A Bright Future For Renewable Energy? A Structural Vector Autoregressive Approach to Evaluate the Impacts of Renewable Energy Expansion in Kenya and South Africa

Abstract

Africa is a continent endowed with natural resources and a high renewable energy potential. Kenya and South Africa have outlined significant emission reduction goals. This paper applies a Structural Vector Autoregressive (SVAR) Model to forecast the structural impacts of a shock in the renewable energy share in the electricity generation mix on the response variables CO2 emissions and real gross domestic production in Kenya and South Africa. This paper utilizes the framework set out by Oryani et al. (2020). A reduced form Vector Autoregressive (VAR) model is estimated before an SVAR model identified with long-run restrictions is estimated. This paper finds that in Kenya, a shock in the renewable energy share in the electricity generation mix is forecast to cause a short-term increase in real gross domestic product and a reduction in CO2 emissions. In the medium to long-term both CO2 emissions and real gross domestic production oscillate toward zero in a cyclical fashion. The structural forecast error variance decomposition reveals that in Kenya the renewable energy share has the strongest environmental impact and real gross domestic production has the weakest. In South Africa a shock in the renewable energy share in the electricity generation mix leads to a short-term increase in CO2 emissions before the trend oscillates to zero. This paper also finds that the same shock leads to a short, medium and long-term increase in real gross domestic production in South Africa. The structural forecast error variance decomposition indicates that the majority of forecast error variation in CO2 emissions is due to itself, and the renewable energy share and real gross domestic production have very similar environmental impacts over the time period forecast. The impacts of a renewable energy shock in the electricity generation mix varied across both countries. With potential for large renewable energy expansion in Kenya and South Africa, the forecast increases in real gross domestic production and the possibility of devel- oping a long-term sustainable energy supply should encourage policy makers to overlook any possible short-term negative consequences of increasing the renewable energy share in the electricity mix as they make decisions about the development of renewable energy supplies.