The current generation profile for the DRC is 98% renewable energy, almost exclusively from hydropower (IEA, 2019) but the country generates less than five gigawatts (GW) of hydropower out of a potential of 100–110 GW (Oyewo et al., 2018). Thus, the future role of hydropower is carefully considered in the current study’s scenario results. DRC has commited to a nationally determined contribution (NDC) of 21% emissions reduction by 2030, the attainment of which is largely conditional on external investment (MEDD, 2021).
In October 2021, DRC formally updated the ambition of its nationally determined contribution (NDC) to a 21% reduction in economy-wide emissions by 2030 relative to projected business as usual emissions (BAU) (430 Mt CO2e). (DRC does not have a more specific NDC sub-target focused on emissions reduction or mitigation in the energy sector.) A 19% reduction is conditional on international funding—referred to as foreign direct investment (FDI)—representing more than $44B of the estimated $48.68B in funding required to meet the full NDC (MEDD, 2021). DRC is not atypical: twenty-six African countries have conditional NDCs that rely on external investment (Senshaw and Kim, 2018). Conditional funding has become a common characteristic of NDCs for LMICs.
Sources from both academic and grey literature indicate that DRC is not currently conducive to external investment in RETs because of a lack of energy policies impacting RETs explicitly (Kusakana, 2016; World Bank, 2020; UK Aid, 2019). The most recent energy policy was passed in 2014, which liberalized on-grid electricity generation and T&D, established the Electricity Regulation Authority (ARE) and the National Agency for Electrification and Energy Services in Rural and Peri-Urban Areas (ANSER), but did not address RET cost or investment (ARE, 2014). Making DRC a favorable country for business investment will substantially increase the chance of success for its NDC.
The DRC National Development Plan for 2019–2023 includes five major strategic pillars. Pillar IV, Territory Development, has major objectives for the electricity sector, including leveraging greater private participation to finance the sector and intensifying investments in RETs. The funding section of the plan highlights accelerating reforms to improve the business climate and implementing specific incentive measures offering tax and customs advantages by sector as two major strategies for attracting the FDI needed (UNDP, 2021). The importance of these strategies is further highlighted by DRC’s stated goals of 30% electrification by 2025 and 60% electrification by 2030 (ANSER, 2020). Therefore, a priority gap for the DRC government to address is understanding which policies could be introduced to improve the business environment for RET investment.
There are three types of RET-supporting policies: targets, regulatory, and fiscal incentives/public financing (REN21, 2021). RET fiscal incentive policies were selected as the focus for this study because targets would be politically and legally challenging for the DRC to implement and regulatory policies cannot be easily integrated into energy system modeling.
Currently, DRC has a standard value-added tax (VAT) rate of 16% that is applied to all goods and services bought or sold for use or consumption in-country (PwC, 2022). VAT exemptions are applied to specific types of goods. Notably, “equipment, material, and chemicals imported by mining and oil companies for prospecting, exploration, and research” are VAT-exempt, providing a financial incentive for fossil fuel-based energy production (International Trade Administration, 2021). DRC import duties add up to an additional 19% to the cost of RETs. In theory, RETs should be exempt from VAT and customs import duties in DRC, but this has not been properly codified. Thus, the exemption is applied inconsistently, and, in many cases not at all (USAID and Power Africa, 2019). For two scenarios in this study, a conservative 16% subsidy (cost reduction) was applied to the capital cost of RETs for simplicity, which the DRC government could achieve through uniform application of a VAT exemption, or, if necessary, through a partial reduction of customs import duties.
For two scenarios in this study, a 70% tax (cost increase) was applied to the capital cost of fossil fuel technologies. Fossil fuel subsidy reform dominates the literature on applying financial disincentives to fossil fuel energy production (Jakob et al., 2014; Skovgaard and van Asselt, 2019). But, unlike most other countries, DRC does not have post-tax subsidies on petroleum, coal, or natural gas that could be eliminated (International Monetary Fund, 2015), so these approaches are not applicable. However, as detailed in the previous section, one straightforward tactic the DRC government might employ to implement a fossil fuel tax would be to eliminate the current VAT-exemption in place for fossil fuel-based energy production. In financial terms, removing the VAT-exemption (fossil fuel subsidy) would be equivalent to introducing a 16% tax.