Lighting Up Africa: Chinese Development Finance’s Impact on Energy Poverty

By Yan Wang and Yinyin Xu

Energy poverty remains a persistent and widespread development challenge across Africa, where more than 600 million people, primarily in sub-Saharan regions, still lack reliable access to electricity. This situation accounts for over 80 percent of the global electricity access gap. Even though many African countries are rich in natural and renewable resources, they face challenges such as inadequate generation capacity, outdated generation and transmission infrastructure, and restricted access to affordable energy financing.

Development finance institutions (DFIs) play a crucial role in financing energy infrastructure in Africa, especially in contexts where the private sector may lack motivation or capacity to invest. In particular, Chinese DFIs have significantly invested in energy infrastructure projects throughout Africa since the early 2000s. What are the technological and geographical distributions of these generation capacities financed or co-financed by Chinese DFIs? How effective are they in reducing energy poverty at the subnational level? How has China’s power finance evolved on the continent, and what are the prospects for China’s involvement in Africa’s energy transition in the coming decades?

Our new working paper empirically investigates the impact of China’s power finance on energy poverty using a newly-compiled panel dataset spanning 850 subnational regions across Africa from 2012-2020. This dataset integrates detailed power plant unit-level data sourced from the S&P Capital IQ Pro Global Power Plant Database with the China’s Overseas Development Finance (CODF) Database, managed by the Boston University Global Development Policy Center. To assess electrification likelihood at the subnational level, the study employs the satellite-based computational classifications of energy poverty derived from nighttime light imagery, which provides an innovative measure of energy poverty across the developing countries.

Our empirical results demonstrate that each additional 1,000 MW of operating power generation capacity financed or co-financed by China leads to a 0.4 percentage point increase in the average likelihood of electrification in African subnational regions. This positive and significant impact remains consistent even after accounting for power generation capacity financed by other sources, geographical factors, proximity to urban centers and fuel-specific capacity factors, as well as under various more stringent specifications.

Although the results of electrification have advanced, most of the capacity financed or co-financed by Chinese DFIs relies on fossil fuels. Similar to the global trend, China’s power financing in Africa is shifting towards cleaner options such as solar and wind. However, fossil fuel energy still constitutes a considerable portion of China’s overseas power portfolio, along with the committed projects being brought online. Coal and gas power plants constitute a significant portion of the portfolio, with many still in the early stages of their decades-long tenure and far from retirement.

In 2020, the last year covered by our analysis, fossil energy had a capacity of 0.6 GW, representing 51 percent of total nominal capacity financed or co-financed by Chinese DFIs. Of that, 0.5 GW was from coal. This significant dependence on fossil fuels sparks concerns regarding the sustainability of Africa’s energy mix and the carbon footprint of its developmental path. Those projects were committed and in the pipeline before China’s pledge in September 2021 to cease financing new coal-fired power plants abroad. Nevertheless, there is still an opportunity for development partners to engage in active policy discussions for effective collaboration to decarbonize the existing capacity stock while satisfying energy demands.

Recognizably, the trade-off between expanding access to electricity and transitioning to clean energy often arises when balancing immediate energy needs for economic development with long-term sustainability goals. Given the current state of technology readiness, governments and policymakers might prioritize the development of coal-fired power plants or natural gas facilities to enhance energy access and meet urgent demands. Focusing solely on renewable energy solutions, such as solar or wind, could initially limit reliable energy access due to higher upfront costs or technological barriers. Moreover, due to technological and thermodynamic constraints, cleaner alternatives might generate less energy than fossil fuels at equivalent nominal capacity, indicating that a greater nominal capacity needs to be installed. Taking account of the capacity factors of various generation technologies: Replacing 1 GW of fossil energy capacity would necessitate 2.4 GW of solar or 1.2 GW of wind on the continent. Therefore, strategic planning and collaborative efforts are essential for decarbonizing Africa’s energy mix to achieve sustainable development while addressing climate change challenges.

To address this trade-off, development partners, including Chinese DFIs, can adopt integrated approaches to support African countries. First, they can utilize their expertise and domestic experiences to assist host countries in refinancing and repurposing aging fossil fuel energy generation capacity into renewable sources. Second, they can engage in constructive dialogue and explore concrete pathways to decarbonize coal plants they have financed or co-financed. Initiatives such as the Green Investment and Finance Partnership (GIFP) hold the potential to look for viable financing options. Third, there should be an intensified effort to promote the widespread adoption of renewable energy across the continent, for instance, by establishing dedicated bilateral or multilateral project preparation facilities for renewables, or by fostering a market environment that encourages private sector participation in renewable energy manufacturing, thus unlocking Africa’s potential for sustainable industrialization.

Yinyin Xu is a recent graduate of the Cornell Program in Regional Science.

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