The influence of external finance and domestic investment on clean energy transitions for African urban and rural households

Abstract

This study examines the determinants of household energy transition in 48 African countries (2000–2023), focusing on domestic investment and external finance roles. Employing a dual-method empirical framework, the analysis combines Driscoll and Kraay’s fixed/random effects estimators to address cross-sectional dependence and autocorrelation, alongside instrumental variable quantile regression (IVQR) to account for endogeneity and heterogeneous effects across quantiles. Disaggregating results by sub-region (Sub-Saharan Africa [SSA] and North Africa [NA]) and household type (rural and urban), the research reveals elaborate patterns in regional and residential disparities. Key findings reveal domestic investment, external debt, and official development assistance (ODA) as significant positive drivers of energy transition across urban and rural households in the full sample. However, sub-regional analysis highlights divergent impacts: external debt boosts transition in SSA but hinders it in NA, while ODA and domestic investment remain universally positive. Foreign direct investment (FDI) shows a positive but statistically insignificant effect overall, yet significantly supports rural households in NA. Remittances exhibit a negative influence, particularly in NA, where they impede both urban and rural transitions, while SSA shows marginal (statistically insignificant) contrasts between rural (positive) and urban (negative) households. IVQR results further underscore heterogeneous responses across quantiles, with rural/urban households and SSA/NA subpanels displaying varying sensitivities to financial drivers. These findings emphasise the need for regionally differentiated policies, blending targeted financial instruments with context-specific strategies to accelerate equitable energy transitions. The study advocates for recalibrating debt mechanisms in SSA, leveraging FDI for rural NA projects, and redirecting remittance flows, while addressing quantile-level disparities through adaptive financing frameworks.