Login

Register




Building capacity to help Africa trade better

Using trade policy to address renewable energy access challenges in Africa

News

Using trade policy to address renewable energy access challenges in Africa

Using trade policy to address renewable energy access challenges in Africa
Photo credit: Isofoton Marrueco

What role can trade policy play in tackling the various challenges that prevent a large-scale deployment of renewable energy systems in Africa? 

Estimates from the International Finance Corporation (IFC) show that close to 600 million people in Africa, around 70 percent of the continent’s population, did not have access to electricity as of September 2012. Various studies have clearly established the correlation between a country’s GDP and its per capita energy consumption. Affluent countries have a high rate of energy consumption, while a number of poor countries in Africa, for example, have very low GDP and energy consumption.

The Human Development Index (HDI) study run by the United Nations Development Programme (UNDP) suggests that no country with annual electricity consumption below 4000 kWh per person per year has an HDI value of 0.9 or higher, and similarly, no country above 5000 kWh per person per year has a HDI value lower than 0.8. The study has been conducted in the world’s 60 most populous economies, comprising 90 percent of the world’s population.

In case of Africa, with the exception of few countries like South Africa, almost every country shows some correlation between per capita electricity use per year and HDI. The lack of access to energy affects the rate of development in the country resulting in adverse impacts on general health and women’s health in particular, safety, education, environment, and finally results in loss of productivity. While energy access is recognized as an important component in improving the lives of the rural poor, high capital costs and the remoteness of sparsely populated habitats is a major hindrance in expanding centralised electricity grids and reducing energy poverty. On the other hand, some renewable energy sources such as solar and biomass, have the inherent advantage of being good sources of distributed energy with no need for centralisation. Critical energy access could therefore be provided without having to rely on a central grid. Solar products such as lanterns, solar home lighting solutions, and small-scale power plants are particularly suited for providing such access.

Challenges to renewables adoption

Renewable energy adoption is hindered by various challenges. Some of these include the high upfront costs of solar, lack of access to finance, lack of familiarity with the sector by the local banks and micro financing institutions (MFIs), lack of effective after-sales and maintenance structure for the product suppliers, market spoilage through proliferation of low cost, low quality products, and lack of consumer awareness. These problems are further aggravated by an absence of robust policy and regulatory mechanisms, distorted subsidy structures for fossil-fuel sources such as kerosene, high import duties levied on renewable energy based products and components associated with their manufacture and assembly, counterintuitive taxation regimes that favour import of prefabricated products as opposed to domestic manufacturing and assembly, local content requirements, and improper standardisation and quality control measures. Both trade and non-trade related options exist to tackle these barriers.

Non-trade related tools to address renewables barriers

As a first step, raising awareness vis-à-vis the end consumer around available choices between traditional and alternate energy, as well as the relevant financing opportunities, is critical to scale up informed decisions that catalyse the shift to clean energy sources.

Awareness creation as well as policy and regulatory reforms are also required in the case of imports where customs duties and taxes are levied on renewable energy based products even though they are, by law, exempt from such duties. In certain cases such levying of duties may be due to lack of awareness or understanding by customs authorities regarding the relevant internationally agreed Harmonized System (HS) codes under which the products are to be imported.

What’s more, quality assurance programmes that function through the employment of testing and certification mechanisms do not exist in various countries in Africa. Testing centres should be set up across the continent to help overcome this issue. Standardisation and product approval for sale in a territory could also be decided on a product-to-product basis rather than a blanket criterion. Policy and regulation should be formulated to encourage financing through MFIs due to high upfront costs associated with renewable energy products and low income among the potential consumers.

In addition, subsidy mechanisms in various countries in Africa are limited to provision of capital subsidy, as a percentage of total capital cost, on various products. Innovative business models such as the “pay as you go” would not benefit from an upfront subsidy since the payments under that model are spread over a period of time – the payments are made per unit of electricity consumed till the cost of the system is recovered after which the ownership is transferred to the consumer. Thus the subsidy in this case would have to be provided per unit of electricity consumed. Regulations would have to be revised to accommodate such innovative business models to help alleviate the burden on the end consumer. Finally, fossil-fuels such as kerosene are currently heavily subsidised, which can render renewable energy systems uncompetitive. The subsidy offered for these fossil-fuel systems could instead be channelled towards the development of renewable energy systems.

Tackling renewables trade barriers

Sustainable power generation is usually characterised by higher upfront equipment costs. While governments seek to bring down the costs of sustainable power through subsidies and various other fiscal incentives, they may also simultaneously try to meet other policy objectives. These objectives could include creating a manufacturing base for sustainable energy equipment and generating local jobs. While synergies are possible, it can become difficult for policymakers to balance sometimes seemingly conflicting objectives. It may be difficult, for instance, to seek sustainable power production at the lowest cost possible when power producers are facing import restrictions on technologies and equipment at the level of quality and prices they desire. These restrictive policy and regulations can also lead to trade disputes, which in turn may result in stalemates during negotiations related to climate change and sustainable development.

Given this scenario, it may be worth setting up a Sustainable Energy Trade Agreement (SETA) as a stand-alone initiative that could address such barriers, allowing trade policy to advance climate change mitigation efforts while also increasing sustainable energy supply. Such an agreement would cover all trade-relevant aspects of sustainable energy production, allowing for possible scale-ups. A SETA is also a way to bring together  countries interested in addressing climate change and longer-term energy security while maintaining open markets.

Making a SETA work for Africa

It is desirable for countries that are important traders of Sustainable Energy Access (SEA) products to identify and clearly define these products including within their national tariff lines as well as agree to arrive at a common description for these products, and ensure consistent tax treatment upon importation.

High import duties, as well as taxes levied on renewable energy products and components for assembly of sustainable energy goods, are particularly problematic where African countries are concerned. While many of the continent’s economies may not be willing or ready to join a SETA immediately, they could consider voluntarily addressing high duties that hold back imports of these goods as well as simplify the duty structure for such products. Appropriate provisions for special and differentiated treatment for African countries could also be part of an eventual deal as well as enhanced provision of nontrade related technical assistance.

The importance of countries such as the US, EU, China, and India in manufacturing, exporting, importing products such as solar lighting equipment underscores the need and relevance for these countries to be part of an eventual SETA. And given the importance of addressing energy access issues for many African economies, it would be worthwhile these countries engaging either as observers or becoming involving in those provisions of a SETA that directly or indirectly affect their manufacturing, exports, or imports of SEA equipment.

The disbursal of government subsidies for consumer products such as solar lanterns or solar powered home power systems in certain countries requires that the product fulfil the local content requirement criterion. Such requirements can hold back dissemination of important equipment and restrict consumer choice. Standardisation policies as well as related capital subsidies and incentives, which may affect access to sustainable energy equipment such as solar lamps by constraining the sale of innovative or most-efficient models, should also be addressed. These should be designed in such a way that it ensures component choice based on performance rather than system design.

Trade facilitation related measures that speed up clearance of sustainable energy equipment at customs and ports could be also considered by a SETA. For instance, agreement could be reached that all SEA related goods would be subject to customs inspection and clearance in a certain number of hours or days, unless there is serious reason for an extension. An important aspect of this would be developing a classification system for relevant sustainable energy products based on clearly identifiable characteristics and the internationally agreed HS-codes, able to be easily understood by customs authorities.

Any technical cooperation or assistance mechanism that is set up by a SETA should take cognizance of measures that could help facilitate the dissemination of SEA products. For instance this article earlier pointed to a lack of awareness among customs officials regarding various tax and duty incentives eligible for SEA products as well as on relevant HS-codes under which the products are imported. This could be one of the areas where a SETA could create a fund for the training of customs authorities in countries where it may be felt necessary. Such awareness creation exercises could also include updated information on any changes to HS-codes or re-classifications agreed-upon by countries for SEA products.

Free trade is a very challenging issue for most countries trying to balance sourcing of solar components at minimised cost whilst encouraging a local manufacturing ecosystem. The latter can break down beneficial trade relations between countries. The creation of a SETA, and finding a way to include African economies, would likely help economies come together to reduce the trade tensions. Scaling up renewable energy diffusion in Africa would ensure that sustainable energy access is provided to the rural poor helping to improve their quality of lives. 

Contact

Email This email address is being protected from spambots. You need JavaScript enabled to view it.
Tel +27 21 880 2010