Shaping Trade Policies to Facilitate Renewable Energy Manufacturing in Africa

Shaping Trade Policies to Facilitate Renewable Energy Manufacturing in Africa   African leaders are focusing on energy transition and green growth plans to bring about a new age of prosperity across the continent. Given the significant regional demand and abundant natural resources, the energy transition represents an opportunity to reduce import dependency, build local industries and ensure that African countries play a major role in the renewable energy technology supply chains.

The 2nd Africa Renewable Energy Manufacturing Initiative (Africa REMI) Virtual South-South Policy Dialogue convened experts to discuss the role trade policies play in supporting domestic renewable energy manufacturing. 

Trade policies represent an important part of a holistic industrial policy toolkit to catalyze investments in local manufacturing of energy transition solutions, including solar modules, batteries and electric vehicles. Tariff and non-tariff trade policy instruments need to delicately balance the priorities of supporting the rapid adoption of energy transition solutions in-country while also incentivizing local value chain development by facilitating access to technology, investments and aggregated demand.

Trade policy as a lever for supporting renewable energy manufacturing  

Here are our six main takeaways from the recent Policy Dialogue:

1. Ensuring policy space for developing countries to deploy industrial policies to support local value chain development. Emerging green industries must be fostered with various tariff- and non-tariff instruments. A dialogue is needed on the application of global trade rules that can enable the benefits of the energy transition to be more equitably spread. It is crucial to bring consistency and coherence at a global level among agreements related to trade, intellectual property and climate change. As the number of critical minerals-specific trade agreements rise globally, these must integrate the structural transformation priorities of the resource-rich countries. 

Trade agreements should go beyond extraction and access to the critical enerey transition minerals. At the core of these agreements should be structural transtormation and economic diversilication to ensure mineral-rich countries are also able to produce the technologies.
 

Covis Freire, Chief, Commodity Research and Analysis Section. Commodities branch. UN Trade and Development

2. Focusing on timely and effective implementation of incentives. As countries announce fiscal incentives to support local assembly, including exemptions or reduced rates on components, implementation timelines and access can be resource- and time-intensive sometimes taking up to 12 to 18 months for fruition. Additionally, change in government policy poses a risk to the realization of policy directions, impacting the private sector's ability to raise capital. Funders often prefer to wait until policies are fully realized before committing capital.  

The South African Renewable Energy Masterplan takes a value chain approach for technologies, including solar and wind, to assess what capacities exist and what can be developed in South Africa through a range of intervention to competitively manufactutr domestically. It sees a compelling role for Special Economic Zones.

Matthew Cullinan- CEO, Atlantis Greentech Special Economic Zone, South Africa.  

To improve local manufacturing, we need to look at three aspects. First, improving trade with neighbours. Second, facilitating movement and access to capital and third, technical capacity and harmonization of regional standardization to enable trade and catalyze demand.

Fenwicks Musonye- Deputy Director, Energy Efficiency, Energy Efficiency, Energy and Petroleum Regulatory Authority, Kenya.  

3. Advancing regional trade and harmonization. One of the challenges faced by the local industry is the high cost associated with moving, either components or finished goods, across borders within Africa due to existing tariff regulations. This directly impacts costs for end-consumers which can vary up to 25% between countries for electric vehicles. The Africa Continental Free Trade Area (AfCFTA) is a tool for driving green industrialization on the continent by promoting Africa as a single market, allowing production to access different markets with gradually reduced tariffs, thus also addressing the market sizing challenge. Regional value chain development is a priority in the AfCFTA, which identifies four priority sectors, including the automotive sector. The Protocol on Investment adopted in 2023 is one of the few existing binding legal frameworks that address climate solutions directly. Developing and implementing harmonized technical standards for renewable energy products, including testing and certification processes, can reduce compliance costs and facilitate cross-border trade. Different countries also have different banking laws which increase the transaction cost. 

Africa Policy Research Institute (AfCFTA) addresses the market size issue by promoting Africa as a single market with production being able to access different markets with gradually reduced tariffs. 

Teniola T. Tayo- Trade Policy Fellow, AfCFTA.  

E-mobility enterprises are at a nascent stage and face significant working capital requirements given the terms of payment with trade partners. Dedicated financing facilities can help to manage cash-flows, as well as offer third-party guarantee facilities to unlock local capital.

Sylviah Mwaura- Senior Associate, GreenMax Capital Advisors. 

4. Facilitating access to trade financing for local enterprises. Local enterprises often struggle with limited access to capital. Those importing components/products face significant working capital requirements as they scale, given the terms of payments with trade partners, which often require 100% payments before delivery, with buyers also seeking extended credit terms. To address this, dedicated trade facilitation platforms such as GreenShift Africa are needed. Such platforms can help local enterprises leverage capital to meet market demand, manage cash flows, and offer third-party guarantees and risk-mitigation for local financing institutions which in turn can reduce collateral requirements for letters of credit.     Additionally, there is a need for technical assistance, including on risk modelling, due diligence, transaction advisory and awareness raising. This is crucial, given the nascent stage of the sector and the low exposure among financing institutions, which tend to evaluate new-age manufacturing enterprises against traditional benchmarks. Blended finance structures should be considered, leveraging development finance and philanthropic capital to provide affordable, longer-term and concessional debt financing for the sector. 
    
5. Bridging the trade data gap to track commodity exchange and target incentives. A bottom-up approach is essential to catalogue the various renewable energy solutions being deployed as a subset of green technologies. Comprehensive trade information systems can help track trade flows. This data can be further translated into tariff lines and product groups to effectively apply trade facilitation and promotion measures, as well as link the different value chains continentally.   
    
6. Catalyzing South-South cooperation. There is a significant opportunity in highlighting complementary production structures among countries to facilitate collaboration at the value chain level. The transboundary Special Economic Zone in the DRC and Zambia is an example which aims to leverage the countries’ complementary critical minerals reserves to localize parts of the battery and electric vehicle value chain. A bottom-up approach may be necessary to assess existing capacities, investment and trade policy framework to identify links across sectors, including automobile and renewables, first sub-regionally and then continentally.  

The high cost of trade of products and components across borders within Africa needs to be addressed to facilitate the development of regional manufacturing supply chains and make electric mobility solutions more affordable for end-consumers.  

 Loving Asibey Koranteng- Chief Investment Officer, SolarTaxi, Ghana 

The recording of the webinar and scene-setting presentation can be accessed here. The next webinar in the series will take place in September 2024. Please sign up here to the Africa REMI mailing list for updates.