The Carbon Credits Chaos: How Solar Investors in Africa Can Survive and Thrive Amid Uncertainty

Key message

The carbon market is undergoing significant changes, and renewable energy investors, particularly those working in solar, face increasing challenges. The recent decision by the Integrity Council for the Voluntary Carbon Market (ICVCM) to exclude many renewable energy projects from qualifying for high-integrity carbon credits has raised concerns, especially in Africa, where solar projects often depend on these credits to secure financing. This article explores the reasons behind the declining role of these credits in solar investments, the implications for African markets, and the strategies investors can use to prove additionality and continue benefiting from the credits despite the tightening regulations.        

For years, renewable energy developers—particularly those working in solar—have relied on carbon credits as an additional revenue stream to improve project returns. Carbon credits were not only a tool for offsetting emissions but also a vital source of financial support for renewable energy projects, especially in emerging markets. But the landscape is changing. Recent developments in the voluntary carbon market have thrown the future of renewable energy carbon credits into question.

In August 2024, the Integrity Council for the Voluntary Carbon Market (ICVCM) announced that existing renewable energy projects—including solar, wind, and hydroelectric—would no longer qualify for its high-integrity Core Carbon Principles (CCP) label. This decision was driven by concerns over additionality—a key concept in carbon credits that assesses whether a project would have occurred without the financial support of carbon credits.

The ICVCM decision could have far-reaching impacts, especially in Africa, where solar energy projects often depend on carbon credits to overcome high financial barriers. Without them, solar investors and developers in Africa face a critical question: How can they navigate this changing market, or should they begin rethinking their strategies?

Why Renewable Energy Carbon Credits Are Losing Ground

The voluntary carbon market has historically played a critical role in financing renewable energy projects. Since 2010, more than 750 million voluntary carbon credits have been issued by over 1,700 renewable energy projects, accounting for about 32% of the total market. These projects have helped shift global energy systems away from fossil fuels, particularly in regions where the costs of renewable energy were higher than conventional power sources.

However, the situation has changed dramatically. Over the past decade, the cost of renewable energy technologies—particularly solar photovoltaic (PV)—has plummeted. According to the International Renewable Energy Agency (IRENA), the cost of solar PV has dropped by over 80%, making it the cheapest source of electricity in many parts of the world. In fact, solar PV now averages a cost of $0.04 per kWh globally, often undercutting even fossil fuel-based energy sources. While this is good news for the widespread adoption of renewable energy, it has raised serious concerns about whether these projects truly need carbon credits to be viable.

The ICVCM's decision to exclude renewable energy projects from its high-integrity CCP label was based on the fact that existing methodologies fail to meet additionality standards. This means that, in many cases, these projects would likely proceed even without the financial incentive provided by carbon credits. As a result, nearly 236 million unretired carbon credits, or 32% of the voluntary market, are affected by this decision.

Who Stands to Lose the Most: Africa’s Solar Sector

The implications of the ICVCM decision will be felt globally, but emerging economies—particularly in Africa—stand to lose the most. In developed markets, where financial resources for renewable energy projects are abundant, developers can turn to alternative financing mechanisms like green bonds, low-interest loans, and government incentives. For example, in the U.S., the Inflation Reduction Act (IRA) unlocked nearly $400 billion in federal funding for clean energy, making it easier for developers to secure capital without relying on carbon credits.

However, the situation is very different in Africa. Solar projects in the region face significant barriers, including unreliable grid infrastructure, high capital costs, and political instability. In these markets, carbon credits have historically played a vital role in bridging the financing gap by providing an additional revenue stream to mitigate risks and attract investment.

Without carbon credits, solar projects in Africa face a much tougher path to securing financing. The cost of capital is higher in Africa due to perceived risks like currency fluctuations and regulatory uncertainty, and investors often demand higher returns to compensate. This creates a double burden: developers must secure financing in a high-risk environment, but they’re losing a key tool—carbon credits—that has traditionally made these projects more attractive to investors.

Proving Additionality to Secure the Credits: The New Playbook for Investors

Let’s face it: the tightening of the standards, particularly when it comes to additionality, can seem daunting for any investor in the renewable energy space—especially those working with commercial and industrial (C&I) solar projects. But this doesn’t mean you’re left without options. In fact, there are practical ways to approach this challenge and secure the future of your projects. Here’s how:

First off, let’s talk about the core of the issue: carbon credits should play a critical role in making your project financially viable. Now, I know that for many of us in this sector, we might assume that because solar is a widely accepted technology, the additionality case becomes harder to prove. But here's where you can still turn this around. If your project relies heavily on the revenue generated by carbon credits, then it’s clear that without them, the numbers simply wouldn’t add up. Take a C&I solar project, for instance, where Power Purchase Agreements (PPAs) with off-takers might offer a stable income, but they alone aren’t enough to make the project financially viable. If carbon credits are providing, let’s say, 20-30% of the total revenue, you can logically argue that this revenue is essential to the project moving forward.

And this is where IRR analysis comes into play. The key is to show how carbon credits bridge the financial gap. Without them, your project’s pre-credit IRR might fall below the level that makes it attractive for investment—possibly even rendering the project unfeasible. However, when you factor in the revenue from carbon credits, your post-credit IRR can rise significantly, potentially transforming a borderline project into one that comfortably meets or exceeds your financial benchmarks. This shift in IRR underscores just how vital carbon credits are in making the project not only viable but profitable.

So, while it might feel like the market is tightening, this difference between pre-credit and post-credit IRR is exactly the tool you need to prove financial additionality. The greater the gap, the stronger your case that carbon credits are indispensable. And, ultimately, this kind of analysis can help you keep your project attractive and on track, even as the standards become more stringent.

Another crucial thing you could also look at in this line of thinking is to demonstrate that carbon credits weren’t an afterthought—they were part of the plan from day one. If you can show that carbon credits were considered early in the decision-making process, you’re proving that these credits were always intended to be a key driver of the project’s viability. Think of it this way: If you go into a project already planning for the carbon credit revenue, you’re building the financial model with those credits in mind. This is something any well-planned project would do. Whether through internal memos, board discussions, or early-stage financial projections, having a record that shows credits were factored in early sends a clear message—this project wouldn’t have gotten off the ground without them.

And let’s not forget the role that barriers to implementation play. It’s easy to look at the cost of solar PV dropping by 80% globally and assume that these projects should be able to fly on their own, but in regions like Africa, the reality is often more complex. You’re still dealing with different types of barriers; those that are inherent and arise from projects’ characteristics, and evidenced barriers, which are supported by documentation or external sources.

Inherent barriers are those tied directly to the nature of the project—things like its location, scale, or the infrastructure around it. For example, a project in a rural, off-grid area might face much higher implementation challenges than one in an urban, well-developed grid. In these cases, the lack of local infrastructure, the distance to connect to the grid, or the need for additional energy storage solutions can all be seen as inherent barriers. If these barriers are significant, it strengthens the argument that carbon credits are essential to making the project financially viable.

And even if your project, as an investor, is for the C&I sector, you can still show that barriers exist, particularly if the project is connected to a grid that is not adequate or reliable. While C&I energy users are often found in on-grid locations, not all grids are created equal. In many countries, even where the grid exists, it may not meet the energy demands of growing industries. In these cases, solar projects can demonstrate additionality by showing that they are expanding energy capacity in regions where grid infrastructure is inadequate for industrial growth. And you make an even stronger case when your C&I project serves hard-to-abate sectors like steel, aluminium, or cement, where energy demands are high and emissions are significant. In such industries, reducing reliance on fossil fuels and ensuring a stable, clean energy supply is critical, and carbon credits can play a pivotal role in bridging the gap between grid limitations and the energy needs of these emission-intensive operations.

Then there are evidenced barriers—the barriers you can back up with credible sources or documentation. These could include high capital costs or regulatory hurdles that are unique to the country or region. For example, you could use reports that highlight the political risks or financial instability in a particular area, or studies showing how currency fluctuations have impacted previous solar projects in that country. Having this kind of documentation strengthens your case for carbon credits by showing that, without the credits, these risks would likely prevent the project from moving forward.

Another important angle to consider when proving additionality is the legal and regulatory landscape surrounding your project. As a rule of thumb, if the project is required by law or regulation, its additionality could be compromised. But this doesn’t mean all hope is lost. For instance, if your project operates in a country where environmental regulations are weakly enforced or where the grid remains underdeveloped despite national renewable energy goals, you can still build a case for carbon credits.

Take South Africa, for example. While the government has established policies like the Integrated Resource Plan (IRP) to increase renewable energy capacity, many industries still suffer from load shedding due to the country’s unstable grid. Although there are regulatory frameworks in place, enforcement remains inconsistent, and grid infrastructure is often underfunded. In this case, a solar project for a C&I off-taker could show that without carbon credits, it wouldn’t be financially feasible to overcome the reliability issues of the national grid.

Or consider Nigeria, where there are national efforts through initiatives like the Rural Electrification Agency (REA) to boost renewable energy in rural and underserved areas. However, even with these policies, much of the energy sector relies heavily on diesel generators due to the unreliable grid and slow progress on grid upgrades. Here, you could demonstrate that carbon credits are essential for financing solar projects, as they fill the gap left by the absence of enforceable policies that require industrial users to adopt renewables.

And while we’re talking about proving additionality, it's worth noting that the prevalence of solar technology in a given country—or what we call "common practice"—can also impact your case. If solar projects are still relatively uncommon in the country where you're investing, it strengthens your argument that carbon credits are needed to make your project viable. The lower the market penetration, the higher the additionality. This is something you can easily find data on—organisations like IRENA or IEA have databases on technology adoption, and even the various carbon crediting programmes, such as Verra or Gold Standard, already track this information.

What to Prioritise Now: Immediate Actions for Developers and Investors

It’s now clear that investors and developers can no longer afford to treat carbon credits as an afterthought, especially as the market tightens and additionality requirements become more stringent. Instead, they must take immediate and strategic steps to ensure that their renewable energy projects, particularly those in the C&I solar sector, remain financially viable and competitive in this evolving landscape. Here are a few actionable steps to consider right now:

1. Start with Carbon Credits at the Core of Your Financial Model

The days of tacking on carbon credits as an extra revenue stream after a project is already underway are over. To navigate the new rules, carbon credits need to be part of the conversation from day one. Early integration of carbon credits into your financial model is not only a way to ensure the project’s profitability but also a method of proving that credits are essential to its success. For instance, as soon as you're drafting your initial project case or engaging with stakeholders, make sure the role of carbon credits is front and centre. This can be done through early-stage financial projections, internal memos, or board discussions that explicitly outline how carbon credits are crucial to achieving the project’s return on investment (ROI). This will provide clear documentation showing that credits were always an integral part of the plan, not just an afterthought, which is essential to meet the stricter additionality tests.

2. Conduct a Robust IRR Analysis—Before and After Carbon Credits

A key part of proving financial additionality is showing how carbon credits change the financial attractiveness of the project. Conducting a pre-credit and post-credit Internal Rate of Return (IRR) analysis will give you the evidence you need to prove that the credits are critical to making the project financially viable. By running an IRR analysis early, you can demonstrate that without the revenue from carbon credits, the project’s return would fall below acceptable thresholds, making it unlikely to secure financing. Once the carbon credits are factored in, if the IRR jumps to a level that makes the project appealing to investors, it strengthens your case for why the project wouldn’t have gone ahead without these credits. This type of analysis should be done as early as possible, so that when it’s time to pitch to stakeholders or submit for carbon certification, you have solid data to back your case.

3. Identify and Quantify Barriers Early

We’ve discussed the importance of proving both inherent and evidenced barriers to justify the need for carbon credits. Start by identifying the specific barriers your project faces, whether that’s high capital costs, unreliable grid infrastructure, or political risks. But don’t just identify them—quantify them. In your early planning phase, gather credible data that demonstrates these barriers. For instance, use reports from financial institutions or third-party sources that highlight the currency risks, political instability, or infrastructure gaps in the countries you’re targeting. This early research will pay off later when proving to regulators or carbon crediting bodies that your project requires the extra financial buffer that carbon credits provide. Showing that you’ve done your homework and can support your claims with hard data is essential in this more stringent carbon market.

4. Plan for Regulatory and Market Shifts

One of the biggest mistakes developers can make is assuming the current regulatory environment will remain unchanged. The carbon market is in flux, and regulations can vary significantly across regions. Early in your planning, conduct a thorough legal and regulatory review to understand where your project stands within the broader landscape. Look at whether there are existing or upcoming regulations that could affect your project’s additionality. For example, if your project is located in a region where renewable energy mandates are weak or enforcement is inconsistent, use that information to your advantage. You can make the case that carbon credits are crucial because the existing legal framework isn’t strong enough to push projects like yours over the finish line without them. Planning for regulatory changes early ensures you’re not blindsided by shifting rules later.

5. Leverage Available Data and Partnerships

When building your case for additionality, data is your best friend. Make use of publicly available data from organisations like IRENA, the IEA, and even carbon crediting bodies like Verra or Gold Standard to support your claims. Beyond just relying on existing data, early-stage partnerships with local governments, financial institutions, and NGOs can provide additional insights and resources to bolster your project’s viability. These partnerships can also give you access to local market knowledge, which may help you navigate regulatory environments or even secure additional incentives that complement your carbon credits. The more partnerships and data you integrate into your early planning, the stronger your project’s foundation will be when it’s time to present your case for additionality.

6. Reassess Your Project Pipeline—Not All Projects Will Make the Cut

As additionality requirements become tougher, not every project in your pipeline may be able to secure carbon credits. It’s crucial to conduct a strategic reassessment of your project portfolio. Identify which projects are most likely to meet the new additionality standards and which may struggle without significant restructuring. For those that won’t make the cut, consider restructuring them or looking into alternative financing mechanisms, such as government subsidies, that may complement or replace the role of carbon credits. Early identification of which projects will thrive under the new rules allows you to focus resources where they’re most likely to succeed.

Key Takeaways and Final Thoughts

The era of relying on carbon credits as a guaranteed stream of revenue is coming to an end. The carbon market is changing fast with stricter rules and tougher additionality requirements. What used to be a dependable revenue stream now requires much more careful planning and strategy.

The new reality is that early planning and integrating carbon credit strategies are no longer optional—they’re essential. If you're a developer or investor, the best way forward is to make carbon credits a central part of your project from the very beginning. It’s not something to think about later—it needs to be part of the financial foundation of the project. Whether it’s running IRR analyses to show how carbon credits affect returns or proving that credits are essential to overcoming challenges like high capital costs or unreliable infrastructure, thinking about carbon credits early can give you a real advantage.

At every stage of project development, from initial planning to final financial checks, you need to consider how carbon credits fit into the bigger picture. Those crediting governance bodies aren’t just looking for good projects—they want to know how you’ve handled the challenges of the carbon credit market. Have you shown that carbon credits were part of the plan from the start? Have you proven how they make your project financially attractive? And have you thought about the regulatory or infrastructure challenges that make carbon credits necessary? These are the questions you need to answer early on if you want to secure carbon credits and make your project financially successful.

Developers and investors who plan ahead, adapt quickly, and rely on data will be in the best position to succeed in this changing carbon credit market. The key is using all the tools available to you, from financial models to data-driven insights, while staying aware of changes in regulations and market conditions. Those who understand additionality, conduct thorough barrier analyses, and include carbon credit strategies in their early plans will be better prepared than those who wait until it’s too late.

In a world where the carbon market is becoming more selective, the winners will be those who evolve with it, leveraging credits not as a secondary revenue stream but as an indispensable part of the project’s DNA. As the rules get stricter and the standards get higher, those who start planning now—who look ahead and build carbon credits into their projects from the start—will be the ones who not only survive but thrive in this new era of renewable energy financing.

The message is clear: Act now, adjust your strategies, and plan for carbon credits from the beginning. In doing this, you’ll be ready to handle the changes in the market, ensuring your projects remain competitive, financially strong, and focused on delivering sustainable results.