FDI and the Gap of Clean Power Finance: The Case of Africa

FDI and the Gap of Clean Power Finance: The Case of Africa

Ahmed Rashed, Yong Chen Chen, Siew-Voon Soon
Copyright: © 2022 |Pages: 25
DOI: 10.4018/978-1-7998-8210-7.ch009
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Abstract

Twin deficits in energy and financing are extensively detrimental in Africa which in turn entails foreign direct investment (FDI) to be effectively promoted. This study intends to examine the determinants of FDI in the clean power industry in Africa over the period 2003-2019. By using a robust model of FDI panel gravity fixed effects Poisson pseudo-maximum likelihood, a range of encouraging and reassuring results are found. Importantly, enhancing the awareness of the importance of renewable energy robustly attracts FDI in Africa. Moreover, as anticipated, geographical distance is not the main factor in influencing the decision made by foreign investors. Moving forward, improving renewable energy education with the timely availability of data promotes awareness in society and thus may facilitate the development of the clean power industry in Africa in the near future.
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Introduction

The power security issue is a precondition for economic development. Concurrently with announcements of reaching the electricity universal access and achieving electricity surplus by different countries worldwide, Africa is still incapable of meeting its people's power needs. Africa is an influential continent globally; the second-largest and fastest-growing population continent inhabited by a fifth of the world's people in 54 countries that is distributed into two central regions: North Africa (NA) and Sub-Saharan Africa (SSA). This labor and geographical wealth inadequately contribute to power security; almost 600 million Africans lived without power access and 900 million had no modern and clean cooking facilities in 2019 (IEA, 2019). Another example of an electricity insecurity issue is highly highlighted during combating coronavirus pandemic in which thousands of African hospitals were without power, leading to impeding social distancing (IEA, 2020). In other words, electricity frequent outages negatively affect the required environment for social distancing adoption in Africa, e.g., Africans could not stay connected at homes and continue to communicate with public services remotely; a situation that could force them to gather and communicate face to face. Generally, Africa forms only 4% of the global power utilization, achieving just 45% of the global access to power in SSA comparing with 98.5% in NA in 2019 (ADB, 2018; IEA, 2019; Pappis et al., 2019). NA is wholly electrified; however, this region struggles to meet its growing energy needs.

Readers immediately may infer that electricity insecurity is detrimental to Africa. Since 2010, the continent's gross domestic product (GDP) constituted limited growth of 3.1% comparing with 3.5% globally. The acute shortage of power aggravates the situation. Thus, Africa loses about 2%-4% of its GDP per annum; which disrupts doing businesses in many African countries (IEA, 2019). Energy poverty, therefore, is harmful to Africa. So, what do African policymakers do now? Is a fossil fuel-based power expansion relevant? It is an unwise option of which it would contribute towards global warming.

Global warming is an international threat ascribed to fossil fuel burning. Africa is the most vulnerable to this phenomenon's effects as it highly depends on agricultural activities, enacts weak adaptation policies, has food insecurity problems, and faces rising poverty rates (Acheampong et al., 2019). Thus, it is unwise that Africa treats its power deficit by fossil fuel burning. Put differently, in Africa's attempts to mitigate its electricity insecurity challenges with considering the Paris Agreement [limiting global average temperature to below 2 degrees Celsius and improving renewable energy technologies use] and the UN Sustainable Development Goals [specifically goal 7 of reaching affordable and reliable energy for all, as well as goal 13 of combat climate change]; it should harness its renewable energy [RE] resources (Garcia, 2022). It is believed that managing African power insecurity by RE can put the continent on the right track. The International Energy Agency (IEA) cited that Africa can meet almost a quarter of its energy demand by 2030 if it harnesses its RE effectively (Aliyu et al., 2018; IEA, 2019).

Here, the public may wonder, why is Africa still lagging in energy issues? The simple answer is because the RE financing gap, which renders a substantial part of clean power [CP] resources1 untapped. Readers, thus, can easily understand that this gap is at the core of electricity insecurity issues in Africa. Additionally, for the information of the readers, African RE development is mainly funded by global financial assistance resources, which are basically insufficient. As a result, further RE financial needs are growing which entails inbound green foreign direct investment [FDI] to be promoted (Adesola et al., 2018; IEA, 2019; Bunyaminu & Yakubu, 2022).

Against this backdrop, this study intends to propose insights and recommendations to accelerate and stimulate the FDI into the clean power industry [CPI]. Put differently, this chapter empirically examines potential determinants of FDI in the CPI over 2003-2019 in 33 African countries. It is believed that the results could be important in formulating coherent CP policies by African policymakers and informative for green progression proponents.

The chapter addresses the financing gap and FDI inflows in the clean power industry in Africa. The literature review is also presented. Then, methodology, results, and discussion are introduced. The chapter concludes with a conclusion and policy implications.

Key Terms in this Chapter

Financial Deficit: A negative gap between supply and demand for financial resources.

Renewable Energy Public Awareness: General awareness of all aspects of renewable energy resources.

Renewable Energy Resources: Sustainable and limitless resources to yield clean energy.

Clean Power Financing Gap: Supply of renewable energy financial resources – demand for renewable energy financial resources = ± financing gap.

Clean Power: Produced electricity from renewable energy resources.

Renewable Energy Measures: Policies to organize and govern the renewable energy industry regulatorily and financially.

Green Investment: Investment poured in renewable energy industry.

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