Coal, a necessary precursor to a renewable Tanzania?

In the post Covid-19 phase, the world has realised the significance of mobilising resources between geographical barriers despite catastrophic events. The ‘new normal’ continues to evolve and invites us to work together and create a common purpose - particularly now when the situation in Ukraine has sent shockwaves across the globe as States scramble for fuel. Before the war, Russia reportedly supplied 70% of the EU natural gas needs. The EU’s decision to phase out its dependency on Russia’s fossil fuels by 2023 has created renewed interest and opportunity for Africa fossil fuel exports, especially gas and LNG as a long-term alternative supply for Europe.

Coal exports to Europe have also benefited, particularly from South Africa (surging by +583 percent year on year in the nine months to Sep 2022 to 9.6m tonnes, from just 1.4m tonnes in the same period of 2021). But the impact on Tanzania’s coal industry has also been significant - for example, in the year to 30 June 2022 the volume of coal exports from Mtwara port totalled 592,365 tonnes - more than triple the prior year volume (of 177,388 tonnes)! In terms of financial impact, the Bank of Tanzania Monthly Economic Review for December noted that coal worth $141.6m was exported in the year ending November 2022, as compared to USD13.2m in the corresponding period in 2021 “largely explained by rising demand for alternative source of energy following the short supply of crude oil and natural gas amid the war in Ukraine”.

The energy crisis is however not just a question of European geopolitics, but also of climate change. “Energy Outlook 2023”, a recent report by the Economist Intelligence Unit, highlighted that energy crises caused by extreme weather events (including drought potentially impacting hydro power generation in a number of major economies including China, Europe, India, and US) will encourage coal usage.

Whilst the energy crisis provides a valuable opportunity for Mtwara’s port and the coal industry in Tanzania, what is the impact of this on the global climate change agenda and transition to “net zero” ? Energy security and environmental sustainability should always align and it is important for countries to have strategic sourcing and versatile energy supply chains to minimise shock when circumstances change.

According to PwC’s Africa Energy Review 2022 “balancing the developmental impact and the growth of Africa with the pace of the Energy Transition being undertaken by developed economies is seen as a major challenge and increasingly referred to as part of a Just Energy Transition (JET)”. Further it noted that “although the Energy Transition will contain a share of fossil fuels for many decades to come, it will increasingly be anchored on expanding green energy access through renewables and clean technologies”. So, a JET for Africa is a delicate balancing exercise that should enable developing countries with lower carbon footprints to exploit their prevalent non-renewable energy sources (such as coal) without falling behind on their climate change mitigation targets.

Amplifying the stream of coal exports - particularly to Europe - does pose the challenge in the medium term of market withdrawal symptoms if Europe finds its way back to alternative energy sources (which was hinted at during COP27). With the window of opportunity being short, it may not be viable for Tanzania to develop long term reliance on coal exports given the focus on renewable energy sources. On the other hand, a recent McKinsey report (“The energy transition: A region-by-region agenda for near-term action”) notes that “despite growth in renewable energy, the use of fossil fuels is also expanding to meet growing demand for energy” and that “prescriptions for the role of fossil fuels cannot be simplistic, given this continued reliance”.

In categorising countries into five archetypes (with respect to their opportunities and priorities for a more orderly energy transition) it notes that for archetype 3 “large, emissions-intensive economies”, comprising China, India, and South Africa, “a net-zero transition would naturally focus on finding a balance between meeting growing energy demand with cleaner resources and addressing reliance on the most emissions-intensive fuel, which has historically been relatively low-cost, domestically produced coal”. So the wind down from coal may be slower than anticipated.

Following the COP27, a review has begun to ensure the implementation of the Paris Agreement to increase global transparency on individual country’s action plans. The three sustainability principles - environment, social and governance (ESG) - are the guiding principles for simultaneously unlocking investment opportunities and boosting economic growth. Environmental concern should be front of mind while leveraging the most sustainable production channels to meet energy demand.

Although rising coal demand in Europe might put into question the achievement of climate change mitigation, the newly developed trade channel between Tanzania and EU countries paves the way for further collaboration between Europe and Africa in renewable energy projects. Given the urgency of climate change impact, this is a prime opportunity for stakeholders to align net zero emissions interests with the energy demand-driven market, and simultaneously deliver on the global consensus to combat climate change. The partnership is foretelling of the potential in energy harmonization between developing and developed countries to have a “meeting of the minds” so as to achieve energy security and environmental regulation. It is possible that the investment required for Africa’s energy sector to sustainably transition to a globally competitive continent hinges on these newly formed trade channels and how they evolve. This presents us with a new equation for a more inclusive climate change action plan.