs to be substantive improvement in regional infrastructure to accommodate such trade.

As Terje Osmundsen, the founder of Empower New Energy, recently suggested that the agreement cannot be implemented "without massive investments in roads, ports, electricity, digitisation and other infrastructure".

It is vital that the problems around reliability of energy supply are addressed quickly and comprehensively.

Following the official ceremony in Niger in July launching the AfCFTA, much has been written in the press about the difficulties of agreeing “rules of origin” or the timelines for the reduction of tariffs.

Yet the practical difficulties of trading across African borders can only be resolved with the creation and expansion of enabling infrastructure.

It is in the arena of regional infrastructure development and investment that the implementation of the AfCFTA will succeed or fail.

It should be noted that enabling infrastructure in this context is certainly physical, but also digital and legal, amongst others.

As the Brookings Institute has recently noted in its Africa Economic Outlook 2019, there is some evidence of increasing regional collaboration towards what it describes as “regional public goods” in Africa in “several areas:

(i) peace and security
(ii) hard infrastructure (roads, ports, railways, and corridors)
(iii) soft infrastructure (logistics markets including regulatory policies for mining and energy)

Yet surely the opportunity now presents itself for the countries of the African continent to create the impetus to effect a transformation in their economies.

Certainly with respect to energy, it is notable that Africa still suffers from large-scale energy poverty.

As Osmundsen notes “...the estimated average of 22 hours without electricity per month means lost sales revenues of up to 10% or more for a large proportion of Africa’s businesses.”

Whist acknowledging these challenges, it is also notable that the prospects for the African continent have rarely been more auspicious.

Africa’s changing demographics are yielding a middle class with purchasing power and a large number of new consumers.

Global capital is available in substantial supply, including substantial capital for development projects from development finance institutions (DFIs) and multilaterals, as well as funding from China.

Chinese trade with African countries alone now accounts for approximately $150-200 billion annually.

In terms of energy resources, clearly the African continent boasts near-limitless supplies of renewable energy recourses, including solar irradiation, hydro power potential, geothermal power potential and wind resources.

In addition, there have been a series of major new gas discoveries across Africa in recent years. This includes a “significant” find off South Africa’s southern coastline earlier this year, along with new discoveries in Ghana, Nigeria and Senegal, to name but a few.

In Eastern Africa, Mozambique and Tanzania are well advanced towards utilising their natural gas reserves.

In North Africa, it would appear that the latest gas discoveries in Egypt and the Eastern Mediterranean will soon be utilised to feed domestic growth or to be liquefied and exported using existing LNG infrastructure.

One of the fundamental problems in the region is not around the availability of fuel but rather the African continent’s ability - or inability - to utilise that fuel in a way that meaningfully contributes to regional socio-economic development.

Following on from this, questions are now emerging around the future and governance structures of regional energy infrastructure, such as the West African Gas Pipeline, and how such infrastructure may be utilised more effectively in future.

As we look into how we can best use these energy resources both locally and regionally to fuel growth, further questions loom: is it possible to accelerate growth and fuel economic development whilst simultaneously preserving Africa’s unique environment?

Will it continue to be possible to utilise locally produced oil & gas resources to power growth, particularly in light of the terms of the Paris Agreement on climate change?

It is especially noteworthy that, with a rapidly growing population in sub-Saharan Africa and changing patterns of consumption, there is a real risk for Africa’s environment and a real opportunity to develop infrastructure for the future and forge a new pathway for development that respects natural limits.

A significant new initiative for regional governance and trade, like the AfCFTA, simultaneously offers unique opportunities to realise the United Nations’ Sustainable Development Goals (SDGs) in a new development model for the future.

This is clearly an area where the “regional public goods” championed by the Brookings Institute may find their greatest relevance.

There are certainly good grounds for optimism, given the ongoing development mechanisms of regional governance and the concerted efforts of DFIs, multilaterals and the private sector to generate real results.

Certainly, one could see fruitful ground for regional cooperation in supporting renewable energy generation in the context of a broader energy transition.

These underlying trends and themes have a significant role to play in shaping the African energy market in the years to come.

The AfCFTA is a tremendous opportunity to not only “turbo-charge” growth but also to create regional public goods, especially infrastructure, that will enable a prosperous and sustainable future for Africa.

 source: Mining Review