Africa’s energy transformation calls for innovative financing solutions

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Africa must expand its renewable energy capacity to meet energy transition goals and drive economic growth for its expanding population. Much of the continent’s decarbonization efforts have involved switching from coal and oil to natural gas-generated power, though some countries have made significant advancements in decarbonizing their electricity generation. Broadening accessibility to reliable electricity remains a key issue: More than 600 million people in Africa lack access to electricity and about 1 billion people have no access to clean cooking options, according to the International Energy Agency.

The Climate Policy Initiative estimates that Africa requires $277 billion annually to implement its nationally defined contributions and meet the 2030 climate goals of the Paris Agreement on climate change. About half of this amount is required for clean energy projects. However, annual climate finance flows only cover about 11% of these needs, with most represented by debt rather than equity financing. Sustainable finance instruments — green, social, sustainability, and sustainability-linked bonds and loans — can help close the financing gap for African countries. New placements of sustainable debt in Africa reached a record $13 billion in 2024 and are on pace to grow further in 2025.

Africa stands at a pivotal crossroads in its power transition. The continent has abundant natural resources and is experiencing rapidly increasing electricity demand, which creates significant potential for renewable energy solutions. However, investment levels in Africa's renewable sector significantly lag behind other global markets, underscoring the hurdles that must be overcome to achieve a sustainable and resilient energy future.

As the continent strives to diversify its energy mix, energy security remains critical. A stable and reliable power supply is essential for meeting the needs of Africa's expanding population and driving economic growth. Reliability is a particularly pressing issue. Interruptions in energy supply can hinder development and affect quality of life. An unreliable energy supply also discourages investment in power-intensive sectors such as manufacturing.

Africa's power supply relies heavily on domestic fossil fuels. As of the end of 2024, S&P Global Energy data shows that coal, oil and natural gas accounted for about 75% of the continent’s total power generation, with the share as high as 90% in North Africa, where natural gas is the largest source of power generation. Fossil fuel dependence presents a dual challenge for many African countries: They must meet increasing energy demand while pursuing pathways to a more sustainable and diversified energy future.

Over the past decade, coal-fired generation in Africa has fallen by almost 20%, led by the decommissioning of old plants, particularly in South Africa, where coal still comprises about 75% of the total power mix. Generation from oil has decreased by about 7%, while generation from natural gas has increased significantly. These trends confirm the ongoing role of hydrocarbons in the electricity mix as countries continue using domestic resources to increase power supply and support intermittent renewable generation.

The outlook for coal-fired power generation in Africa suggests a continued decline, driven by aging infrastructure and a lack of new projects. S&P Global Energy forecasts that by the late 2020s, coal's share of total power generation in Africa will drop below 20%, with natural gas becoming a more dominant part of the power supply.

Hydropower accounts for more than 16% of Africa’s total energy generation, S&P Global Energy data shows. When excluding North African markets and South Africa, this share is more than 43%, making hydropower the largest source of power generation in most of sub-Saharan Africa. By the end of 2024, Africa had an estimated total installed hydropower capacity of about 47 GW, generating approximately 160 TWh. 

In countries such as Ethiopia, Zambia and the Democratic Republic of Congo, hydropower constitutes more than 80% of electricity generation. These markets have developed their energy strategies around abundant river systems and favorable topography, with several large-scale facilities forming the backbone of their hydropower infrastructure. For example, the DRC's Inga Dam complex holds vast untapped potential and aspires to exceed 40 GW of installed capacity, while Ethiopia's Grand Ethiopian Renaissance Dam is the largest operational hydropower plant in Africa.

However, overreliance on hydropower has exposed these countries to vulnerabilities, especially inconsistent water flows during extended droughts. While sub-Saharan Africa's hydropower ambitions are gaining traction, the path to realizing these goals is challenging. Of the 24 GW of approved hydropower projects, many remain stalled due to financing issues, currency fluctuations and ongoing concerns about project bankability. These obstacles highlight the need for innovative financing solutions and targeted policy support to mitigate risks and expedite project implementation.

Given the continent’s diverse environmental and social challenges, African issuers have various options for labeling their issuances. Investments in solar, wind and hydropower projects — as well as projects that promote LNG for cooking as a less carbon-intensive alternative to traditional practices — could qualify as “green” due to their positive environmental impacts in the local context.

Use-of-proceeds financings — bonds or loans where issuers commit to exclusively allocate the proceeds to projects with clear environmental or social benefits — accounted for about 74% of total sustainable debt volumes in 2024. Since a green or social label requires the issuer to use the proceeds exclusively to finance green or social projects and to periodically report on allocation and impact, these financings could address investor confidence issues. They may also attract a specialized investor base, such as thematic funds and multilateral development institutions, with mandates that correspond to the development of specific projects. The strength of green labeling in Africa can also be supported by the fact that many green projects, such as solar plant construction, are associated with strong social co-benefits, including employment generation and better access to electricity. 

Africa is at a critical juncture in its energy transition, with vast opportunities for innovation, investment and renewable energy. The shift from a fossil fuel-dominated energy mix to a more diversified and sustainable system could uplift millions of people across the continent. However, this journey will require a concerted effort to overcome financial, regulatory and infrastructural barriers.

To promote renewable energy investments, Africa must prioritize political stability and establish clear, long-term policy frameworks. This strategy will enhance investor confidence and create an appealing environment for domestic and international capital. Developing innovative financing mechanisms and strengthening public-private partnerships will be crucial in mobilizing resources to tap into Africa’s renewable energy potential.

While the path ahead may be complex, a commitment to clean energy can yield significant benefits for local communities and support global sustainability efforts. As African countries embrace renewable energy, they can position the continent as a leader in the global shift toward sustainable solutions. Ultimately, Africa’s energy transition requires stakeholders to recognize the interconnectedness of sustainability initiatives, energy access programs and economic development strategies.

• Consistent with our previous reports about sustainable debt issuance, this market overview draws on Environmental Finance's database of global sustainable debt issuance for nonfinancial corporates, sovereigns, financial institutions and international public finance, but excludes structured finance issuers. Because the database is continuously updated, some figures may not exactly match those cited in previous years. Our sustainable bond forecasts in this commentary are informed by S&P Global Ratings’ global bond forecasts, issuer and intermediary surveys, as well as market intelligence gathered by our sustainable finance and credit ratings analysts. Back to section

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