Energy transition, institutional quality, and financial development in Africa

This study examines the influence of institutional quality and financial sector size on driving renewable energy (RE) development using a sample of 31 African countries. We first employ a nonparametric trending panel data model that allows us to capture the gradual process of RE transition. The estimated common trend function reveals a steady increase in the share of RE from 2002 to 2019. Although fossil fuels dominate the energy structure in some African countries, a shift toward low-carbon sources is emerging, becoming increasingly significant in the energy mix. In the next step, we apply recent panel quantile regression techniques to model the heterogeneous and asymmetric relationships between RE and its main determinants. We find that institutional quality has a prominent influence on advancing the low-carbon transition, with significant positive effects across almost all conditional quantiles of the RE distribution. However, financial sector size seems to be important only for countries with a lower share of RE. Our results also confirm the asymmetric impact of income growth, which is negative in the lower quantiles but positive in the upper tail of the conditional distribution. From a policy perspective, governance factors, including the quality of policy formulation and implementation, have a critical role in promoting clean energy initiatives in Africa.