ENERGY POVERTY in AFRICA 39 Proceedings of a Workshop Held by OFID in Abuja, Nigeria June 8 –10, 2008

OFID PAMPHLET SERIES ENERGY POVERTY IN AFRICA 39 Proceedings of a Workshop held by OFID in Abuja, Nigeria June 8 –10, 2008

ENERGY POVERTY IN AFRICA Proceedings of a Workshop held by OFID in Abuja, Nigeria June 8–10, 2008 The “OFID Pamphlet Series” was begun in 1977, a year after the establishment of OFID. The series is meant to promote a better understanding of the aspirations and problems of developing countries, including OPEC Member States.

OFID is the multilateral development finance institution established by the Member States of OPEC in 1976 to promote South-South solidarity and strengthen cooperation between countries of the developing world.

The opinions expressed in this pamphlet are those of the authors and should not be construed as necessarily representing either the view of OFID or its member countries.

The OPEC Fund for International Development (OFID) Parkring 8, A-1010 Vienna, Austria P.O. Box 995, A-1011 Vienna, Austria Telephone: (+43-1) 515 64-0, Fax: (+43-1) 513-92-38 Internet: www.ofid.org Email: [email protected]

Cover photo: Doug James/Shutterstock Design: etage.cc, Vienna,Austria Printing: Druckerei Odysseus, Himberg, Austria OFID PAMPHLET SERIES

ENERGY POVERTY IN AFRICA

Proceedings of a Workshop held by OFID in Abuja, Nigeria June 8 –10, 2008

OFID PAMPHLET SERIES 39 Vienna, Austria October 2010 Unless otherwise stated “dollars” ($) refers to United States dollars. “Billion” means a thousand million.

Maps are for illustration purposes only and are not to be taken as accurate representations of borders.

This publication is also available in PDF format on the OFID website at www.ofid.org

4 OFID PAMPHLET SERIES 39 Contents

Foreword of the Director-General of OFID 13

I. Introduction and Overview 17 Akin Iwayemi

II. Energy Poverty in Africa 39 Suleiman J. Al-Herbish

III. Regional Integration of Power Systems: 49 A Tool for Reducing Energy Poverty and Accelerating Economic Growth Roger M. Gaillard

IV. Powering Industrial Growth: 57 The Challenge of Energy Security for Africa Pradeep Monga

V. Energy Access in Rural Areas 105 Phil U. Chineyemba

VI. Expanding Energy Access through 121 Sustainable Energy Enterprises in Africa: Financing, Capacity-building and Policy Aspects Lawrence Agbemabiese

VII. Africa’s Power Supply Crisis: Unraveling the Paradoxes 139 Waqar Haider

VIII. Why Africa Lags Behind in the Energy Sector 169 Steve Olumuyiwa

IX. Promotion of Public-Private Partnership 185 to Improve Energy Access for Poverty Reduction and Growth in Sub-Saharan Africa Adeola Adenikinju

X. Energy and Poverty in Sub-Saharan African Economies: 209 Supply-side Issues Akin Iwayemi

List of Tables, Figures and Boxes 6 Acronyms and Abbreviations 238 About the authors 240

OFID PAMPHLET SERIES 39 5 List of Tables, Figures and Boxes

II. Energy Poverty in Africa

Tables: 1 World energy production 42 2 Energy use per capita 42 3 Electricity production 46 4 Sectoral distribution of OFID's financing 47

Boxes: 1 OFID and the energy sector 41 2 Trade revenue and energy budgets 45

III. Regional Integration of Power Systems: A Tool for Reducing Energy Poverty and Accelerating Economic Growth

Figures 1 Electricity consumption / population (kWh per capita) 51 2 Activities and operations of AfDB diversified across all regions and critical sectors (in percent) 53

IV. Powering Industrial Growth: The Challenge of Energy Security for Africa

Tables: 1 World primary energy demand, 2005, 2015 and 2030 61 2 Basic energy indicators for country groups 63 3 African oil and gas reserves as of end 2005 67 4 Industrial energy intensity by country groups, 1990 and 2002 70 5 Heat shares in industrial energy use 74 6 Temperature ranges for industrial processes 75 7 African electrification rates, 2005 77 8 Electricity outages of firms in Africa 78 9 Basic patterns of energy consumption in East African Community (EAC) Countries 78 10 Energy access targets agreed by African ministers for 2015 82

6 OFID PAMPHLET SERIES 39 11 Investment requirements for increasing access to modern energy services in sub-Saharan Africa 83 12 Size of African power sector 91 13 Selected African countries’ restructuring profile 92

Figures: 1 Relationships between energy and achievement of the MDGs 59 2 Regional energy production in Africa, 2005 65 3 African energy consumption fuel shares, 1971 and 2005 66 4 Sustainable development impacts of increased energy efficiency 69 5 African electricity intensity, energy intensity and energy production intensity 70 6 Self-generation shares in African enterprises 89

Boxes: 1 Biofuels activities in Africa 76 2 Jatropha for biodiesel production in Africa 77 3 Access to thermal energy and mechanical power for productive uses in Africa 79 4 Integrating energy access into national strategies: Mali, Rwanda, Senegal 80 5 ECOWAS/UEMOA White Paper on Energy Access 81 6 CEMAC Action Plan 82 7 Hydro-power construction in Africa 96 8 India-Brazil-South Africa Declaration on Clean Energy 96

V. Energy Access in Rural Areas

Figures: 1 Energy consumption in Africa in percent in 2001 106 2 The vicious circle of energy poverty 109 3 A virtuous circle to break out of energy poverty 110 4 Implementational flow of market-based models 115 5 Concession and rental approach of market-based models 115 6 Government-led model in China – financial flow 116

OFID PAMPHLET SERIES 39 7 List of Tables, Figures and Boxes

VI. Expanding Energy Access through Sustainable Energy Enterprises in Africa: Financing, Capacity-building and Policy Aspects

Boxes: 1 Vent et Eau pour la Vie (VEV) in Senegal 124 2 SODIGAZ: Butane gas distribution in Mali 124 3 Biomass Energy Tanzania Limited (BETL) 124 4 AREED Investments 2000–06 125 5 Amount financed by AREED and annual repayments 126 6 AREED loans and repayments in Ghana 129 7 AREED loans and repayments in Tanzania 130 8 Terms of AREED loans in Ghana 132

VII. Africa’s Power Supply Crisis: Unraveling the Paradoxes

Tables: 2.1 Emergency power generation in SSA 145 2.2 Private participation power-sector transactions in SSA (review basic information) 153 2.3 Power-sector expenditure 157 2.4 Annualized power-sector expenditure requirements to 2015 159

Figures: 1.1 Evolution of power infrastructure in SSA relative to other regions 140 1.2 Electricity prices and consumption in Africa relative to other regions 141 2.1 Countries affected by acute power-sector crises in recent years 143 2.2 Drivers of operating costs for SSA power systems 147 2.3 Electricity costs and revenues by type of power system 149 2.4 Average power-sector revenue and various cost benchmarks 149 2.5 Electricity service coverage in SSA 150 2.6 Electricity service expenditure in SSA 151 2.7 Evaluation of power-sector reform 152 2.8 SOE governance characteristics 154 2.9 Frequency distribution of power-sector efficiency indicators 155

8 OFID PAMPHLET SERIES 39 2.10 Hidden costs of power-sector inefficiency 156 2.11 Long-term trends in external finance for the SSA power sector 158

Boxes: 1 Introducing the Africa Infrastructure Country Diagnostic 141 2 Regional and economic effects of South Africa’s power-supply crisis 144

VIII. Why Africa Lags Behind in the Energy Sector

Tables: 1 World demographic and total energy consumption indicators: selected indicators for 2005 173 2 Selected world electrical power production statistics 174 3 Selected world energy and environment indicators 175

Figures: 1 Total primary energy supply The world in 1973 and 2005: regional shares of total primary energy supply 170 2 1973 and 2005 regional shares of electricity generation 172 3 Location of the Inga Hydro Power Project 181

IX. Promotion of Public-Private Partnership to Improve Energy Access for Poverty Reduction and Growth in Sub-Saharan Africa

Tables: 1 Electrification rates by region 188 2 Electrification trend in selected countries in SSA 190

3A International initiatives to get energy to the poor 194

3B African regional initiatives to get energy to the poor 196 4 Sources of resources and allocation of risks under various PPP options 200 5 Types of government guarantees 201 6 Examples of off-grid power plant technologies 203 7 Possible IPP outcomes 204

OFID PAMPHLET SERIES 39 9 List of Tables, Figures and Boxes

Figures: 1 Energy access and poverty links 185 2 Electrification rate in various regions (2002) 187 3 Regional comparison of rural population access to electricity 189 4 Access to electricity for upper income households among selected countries in SSA 189 5 Income distribution of access to electricity in selected countries in SSA 190 6 Dependence on biomass fuels 191 7 Impact of reforms on the pace of electrification of the poor 192 8 Private investment in power generation in developing countries 198

X. Energy and Poverty in Sub-Saharan African Economies: Supply-side Issues

Tables: 1 Key socio-economic development indicators in Africa 214 2 Per capita energy and income for selected developed and African countries 216 3 Electric power consumption (kWh per capita) in African countries 1970–2001 219 4 Electric power transmission and distribution losses (percent of output) in African countries 1970–2001 220 5 Energy imports (percentage of commercial energy use) in African countries 1970–2001 223 6 Share of fuel in merchandise imports 2000–04 224 7 Biomass energy consumption (percent of total energy) in African countries for selected years 1970–2001 225 8 Energy resources in Africa 227

Figures: 1 Africa’s share in world oil production 1965–2005 217 2 Africa’s share in world oil consumption 1965–2005 217 3 Access to electricity in selected countries in Africa 222 4 Interlocking issues in sustainable energy supply in SSA 226

10 OFID PAMPHLET SERIES 39

Foreword

In November 2007, in Riyadh, Kingdom of Saudi Arabia, the Heads of State and Government of OPEC Member Countries, meeting in a Third OPEC Sum- mit, issued a Riyadh Declaration, which, among other issues, “recognized that energy was essential for poverty eradication and sustainable development.” The Declaration pledged that Member Countries “would continue to align the programs of [their] aid institutions, including those of OFID, with the objective of achieving sustainable development and the eradication of energy poverty in the developing countries, and study ways and means of enhancing this endeavor, in association with the energy industry and other financial institutions.” This was a charge to all aid institutions of Member Countries, including OFID, to pay greater attention to energy as a vital element in the development process. OFID was quick to take up the assignment, moving to accord renewed attention to energy projects and programs. In early June 2008, in keeping with the spirit of the Riyadh Declaration, OFID organized an Energy Workshop in Nigeria’s capital city of Abuja. The Abuja Workshop certainly met our expectations. Almost all the countries and institutions invited were able to attend. And the quality of the papers presented was very high. Among the invited were such leading institutions and corporations as the World Bank, the African Development Bank, the Arab Bank for Economic Development in Africa, the Chevron Corpora- tion, ExxonMobil, International Energy Forum and the United Nations Industrial Development Organization. Yet others included the Islamic Development Bank, the Organization of Arab Petroleum Exporting Countries, the Power Holding Company of Nigeria Plc., the Saudi Fund for Development, Schlumberger Ltd., the United Nations Environment Program, the West African Power Pool, the World Energy Coun- cil, the OPEC Secretariat, the UK Department for International Development and Japan’s International Cooperation Agency.

OFID PAMPHLET SERIES 39 13 Energy poverty in Africa calls for priority attention from the international community. Indeed, the region’s energy needs are huge, particularly in sub- Saharan Africa, which has the lowest rate of electrification in the world – less than 30 percent, according to the UNDP Human Development Report 2007/2008. This rate is all the more unacceptable, when one realizes that the estimated population of sub-Saharan Africa is 16 percent of the world total. The sub-region depends largely on inefficient traditional biomass, used mainly for cooking and water-heating in households. Traditional biomass accounts for over 80 percent of primary energy demand. These sources of energy (firewood, charcoal and animal dung, for instance) burn inefficiently and give off noxious fumes, which can cause serious respiratory disease and even death. The surrounding environment is also degraded, through the depletion of forest resources. Clearly, energy poverty has diminished Africa’s productive capacity. And as a continent, Africa itself has been discussing the issue. Thus, the contributions of OFID’s Abuja Workshop were only additional to what Africa itself had been undertaking and what Africa’s friends – amongst whom OFID counts itself – need to be doing. Indeed, the primary purpose of the Abuja Workshop was to draw government and industry and international organizations together to consider ways of adding value to what Africa, as a continent, has itself been doing to address this problem. The workshop sought to unite strengths and resources among participating agencies and corporations behind Africa’s own committed search for energy sufficiency. Two years on (June 2010), the issue of energy poverty has moved right up the international development agenda. Its eradication is now being widely referred to as the Ninth Millennium Development Goal. Indeed, it was also in June 2008 – the month of the Abuja Workshop – that a global Energy for the Poor Initiative was announced at the Jeddah Energy Summit, the objective being to help developing countries access modern energy services. A call was made by King Abdullah of Saudi Arabia on the World Bank to organize a donors’ and development institutions’ meeting to develop a framework for the Initiative. In addition, the King called for OFID’s Ministerial Council to consider a parallel program with an allocation of $1 billion. This Initiative has grown and has drawn support from many other international institutions and governments. OFID is participating strongly in the Initiative, which will form the central pillar of its lending program over the period 2011–2013. Abuja was a seminal event in the annals of OFID. We managed to gather together a number of leading scientists, economists and ranking state officials

14 OFID PAMPHLET SERIES 39 to examine the energy equation. The following papers recall much of the atmosphere and discussions at the Workshop. The papers are here assembled for historical record and education. I should, one more time, express OFID’s gratitude to the writers, the editors and all who were involved in the Work- shop. A special note of appreciation also goes to the Federal Nigerian government and, indeed, the nation of Nigeria, for years of unbroken support to this institution. At Abuja, I conveyed OFID’s gratitude to Nigeria for Nigeria’s continuing contributions to the institution. Nigeria was there at the very begin- ning, and has remained a Member State in good standing. We certainly look forward to many more years of Nigeria playing a key role in OFID.

Suleiman J. Al-Herbish Director-General

OFID PAMPHLET SERIES 39 15

Introduction and Overview I Akin Iwayemi

Africa is well endowed with renewable and non-renewable energy resources that far exceed its energy demand requirements for the next century. But paradoxically, most African countries are characterized by energy poverty and poor energy access, a reflection of their low income and general state of economic underdevelopment. Identification of the challenges of the paradox of energy poverty amidst plenty in most African countries, and their effective and efficient solution, have been a subject of recent debate. The dearth of analysis of Africa’s energy problems reflects the minimal attention given to the issue by energy experts despite the central role of energy in economic growth, rising employment opportunities, improved living standards, poverty alleviation, and the overall development process. Historically, expanded energy access, propelled by relatively inexpensive energy supply, played a major role in the large gains in productivity and rapid economic growth and significant reduction in poverty witnessed in the world economy in the last century. It is conventional wisdom that increased use of modern energy services per capita is an integral part of higher and sustained economic growth and significant improvement in living standards in low income developing countries. Arguably, expanded access to adequate, reliable, efficient, secure, environmentally responsive and affordable energy is a key element in Africa’s quest to achieve sustained economic growth. Other vital elements are significant poverty reduction, substantial improvement in living standards and achievement of the Millennium Development Goals (MDGs). The context for realizing the central goal of achieving expanded energy access and minimizing energy poverty, which will translate to substantially higher and more efficient per capita energy consumption in the shortest time possible, is defined by the following stylized facts: • Africa is well endowed with energy resources, including oil and gas, yet most African countries are energy-poor and have low energy access;

OFID PAMPHLET SERIES 39 17 • Significant energy demand-supply gaps exist, the most acute being in electric power; • Domestic energy prices are high compared to most other developing countries; • Contrasting demand and supply paths in the region reflect diverse initial economic and social conditions and energy resource endowment; • Supply-demand balances reveal significant differences at sub- regional and country levels; • Capacity utilization is low, resulting in significant dependence on expensive imports of petroleum products and unreliable and poor quality of electricity supply; • Poor regional and intra-regional energy infrastructure linkages have exacerbated the cost of domestic supplies especially in landlocked countries; • The problem of access is more pronounced in rural areas of Africa where the majority of the population lives. The problem of energy and income poverty is also more acute in the rural areas; • The relatively weak state of economic and social conditions in most economies in the region, which is the world’s poorest, follows almost two decades of poor economic performance and deepening poverty.

Furthermore, global energy market developments and the countervail- ing policies of major energy importing and exporting countries have brought the era of inexpensive energy to an end. These external developments have made the challenges facing expanded energy access and the elimination of energy poverty in Africa more overwhelming. Arguably, the sharp increase in world energy market prices since 1999 has made Africa’s drive to achieve affordable and expanded access to energy and sustainable development, as embodied in the MDGs more challenging. For example, higher prices have pushed access to refined petroleum products beyond the reach of hundreds of millions of low-income households, especially in rural areas. This and other developments associated with structural adjustment and related economic reform measures have reversed the meager improvement in living standards and economic well-being in the post-adjustment period. With low income and higher fuel prices, the result has been increased recourse to biomass fuels with

18 OFID PAMPHLET SERIES 39 their obvious environmental consequences. There is general agreement that I the adverse effects of higher world energy prices on domestic energy supply, access, economic growth and sustainable development, have been more severe in Africa than elsewhere. Poor access to modern energy services constitutes a major constraint on the exploitation of economic opportunities, sustained economic growth and the achievement of higher living standards in the continent. Against the foregoing factors, several questions demand inquiry in the search for a solution to the problem of achieving expanded access to affordable energy and the elimination of energy poverty. Among the questions are: What do we know and what have we learnt about the trends and characteristics of energy supply and demand in African countries? What are the main characteristics of energy poverty? What are the causal factors in Africa’s energy poverty? What are the conditions and requirements for achieving the much-desired objectives of expanded energy supply and access, as well as the elimination of energy poverty? How can supply capacity be increased in the context of sustainable energy and human development future? What are the economic, political, social, legal, technical, human resource and environmental challenges to a reliable, adequate and affordable energy supply to meet the continent’s energy needs for economic growth and sustainable development? What are the energy security issues in the region and how should they be addressed? What are the cost implications of the required wide energy access and the elimination of energy poverty and insecurity? What are the policy and institutional requirements for overcoming the region’s protracted energy and income poverty and for the establishment of an efficient, reliable and sustainable energy supply? In sum, can Africa achieve the vast expansion in supply of modern energy services, the expanded energy access of the population in both urban and rural areas and the elimination of energy poverty that could drive its sustainable energy future plan given the multi-dimensional challenges described above? At the regional level, the energy demand-supply balance situation provides some room for optimism given that substantially higher energy consumption can be met through regional supplies with ample surplus for export, considering the region’s total energy resource endowment. Despite this seemingly optimistic outlook, the country and sub-regional realities reveal multi-dimensional issues and challenges confronting expanded energy access and the elimination of energy poverty. These challenges, which have both short and long-term dimensions, encompass economic, political, social, technological, institutional, legal and organizational facets. The consensus is that much will depend on the design and implementation of appropriate policy strategies. These will involve among others: the deepening of current

OFID PAMPHLET SERIES 39 19 economic, social and political reforms; the alignment of economic and energy development policies at the country and sub-regional and regional levels; intensified integration efforts to create dynamic inter and intra-regional markets for goods, including energy, underpinned by openness that minimizes transaction costs in domestic, sub-regional and regional energy markets; defined roles for key actors in the region such as: the African Union (AU); the United Nations Development Program (UNDP); the African Development Bank (AfDB) and other Development Financial Institutions (DFIs), such as the the OPEC Fund for International Development (OFID); the World Bank; the European Union (EU) and other development stakeholders. Perhaps the most important factor is long-term credible regional and sub-regional political commitment to a sustainable energy vision anchored on the emergence of efficient energy markets. Finally, what is required is a paradigm shift in energy sector development and management from rigid public ownership and control, to a more market responsive private enterprise-led sector guided by an appropriate institutional and legal framework. The prime challenge of the first half of the 21st century for Africa is the development and efficient management of the continent’s energy wealth. This would serve as a strong anchor for achieving sustainable economic freedom and livelihoods in an environment currently defined by energy poverty, energy-induced environmental degradation, low living standards, large-scale unemployment and social conflicts, albeit diminishing in number and scale. However, the alternatives are few, considering the current development divide that Africa has to bridge. The nature and content of the responses to the policy challenges will largely shape the energy and economic future of sub-Saharan Africa (SSA). This book of proceedings, which is based on the papers presented at the workshop organized by OFID in Abuja in June 2008, is an important contribution to the much-neglected issue of energy poverty in Africa. The workshop provided a unique forum for diverse stakeholders involved in energy sector activities and the development process to illuminate several of the issues and questions raised above. The participants, who came from a broad range of backgrounds including policy making, academic, professional, and energy and development practitioners from domestic and international organizations, offered important perspectives on the subject. These include energy poverty, energy access and the design and implementation of policies that will ensure a sustained and wider access of the population to modern energy services. In illuminating the contours of the complex issues associated with Africa’s multi-dimensional energy crises, this book of proceedings will not only help to

20 OFID PAMPHLET SERIES 39 deepen our understanding of Africa’s energy issues and challenges, but also pro- I vide useful policy insights and a framework for achieving sustainable energy development that will facilitate the achievement of the MDGs. The common theme that runs through this book and the workshop is the identification of, and solutions to, the twin problems of energy poverty and expanded access to modern energy services in Africa. The book consists of 10 chapters that follow the structure of the workshop sessions, namely: Introduction and Overview (Chapter 1); Energy Poverty in Africa (Chapter 2); Regional Integration of Power Systems: A Tool for Reducing Energy Poverty and Accelerating Economic Growth (Chapter 3); Powering Industrial Growth: The Challenge of Energy Security for Africa (Chapter 4); Energy Access in Rural Areas (Chapter 5); Expanding Energy Access through Sustainable Energy Enterprises in Africa: Financing, Capacity-building and Policy Aspects (Chapter 6); Africa’s Power Supply Crisis: Unraveling the Paradoxes (Chapter 7); Why Africa Lags Behind in the Energy Sector (Chapter 8); Promotion of Public-Private Partnership to Improve Energy Access for Poverty Reduction and Growth in Sub-Saharan Africa (Chapter 9); Energy and Poverty in Sub- Saharan African Economies: Supply-Side Issues (Chapter 10). They reflect the variety of issues and insights that emerged from the workshop. The discussions cover key issues, challenges and constraints to the elimination of energy poverty and expanded energy access in both urban and rural areas. Also covered are solutions based on the sustainable exploitation and utilization of the region’s abundant, though unequally distributed, renewable and non-renewable energy resources. The conclusions that emerge from this book can be summarized as follows: First, energy development must be integrated into sustainable development in which a sustained improvement in the general well-being of the people and the enlargement of their economic and social choices are key elements. Second, sustainable energy and economic future in Africa must be based on the design and implementation of appropriate and harmonized regional and national energy and economic policies. These should be backed up by adequate financial, technical and other support from the International Financial Institutions (IFIs) and the development community. Third is the strengthening of energy institutional infrastructure, governance and accountability to support the development and management of a robust energy sector. Fourth is the creation and sustenance of an incentive-based competitive market system underpinned by market-responsive energy pricing that guarantees an adequate risk-adjusted rate of return for investors, but that also minimizes deadweight loss associated with market monopoly power. Fifth is the

OFID PAMPHLET SERIES 39 21 establishment of a well-targeted support system (of which “smart subsidies” would be an element) to help the energy poor in both urban and rural areas. Sixth, there must be due cognizance of the need for technical and capacity building requirement to support the drive for expanded supply and access to cleaner energy. Finally, there is a need to foster a strategic Public-Private Part- nership (PPP) to drive a new energy paradigm that encompasses the efficient use of both renewable and non-renewable energy sources that will minimize carbon emissions and climate change. What emerges forcefully from the workshop and this book is the need for a paradigm shift in the development and management of Africa’s energy sector backed up by policy continuity and credibility in the sector’s reform process. In conclusion, most fundamental to the effectiveness of a solution to the energy poverty and expanded access problems is translating the ideas in this book to practice propelled by good governance and political accountability.

In Chapter 1, “Introduction and Overview,” Iwayemi provides a concise summary of each of the chapters, with focus on the key issues, challenges, opportunities and policy matters concerning the two fundamental problems of expanded energy access and energy poverty at the continental, sub-regional and country level in SSA. In this overview, the author highlights the key recommendations of the different chapters concerning how to overcome the twin problems of rural and urban energy access and poverty reduction.

Chapter 2, “Energy Poverty in Africa,” is authored by OFID Director-General, Suleiman J. Al-Herbish. He sets the tone of the debate by taking an overview of Africa’s energy dilemma. He provides evidence to support the point that Africa is the most energy poor and has poor energy access compared to other regions of the world. The effect of low energy use and access is the region’s diminished productive capacity and lackluster economic performance. In addition, he points out the overdependence of the region on inefficient traditional biomass to meet its primary energy needs, which are mainly for domestic cooking and water heating. He argues that the great challenge facing SSA economies is how to achieve the first objective of the MDGs, namely, to reduce by half the proportion of people living on less than a dollar a day and also to slash by half the proportion of people who suffer from hunger. Al-Herbish further notes that the present crises in the energy sector have hindered SSA countries from achieving higher economic growth and living standards. He discusses OFID’s intervention in the energy sector, which comes in four forms, namely, direct project funding; technical assistance in support of international and national institutions; funding the activities of

22 OFID PAMPHLET SERIES 39 multinational agencies; and research grants for specific studies and investiga- I tions and the operation of an energy account. Al-Herbish argues for a re-ordering of priorities that would give energy poverty and expanded energy access higher priority if Africa is to achieve robust economic growth and sustainable development. He considers the challenges of financing energy schemes given the quantum of investment required to find long-term solutions to energy poverty and limited energy access, against the background of inadequate domestic and regional investment constraints. The author proposes greater reliance on private investments, micro-financing, other innovative financing schemes and Foreign Direct Investment (FDI), in light of the poor funding of public energy sector projects. He also discusses the role governments should play in supporting sustainable energy poverty solutions by providing the enabling environment for efficient market development. Al-Herbish further notes that the recent experience of countries that pursued credible reform of the energy sector shows that market incentives and business innovation can provide new pathways for solving the seemingly intractable energy problems in the region. Other measures include: the need to maximize entrepreneurship, transfer skills and build human capacity as well as encourage PPPs. The challenge here is to make clear policies and other measures that would increase the funding of energy sector projects. He also acknowledges the need to integrate energy policies into broader development strategies in African countries, while at the same time encouraging regional integration. Al-Herbish goes on to discuss the important issue of supply and end-use efficiency. The challenges of meeting energy requirements of rural areas are also discussed. He then proposes further studies and investigation that would address the great challenge of how to supply electricity to the rural areas of Africa, given their peculiar characteristics such as low population density, remoteness from urban centers, limited income and the low ability of the majority of rural dwellers to pay economic prices, at least in the short term. The author suggests that to guarantee the sustainability of rural energy projects, these should be packaged as viable enterprises capable of attracting private- sector intervention. Al-Herbish said OFID expects the workshop to assist in the formulation of a research and investigation agenda related to the various issues that were identified. Finally, he suggests that energy poverty issues should be incorporated into national planning processes.

In Chapter 3, “Regional Integration of Power Systems,” Gaillard argues for a regional approach to solving Africa’s protracted electricity crisis, based on the evidence that despite the continent’s abundant energy resources, many

OFID PAMPHLET SERIES 39 23 countries are energy poor. This is because the energy markets, due to their small size, would not be sufficiently profitable to support the electrification of these countries. He therefore emphasizes the need for the energy-poor African countries to pursue a regionally-based, rather than an individual country-based approach. He says, individually, the countries are unable to attract adequate investment for the development of their energy sectors. The author notes that electric interconnections are well established in most of the industrialized countries, adding that such interconnections have produced more competitive, affordable and reliable energy services to end users. He observes that Africa is the least interconnected region in the world in terms of electricity. Therefore, he continues, such electric interconnections are a sine qua non for better balancing of energy supply and demand among countries with different energy resource endowment. Gaillard posits that regional and sub-regional energy integration would facilitate the establishment of more efficient and reliable energy supply to meet demand. He also advocates sub-regional and regionally- based interventions to eliminate the region’s electricity crisis integration through construction of power generation plants and transmission lines. He says this would allow for the development of a transnational electricity market with the aim of reducing energy poverty and facilitating the conditions for better availability, accessibility and affordability of modern energy. Against this background, he notes the numerous efforts of Regional Economic Communi- ties (RECs) and IFIs to support and encourage the establishment and operation of sub-regional and regional electric power pools. Other supported areas are the joint development of hydro-power projects as well as cross-border transmission lines and gas pipelines. He then describes the AfDB’s interventions, which focus on exporting electricity to neighboring countries. The aim, he says, is to exploit energy resources where they are in abundance and make the electricity generated from such resources available to energy-deficient countries through energy trade. He argues that such an approach would ensure much-desired sufficiency and greater reliability of electricity supply. These, he adds, are essential to achieving the objectives of greater country, sub-regional and regional economic competitiveness, higher economic growth and the alleviation of energy and income poverty. Although the author’s focus is the electricity sector, he recognizes that the region’s energy problem goes beyond that area. Rather, it encompasses the best energy source for all needs – biomass, kerosene and other renewable energy sources. He also discusses AfDB’s involvement in related activities such as rural electrification, and the promotion of renewable and clean energy. Others are development of small power plants and off-grid power systems, and

24 OFID PAMPHLET SERIES 39 in the energy sector at large, participation in projects in the oil and gas indus- I try and in cogeneration schemes from biomass. Gaillard concludes that, without addressing the issue of energy poverty, sub-Saharan economies will find it difficult to achieve the MDGs in 2015. Also, they will find it hard to improve the quality of life of the majority of their population, which is projected to double by 2030. He emphasizes the role of regional and IFIs in providing significant resources. This is in addition to being a catalyst in regional energy integration projects to change the energy map of the continent. The author points out the importance of statistics and information in dealing with the challenges of Africa’s energy sector.

In Chapter 4, entitled “Powering Industrial Growth: the Challenge of Energy Security for Africa,” Monga examines the problems of energy poverty and lack of access to modern energy services from the perspective of industrial development and energy security. Energy poverty is viewed as a dimension of energy insecurity and a serious constraint to economic and human development. The author begins his analysis by looking at Africa’s energy deprivation and lack of energy access in comparative global, regional and sub-regional terms. The evidence shows significant gaps between Africa and the rest of the world, as well as sharp contrasts between rural and urban areas and at sub- regional levels. He argues that energy security, which has supply and demand dimensions, must be viewed from both the quantity and price perspectives. Using less energy to provide energy services and having access to energy and technologies that provide these energy services are two principles that underpin energy security. He stresses that these principles should be of interest to Africa. Monga acknowledges that energy security, which has both internal and external dimensions, is a complex topic with linkages to numerous other sustainable development objectives. He said there is a strong nexus between energy production/use and human development, despite the lack of energy- specific MDGs. Therefore, energy security issues must be integrated into energy policies alongside other development and environmental goals. In the context of Africa, the issues of access and the affordability of energy services assume special significance in addressing the challenges of climate change and facilitating achievement of the MDGs. Also, aspects of African energy security include the diversification of energy supply and demand; the development of energy infrastructure, with attention to its resilience; and the promotion of clean and affordable energy sources and technologies. Other factors are decentralization of energy production through development of local energy resources and systems; energy trade and regional integration; and energy/power

OFID PAMPHLET SERIES 39 25 sector reform and price volatility. In addition, (carbon) financing and technology transfer also play an important role in improving African energy security. The author observes that energy efficiency is a notable constraint to African industrial development. A substantial improvement in the efficient consumption of energy, especially electricity, by the manufacturing and service sectors, is necessary to improve the productivity and competitiveness of African industry. Therefore, any overall strategy to improve their competitiveness must have as a primary objective, an improved economic development, for which a reliable and cost-effective energy supply is a prerequisite. Africa’s high energy-intensity, even at low levels of industrialization, points to an inefficient energy use. An important element of any energy security policy in Africa is, therefore, tapping the potential of cost-effective energy efficiency improvements in the continent’s industrial sector. He points out that numerous studies have shown the potential for improving energy efficiency along the industrial conversion value chain. The author also discusses the role that biofuels can play in the provision of reliable and adequate energy supply in Africa. Since biofuels can, under certain conditions, reduce dependence on imported fossil fuels and increase energy security as well as mitigate climate change, he notes that many countries in the region are working towards attracting investment for large-scale biofuel production. Biofuel production results in job creation in the rural areas. Thus, he suggests that production and trade in biofuels can meet Africa’s objectives of energy security, employment generation and poverty reduction. Though he recognizes the potential of second and third generation biofuels to increase fuel availability, he also admits to their potential to adversely impact food production or sustainability. The author cites the example of the United Nations Industrial Development Organization (UNIDO) in promoting industrial conversion technologies of biofuels, with specific focus on bio-residues and non-edible crops like Jatropha, as evidence of viable biofuels as an energy source in Africa. Monga also notes the emerging use of renewable energy sources, for rural electrification and industrial applications in energy-intensive small and medium-scale enterprises, as an increasingly attractive option in many parts of Africa. He suggests that linking rural energy with productive uses can create employment opportunities, raise income levels and improve quality of life in rural areas. At the same time, the linkage can contribute to the protection of the environment and the improvement of energy security. The author notes a number of renewable energy initiatives that are taking place in Africa. These

26 OFID PAMPHLET SERIES 39 are aimed at the integration of renewable energy generation into national grid I services and the creation of mini-grids. He argues that much would depend on the ability and absorptive capacity of each country or sub-region to harness the true potential of renewable sources of energy. The development and transfer of modern energy technologies are linked to local capacity building in the areas of design, manufacture, assembly, and the operation and maintenance of energy equipment and structures. He further notes that financing is the key issue in overcoming barriers relating to the scaling up of renewable energy to improve access and markets for energy-efficient technologies. In addition, regional energy cooperation is important to rationalize the geographical distribution of energy resources. Regional integration of energy supply systems will boost energy access and security. Also, power pools and energy trading will increase the security of supply by allowing neighboring systems to provide backup facilities. In conclusion, Monga argues that, since energy poverty is a serious impediment to economic development, a transition to modern fuels and efficient technologies can help break the vicious circle of energy deprivation and under-development. The transition to sustainable energy economies at national and regional level in Africa needs to be supported by conducive and effective public policies. These should promote regionally efficient practices, energy efficiency and renewable energy-based interventions for enhancing intra/inter-regional cooperation in Africa. Strengthening common energy markets and harmonizing policies so as to power industrial growth and meet energy security challenges are essential to sustainable industrial development in Africa.

In Chapter 5, “Energy Access in Rural Areas,” Chineyemba discusses the challenges of providing adequate and modern energy services to rural communities, where efforts are aimed at improving the standard of living through increased potential for income and employment generation. He reasons that relatively low income level in rural areas makes the provision of modern energy services unaffordable to most communities. The resulting heavy reliance on traditional energy sources means a low level of energy efficiency; heavy deforestation and a loss of biodiversity; greater health hazards due to indoor air pollution; and reduced capacity to mitigate climate change. The author notes the “vicious circle” of energy and income poverty, adding that the income poor are also “energy poor.” He stresses the ability and willingness of rural people to make the transition from traditional to modern energy sources. However, he points out, this may be contingent upon their

OFID PAMPHLET SERIES 39 27 financial resources, as their prospects of achieving higher income levels are, in turn, often constrained by the extent to which such a transition is achieved. Furthermore, pricing for rural energy services poses a dilemma, because high prices for energy services may not be affordable for the majority of rural dwellers. On the one hand, the energy poor may not have the means to buy improved but higher priced energy services, even if they have access to them. On the other, pricing below cost of service may make it difficult to elicit the necessary investment from private investors. Also, even when the improved energy supplies are affordable, the energy poor may not be able to afford the “conversion technology” which makes that energy useful (for example, a stove, radio, light bulb or motor). Chineyemba argues that increased access to cash income becomes crucial. This is because improved energy services at the household level frequently require switching to an energy technology that involves higher initial fixed capital cost. Even where improvement in lighting results in cash savings, because the new source replaces more costly but less effective supplies (such as batteries and candles), there is frequently a net increase in money expenditures because people make more use of the improved energy services. He recommends that the immediate priority in dealing with rural energy poverty is to provide a minimum amount of energy to meet people’s basic needs, irrespective of their ability to bear the costs of supply and delivery. He emphasizes that the cycle of energy and income poverty will be broken only by combining improved energy services with end uses that generate cash incomes. This will result in a “virtuous circle” of higher energy access and increasing productivity, extending the range of outputs or improving output quality. The author notes that, when planning pro-poor energy interventions, it is important to consider the strategy of using the energy to secure cash incomes at an early stage of the development process. Subsequently, it would be necessary to see how the impact of improved energy services can be extended to other aspects of sustainable livelihoods. He considers approaches for increasing energy services in rural areas to include government and market- based, private sector-led. He points out the limited evidence on increasing energy services in a sustainable fashion to rural areas using a market-based model, due to the distributed service and limited profit on investment in this area. He then suggests the use of the concession approach. The concession to provide the energy services as a regulated monopoly in certain areas and over a certain number of years is given to the most qualified bidder who will operate in a “controlled” free-market environment. In developing countries, the

28 OFID PAMPHLET SERIES 39 task of ensuring adequate energy supplies is increasingly being left to the I private sector. Therefore, private investments will be crucial in sustainable energy supply to rural inhabitants. Accordingly, the role of appropriate institutional infrastructure development to support effective private sector participation cannot be overemphasized. In conclusion, Chineyemba states that rural development, specifically rural energy, needs to be given much higher priority by policy makers. Furthermore, rural energy development must be decentralized to put rural dwellers themselves at the heart of planning and implementation. Also, rural energy development must be integrated with other aspects of rural development. Meeting Africa’s energy challenges will require a radical scaling-up of access. However, this will be contingent on an improved enabling environment, an effective policy and regulatory framework, enhanced management capacity and financially healthy energy utilities.

In Chapter 6, “Expanding Energy Access through Sustainable Energy Enterprises in Africa: Financing, Capacity-building and Policy Aspects,” Agbemabiese looks at energy poverty and access from the perspective of sustainable energy enterprises. The case study for his analysis is the innovative energy enterprise program, the African Rural Energy Enterprise Development (AREED) program. The main goal of AREED is the promotion of energy-efficient and renewable energy sources including solar, biomass, wind, hydro and biofuels in peri-urban and rural communities through Small and Medium- sized Enterprises (SMEs). The author examines the achievements, constraints and challenges of AREED as a prototype for the development of viable energy SMEs in Africa. According to Agbemabiese, the achievements of AREED include an ingenious plan of loan provision, capacity building in bankable business plan development, analysis of market conditions and identification of efficient energy systems for SMEs. He cites wind pumping in Senegal, Liquefied Petroleum Gas (LPG) distribution in Mali and biomass energy in Tanzania, as examples of AREED’s successful project interventions. The program is said to have yielded significant environmental benefits in terms of annual savings of tons of carbon dioxide emissions and avoidable use of biomass. The author notes that despite these achievements and prospects, energy SMEs in Africa face several constraints and challenges including: the lack of relevant policies and an institutional framework to provide sufficient leverage for SMEs to tap into new energy business; the absence of capacity building in energy system development and commercialization; a limited rural energy market; the inherently high initial cost of renewables and energy efficient products; and poor access to clean energy financing.

OFID PAMPHLET SERIES 39 29 The author concludes that AREED has great potential to contribute to overall national development priorities, by facilitating wider access to energy services for under-served communities. He identifies the critical success factors to support the development of energy SMEs geared to clean energy systems in Africa. First is for national governments to establish the relevant policies and institutional framework for energy SMEs and translate them into implementation strategies and budgetary support. In this regard, the governments should also improve the policy environment of the private sector to foster stronger links with public-sector decision-makers and make conscious political commitment to widen national energy access, particularly for peri- urban and rural communities. Second is building human and institutional capacity in energy systems management. The author suggests that governments should create a positive business environment for SMEs to function as the engine of growth for job and wealth creation in Africa, noting that various institutions have been created for this purpose. Governments should restructure SME-support institutions by recruiting appropriate experts to their boards. Governments should also provide logistical support to enable the institutions to build the capacities of SMEs and offer the needed technical and expert support. Third is the development of functional clean energy markets, particularly in rural areas. This can be done through explicit policy incentives and procedures to guide and stimulate clean energy equipment development. Agbemabiese notes that packaging energy service delivery projects with income-generating possibilities is essential in improving the financial viability of energy SMEs. Furthermore, he points out that government agencies and organizations mandated to manage various energy-related funds should explore innovative interventions. The aim here is to reduce the costs of renewable and energy-efficient technologies through more investment in product and market development. To address the lack of understanding of the financial systems and processes by potential investors, he suggests that energy ministries, departments and agencies should work closely with private-sector actors to furnish potential investors with evidence-based data. These will highlight the costs and benefits of investments in clean energy technologies, as well as raise awareness, increase acceptance and reduce the perception of risks in this segment of the energy sector. To reduce high capital cost and investor risk, national governments should also institute investment incentives. These can be capital grants or third-party finance arrangements, where the governments assume the risks or provide low-interest loans.

30 OFID PAMPHLET SERIES 39 In Chapter 7, “Africa’s Power Supply Crisis: Unraveling the Paradoxes,” I Haider notes that SSA faces major energy infrastructure challenges, with the most severe being the electric power sector. Presenting the preliminary findings from a World Bank Africa Infrastructure Country Diagnostic Study, the author provides an incisive analysis of the paradoxes of the SSA electric power sector. He identifies the four paradoxes as: abundant energy but little power; high prices but even higher costs; widespread but ineffective reform; and high expenditure, yet inadequate financing. He begins his discussion by highlighting the poor electric energy statistics in Africa in comparative terms, as evident in the lowest global electrification rates, access and consumption per capita. Haider notes that the grossly inadequate generating capacity, illustrated by about one- fourth of generating capacity not being in operational condition, has exacerbated the crisis in the electricity sub-sector. Furthermore, he states that electricity tariffs in some SSA countries have been kept low administratively so that prices fail to cover costs. Yet, he emphasizes, the average tariff in SSA is about double those in other parts of the developing world and almost as high as in countries of the Organization for Economic Co-operation and Development (OECD). He points out that inadequate and unreliable supply largely explains the comparatively high cost of supply to end users in SSA. The author says African manufacturing enterprises report regular and significant power outages and low-quality electricity supply, adding that this reduces revenues by 5-6 percent. He notes that in the informal sector, where firms rarely have the capital for backstop generation, lost revenues from power outages can be as high as 20 percent. Deficient power infrastructure dampens economic growth and weakens competitiveness by having a detrimental effect on productivity. The author refers to another study, which shows that in most SSA countries, infrastructure accounts for 30-60 percent of the adverse impact on a firm’s productivity. This is well ahead of factors like red tape and corruption. Moreover, in half the countries analyzed, power accounted for 40-80 percent of the infrastructure effect. He also cites yet another study which demonstrates that if the quantity and quality of power infrastructure in all SSA countries were improved to that of a better performer (Mauritius), long-term per capita growth rates would be higher by as much as 2 percent. Thus, the inefficiency of SSA utilities generates substantial hidden costs. He suggests that in many SSA countries, hidden costs can be as high as 2 percent of Gross Domes- tic Product (GDP). Haider further points out that Africa’s overstretched electricity systems have become exceedingly vulnerable to supply shocks, resulting in widespread

OFID PAMPHLET SERIES 39 31 outages and load-shedding. Economic growth in the past decade has raised demand for electricity. However, the stagnation in generation, transmission and drought-induced reduction in power supply in hydro-dependent countries, has made prolonged blackouts commonplace. Countries whose power infrastructure has been damaged by conflict have also suffered severe shortages. Also, high petroleum prices have created enormous cost pressures in countries that depend on imported oil products for electricity generation. The author identifies and discusses how the four electric power paradoxes can be eliminated. First, and most important, is the need for significant improvement in the governance of national power utility. This is because of the widespread nature of poor governance practices in most energy utilities in African countries. Furthermore, it is evident in two-thirds of SSA utilities report- ing losses of more than double and revenue collection less than half of what is obtained in well-run utilities globally. However, he said the policy choices that best address electric power paradoxes are not clear-cut. The traditional model that predominates in the SSA power sector – vertically-integrated, state-owned monopolist utilities – has yielded disappointing results. Yet, reforms to increase efficiency and boost competition through private participation have in many cases failed to deliver the expected results. For example, unbundling is limited, the failure of transactions and projects is frequent, and additional investment has been minimal. The author notes that the lesson that emerges from study is that success in tackling the challenges is not a simple function of the model adopted. The power sector in Africa needs to move to a “mixed economy,” characterized by a range of structures, regulations, and technologies adapted to the country context. Successful interventions will tackle several problems simultaneously to put the sector on a positive trajectory of improved sector and utility management, financial viability, new investment, and better customer service. It means recognizing that the power sector has quasi-monopolistic characteristics. This is particularly so in grid-based distribution and to a lesser extent in transmission. Also, incumbent utilities will continue to be the largest players in the sector for the foreseeable future. But interventions need to be innovative and ambitious. They have to recognize that meeting customer needs means multiple providers, financial viability and new forms of external financial assistance. There may be certain preconditions like appropriate regulatory frameworks for PPPs, reformed tariff frameworks and sufficient security of investment for investors. In that case, sector reforms can do much to facilitate the entry of strategic private partners.

32 OFID PAMPHLET SERIES 39 Haider concludes by proposing as a starting point, sustained and concerted I action on three strategic priorities: (i) regional scaling-up of generation capacity, (ii) improving the effectiveness and governance of utilities, and (iii) expanding access through sector-wide engagement. He says the three are interdependent and must be tackled together. These actions should be complemented by important short-term measures, including demand-side management. Examples include the introduction of energy efficient light bulbs and loss reduction programs such as enhanced bill collection and initiatives to tackle electricity theft.

In Chapter 8, “Why Africa Lags Behind in the Energy Sector,” Olumuyiwa discusses the reasons why the continent lags behind in the energy sector and the difficulties faced by its governments in this regard. He also identifies the adverse consequences of allowing this situation to continue and the corrective efforts required to deal with the problem. He identifies the factors that explain why Africa falls behind in electrical energy production. These are: the poor economic status of African States, especially SSA; poor governance or unstable governments and wars; and regional and domestic, social and ethnic conflicts. He makes a number of proposals to improve upon the poor electricity supply conditions in the region. These include safety and stability issues. He emphasizes that without regional peace and stability, there can be no meaningful development. He points out that peace and political stability are prerequisites for the creation of an enabling environment for infrastructural development in the region. He points out that physical security is of even greater importance for integration projects, adding that power lines and pipelines are vulnerable to damage. The author cites an example where ethnic militias disrupted gas flow meant for the West Africa Gas Pipeline (WAGP). He says the success of interconnected power lines across the continent is totally dependent on the safety of the transmission systems. He notes that peace is not simply the absence of war and that signing peace treaties does not necessarily end wars. This is because years of civil re-adjustment may be required before sustainable peace can prevail. Olumuyiwa discusses the potentials of the Inga Dam hydroelectric scheme in the Democratic Republic of the Congo with its continent-wise electricity supply. Conflict resolution initiatives should be prioritized by African heads of government in cooperation with the AU. Such collaboration should be strengthened towards ending the many wars and conflicts on the African continent. He observes that Africa suffers too much from abandoned projects syndrome, where regime changes almost always result in the reversal or delay of

OFID PAMPHLET SERIES 39 33 programs and projects of previous governments. The consequences, he argues, are unreasonable delays, with a costly escalation of project costs, or outright abandonment. Connected to this is the institutionalized corruption that trails government projects in African countries. Therefore, the fight against corruption has to be taken seriously if Africa is to experience the needed growth in energy infrastructural development and production. Africa needs visionary and responsible leadership to drive these needed paradigm shifts in the way we run nation states in the continent. Although many governments have embraced privatization of the power sector in principle, the author points out that they show some foot-dragging and lack of the political resolve to fully embrace the program. The reality, however, is that most African governments cannot come up with the required massive capital investment, both local and foreign. How- ever, private capital and involvement, foreign governmental and institutional donors and lending agencies need to be appropriately coordinated. This is to insure that the eventual electrical power will be reasonably priced to make the project profitable and power affordable for the customer.

In Chapter 9, “Promotion of Public-Private Partnership to Improve Energy Access for Poverty Reduction and Growth in Sub-Saharan Africa,” Adenikinju touches on various aspects of the subject. He says between now and 2015 and beyond, substantial investment will be required to make modern energy services accessible to the vast majority of people in the poorest and most isolated communities in the rural and peri-urban areas of SSA. The sub- region receives only a small share of global private investment in infrastructure due to its low credit worthiness. He defines most African countries by their shallow domestic financial markets, the high-risk profiles of energy infrastructure, limited resource availability due to weak domestic economic conditions and volatile commodity markets. The author suggests greater use of PPP to bring about the inflow of investment capital essential for the elimination of the prevailing weak energy access and energy poverty. He considers PPP as one of the most innovative options for mobilizing the domestic and foreign capital required for energy infrastructure development to support widespread and expanding energy access. He says expanded energy access should be seen holistically, beyond electricity provision to the poor. He also makes the point that electricity is not always the most appropriate form of energy, nor is it the quickest or the most cost-effective way of providing energy services to the poor. Providing clean, modern energy services to poor communities will require expanding the choice of energy options, including conventional and non-conventional sources.

34 OFID PAMPHLET SERIES 39 Adenikinju discusses five PPP options available to African countries, namely: I technical assistance, management contracts, lease contracts, concession contracts and outright sale of public infrastructure assets to the private sector while retaining regulatory control. He observes that the option or combination of options adopted by a country would depend on local economic, social, legal and political factors. The author argues that the determination of an appropriate framework for the allocation of risk between the government and the private sector is one of the key issues in PPP. Usually, the government assumes non-commercial risk, while the private sector bears the commercial risk. He shows the different ways resources and the allocation of risk are characterized under the various PPP options. Adenikinju discusses the benefits of PPP as a viable approach to addressing the energy infrastructure shortages in African countries. These include: opportunity for the private sector to complement and even replace available public energy infrastructure capital, which, by its nature is not an attractive option to the private sector, due to the large capital requirements and long gestation periods; and better allocation of risk between the government and the private sector: efficient private provision of energy services through the discipline that the market imposes on the private sector in the provision of such services. The author notes that the private sector under the PPP arrangement often requires different types of guarantee from the government. This is to enable them to commit resources to the provision of infrastructure services. In the case of the electricity sector, this is sometimes contained in the Power Purchase Agreement (PPA). He points out that governments need to develop the capacity to evaluate proposals from the private sector and determine the appropriate guarantee to extend to particular projects. He goes on to identify barriers to the successful implementation of PPP, including appropriate pricing for the services provided under the Partnership. He also recognizes the critical success factors in PPP. These include the incentive structure under which the Partnership will operate; the establishment of an appropriate legal and regulatory framework; as well as a path of credible and sustained economic and political reforms. These incentives are meant to reduce “country risk” and other “investment risks” that constrain foreign capital inflow to the energy sector. Generally, to successfully attract foreign investment for the development of PPP on a sustainable basis, the outcome of Partnership projects must be positive for the investors and the country. Adenikinju further contends that investors must enjoy a reasonable return on their investment.

OFID PAMPHLET SERIES 39 35 However, for the country, the cost that the government has to bear must not be excessive. Experiences of PPP development in developing countries show that not all projects result in this desirable win-win situation. In fact, he identifies the possibility of cases characterized by a lose-lose situation for both the country and the investor. To guarantee the sustainability of the PPP model, he concludes that political leaders must exercise the necessary political will to put in place legislative and regulatory policies that would insure the success of the Partnership.

In Chapter 10, “Energy and Poverty in Sub-Saharan African Economies: Supply-side Issues,” Iwayemi observes that despite the role of energy poverty and poor energy access – as causal factors in low income and energy consumption per capita among other human development indicators observed in the region – Africa’s energy problems have not been given much thought. He further states that SSA remains one of the regions whose energy problems have been grossly under-researched. In addressing this research gap, the author provides a brief review of the energy and economic context of the problem, followed by discussion of some of the key issues, challenges and constraints to expanded supply in the region’s quest for sustainable exploitation and utilization of its energy resources and economic development. The author then raises the fundamental question of whether Africa can achieve the twin objectives of expanded energy supply and access, as well as the elimination of energy poverty. These are key elements in the continent’s sustainable energy and development future. He answers in the affirmative and goes on to discuss the economic, financial, technical and manpower challenges to a reliable and adequate energy supply to meet Africa’s energy needs for economic growth and development. Furthermore, he discusses the policy and institutional requirements for overcoming persistent energy and income poverty and for the establishment of efficient and sustainable energy supply. He highlights the key supply-side issues in the design and implementation of coherent policy reforms and programs for a viable energy industry. Iwayemi argues that situating Africa’s non-renewable and renewable energy exploitation in the context of a sustainable energy future and the MDG goals is particularly important. This should lead to a better and more precise appreciation of the challenges that confront policy makers, sector operators and other stakeholders. Finally, he discusses an action plan for achieving expanded energy supply. He notes that the degree of success of the strategies adopted will determine the extent to which Africa will share in the gains from increasing material prosperity associated with globalization, and more importantly, achieve the MDGs.

36 OFID PAMPHLET SERIES 39 The author suggests that a dramatic scaling-up of investment in energy infra- I structure capacity is required in the next three decades. The financing requirement will be huge by regional standards. Besides, the capital requirement must be situated within the context of global capital market competitiveness and industry risk. He states that while the investment scale is daunting, it is not insurmountable, provided the appropriate institutional framework, policy consistency, incentive structure and security of investment exist. He notes that a public-private sector mix has become more attractive in recent years. This may be particularly pertinent in the development of pro-poor and environmentally clean, renewable energy resources, such as solar, wind, wave and other clean energy forms. In conclusion, Iwayemi suggests that Africa can eliminate the sub-standard state of modern energy services and ensure the supply of the large investment required to support sustainable energy development. Such capital underpins the objective for significant reduction in poverty, contingent on several conditions. These include: a strengthening of the institutions and governance in the energy sector; creation and sustenance of an incentive-based competitive market system, strengthened by market responsive energy pricing that guarantees an adequate risk-adjusted rate of return; establishment of a well- targeted support system to reinforce the drive for an expanded supply of clean energy, based on renewable energy resources; and a strategic PPP to drive a new energy paradigm that is anchored on adequate, reliable and affordable energy that will minimize carbon emission and climate change.

OFID PAMPHLET SERIES 39 37

Energy Poverty in Africa II Suleiman J. Al-Herbish

Introduction

Recent macroeconomic data indicates that sub-Saharan Africa (SSA) economies are undergoing rapid expansion, with a real Gross Domestic Product (GDP) growth rate of 6.5 percent in 2007. The improving terms of trade, as exempli- fied by the solid global demand for commodities, greater inflows of capital and the debt relief schemes are some of the salient factors contributing to the high growth rates. However, the great challenge facing SSA economies is how to reduce poverty by half, by the year 2015, in line with the first objective of the Millen- nium Development Goals (MDGs). Specifically, the targets are to reduce by half the proportion of people living on less than a dollar a day and also cut by one- half the percentage of people suffering from hunger. These goals call for GDP growth rates that are even higher than the current achievement. The implication is for higher levels of domestic investment and productivity of the economy in order to attain this goal. Thus, real GDP growth rates should be 7 percent or more per annum. Yet the productivity and overall performance of SSA economies is being hampered by the state of the energy sector. Lack of energy services or poor access to this resource, are some of the factors militat- ing against SSA economies’ ability to realize their higher potentials. Measures to overcome this problem have engaged and are continually attracting the attention of governments, the international lending agencies, non-governmental organizations and the various stakeholders. The OPEC Fund for International Development (OFID) organized this workshop to further deepen the discussions. The main purposes are to elucidate the issues and find appropriate answers that will keep SSA on a much more robust growth path towards achieving the key targets of the MDGs.

OFID PAMPHLET SERIES 39 39 Energy resources

Africa’s landmass of 30.3 million km² is endowed with rich natural resources including fossil and renewable energy. Yet most of these resources are yet to be exploited. It has been estimated that Africa’s energy resource endowments with respect to the world totals are in the following order of magnitude: Oil 9.5 percent Coal 5.6 percent Natural Gas 8.0 percent The sustainable development of these energy assets will ensure that national resources are managed to meet the needs of the present and succeed- ing generations. However, large foreign investments are required to develop these resources.

Current situation

Energy supply is given as a target indicator for achieving the seventh objective of the MDGs, which is to ensure environmental sustainability. Africa is energy poor, a situation that has diminished the continent’s productive capacity. SSA in particular depends largely on inefficient traditional biomass used mainly for cooking and heating water in households. Traditional biomass accounts for over 80 percent of primary energy demands. These sources of energy – for example, firewood and charcoal – burn inefficiently, thereby giving rise to energy loss. The surrounding environment is also degraded, through the depletion of forest resources. Pollutants (carbon monoxide, benzene, nitrogen oxides, etc.), which are also health-damaging substances, are emitted when these forms of energy sources are used indoors. Also, deaths from indoor air pollution, arising from the burning of biomass fuels, are substantial. Table 1 shows that SSA has the lowest measure of energy production, accounting for only 6.4 percent of world energy output. Total SSA production in metric tons of oil equivalent was 715.4 million, compared to 4,450 million for high-income countires, 5,604 million for middle-income countries and 6,767.1 million for low and middle–income countries combined. This performance is all the more unacceptable, when it is realized that the estimated population of SSA is 16 percent of the world’s total. In Africa, energy use per capita is very low, compared to other regions of the world. Table 2 indicates an energy usage per capita of about eight times for high-income countries, compared to the usage level of SSA. The figures for low/middle-income and middle-income countries are 2 and 1¼, respectively.

40 OFID PAMPHLET SERIES 39 OFID and the energy sector Box 1

OFID intervention in the energy sector takes four forms, namely: direct project funding; II technical assistance in support of international and national institutions; funding the activities of multinational agencies; and, research grants for specific studies and investigations and the operation of an Energy Account. It is expected that these forms of assistance will continue in the near to longer-term. As at December 31, 2006, over one-fifth of all OFID-approved funding was for energy sector projects. Cumulative approvals, as at December 31, 2006, for the energy sector was $1.1 billion, out of a total of $5.4 billion, for all sectors. Energy projects in Africa accounted for 6.8 percent of the total. The bulk of OFID financing was in the Asia Region with 11.8 percent of the overall lending, while the Latin American and Caribbean countries accounted for the balance of 1.5 percent of the total. Over the years, OFID has approved funds by way of technical assistance, to co-finance the activities of multilateral, bilateral and other international agencies. Notable examples include the establishment of the Solar Energy Regional Centre in Mali under the auspices of the West African Economic Community. OFID has established the United Nations Development Program (UNDP) Energy Account and has also funded activities under the United Nations Financing System for Sci- ence and Technology (UNFSTD). Notable activities funded under the UNDP Account include the Djibouti Geothermal Exploration Project, the Monitoring of Biomass Gasifier Project in Africa and the funding of Energy Audit schemes in Ethiopia, Tanzania and Uganda. Under UNFSTD, OFID has expended funds for the development of Solar Energy and Biogas Pro- duction in the Kingdom of Lesotho. The OFID approved grants for research and similar activities include funds for the World Petroleum Congress, the Oxford Energy Seminar, the United Nations Conference on Trade and Development and the Organization of the Petroleum Exporting Countries (OPEC) Sec- retariat. Others are the First and Second Workshop on Energy and Development, as well as the financing of a Seminar on New and Renewable Sources of Energy. OFID has also funded the study on Energy Taxation and Economic Growth and the Vanishing Greenhouse Effect.

Also, on average, per capita annual growth rate of energy use was static during 1990–2004 for SSA, compared to about 1 percent for the high income and 0.2 percent each for the other regions of the world. Energy supply, as a target indicator, should be given a higher priority for Africa to achieve robust economic growth and produce enough goods and services, all of which are necessary for the attainment of sustainable development. Therefore, a re- ordering of priorities addresses the energy poverty issue. There is the need for further investigation, to enable African countries, characterized by energy poverty, to overcome the problem of access to energy services, as a basis for creating sustainable development.

OFID PAMPHLET SERIES 39 41 World energy production Table 1

Million tons of oil equivalent (Mtoe) Average annual percent distr. growth rate Group of countries 1990 2004 (2004) 1990-2004

1. Low income 791.6 1,172.8 10.5 2.7 (SSA) (481.8) (715.4) (6.4) (2.7)

2. Lower middle income 2,160.0 3,257.8 29.2 2.8

3. Upper middle income 2,226.9 2,347.3 21.0 0.4

4. High income 3,657.9 4,450.0 39.8 1.3

World 8,798.3 11,171.2 - 1.6

Energy use per capita Table 2

Kilograms of oil equivalent (Kgoe) Average annual growth rate Group of countries 1990 2004 1990-2004

1. High income 4,842 5,511 0.9

2. Upper middle income 2,980 2,583 -0.9

3. Lower middle income 953 1,175 1.4

4. Low income 464 513 0.7

5. (Sub-Saharan Africa) 693 703 0

World average 1,685 1,793 0.4

Challenge of investments

At present, the financing of energy schemes is inadequate and unpredictable. Current estimates put the order of magnitude required in the next 12 years to 2020, at $3 billion per annum. Also, funding in the energy sector is on a project-by-project basis as opposed to a financing strategy for the longer-term and within established national and regional programs. Long-term solutions to energy poverty are simply not achievable without adequate inflow of

42 OFID PAMPHLET SERIES 39 investment. Experience shows that market incentives and business innovation can provide new pathways for energy solutions. There is the need to maximize entrepreneurship, transfer skills and capacities and encourage public-private II partnerships. The challenge here is to elucidate policies and other measures that would increase the funding of energy sector projects. For the private sector, there is the need to encourage better utilization of private investments, micro-financing, other innovative financing schemes and Foreign Direct Investment (FDI). What role should governments play in supporting sustainable energy poverty solutions? If the energy poverty solution depends on finance, governments have a key role to play in providing the enabling environment, and encouraging market incentives by reviewing taxes, subsidies and regulatory frameworks. Also, for the public sector, the challenge is how to improve the flow of resources for Pub- lic Sector Investment Programs. A contributory factor is the very low level of Official Development Assistance (ODA), which is much below the United Nations (UN) recommended 0.7 percent of the Gross National Income of the Organization for Economic Co-operation and Development (OECD) countries.1 This leads to poor funding of public-sector programs, including energy sector projects. In addition, there are the problems associated with tied-up aid and conditionality clauses.2 These issues require further studies and investigation, for the purposes of elucidating viable options.

Need for regional integration

There is an urgent need to integrate energy policies into broader development strategies in African countries, while at the same time encouraging regional integration. The West, South, East, Central African and Nile Basin power-pool schemes are ready examples. For instance, the West African Power Pool (WAPP) is planned as a joint power-pooling mechanism – of the West African countries – to help integrate the various national power systems into a unified electricity market. The South African Power Pool (SAPP), on the other hand, would be a unified energy market for the members of the SAPP countries. According to the

1 In 1970, rich countries of the Organization for Economic Co-operation and Development (OECD) agreed at the United Nations (Resolution 2626) to give 0.7 percent of their GNP (now GNI) as aid to the developing countries. 2 Official Development Assistance (ODA), is attractive, as these facilities are packaged for long-term economic and socio-economic development. The proceeds from ODA sources are by an official creditor; with the promotion of economic development and welfare as the main objective; and at concessional financial terms (of a loan, with a grant element of at least 25 percent).

OFID PAMPHLET SERIES 39 43 Business Times of Nigeria, energy experts counsel that the best solution in the long run – to energy poverty – would be for nations to cooperate on regional power solutions by building few large plants, which could supply power more cheaply and efficiently, than dozens of smaller ones. The East African Power Pool Project (EAPP) is expected to come on stream by 2011. When operational, the three East African states of Uganda, Kenya and Tanzania will have a power sharing pool to ease shortages. This strategy will insure the building of interconnection grids that would enable power flow from places of abundance to power deficit areas. The Central African Power Pool (CAPP) would also help the development of the power sector in Central Africa. The CAPP vision is to exploit the enormous hydroelectric potentialities of Central Africa and to satisfy all demands in electricity for the household, states and central African industry. The Nile Basin Power Forum (NBPF) “recognizes the significant socioeconomic and power-system benefits that can be realized from regional cooperation. This forum provides an important means for cooperating in the development of electric power resources in the Nile Basin.” Furthermore, NBPF will build on national power master and regional plans, with linkages to existing power forums. We are confident that energy initiatives that are operational under the African Energy Commission (AFREC)3 and the New Partnership for Africa’s Development (NEPAD) will serve to set regional energy priorities. These initiatives will also help integrate the energy policies of several African countries, to realize energy’s crucial role in the attainment of the MDGs.

Electric power sub-sector

Electricity accounts for only 4 percent of SSA’s total energy consumption. Yet this energy source is a most vital input in production processes and the delivery of the social services, namely, education and healthcare. Electric power is a catalyst for social and economic development. In Africa, electric energy is provided mainly from fossil fuels and hydro-power. Electricity consumption is also the lowest, on a regional basis, at about 515 kWh/per annum, compared to the world average of 2,326 kWh/per annum. Out of the

3 The African Energy Commission (AFREC) is an institutional framework, established by the African Union Energy Ministers Conference, to develop Africa’s huge energy potential. AFREC “is an institutional framework appropriate for enhancing energy co-operation on the African continent.” The body will facilitate co-operation and consulting of the African countries in the energy sector.

44 OFID PAMPHLET SERIES 39 Trade revenue and energy budgets Box 2

Measures to increase the existing level of international trade of Africa could do more to II increase the overall funding of the public-sector budget than any advocacy for increased aid. Although many an African country depends on the exports of primary agricultural products for export earnings and subsequent funding for the recurrent revenue needs of the public budget, the demand for these products is on the decrease. Africa’s share of world trade has decreased from 7.5 percent of world exports to about 2.4 percent in 2003. Also, Africa’s total merchandise trade increased to 3.1 percent in 2006. The poor performance is due to unfair market access, leading to the major erosion of Africa’s share of world trade. The continent’s abysmal result is also influenced by the agricultural policies of the developed countries, especially the distortions in the market caused by their subsidies. Therefore, the challenges include identifying the measures that would increase the potential export earnings for Africa that could exceed the current amount of aid received by African countries. total SSA population of 743 million, over 500 million, or 67 percent, lack access to electricity. Also, the MDGs in the education and healthcare sectors are being compromised by the lack of electricity, as the majority of schools and healthcare centers cannot function properly. As is well known, inadequate lighting or illumination in schools is not conducive to learning. Consequently, there is undue reliance on standby generators or kerosene lamps that are not safe.

Efficient supply and use of electricity

A key challenge that is not addressed is the efficient supply and use of electricity, which takes account of technological changes and innovations, improving operation and maintenance standards and information disseminated by other stakeholders. On the supply side, these factors lead to “efficiencies of supplying energy” and on the demand side, to “end-use efficiency.” The utilization of these factors could increase the supply of electricity from existing sources to serve more consumers, as SSA is particularly lacking in this resource. The role of government is therefore to insist on the adoption of these efficiency “enabling factors,” in the licensing processes.

Challenges of the rural areas

Electricity connection rates are even lower in rural areas, and there exists an urgent need for further studies and investigation that would address the great challenges being faced there. However, rural areas of SSA pose specific challenges. Firstly, population density is low and secondly, these areas are remote

OFID PAMPHLET SERIES 39 45 Electricity production Table 3

Billions of kilowatt hours (BkWh) Average growth rate Group of countries 1990 2004 1990-2004

Low income 518.1 1,026.4 7.0 (SSA) 224.4 339.0 3.6

Lower middle income 1,828.6 3,903.4 8.1

Upper middle income 2,014.3 2,355.4 1.2

High income 7,426.7 10,087.3 2.6

World 11,787.7 17,372.0 3.4

and far away from urban centers, resulting in high production, transmission and manufacture costs. Consequently, the unit costs for construction of electricity networks are high. Thirdly, consumers have limited income or resources to pay, implying that revenues fail to cover operating and maintenance costs.

Suggested areas for further investigation

Overall, the under-listed themes require further investigation to guide the various stakeholders: • Identifying and implementing measures to increase the average per capita annual growth of energy consumption, which has been observed to be static. • Changing the current emphasis of devoting more of the public sector investments from the education and health sectors to the energy sector, to achieve a more robust level of economic growth, but also to improve the performance of the education and healthcare sectors as well as ensure environmental sustainability. These objectives are in line with the MDGs. • The packaging of energy sector projects as viable enterprises for private-sector intervention, taking cognizance of the challenges of low energy demand base, thereby leading to high energy production to consumption ratio. The very poor manufacturing base and overall level of industrialization is a contributing factor.

46 OFID PAMPHLET SERIES 39 Sectoral distribution of OFID’s financing Table 4 Cumulative approvals – December 31, 2006 II

Energy sector percent Energy/All sectors Regions $ million distr. percent

1 Africa 369.3 34 6.8

2 Asia 636.8 59 11.8

3 Latin America and the Caribbean 81.0 7 1.5

Total 1,087.1 100 -

Total (all sectors) 5,396.2 - 20.1

• Challenges arising from the lack of domestic finances for energy sector projects leading to undue reliance on external financing. New resources (capital, technology and human) from the domestic private sector, financial institutions, civil society and end-users, could be identified to complement the resources from the public sector and donor agencies. • The challenge of how to encourage regional bodies, for the purposes of facilitating the building processes of Africa’s economy, largely with the resources that exist in the region.

Conclusion

OFID’s assistance for Africa’s energy sector through project lending, technical assistance and research grants for specific studies and investigations, will continue. These resources will be used to assist several African countries augment their own funds through the co-financing process. OFID expects the Workshop to assist in the formulation of a research and investigations agenda related to the various issues that have been identified. Energy policy options needed to alleviate poverty and achieve the MDGs could be formulated, backed by the findings from the research efforts. To ensure that energy poverty in society is fully addressed in the national planning processes, OFID hopes that many African countries will integrate energy poverty issues raised in the national Poverty Reduction Strategy Papers (PRSP).

OFID PAMPHLET SERIES 39 47 Bibliography

BUSINESS TIMES OF NIGERIA (2008). February 10, 2008.

FORUM FOR ENERGY MINISTERS IN AFRICA (2005). Report on the FEMA Ministerial Meeting. Entebbe, Uganda, August 3, 2005.

IMF SURVEY (2008). vol. 37, no. 3, March 2008.

INTERNATIONAL COUNCIL OF SCIENCE (ICSU) (2007). Regional Office for Africa: Sustain- able Energy in Sub-Saharan Africa. July 2007.

IYER, VIJAY S. Africa Energy Access and Security – Some Ideas.

NJUGUNA, ANGELICA E. AND STEPHEN N. KARINJI (2007). Macroeconomic Policy Space and African Economies: An Empirical Shifting through Reality and Rhetoric. African Economic Conference, Addis Ababa, Ethiopia, November 15-17, 2007.

OPEC BULLETIN (2008). vol. XXXIX, no. 2, February 2008.

POWER ENGINEERING SOCIETY GENERAL MEETING (2005). IEEE, June 12-16, 2005, vol. 2, 1801-07.

SUBRAMANIA, ASHOK AND JACOB GRANIT (2004). The World Bank and the Nile Basin Initiative. February 2004.

TEYSSEN, JOHANNES (2007). World Energy Council Europe, Sustainability Symposium on Energy Development in Africa. TU Delft, November 2, 2007.

UN-ENERGY/AFRICA. Energy for Sustainable Development: Policy Options for Africa.

WORLD BANK (2007). World Development Indicators 2007. Washington DC.

48 OFID PAMPHLET SERIES 39 Regional Integration of Power Systems: A Tool for Reducing Energy Poverty and III Accelerating Economic Growth Roger M. Gaillard

1. Introduction

This chapter discusses the roles of the African Development Bank (AfDB) in support of the energy sector in Africa. This is in line with two of the bank’s key growth strategies, namely, regional integration and infrastructural development. After recalling some of the key features of the African energy sector, the paper focuses specifically on regional interventions for achieving integration through the construction of power generation plants and high voltage (HV) transmission lines that make the development of a transnational electricity market possible. Such projects, as well as the parallel activities in support of the development of utilities at country and regional levels, aim at reducing energy poverty in Africa by fostering conditions for the better availability, accessibility and affordability of modern energy. Although this paper reports on the electricity sector, it is worthwhile to underscore that AfDB is also active in collateral sectors like rural electrification, promotion of renewable and clean energy, development of small power plants and off-grid power systems. The bank is also involved in the energy sector at large, through participation in projects in the oil and gas industry and cogeneration schemes from biomass.

2. The energy sector: worldwide prospects and trends

The findings of most recent surveys indicate that energy use across the world will continue to grow inexorably in the future. Fossil fuels will continue to dominate the energy mix and developing countries’ consumption will increase rapidly, approaching the level of Organization for Economic Co-operation and Develop- ment (OECD) nations, who are the largest consumers of commercial energy. Currently, more than a quarter of the world’s population lacks access to electricity and 40 percent still rely on traditional biomass for their basic energy

OFID PAMPHLET SERIES 39 49 needs. Despite the increase in the absolute number of people with access to power supply, 1.4 billion people will still be without electricity in 2030, with 650 million of them in Africa, compared to 509 million today.

3.The energy sector: situation in Africa

Several African nations, including oil-producing countries, are confronted with serious deficiencies in energy supply in all its various forms. Inefficient management of utilities, corruption, protracted conflict and short-sightedness have deprived most countries of the energy supplies needed to fuel their growth process. In many cases, the investments needed to rejuvenate the energy sector are beyond the financial capacity of the domestic economy, both public and private. Moreover, the activities of public utilities often have a huge impact on the management of the economy, especially when imported fuels are bought with foreign exchange and end-users pay in local currency at rates below full-cost recovery. The paradox is that even though energy is desperately needed for economic growth and poverty reduction, Africa, a net exporter of commercial energy, is very poor. Africa produces 7 percent of the world’s commercial energy, but consumes only 3 percent. As if to compound the problem, the per capita consumption in sub-Saharan Africa (SSA) from 1990-2000 was in decline. This is not a positive signal given the correlation between Gross Domestic Product (GDP) growth and the consumption of energy. Access to sustainable energy is a key factor for promoting social progress and economic growth, both of which are closely linked to sustainable poverty reduction. Energy plays a critical role in efforts to achieve the Millennium Devel- opment Goals (MDGs). Lack of access to adequate, affordable, reliable, safe and environmentally friendly energy is a severe constraint on development. History and empirical research have shown that there is a close correlation between the use of energy (electricity) and the quality of life. Surveys in the 1990s have established that developing countries’ achievement of sustainable socio-economic growth can be measured by energy consumption. For annual electricity consumption below 1,000 kWh per capita (where 60 percent of the world population falls), indicators like literacy rate and access to potable water remain respectively under 40-50 percent. However, when the per capita consumption reaches 2,000 kWh, the same indicators rise to 85-90 percent. This correlation has also been established for human development indicators like infant mortality or life expectancy.

50 OFID PAMPHLET SERIES 39 4. Energy resources distribution in Africa

The fact is that energy resources are not equally distributed and available over the continent. Coal, oil, large rivers, biomass and fuelwood, solar, geothermal and wind potentials are unevenly distributed over Africa, resulting in cruel III imbalances between countries and regions. Despite having a great deal of under-exploited energy sources, both non-renewable and renewable, Africa dis- plays the lowest per capita consumption of electricity, with an average of approximately 400 kWh per capita per year in the SSA region.

Electricity consumption / population (kWh per capita) Figure 1

Tunisia

Morocco

Algeria Libya Egypt

Eritrea Senegal Sudan Benin

Nigeria Ethiopia

Togo Cameroon Ghana Côte d’Ivoire Kenya Democratic Gabon Republic of Congo Congo Tanzania

Angola Mozambique Zambia

4,500 to 5,000 Zimbabwe Namibia 2,500 to 3,000 Botswana 1,000 to 1,500 500 to 1,000 0 to 500

South Africa

Source: OECD / IEA 2006

OFID PAMPHLET SERIES 39 51 5. The need for interconnection of energy systems

Poor people see access to energy as a priority, not for the energy in itself, but for the “energy services” it provides, like cooking, lighting, heating, water pumping and transport. There is ample evidence to suggest that improved access to sustainable energy in the rural areas spurs economic growth, enhances social progress and reduces poverty. Energy, however, is not just about electricity; neither is electricity always the best energy source for all needs, as biomass, kerosene and other sources are important too. Given that there is little doubt about the important role that sustainable access to energy plays in growth and poverty reduction, it is imperative to improve access to sustainable energy among the rural and urban poor in Africa. In spite of the abundant energy resource potential in Africa, many countries have not been able to create the conducive environment to attract investment in the development of the energy sector. In addition, the small size of African energy systems and markets does not allow for profitable business ventures in the sector. Against this background, most of the Regional Economic Communities (RECs) are encouraging the establishment and operation of sub- regional power pools, joint development of hydro-power projects, cross-border transmission lines and gas pipelines. Examples are the Inga Hydropower Proj- ect, the Organization Pour la Mise en Valeur du Fleure Senegal-Senegal River Development Organization (OMVS) and the Gambia River Basin Development Organization (OMVG) programs as well as the West African Gas Pipeline Proj- ect. Some RECs have also adopted a legal and regulatory framework with fiscal incentives and guarantees aimed at “dispelling the risk” for investors in the energy sector at the regional level. A case in point is the Economic Commission of West African States (ECOWAS) Energy Protocol. Africa is the least interconnected region in the world, whereas electric interconnections have long been well established in most of the industrialized countries. This allows for better balancing of supply and demand between countries with different resources or having resources of a different nature. It is also an important means to take advantage of the difference in time for the activities occurring from the eastern end of the globe to the western. For example, within Europe, some countries with abundant hydro-resources have installed pump storage schemes or have invested in nuclear power plants in neighboring countries. At certain periods of the day they can store energy at cheap cost or buy and import electricity from countries with excess during the night, when industrial and human activities are low. Then they sell back or export the electricity during peak hours, when

52 OFID PAMPHLET SERIES 39 the demand, and hence the price, are high. This is only possible due to interconnection of infrastructure, joint investments in power generation plants, and adequate systems for the trade of energy between countries, and not least, efficient authorities ruling and regulating the market. In short, international and III regional integration allows Europe or North America to use energy more efficiently and to have sufficient spinning reserve to assure network stability and therefore high-quality supply of electric energy.

6. Activities and operations of AfDB

The AfDB has retained regional integration as one of the priority areas for targeting in its interventions. In the energy sector and more specifically in the electricity sector, significant resources are now earmarked for projects with regional dimensions. Flagship projects involving several countries are currently part of AfDB’s portfolio, or are well advanced for receiving financial support for their development or implementation. Significant examples include the OMVG energy program in which the bank has long been active. The project will soon materialize with the contribution of several donors amounting to more than $1 billion. Recently, the bank also approved the financing of the overall study of the Grand Inga site in the

Activities and operations of AfDB diversified across all regions Figure 2 and critical sectors (in percent)

Total approvals since inception: REGION SECTOR $59 billion

North Africa 32.5 Agriculture and rural development 17.6 West Africa 23.4 Transport 16.7 East Africa 15.2 Multi-sector 15.4 Southern Africa 13.1 Finance 13.8 Water supply 7.8 Central Africa 11.8 Social 11.6 Industry 5.2 Multiregional 4.0 Power Supply 9.3 Other 2.5

OFID PAMPHLET SERIES 39 53 Democratic Republic of Congo for $16 million. The project is so massive it can supply a large part of the continent and even inject electricity into southern European grids. The bank is also considering participating in the €200 million construction of the Gigel Gibe III Hydropower Project in Ethiopia. Last, but not least, both private and public sector windows of AfDB are working on the struc- turing of the Mamabula Thermal Power Project in Bostwana, with an unprece- dented financial outlay that may amount to more than $1 billion. The common feature of these projects is that they are designed for exporting electricity to neighboring countries. The aim is to exploit resources that are abundant at a given place for producing electricity in order to transfer it, under commercial terms, to less favored areas, thus enabling some poor countries to become significant players in the energy production/trade sector. The ultimate objective is to support the creation of regional and continental electricity markets for the economic growth of Africa. Such ambitious but realistic schemes will, at the same time, satisfy the three key considerations in energy use: availability, accessibility and affordability. For this purpose, the interconnection of power lines is necessary. The Bank, therefore, also actively supports this sector, which is necessary for regional integration. The AfDB is currently funding several ongoing projects including the interconnection ventures between Kenya and Ethiopia, Chad and Cameroon, Mali and Côte d’Ivoire and so on. Between 2007 and 2010, the Bank will have allocated more than 2.5 billion units of account for electricity generation and transmission/distribution on a regional scale. With the Bank being only one financier among several others on these projects, the leverage effect can be between three to five, resulting in capital costs of the projects close to 10 billion units of account. This is excluding strictly national projects and Bank support to sub-sectors like rural electrification, renewable energy promotion, reforms and capacity building for authorities and utilities. The outcome of this three- year program will be several millions of additional customers and families having access to modern energy for their everyday lives. It is expected that this will be complemented by other donors, institutions, Non-Governmental Organizations (NGOs) and private-sector investors, who all understand that energy poverty is one of the main insidious components of poverty. There is an obvious trickle-down effect of regional integration of energy systems as it impacts all layers of human and socio-economic activities. Energy is a non-negligible component of the production costs of goods and services. Therefore, a better quality and reliability of supply will increase the competitiveness of African products, thereby fostering exchanges and trade. This would in turn contribute to revenue growth and the alleviation of poverty.

54 OFID PAMPHLET SERIES 39 7. Conclusions and recommendations

Without addressing the issue of energy poverty specifically in the SSA region, African economies would have difficulties taking off at a sufficient pace; first, to achieve the MDGs by 2015; and second, to provide a reasonable quality of life III to a population that is projected to double by 2030. To face this challenge, AfDB will continue to direct its relatively limited resources into energy projects that have the highest impact in terms of the population served. It will continue to support governments, authorities, regional organizations and private entrepreneurs. The Bank will do so by acting as a wise adviser, financier, facilitator and an honest broker in assuring that the availability, accessibility and affordability aspects of the energy supply chain are equitably balanced and respectful of the environment in the proper utilization of resources. With the creative arrangements made under the recently replen- ished AfDB’s 11th Resource Replenishment (ADF XI) for allocating significant resources to regional projects, the Bank will be the key player in partnership with other institutions. It will also collaborate with initiatives like the New Part- nership for Africa’s Development (NEPAD) and the Infrastructure Consortium for Africa, so as to change the energy map of the continent. The numerous authorities created at national and regional levels such as the RECs and various other initiatives deployed by sister institutions and NGOs, will receive due attention from the Bank, which will always consider their interventions alongside its own operations. The AfDB will also encourage and participate maximally in the development of initiatives and actions by the various power pools created in Africa. The Bank will also partner with continental or international actors like the African Energy Commission (AFREC), which launched the African Energy Information System (AIES). By building databases of statistics and information on the African energy sector, the AIES is performing a crucial role. Sound knowledge of the energy sector is now very important for decision makers. This is because it helps them to adopt and implement appropriate policies and strategies in a globalized world, where energy access has become the most important challenge for preserving peace and stability as well as providing support for the socio-economic growth of the less developed regions.

OFID PAMPHLET SERIES 39 55

Powering Industrial Growth: The Challenge of Energy Security for Africa IV Pradeep Monga

1. Energy security in the African context

Worldwide demand for energy is likely to increase significantly over the coming decades, particularly in developing countries. Three-quarters of the projected increase in carbon dioxide emissions will come from fossil fuel consumption in non-Organization for Economic Co-operation and Development (OECD) countries. Commercial energy supply is increasingly concentrated on a small number of countries. These current patterns of global energy production and consumption are set to face multiple challenges: global warming and other environmental concerns, geopolitical conflicts, significant rises in fuel price and depletion of fossil fuel reserves. Consequently, the social dimensions (fight against poverty), the economic dimensions (competitively priced energy, security of supply) and the environmental dimensions of these energy demand and supply patterns, constitute a huge challenge to the achievement of sustainable development objectives. High and highly volatile energy prices have moved global energy security to the top of the political agenda. Energy security was, for example, one of the subjects of the Summit of the Group of Eight (G8) leaders in July 2006. Not having access to energy services is an obvious case of energy insecurity. Compared with other parts of the world, energy deprivation or the lack of access to energy is by far the most prevalent in Africa. Over the last four decades, the gap between energy supply and demand in Africa has been (and is expected to continue) growing (UN-Energy, 2007). Since access to affordable energy services is a key determinant of economic growth and poverty reduction efforts, Africa continues to face critical challenges related to its energy sector. These challenges include the use of renewable energy; improving energy efficiency; the diversification of energy supply; the development of energy infrastructure; and the promotion of new (energy) technologies by exploiting innovative models of technology transfer. Others are energy trade and regional integration; reform

OFID PAMPHLET SERIES 39 57 of the continent’s electricity industries; and the economic vulnerability of African countries to oil price fluctuations. Within Africa, the situation differs dramatically between rural and urban regions as well as between Northern, sub- Saharan and Southern Africa. North Africa is heavily reliant on hydrocarbons, Southern Africa depends to a very high degree on coal, and in sub-Saharan Africa (SSA) (except South Africa), traditional biomass is by far the dominant fuel. This high degree of intra-African variability requires differentiated approaches to tackle the issues related to the continent’s energy security. Energy security may be defined as “a country’s ability to expand and optimize its energy resource portfolio and achieve a level of services that will sustain economic growth and poverty reduction” (RIVM, 2004). The International Energy Agency (IEA) defines energy supply to be “secure” if it is adequate, affordable and reliable (IEA, 2007a).1 From the different definitions of energy security, two broad dimensions may be distinguished: a physical/quantity dimension – risks related to physical supply shortfalls occurring between production and consumption due to infrastructural failure; and an economic/price dimension – the risks of price distortions caused by fluctuations in the price of energy products on the world markets. Essentially, energy security rests on two principles: using less energy to provide energy services (i.e., improving energy efficiency), and having access to technologies (and fuels) that provide these energy services in a sustainable manner. Therefore, energy security encompasses supply-side and demand-side options. Both principles are typically not well met in Africa. From an African perspective, energy security requires a broader definition than just the availability of a regular supply of energy at an affordable price. Energy security is a complex topic with linkages to numerous other sustainable development objectives. Because of this strong nexus between energy production/use and human development (UNDP, 2000, 2007b, 2007c, 2007e; FEMA,

1 A list of energy security definitions can be found in UNIDO (2006). Another aspect of energy security that is of importance to energy producers is “demand security,” the predictable demand pattern (von Hirschhausen, 2005). 2 FEMA was established to provide political leadership, policy direction and advocacy to increase access to, and better utilization and management of, energy resources for the continent’s sustainable development. FEMA’s website can be accessed at http://www.fema-africa.net. 3 In the declaration, ministers identified the need to: increase access to modern energy services, and address the significant negative health and environmental implications of heavy reliance on traditional biomass energy; utilize Africa’s rich energy resources, which are currently underexploited or exported without benefiting the majority of Africa’s citizens; increase financial flows to match Africa’s energy investment needs; and promote a better mix of energy supply options, ranging from existing conventional options to renewable energy sources, to strengthen Africa’s energy security.

58 OFID PAMPHLET SERIES 39 Relationships between energy and achievement of the MDGs Figure 1

MDG 1 MDG 2 MDG 3 MDG 4 MDG 5 IV

Agricultural production Incomes Education Health Increased consumption

Access to affordable, reliable and sustainable energy services

Source: UNECA (2006b)

2006) (and also because there are no energy-specific Millennium Development Goals (MDGs)), energy security must, therefore, be integrated into energy policies alongside other policy objectives, such as developmental and environmental goals. In the context of Africa, the issues of access to energy services and affordability assume special significance in facilitating the achievement of the MDGs. An efficient and effective energy infrastructure is a precondition for economic development in general, and for industrial development (as measured in increases in productivity and competitiveness) and diversification in particular. Yet most forms of energy infrastructure are very capital-intensive and often require large-scale investment, which many African country governments find almost impossible to finance (UNCTAD, 2007c). Figure 1 shows the links between energy use and the MDGs. There are a number of initiatives to address these issues in Africa. To achieve its objectives and the MDGs, the Forum of Energy Ministers of Africa (FEMA)2 proposed to fulfill the following energy-related targets by 2015: the consumption of modern energy services should be doubled; 50 percent of inhabitants in rural areas should use modern fuels for cooking; 75 percent of the poor in urban and peri-urban areas should have access to modern energy services; 75 percent of schools, clinics and community centers should have access to electricity as this would enhance their competitiveness. Also, mechanical power should be available to rural areas. African ministers convening under FEMA met in Maputo in March 2007, where they adopted the “Maputo Decla- ration on Energy Security and Sustainability in Africa.”3 Table 10 provides an overview of energy targets agreed by the African ministers.

OFID PAMPHLET SERIES 39 59 In the New Partnership for Africa’s Development (NEPAD)4 Framework Docu- ment, governments adopted several energy-related targets, including those to: increase African people’s access to reliable and affordable commercial energy from 10 percent to 35 percent or more within 20 years; improve the reliability and lower the cost of energy supplies to productive activities, in order to enable a 6 percent annual economic growth; rationalize the territorial distribution of existing but unevenly allocated energy resources; and reverse environmental degradation associated with the use of traditional fuels in rural areas. Other targets aim to exploit and develop the hydro-power potential for the river basins of Africa; integrate power grids and gas pipelines to facilitate cross-border energy flows; and, reform petroleum regulation and legislation. These targets can be considered a quantification of African energy security and reliability objectives, whereas almost all of these targets immediately relate to the issue of access to energy services. This paper raises aspects related to energy security in an African context by focusing on the industrial sector. Strategic priorities to address the issue include: renewable energy, including agro/bio/fuels, for enhancing access to energy services and industrial applications, and energy efficiency for industrial productivity and competitiveness. Industrial productivity is one of the central determinants of a country’s prosperity. Other aspects in the context of African energy security include the diversification of energy supply and demand; development of energy infrastructure, with attention to its resilience; promotion of clean and affordable energy sources and technologies; as well as decentralization of energy production through development of local energy resources and systems. Others are the role of energy trade and regional integration; energy/power sector reform (of which energy pricing is an essential component) as well as the economic vulnerability of many African countries to oil (and commodity) price fluctuations.

2. Global and African demand and supply patterns

Global trends Worldwide demand for energy is likely to increase significantly over the next decades, particularly in developing countries. This increase is projected to take place in all world regions and for all fuels: • The Intergovernmental Panel on Climate Change (IPCC) projects that the energy demand in developing countries and transition economies could increase by a factor of three to five by

60 OFID PAMPHLET SERIES 39 World primary energy demand, 2005, 2015 and 2030 Table 1

Million tons of oil 2005 2015 2030 2005-2030 equivalent (Mtoe) percent p.a. IV Coal 2,892 3,988 4,994 2.2

Oil 4,000 4,720 5,585 1.3

Gas 2,354 3,044 3,948 2.1

Nuclear 721 804 854 0.7

Hydro 251 327 416 2.0

Biomass and waste 1,149 1,334 1,615 1.4

Other renewables 61 145 308 6.7

Total 11,429 14,361 17,721 1.8

Source: IEA (2007e)

2050. During this period, all IPCC scenarios suggest that the main sources of primary energy will remain a combination of coal, oil and gas, providing between 60 percent and 80 percent of the energy mix in 2050. • The Energy Information Administration (EIA) of the US Department of Energy projects an increase of (commercial) world energy demand by 57 percent from 2004 to 2030 (EIA, 2007). Three-fourths of the projected increase in carbon dioxide emissions results from fossil fuel consumption in non- OECD countries. • The IEA (2007e) expects an increase of global energy demand of 55 percent by the year 2030; while energy demand in the developing world is likely to more than double over the projected period. Table 1 shows projected global energy demand on a fuel basis.

4 The objective of NEPAD is to stimulate Africa’s development by bridging existing gaps in priority sectors, including agriculture, health, education, infrastructure, information and communications technology, environment, tourism, and science and technology. NEPAD’s website can be accessed at http://www.nepad.org/.

OFID PAMPHLET SERIES 39 61 This massive increase in projected energy demand raises important energy security concerns for energy importing nations. With respect to the physical dimension of energy security, on the global scale, there is an increasingly poor geographical correlation between commercial energy supply and demand. Interna- tionally traded energy accounts for a growing share in total energy use. In the case of oil, for example, a small number of suppliers account for an increasing share in total supply. Concerning the economic dimension of energy security, on the global scale, there is enough capital available to finance energy supply projects (including their transport infrastructure). However, in poor regions such as Africa, it is by no means guaranteed that the necessary capital flows will be forthcoming. Two-thirds of the world’s oil and one-third of global gas reserves are in the Middle East, mostly in the Gulf region. Although these countries currently account for some 27 percent of global crude oil supplies, they are expected to double their share by 2010. Africa accounts for 114 billion of the world’s 1,317 billion barrels of proven oil reserves and 484 trillion of the 6,183 trillion cubic feet of proven natural gas reserves (EIA, 2007). Currently, renewable energy technologies supply 13.1 percent of the world’s primary energy mix, but 25 percent of the developing countries’ energy supply, mainly in three forms: traditional biomass for heating and cooking in rural areas, modern biomass combustion, and hydro-power (IEA, 2007c). The IEA (2007e), in its reference scenario, projects that the global share of renewables in electricity generation will increase from 18 percent currently to 21 percent by 2030. Industry (excluding non-energy use) accounts for about one-third of global final energy consumption.5 On a regional basis, this share ranges from 18 percent in Africa to more than 40 percent in China, reflecting the relative importance of the industrial sector in energy use and also its contribution to a region’s GDP.

African trends On the African continent, much more energy is produced than consumed. In 2005 the production of coal was 39 percent higher than consumption. The corresponding numbers for crude oil and natural gas are 236 percent and 119 percent, respectively. However, this does not imply that there are no energy security issues. There is a high degree of intra-African diversity in energy demand

5 Industry is defined as sector D (Manufacturing) under the International Standard Industrial Classifi- cation (ISIC). Industry is not only an important consumer of final energy but also an energy producer.

62 OFID PAMPHLET SERIES 39 and supply that largely reflects the diverging regional resource endowments. Africa’s energy sector is best understood as three distinct clusters: North Africa, Southern Africa and sub-Saharan Africa. North Africa is heavily reliant on hydrocarbons, Southern Africa depends to a very high degree on coal, and in sub-Saharan Africa (excluding South Africa) traditional biomass is by far the dominant fuel. IV The strong growth in total energy production was a result of robust growth in North and West African crude oil production. The share of biomass in total primary energy supply (TPES) decreased from 62 percent in 1971 to 47 percent in 2005. However, Africa’s use of combustible renewables (mainly fuelwood) still remains significantly higher than the world average. Combustible renewables provide most of sub-Saharan Africa’s household energy needs. The presence of large forests, agro-industry, agriculture, a large rural population, and a low GDP per capita has resulted in a massive use of biomass in cooking. This helps explain the extremely high share of biomass in the African energy mix compared to the world average of 10 percent (IEA, 2007b). Global per capita energy consumption is very unevenly distributed when viewed in terms of electricity consumption. Whereas average annual electricity consumption in the OECD is around 9,000 kWh per capita, it is only 1,157 kWh in developing countries on average, and in several sub-Saharan African countries, it is around 100 kWh. In ECOWAS countries, for example, the average per capita electricity consumption is only 88 kWh annually. Africa’s energy

Basic energy indicators for country groups Table 2

Traditional fuel Electricity GDP per unit Per capita consumption (percent of total consumption per of energy use (2000 CO2 emissions energy requirements), capita (kWh), PPP $ per kg of oil (metric tons), 2003 2004 equivalent) 2003

All dev. countries 26.3 1,221 4.6 2.2

Sub-Saharan Africa 81.2 478 – 0.8

OECD 4.6 8,795 5.3 11.2

World 21.7 2,701 4.8 3.7

Sources: UNDP (2006) and UNDP (2007e)

OFID PAMPHLET SERIES 39 63 intensity is higher than the world average despite low electrification rates and less developed industry and transport sectors. This clearly points to a low overall energy efficiency. In addition, energy intensity has not improved since 1971 (Figure 5). Table 2 presents basic energy indicators for individual African countries. Thirty-four of the 50 Least Developed Countries (LDCs) are in Africa. In 2005, Africa produced 12 percent of world crude oil and exported 79 percent of its production. With the exception of Egypt, the major oil producers in Africa all registered strong growth in 2005. Nigeria, Algeria, Libya, Angola and Egypt accounted for 83 percent of African production. In 2005, Africa’s production of crude oil averaged 8.856 million barrels per day. Algeria, Angola, Libya, and Nigeria are the main oil producers. Other oil producers are Cameroon, Chad, Congo, Côte d’Ivoire, Egypt, Equatorial Guinea, Gabon, Mauritania, the Sudan and Tunisia. Natural gas experienced the fastest increase in primary energy production between 1971 and 2005, with natural gas TPES increasing from 1 percent to 12 percent. Almost all African gas production comes from Algeria, Egypt and Nigeria, at 52 percent, 25 percent and 11 percent respectively. More than half of African natural gas production is exported, both by pipeline and LNG. Africa’s production of natural gas in 2005 averaged 171,735 million standard cubic meters, which represented an increase of 13.1 percent from 2004. This raised Africa’s share in world gas production from 5.5 percent in 2004 to 6.1 percent in 2005. Algeria accounted for 50 percent of Africa’s total production of gas, followed by Egypt, Libya, and Nigeria, together accounting for about 44 per cent in 2005. The increase in African production of natural gas is explained by two main factors. The first is related to the acceleration of substitution of crude oil by natural gas in the generation of electricity around the world. The second reason is the high level of international prices for both oil and gas, which increased the level of extraction of gas on the continent (UNECA, 2007). In 2005, South Africa accounted for 97 percent of Africa’s total coal production and 90 percent of consumption. Also, South Africa remains the world’s fifth-largest producer of coal. A third of the coal is exported, 38 percent is used in electricity generation and 16 percent is converted in coal liquefaction and gasification plants.6

6 In the industrial sector, increasing use of coal in Africa is expected for several purposes, including the production of steam and process heat for industrial applications, production of coke for the steel industry, and production of coal-based synthetic liquids. Currently, two commercial-sized coal-to-liquids plants (Sasol II and Sasol III) in South Africa supply about 28 percent of the country’s total liquid fuel requirements. The two plants together are capable of producing 150,000 barrels of synthetic liquids per day (EIA, 2006).

64 OFID PAMPHLET SERIES 39 Regional energy production in Africa, 2005 Figure 2

Other 350 Mtoe Combined renewables IV 300 Gas 250 Oil Coal 200

150

100

0 North Africa East Africa Southern Africa Central Africa West Africa

Source: IEA (2007b)

Electricity production and consumption largely reflects the disparity in fossil fuel resources between regions of Africa. North African countries and South Africa generate 79 percent of the continent’s total electricity. Figure 2 highlights the continent’s diversity concerning energy production by fuel type. Between 1971 and 2005, total African energy consumption increased at an average annual rate of 3.3 percent to 605 Mtoe. Figure 3 shows the continent’s fuel shares in 1971 and 2005. However, as stated above, this average masks important regional differences in energy consumption. For example, the biomass share in TPES for the whole continent stands at 47 percent, while for South Africa it amounts to 15.4 percent, in Libya 1.4 percent, in Egypt 2.3 percent, and in Ethiopia > 90 percent. Conversely, and not surprisingly, the share of hydrocarbons is the highest in North and West Africa. While average per capita commercial energy consumption in Africa is estimated at 313 kilograms of oil equivalent, the average figure for African LDCs is only 30.4 kilograms of oil equivalent. Many LDCs are characterized by very low commercial energy consumption such as 5 kg of oil equivalent in Chad, 13 kg in Mali, 19 kg in Burundi, 20 kg in Uganda and 21 kg in Mozambique (OSCAL, 2001).

OFID PAMPHLET SERIES 39 65 African energy consumption fuel shares, 1971 and 2005 Figure 3

Combined renewables

62% 18% Oil 22% 47%

1971 2005 18% Coal 17% 198 Mtoe 605 Mtoe

1% Gas 1% 12%

Hydro 1% 1% Other

Source: IEA (2007b)

Five countries dominate the demand for refined oil products: Algeria, Egypt, Nigeria, Libya, and Tunisia, accounting for almost 65 per cent of the total African consumption of refined products in 2005. At the end of 2005, African proven reserves of crude oil represented 10.2 percent of the world’s total, while reserves of natural gas in Africa accounted for 7.9 percent of the world’s total. Algeria, Libya, and Nigeria lead in terms of proven reserves with a share of 76 percent of total African reserves, followed by Angola, Egypt, Gabon and the Sudan with a combined share of 18.4 percent. Africa continues to be a net exporter of crude and refined oil products. In 2005, exports of crude oil reached 6.477 million barrels per day, which represented an increase of 1.8 percent from 2004. Sixty-eight percent of the gas reserves are in just two countries, Algeria and Nigeria. Table 3 shows African oil and gas reserves as of end of 2005 (UNECA, 2007).

3. Energy efficiency for industrial productivity and competitiveness

One of the principal aims of the United Nations MDGs is to halve extreme poverty by 2015. To achieve this goal, developing countries are in need of a vibrant private sector with entrepreneurs making investments and creating jobs. Enhancing productive capacities7 also directly contributes to UNIDO’s twin objectives of promoting sustainable industrial development and environmental protection. While some industrial sectors have reduced the problem of energy access by using decentralized on-site power generation, energy

66 OFID PAMPHLET SERIES 39 African oil and gas reserves as of end 2005 Table 3

Country Oil Oil R/P Gas Gas R/P reserves production (years) reserves production (years) (billion barrels) (mb/d) (tcu.m) (bcu.m) IV Algeria 12.2 2.015 16.6 4.58 87.8 52.2

Egypt 3.7 0.696 14.6 1.89 34.7 54.4

Libya 39.1 1.702 63.0 1.49 11.7 n/a

Tunisia 0.7 0.074 25.2 - - -

Nigeria 35.9 2.58 38.1 5.23 21.8 n/a

Angola 5.4 1.242 19.9 0.31 0.93 n/a

Equatorial Guinea 1.765 0.355 13.6 0.04 1.4 n/a

Sudan 0.6 0.379 46.3 0.09 0 -

Gabon 2.5 0.234 25.8 0.034 0 -

Congo-Brazzaville 1.5 0.253 19.3 0.091 0 -

Cameroon 0.4 0.06 n.a 0.11 0 -

Chad 0.9 0.173 14.3 0 0 -

South Africa 0.157 0.2308 n/a 0.037 3.11 n/a

Côte d’1voire 0.1 0.0538 n/a 0.03 1.43 n/a

Other Africa 0.4 0.07 12.0 0.46 0.13 n/a

Total 114.3 9.835 31.8 14.39 163.3 88.3

n/a = not available

Source: 2007 BP Statistics, African Business, Jan. 2007

7 “The productive resources, entrepreneurial capabilities and production linkages which together determine the capacity of a country to produce goods and services and enable it to grow and develop” (UNCTAD, 2006).

OFID PAMPHLET SERIES 39 67 efficiency problems are very often a considerable impediment to African industrial development. A broad consensus has emerged that one of the major challenges facing Africa is, for the continent as a whole, and more so for sub-Saha- ran Africa, converting comparative advantages, the cornerstone of trade theory, into industrial competitiveness (UNIDO, 2007a). Energy industries have an impact on many policies, including transport, environment, industrial competitiveness and economic development. There- fore, a competitive, energy-efficient industrial sector improves a country’s overall economic competitiveness. The productivity of most African industry is compromised by the lack of a coordinated approach to energy efficiency technologies and measures.8 A substantial improvement in efficient consumption of energy, especially electricity, by the manufacturing and service sectors is necessary to improve the productivity and competitiveness of African industry. Competitiveness can be viewed at several levels – national, industrial, or firm – as well as domestically and internationally. As both national and even industry comparisons are based on aggregate measures, the clearest analytical approach to look at competitiveness is at the firm level. Here, competitiveness is defined as the firm’s ability to maintain or increase market-share based on its cost structure, quality, or other perceived attributes. Ultimately, national competitiveness depends on the competitiveness of individual companies. Industrial competitiveness is generally viewed as an industry’s ability to export its goods, with industry being defined as a group of firms that produces similar goods. Depending on the firm’s cost structure and adaptation, competitiveness is affected both domestically and internationally. Domestically, these impacts include changes in the market shares and profit margins of firms within the domestic industry. Also, the factors include increased competition from imported goods as well as changes in the return on investment, and thus a potential shift of production between different firms or industries (or sectors). Internationally, the most direct measure is reflected in the firm’s ability to

8 Productivity is a measure of how efficiently the economies’ resources are transformed into the production of goods and services. It measures how much output is produced relative to the inputs of labor, capital (plant and equipment), and (energy consuming) technology. An increase in productivity implies that more output can be produced with the same inputs. Productivity increases allow companies to defend their competitive position. Investment in more energy-efficient equipment increases the productivity of the input energy. Similarly, at the national level, productivity is the single most important determinant of sustained improvements in the standard of living of its citizens. Productiv- ity increases and wealth creation would facilitate increased spending on social programs, health care, higher education, cleaner environment, etc.

68 OFID PAMPHLET SERIES 39 Sustainable development impacts of increased energy efficiency Figure 4

Decoupling by improving energy efficiency

Primary energy Final energy Useful energy ENERGY IV Supply side efficiency Demand side efficiency Demand side efficiency SERVICES

Environment Competitiveness Quality of life Energy security

maintain its export markets. The OECD (2006c) finds that sub-Saharan Africa is the region with the lowest industrial productivity. The issue of energy and competitiveness covers three levels. These are: measures related to the energy sector that affect the competitiveness of individual fuels within a country’s energy system; the competitiveness of the whole energy sector, for example, as measured by the trade in energy products; and, how the productivity of a country’s energy sector affects the competitiveness of the whole economy, for example, as a result of lower energy prices. The fact that demand for fuels is a derived demand allows, in many cases, a high degree of substitution between factors of production in order to produce the consumer-relevant energy services. The concept of energy services also nicely bridges the supply side with the demand side. Improving efficiency on either side, therefore, also contributes directly to sustainable consumption. Figure 4 outlines the linkages between energy efficiency at each stage of energy conversion and the corresponding sustainable development impact, as measured by quality of life (social dimension), competitiveness (economic dimension) and environmental implications. Numerous studies show the potentials for improving energy efficiency along the conversion chain. Examples include high-efficiency motors and lighting, district heating and heat/electricity cogeneration systems, heat pumps and building insulation. Given the projected growth in global energy demand, energy efficiency plays a crucial role in the attainment of all dimensions of sustainable (industrial) development. At the global level, only some 37 percent of primary energy is converted to useful energy (UNIDO, 2001). Policy mechanisms

OFID PAMPHLET SERIES 39 69 African electricity intensity, energy intensity Figure 5 and energy production intensity

250 Production/TPES 2.5 Electricity/GDP 200 2.0

150 Production/GDP 1.5

100 TPES/GDP 1.0 1971=100

50 0.5

0 0.0 1971 74 77 80 83 86 89 92 95 98 2001 05

Source: IEA (2007b) to promote energy efficiency have been justified on the rationale of market failure, which prevents price signals alone from being sufficient to induce consumers to implement the socially optimal level. The G8 Summit Declaration of June 2007 states: “Improving energy efficiency worldwide is the fastest, the most sustainable and the cheapest way to reduce greenhouse gas emissions and enhance energy security.” Africa’s high energy intensity, coupled with the low levels of industrialization, points to an inefficient energy use. Figure 5 shows African electricity intensity, energy

Industrial energy intensity by country groups, 1990 and 2002 Table 4

Country groups 1990 2002 1990-2002 (Number of countries/ (toe/$106 of manufac- (toe/$106 of manufac- (Average annual total number in the group) turing value added) turing value added) percentage change)

Industrialized countries (25/25) 200 190 -0.4

Transition economies (7/22) 1,380 580 -7.0

Developing countries (53/100) 780 590 -2.3

Least developed countries (8/45) 700 640 -0.7

Source: Luken and Hesp (2006)

70 OFID PAMPHLET SERIES 39 intensity and energy-production intensity. As can be seen, overall energy intensity has not improved since 1971, and electricity intensity has even doubled over that period. This trend is in stark contrast to OECD countries, where energy intensity improved (i.e., declined) significantly and electricity intensity stayed about constant from 1971 to 2006. Luken and Castellanos-Silveria (2007) present a detailed analysis of decoupling of industrial energy consumption from the IV sector’s manufacturing value added for different country groups. Table 4 presents industrial energy intensities, as measured in toe per million US dollars of manufacturing value added, for different country groupings. Industrialized countries’ industries require least energy for every dollar value added while industries in LDCs operate most inefficiently.9 The numbers indicate the significant potential for energy efficiency improvements.10 According to UNIDO (2007a), in terms of the degree of industrial development, measured by the share of manufacturing value-added (MVA) in Gross Domestic Product (GDP), African countries can be grouped into five categories a) Relatively advanced industrial stage – MVA/GDP ratio above 20 percent; b) Upper industrial stage – MVA/GDP ratio of 15-20 percent; c) Intermediate industrial stage – MVA/GDP ratio of 10-15 percent; d) Low industrial stage – MVA/GDP ratio of 5-10 percent; and e) Very low-industrial stage – MVA/GDP ratio of less than 5 percent. While the degree of industrial development differs across African countries, only in a few countries is the share of manufacturing value-added in GDP above 20 percent. For a large number of countries in Africa, the manufacturing sector’s contribution to GDP is less than 15 percent.11 An important element of energy security policy in Africa is tapping the potential of cost-effective energy efficiency improvements in its industrial sector. The IEA (2007d) presents efficiency potentials for several industrial sub- sectors. If all developing countries met the developed country average manufacturing energy intensity as of 2004, energy consumption could potentially be reduced by 70 percent. Also, increased energy efficiency in key sectors would contribute to industrial and economic stability.

9 However, Africa is the most efficient region in aluminum production due to new production facilities (IEA, 2007d). 10 In the case of Ghana, for example, Van Buskirk et al. (2007) estimate an average energy savings potential of 550 kWh/refrigerator/year, and a monetary savings of more than $35/refrigerator/year. 11 From 1980 to 2000, MVA in the developing world as a whole grew by 5.7 percent annually, as compared to 2.3 percent in the industrialized countries. MVA grew by 4.8 percent in the Middle East and North Africa and 1.7 percent in sub-Saharan Africa (Shapiro, 2007).

OFID PAMPHLET SERIES 39 71 4. Renewable energy for productive uses and industrial applications

The key driving factors for an increasing renewable energy implementation in OECD countries are policies to mitigate climate change. In contrast, in developing countries, which are generally characterized by a high share of non-commercial (renewable) energy, particularly in Africa, rising fossil fuel prices and energy security concerns offer additional opportunities for renewable energy. The environmental characteristics of renewable energy systems and the energy security brought about by increased use of indigenous energy sources are the most common reasons cited for renewable energy promotion. However, energy flexibility and diversity issues, economic concerns such as regional development and the export potential of renewable energy technology in emerging markets are also important. Africa has huge potential for renewable energy to meet its growing rural energy needs on a decentralized basis. Sub-Saharan countries are within the tropics and, therefore, offer the best potential for solar energy and biomass. North Africa is another promising region for renewable energy. Egypt, Morocco and Tunisia account for 85 percent of the installed wind capacity in Africa and the Middle East. North Africa is also becoming a focal point for solar thermal projects. This section focuses on productive uses and industrial applications of renewables. In the African context, renewable energy is also well recognized as a vehicle to improve energy access (dealt with in Chapter 5). In developing countries, industry accounts for more than a third of total final energy consumption,12 and 70 percent to 80 percent of this sector’s energy demand is for heat production (process heat for low or high temperature applications). Given the topical concerns of global warming, environmental pollution, energy security and international industrial competitiveness, there is an increasing need for industry to make use of modern sources of energy. Solar and biomass-based technologies have very considerable potential to meet, in a sustainable way, the growing energy needs of many industrial enterprises, especially for small and medium-scale enterprises. Renewable energy technologies have recently also proved economically competitive for meeting the growing

12 For Africa as a whole, due to a low degree of industrialization, this share is only 18 percent. In South Africa industry accounts for 35 percent of total final energy consumption. 13 UNIDO (2007c) defines biofuels “as energy carriers derived from the conversion of biomass to provide sustainable inputs for heat, power, and transport applications.” Biofuels can be liquid, solid or gaseous. The principle sources of biomass are agriculture and forestry.

72 OFID PAMPHLET SERIES 39 energy needs of SMEs. This, for example, is highlighted by enhanced use of solar (thermal) technologies for low heat/drying applications. However, currently only a tiny fraction of solar energy is being used for industrial processes. Bio- mass-based fuels (“biofuels”)13 have recently attracted a lot of attention due to their potential to displace conventional transport fuels. However, in the industrial sector, modern biomass technologies such as biomass gasification can con- IV tribute to the achievement of the above-mentioned concerns. In this context, renewable energy sources and technologies for industrial applications in energy-intensive small and medium-sized manufacturing enterprises (SMEs) have been emerging as an increasingly attractive option to meet the energy requirements for motive power and process heat for low-temperature applications. In addition to strengthening co-generation efforts, biomass gasification and solar technologies have immense potential to meet the growing energy needs of SMEs in developing countries. UNIDO is heavily involved in activities to promote industrial applications of renewable energy (UNIDO, 2004, 2007c, 2007d). Key industrial applications of renewables include: power/process heat from biomass gasification, combustion and co-generation; biogas/power from industrial effluents/residues; power generation from industrial solid wastes; liquid biofuels for the transport/power sector; and solar thermal and photovoltaic applications. Two sources of renewable energy are most relevant for application in SMEs: bio-energy and solar energy.

Solar heat for industrial processes (SHIP) Electricity accounts for around 17 percent of global final energy demand, low- temperature heat accounts for 44 percent (of which traditional biomass used for heating and cooking in developing countries has a significant share), high- temperature industrial process heat accounts for 10 percent, and transport fuels account for 29 percent. Salem (2007) estimates “that the energy demand that could be met by solar heat for industrial processes in the most suitable industrial sub-sectors in non-OECD countries is 2,250,000 TJ, which is equal to 6 percent of all energy used in the industrial sector.” The use of solar energy has a long history in the residential sector, where solar collectors are used for domestic hot-water preparation, swimming-pool heating and space heating. Virtually 100 percent of all solar collectors worldwide are used for these applications. As of 2004, there was an installed solar- thermal capacity of 86 GW, covering 123 million square meters.

OFID PAMPHLET SERIES 39 73 Heat shares in industrial energy use Table 5

Region Heat share Electricity share (percent) (percent)

OECD 70.9 29.1

Non-OECD 80.4 19.6

Africa 78.0 22.0

Latin America 79.2 20.8

Asia (excl. China) 81.8 18.2

Source: Salem (2007)

The industrial sector is well suited to solar (thermal) technology because of its high share and volume of energy required for process heat. Table 5 shows the heat and electricity shares in industrial final energy use for different world regions. In non-OECD countries, for example, some 80 percent of total industrial energy use is required for heat processes such as drying, washing, hot-water preparation, pasteurization and sterilization. A significant potential for using solar heat is in the food and beverage industries, in the textile and chemical industries and for simple cleaning processes (such as car washes). In developing countries, with their generally sunny climate and limited availability of commercial energy supply, solar thermal energy can be used to promote development while at the same time reducing emissions. In addition to the high heat share, the temperature level for almost all applications is below 250°C – a temperature profile that could be well supplied by solar thermal technologies (Table 6). The lower range of that temperature level “can already be provided today with commercially available solar thermal collectors” (ESTIF, 2006).

Biofuels applications Biomass is far too precious to burn. Biofuels are one way of extending the functionality of biomass. Industry, and particularly SMEs, occupy key functions in: producing food, feed and fiber (food industry pulp and paper industry, etc.); pre-processing wastes and residues (for example, polarization); manufacturing equipment with various technologies (assembly/maintenance, logistics); and, converting feed stocks into biofuels (combustion, fermenta- tion, gasification, etc.).

74 OFID PAMPHLET SERIES 39 As highlighted in UNIDO (2007a), there is an urgent need to harness the vast potential of renewable energy resources to promote growth and reduce poverty in Africa, and a growing realization that over-dependence on imported fuel and inefficient traditional energy impedes economic development. Biofuels can reduce dependence on imported fossil fuels and increase energy security as well as mitigate climate change. Their production can also enhance rural economic IV development (UNCTAD, 2006b and 2006e). These benefits are difficult to quan- tify as they are externalities and not reflected in the market price of biofuels. On the other hand, there are potential trade-offs between the production of food, fuel and feed. The recent dramatic increase in agricultural commodity prices (“agflation”) is of particular concern for net food-importing developing countries as well as the poor in urban populations (OECD-FAO, 2007). In poor countries the issue of food security is closely linked to energy security. “A higher share of biofuels will link the price movement of that crop to the

Temperature ranges for industrial processes Table 6

Industry Process / Temperature (°C) Industry Process / Temperature (°C)

Dairy Pressurization 60-80 Chemical Soaps 200-260 Sterilization 100-120 Synthetic rubber 150-200 Drying 120-180 Processing heat 120-180 Concentrates 60-80 Pre-heating water 60-90 Boiler feed water 60-90 Meat Washing 60-90 Tinned food Sterilization 110-120 Sterilization 60-90 Pasteurization 60-80 Cooking 90-100 Cooking 60-90 Bleaching 60-90 Bricks and blocks Curing 60-140

Textile Bleaching, dyeing 60-90 Plastics Preparation 120-140 Drying, degreasing 100-130 Distillation 140-150 Dyeing 70-90 Separation 200-220 Fixing 160-180 Extension 140-160 Pressing 80-100 Drying 180-200 Blending 120-140 Paper Cooking, drying 60-80 Boiler feed water 60-90 Bleaching 130-150

Source: Kalogirou (2003)

OFID PAMPHLET SERIES 39 75 world petroleum market” (Doornbosch and Steenblik, 2007). For this reason, Kojima et al. (2007) conclude that “biofuels are unlikely to become the solution to rising crude-oil prices” (Doornbosch and Steenblik, 2007). The potential contribution of biofuels to the world’s energy mix is highly debated (Smeets et al., 2007). Under optimistic assumptions bio-energy could provide a multiple of today’s energy demand (without competing for food production). However, there are also critical voices arguing that bio-energy’s sustainable contribution is even less than it provides today. A detailed overview of the status, challenges and opportunities for biofuels in Africa can be found in Karekezi et al. (2007), and Box 1 highlights some African biofuels activities.

Biofuels activities in Africa Box 1

The African continent has several comparative advantages for producing biofuels. Some countries have large surfaces of suitable rain-fed lands that have not yet been cultivated, and generally agriculture can be largely improved. At the same time, many countries, even some with good agricultural potential, are struggling to provide sufficient food for their rapidly growing populations. Due to its geographical and social situation, Mozambique may become an important biofuel producer: suitable climatic conditions for sugarcane and oil-tree crops, abundant arable land and a largely rural population. The Mozambican Government is preparing an ambitious biofuel program aimed at decentralized production of electricity, gradual blending of gasoline and biofuel-gel as a substitute for kerosene and firewood in lighting and cooking. The Nigerian National Petroleum Corporation (NNPC) recently signed an agreement with the Brazilian state-owned oil company Petrobras to build an ethanol plant on the shore of the Niger River, aimed at supplying the local market and helping Nigeria achieve a 10 percent ethanol blend in its gasoline supply. Brazil intends to strengthen South-South cooperation and uses its biofuel know-how for this purpose. A survey on Tanzania’s biofuels potential and implications was carried out by the Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ, 2005). As in many other LDCs, imports of petroleum products absorb large amounts of foreign reserves. At the same time, Tanzania has a large potential for expansion of rain-fed crop production. The study concludes that steps need to be taken rapidly to promote the production of biofuels and that, with current oil prices, Tanzania’s ethanol is likely to rapidly become competitive in commercial terms. Zimbabwe pioneered the production of ethanol in Africa. It started a program in 1980 and has since been blending gasoline with 12-15 percent ethanol. As sugar-producing countries, South Africa and Swaziland are well positioned to become exporters of bioethanol. Madagascar is also in the process of developing its ethanol industry on the basis of sugarcane. Zambia is reported to have a large amount of high-potential available land and could become an important ethanol producer. It has also set fuel-blending targets and is promoting the planting of Jatropha.

Sources: SDC (2007)

76 OFID PAMPHLET SERIES 39 Jatropha for biodiesel production in Africa Box 2

Over the longer term, Africa contains a number of countries with considerable potential for benefiting from biodiesel production and trade based on Jatropha, a large, fast- growing, drought-resistant perennial shrub, the seeds of which yield up to 2,700 kilograms of raw oil per hectare. Projects to demonstrate the possibilities of producing bio- IV diesel from Jatropha have been started, or are being planned, in several African countries (Burkina Faso, Ghana, Lesotho, Madagascar, Malawi, South Africa, Swaziland and Zambia).This plant is particularly suitable for growing on land too poor and arid to support food crops, and is also nitrogen-fixing. As with any other crop, the problem is not the palm itself but the industrial model in which it is being implemented. There are numerous examples in Africa to show that this palm can be grown and harvested in an environmentally-friendly manner and that it can serve to fulfill the needs of the local populations in a sustainable and equitable manner.

Source: Steenblik (2006)

5. Energy/electricity access and energy poverty

The World Bank reports that less than one in five Africans has access to electricity. With such low levels of access, electricity can hardly be an effective prime mover for economic development. “Lack of access to affordable electricity and heavy reliance on the inefficient and unsustainable use of traditional biomass fuels … are both manifestations and causes of poverty” (OECD, 2007b). In addition, the distribution of services is also skewed, with 80 percent directed to urban centers, while rural areas, with 70 percent of the population, get only 20 percent. These figures are particularly unsatisfactory, given the importance of industrial/commercial energy use for development. For sub-Saharan Africa,

African electrification rates, 2005 Table 7

Africa Sub-Saharan North Africa

Population without electricity (millions) 554 547 7

Population with electricity (millions) 337 191 146

Electrification rate (percent) 37.8 25.9 95.5

Urban electrification rate (percent) 67.9 58.3 98.7

Rural electrification rate (percent) 19.0 8.0 91.8

Source: IEA (2006b)

OFID PAMPHLET SERIES 39 77 the IEA projects that by 2030, half the population of that region will still be without electricity (IEA, 2004). Table 7 shows African electrification rates. Electrification is normally simply measured by the percentage of households with access to electricity. In some cases, however, too much attention has been paid just to increasing the number of connections and “not enough to the role of electricity in the household and local economy where the poorest people live” (Victor, 2005). In several countries, per capita electricity consumption has declined even with improved electrification rates. An explanation for this phenomenon is that poverty is the limiting factor for electricity consumption and poor households (have to) continue using traditional fuels. Beside the extent of electrification (a quantitative dimension), it also has a quality dimension. Often the population that has access to electricity

Electricity outages of firms in Africa Table 8

Average number of days of supply interruptions per year, 2000-2005

Eritrea 93.9 Mali 10.5 Tanzania 60.6

Kenya 83.6 Senegal 26.1 Uganda 70.8

Madagascar 78.0 South Africa 5.5 Zambia 30.0

Source: Mangwengwende and Wamukonya (2007)

Basic patterns of energy consumption in East African Table 9 Community (EAC) Countries

Population Energy consumption Electrification (million) (percent) (percent) Total Urban Rural Biomass Modern Urban Rural

Kenya 31.9 10.5 21.4 70 30 46 4

Rwanda 8.1 0.5 7.6 90 10 48 1

Tanzania 36.5 12.0 24.5 90 10 38 2

Uganda 24.4 3.0 21.4 93 7 8 1

Total EAC 100.9 26.0 74.9 92 8 40 5

Source: UNDP-GTZ (2005)

78 OFID PAMPHLET SERIES 39 Access to thermal energy and mechanical power Box 3 for productive uses in Africa

Data on access to thermal energy for productive uses, like baking, crop drying, metalwork- ing and vegetable oil processing, is not available. This may be partly because the formal sector industries usually rely on oil and sometimes electricity or LPG, while the informal indus- IV tries/commercial enterprises, particularly those in rural areas, rely mostly on wood fuel. Mechanical motive power for productive uses has gained more currency in the last five to 10 years so that ECOWAS, for example, reports that about 10 percent of the population in rural areas of West Africa have access to energy services for food processing and other motive power needs. Greater challenges lie ahead for increasing access to modern energy systems for cooking, given the very ambitious 2015 targets set by some of the RECs. Unlike the African ministers who put cooking at the top of their energy access “agenda,” the World Bank’s APEA puts this at the bottom of its implementation tracks. Cooking is also where income levels are universally recognized as constituting a major determinant of progression to modern energy systems. Any chances of achieving the targets for cooking with modern energy systems will therefore be closely linked to success at providing energy for income generation, including thermal energy for productive uses and mechanical power in rural areas. “By far the most pervasive form of renewable energy used in the developing world is fuel wood and agriculture residue used for heating and cooking. It accounts for about 10 percent of total primary energy used, or 77 percent of total renewable energy used globally” (IMF/World Bank, 2006).

Source: Brew-Hammond (2007) suffers from poor supply quality with frequent power brownouts and blackouts, as can be seen from Table 8. In the industrial/commercial sector, the low supply security often results in a significant self-generation of electricity in enterprises (Figure 6). The access issue is not confined to electricity. Access definitions can be applied to traditional fuels (biomass), to modern fuels, to thermal energy services and mechanical power for productive uses. Table 9, for example, shows patterns of energy consumption in EAC countries, and Box 3 highlights access issues for thermal energy services and mechanical power for productive uses. The principal challenge in Africa is that 90 percent of the continent is without access to modern energy services. The number of people relying on traditional biomass in sub-Saharan Africa is likely to increase from 575 million in 2004 to 720 million in 2030. Even in North Africa this number is expected to increase. The Poverty Reduction Strategy Papers (PRSPs) of many African countries do not include targets or timelines to meet the energy priorities articulated by the country. A recent review (UNDP, 2007a) found that only 48 percent of the PRSPs included concrete references to energy. In fact, few of the PRSPs focus

OFID PAMPHLET SERIES 39 79 Integrating energy access into national strategies: Box 4 Mali, Rwanda, Senegal

Mali. High-level political commitment from the President of Mali greatly facilitated action to allocate public resources to meeting energy service needs. Previous experience gained through a Multi-functional Platform program had raised awareness of the benefits to the poor of energy for agricultural processing, water pumping, etc. As a result, $4 million of HIPC funding was allocated to village-level energy access programs.

Rwanda. The Economic Development and Poverty Reduction Strategy (Rwanda’s second PRSP) is currently being developed to guide the implementation of VISION 2020, the national framework for development. UNDP and UNEP supported Rwanda in carrying out a costing exercise to estimate the investment in energy infrastructure necessary to achieve a level of energy access in Rwanda corresponding to the EAC regional targets.

Senegal. By integrating MDG benchmarks in its PRSP, Senegal created the opportunity to reassess the contribution of energy to MDGs. Ongoing discussion to develop a regional policy (ECOWAS) further motivated Senegal to align its national efforts to the forthcoming regional policy for energy access. A broad multi-sectoral process – part of the PRSP revi- sion dialogue – led to a common perspective on the level of energy access needed to achieve the MDGs.

Lessons: The integration of energy into national development plans can be facilitated by the existence of a regional policy on access to energy. Developing MDG-based PRSs at national and regional level creates the impetus and political space for re-introducing energy access for poverty reduction and for examining how energy access consideration can help achieve the MDGs.

Source: UNDP (2007d) on access, affordability and choice of energy services. This clearly indicates the need to better integrate energy policies within overall developmental policies. There are several programs to improve access to energy in Africa. Exam- ples include: The ECOWAS/UEMOA White Paper on Energy Access (Box 5); the CEMAC Action Plan for Promotion of Access to Energy 2006 (Box 6); and the EAC Regional Energy Access Strategy developed in 2006.14 Table 10 summarizes the specific energy access targets agreed by African ministers for 2015. An important feature of these targets is that they are not confined to electricity and that they cover all energy consuming sectors. Of particular relevance to UNIDO’s activities are initiatives to increase the use of (mechanical) power for productive uses and industrial applications.

14 The EAC Energy Access Strategy “will engage EAC Partner States in ambitious initiative to scale up access to modern energy services to meet the MDGs and to ensure that at least half of the EAC population has access to modern energy services by 2015” (EAC, 2007).

80 OFID PAMPHLET SERIES 39 ECOWAS/UEMOA White Paper on Energy Access Box 5

The ECOWAS/UEMOA White Paper on Energy Access stands today as a major landmark in the socio-economic development process for the countries of West Africa. The White Paper puts forward a regional policy geared towards increasing access to energy services for rural and peri-urban populations to achieve the MDGs. The White Paper commits IV ECOWAS/UEMOA Member States to providing access to modern energy services by 2015 to at least half the populations in rural and peri-urban communities, aiming at what many regard as probably the most ambitious set of energy access targets agreed to date in any developing region of the world. The decision adopting the White Paper was made at the 29th Summit of the Authority of Regional Heads of State and Government meeting in Niamey, Niger, on January 12, 2006, giving it the highest level of political approval within a regional cooperation framework. The ECOWAS/UEMOA White Paper’s energy access targets, all to be realized by 2015, may be summarized as follows: • 100 percent access to improved energy services for domestic cooking; • At least 60 percent of rural population with access to motive power; and • Over 60 percent access to electricity covering: - 100 percent of households in urban & peri-urban areas, - about 40 percent of households in rural areas, and - 60 percent of social service centers in rural areas.

The magnitude of the challenge posed by these targets is reflected in the very low access rates for modern energy services in West Africa at present. Less than 5 percent of the region’s population has access to modern fuels for cooking, and only four out of the 15 ECOWAS/UEMOA countries have overall electricity access rates above 20 percent. There is no doubt therefore that translating these low rates into the ambitious targets put forward in the White Paper, over a period of less than 10 years, will require some very innovative approaches, the concerted effort of all parties involved and substantial amounts of financial and other resources. As part of the process in the run-up towards agreement of the White Paper, National Multi-sector Committees (NMCs) were established in the majority of ECOWAS/ UEMOA Member States with the mandate to coordinate national stakeholder efforts in developing Energy for Poverty Reduction Action Plans and National Investment Programs. A Regional Multi-sectoral Committee (RMC) was then established to harmonize the work of the NMCs and oversee the White Paper’s development. The White Paper itself eventually proposes the establishment of a Regional Agency for Energy Access (RAEA) to mobilize the necessary resources for tackling the enormous challenge to provide modern energy services to more than half the region’s population by 2015.

Sources: ECOWAS (2005)

OFID PAMPHLET SERIES 39 81 CEMAC Action Plan Box 6

The orientations of the Monetary and Economic Union of Central Africa (CEMAC) Action Plan to be implemented from 2007-11 include: • Capacity building for energy planning oriented towards the needs of rural and peri-urban populations; • Coordinated hydro-power development in the sub-region; • Implementation of policies to promote electricity generation from agro and forest industrial residues; • Creation of exemplary promotional areas with improved access to modern energy services in rural areas of each member state; • Low-cost grid intensification in peri-urban areas; • Integrated regional promotion of solar energy; • Promotion of improved stoves and modern cooking fuels such as LPG; • Work towards a concerted development of the petroleum sector Elabora- tion of a CEMAC Energy Charter; • Creation of an Energy Access Observatory for the sub-region; • Facilitate transfer of technologies among member countries.

Source: http://ec.europa.eu

Energy access targets agreed by African ministers for 2015 Table 10 (percent)

FEMA ECOWAS EAC CEMAC

Modern energy for cooking 50 100 50 80

Modern energy services/electricity for basic needs in urban and 75 100 100 50 peri-urban areas

Electricity for rural households - 36 - 35

Electricity for schools, clinics and community centers 75 60 100 56

Mechanical power for productive uses in rural areas 100 60 100 -

Source: Brew-Hammond (2007)

82 OFID PAMPHLET SERIES 39 Investment requirements for increasing access Table 11 to modern energy services in sub-Saharan Africa

$ billions p.a. Remarks

World Bank (A) 11.0 Electricity only, 725 million people – 100 percent by 2030 IV

World Bank (B) 4.0 Electricity only, 725 million people – 48 percent by 2030

ECOWAS 5.2 Energy costs for cooking account for about half, 250 million people – 50 percent by 2015

EAC 0.3 Using High-Impact Low Costs and Scalable (HILCS) Technologies, 110 million people – 50 percent by 2015

CEMAC 0.2 Electricity only, 35 million people – 50 percent by 2015

Source: Brew-Hammond (2007)

The World Bank has indicated for Africa the levels of investment required to achieve 100 percent electrification and 48 percent by 2030. These levels are presented in Table 11 together with the respective investment costs of the three regional organizations, CEMAC, EAC and ECOWAS, which have developed comprehensive energy access strategies/programs. To reach electricity targets of 100 percent and 48 percent by 2030, the World Bank estimates that this will require $11 billion and $4 billion per annum, respectively, in sub-Saharan Africa (with a current population of 725 million people). CEMAC also estimates electricity investments of about $0.2 billion for 35 million people (Brew- Hammond, 2007). The IEA (2007e) calculates a cumulative investment requirement for African power-sector infrastructure of 484 billion dollars to 2030.15 Most African countries have largely failed to attract investment.

15 Total African energy sector requirement to 2030 amounts to 1,461 billion dollars.

OFID PAMPHLET SERIES 39 83 6. Price fluctuations in fossil fuels

The fact that Africa is a net oil exporter does not imply that there are no energy/oil security issues. The higher oil prices have had a severe impact on the oil-importing African countries. A steep increase in the price of oil has a serious impact on their balances of payments. This development highlights the economic dimension of energy security. The recent oil price increases led to a reduction in oil import volumes by more than two-thirds in LDCs, most of which are in Africa (UNCTAD, 2007a). Developing countries, and LDCs in particular, are highly sensitive to the volatility of the international energy markets. A survey of African importers by the African Development Bank shows that 28 countries spend more than 10 percent of their total import bill on oil. For some countries like Burundi, Ethiopia and Rwanda, these imports sometimes represent more than 30-40 percent of their export earnings. Eritrea spent about $140 million on oil imports in 2004, accounting for about one quarter of its GDP (Habtetsion and Tsighe, 2007). In Tanzania, payments have risen by 152 percent between 2002 and 2006. Mali’s payments quadrupled in 2005 from $100 million spent on oil imports in 1998. The rise in import costs is not unique for Africa. According to the World Bank, the oil price impact on Heavily Indebted Poor (HIP) Countries from December 2002 to April 2006 was 4.7 percent of their GDP (UNCTAD, 2006d). Developing countries are generally more dependent on imported oil and use twice as much oil per unit of economic output as the OECD countries (IEA, 2004; ESMAP 2005d). In addition, energy price fluctuations have a higher impact on their economies due to their fragile financial situation. Analysis of data for a large number of countries shows that a sustained $10 a barrel price increase would deliver a shock equivalent to a loss of GDP of 1.47 percent for the poorest countries (those with GDP per capita of less than $300). Even the highest income group (over $9000 per capita GDP) would suffer a loss of GDP of 0.44 percent.16 Some of the lowest income countries suffer a shock of up to 4 percent of GDP (UNDP/ESMAP, 2005).17 In terms of vulnerability to oil price increases,18 sub-Saharan African (omitting South Africa) and East Asian (excluding China) countries are most exposed. Vulnerability to oil price increases in Africa increased between 1990 and 2003 by more than the oil price rise. This high level of oil vulnerability in Africa was coupled with the highest external debt to GDP ratio, and the lowest per capita income, which shows that for Africa the oil shock is large and that it has the least resources to cope with the shock (ESMAP, 2005d).

84 OFID PAMPHLET SERIES 39 In countries where petroleum products are subsidized, which is the case in most LDCs, the impact of higher oil prices will not be directly felt by households, but the worsening of the government’s fiscal position will result in less government spending than would otherwise have been possible (UNDP/ESMAP, 2005). “There is a risk that progress in reducing dependence on traditional, dirty biomass fuels may be slowed or reversed as the poor face higher prices for LPG and IV kerosene” (UN, 2006). Energy is often subsidized on social grounds. However, in LDCs only 20 percent of energy used is produced commercially. Therefore, subsidies benefit primarily middle and higher-income groups. A challenge for policy makers is to target subsidies specifically for those consumers that are most in need of this kind of support (“smart subsidies”). An example of such smart subsidies would be so-called lifeline electricity tariffs where a certain basic amount of electricity is free for the (needy) consumer; consumption above a threshold, however, subject to full-cost pricing. Such an incentive scheme, if implemented properly, can reconcile social and economic efficiency objectives, but it is difficult to design in such a way that it does not benefit the rich even more than the poor (ESMAP, 2000). In the electricity industry, higher tariffs have the potential to create revenues that utilities can use to develop and expand electricity networks that, in turn, would benefit the poor.19 Page (2006) finds that out of 44 sub-Saharan countries, 24 have fully or extensively passed through higher prices, in 15 sub-Saharan countries there has been a partial adjustment in prices, and no price adjustment could be observed in five sub- Saharan countries. There is evidence that biomass energy prices are linked in many urban areas to the price of petroleum fuels. This linkage means that even those poor households using wood for cooking in the urban areas of many developing countries are not exempt from problems of rising petroleum fuel prices (ESMAP, 2005b).

16 The IEA (2004) estimates that, for the OECD as a whole, a sustained $10 a barrel price increase would result in a loss of GDP of 0.5 percent during 2004 and 2005. 17 Over a two-year period certain countries experienced extremely large shocks, including Guinea- Bissau (7.4 percent), Liberia (5.5 percent) and Sierra Leone (5.9 percent). However, the shock was quite small in some other countries, such as Uganda (1.1 percent) and Botswana (1.1 percent) (ESMAP, 2005d). Calculations also show that within a country low-income deciles are more severely affected than higher-income groups. 18 Vulnerability of an oil-importing country is generally measured by the ratio of the value of net oil imports to GDP. 19 Higher tariffs result in higher utilities revenues only if demand for electricity is price inelastic.

OFID PAMPHLET SERIES 39 85 Sustained higher oil prices will slow growth and progress towards the MDGs in low-income, oil-importing African countries. For most African countries, real GDP growth rates have remained low relative to their development goals. With only five countries recording an average real GDP growth rate of 7 percent or more during 1998-2006, few African countries are positioned to fully achieve the MDGs. Oil-importing African countries are characterized by high oil-intensity of primary energy sources as well as inelastic oil demand. Higher oil prices raise production costs, leading to lower output as well as tighter financial constraints. Governments are forced to decrease expenditure on infrastructure and social services in order to finance the higher oil bill. Moreover, higher oil prices fuel domestic inflation, increase fiscal deficits, and worsen the balance-of-payments position as well as the terms of trade (UNECA, 2007). Although oil-importing African countries have recorded positive overall GDP growth in the past few years, they are experiencing mounting internal and external imbalances. Strong commodity demand, good macroeconomic management, better agricultural performance, improved political governance in many countries and increased aid flows and debt relief are the key factors that helped them to maintain overall growth momentum.20 However, as a result of the recent hike in oil prices, the share of fuel imports in the merchandise imports of oil-importing African countries rose significantly, leading to notable increases in the current account deficits. Moreover, oil-importing countries faced sustained, large terms-of-trade losses (UNECA, 2007). Higher oil prices have generated increased trade surpluses in oil exporting countries. The IMF estimates that Africa’s trade surplus increased to $27.7 billion in 2005. Seven of the 10 countries that had budget surpluses in 2006 were oil exporters (Algeria, Cameroon, Republic of Congo, Equatorial Guinea, Gabon, Libya and Sudan). Therefore, oil continues to be the key factor behind the positive fiscal position for Africa as a whole, which raises concern over the sustainability of fiscal balance over the medium term. For oil producers, fiscal sustainability will require effective strategies for prudent management of oil revenues and strategies to utilize these revenues for enhancing economic diversification (UNECA, 2007). Strategies are needed to make sure that the excess liquidity as a result of high oil revenues does not result in the “Dutch Disease” and its adverse effects (real exchange rate appreciation and loss of competitiveness) on the industrial sector. Economic development requires diversification, not specialization. Heavy dependence on primary commodities remains a common feature of production, exports and growth in all the African sub regions.21 This exposes the continent to external shocks and makes economic diversification a top pri-

86 OFID PAMPHLET SERIES 39 ority for growth policies on the continent. The impact of higher oil prices on trade balances has been offset for some countries by price increases for other commodities, such as metals and agricultural products, but most countries in Africa have suffered worsening terms of trade (UNCTAD, 2006d). During the last years, improved economic management and increases in IV non-oil commodity prices have more than offset the negative impact of high oil prices on the real GDP of African oil importers. This is mainly due to debt relief and increased aid flows as well as improved agricultural production and high agricultural commodity prices. The growth rate in non-oil, mineral-rich African countries was unchanged in 2006 relative to 2005, as gains from the higher prices of minerals were dampened by the effects of rising oil prices (UNECA, 2007). How- ever, in most African countries that benefit from the current “commodity boom” there has been little progress in reducing poverty, inequality and raising employment. Also industrial development remains subdued (UNCTAD, 2006c). A challenge for commodity-dependent countries is to ensure that the positive outlook for commodities can be turned into a broad-based development. African countries need to implement commodity strategies to foster dynamic commodity-sector development, economic diversification and competitiveness. An important policy response is to improve diversification of fuel use or diversification towards energy-efficient technologies. One way in which this can be improved is by increasing the self-sufficiency of the economy with respect to oil production.22 Another promising route for reducing vulnerability to oil shocks would be to reduce aggregate energy intensity. A critical challenge for oil-importing African countries is to reduce their dependence on oil by promoting alternative sources of energy. It is particularly critical for these governments to strengthen growth policies, including industrial strategies that promote diversification of production and exports. The international donor community and international financial institutions should provide special support to oil-importing African countries to mitigate the impact of higher oil prices.

20 “Taking a longer-term perspective, SSA is clearly enjoying its best period of sustained growth since independence” (IMF, 2007b). 21 In 2004 primary exports of sub-Saharan Africa accounted for 70 percent of all merchandise exports. With the exception of Arab States (75 percent) this share is much higher than in all other world regions. In OECD countries this share is only 15 percent; for all developing countries 22 percent (UNDP, 2006). 22 Oil self-sufficiency is defined as the ratio of oil consumption less production to oil consumption.

OFID PAMPHLET SERIES 39 87 7. Energy sector reform and policy issues

The worldwide move toward increased reliance on market mechanisms has progressed during the last years. In the field of energy, governments have played a direct and dominant role. Energy has always been seen as a strategic sector, crucial to international competitiveness, economic and social development and national security, and one in which the most important decisions were taken by the government. State utilities for electricity, gas, and sometimes also coal and oil were instruments for implementing energy policy in many Western countries (European Commission/UNDP, 1999). In many cases, public utilities became huge organizations that were almost out of government control. Also, the introduction of new technologies may be too slow in the case of public ownership of the energy industry. Often consumers did not receive the service they expected. This concept was gradually abandoned in many countries, as it was expected that market mechanisms could perform the same tasks with greater efficiency. The main objective for liberalizing energy markets is to promote increased economic efficiency. From a public policy point of view, it is important that resources are used efficiently, that consumers have as much choice as possible in terms of the different fuels and sources of supply, and that consumer prices are stable and fair. From the perspective of a supplier of energy it is important that energy prices are sufficient to attract investment for the continued development of new supplies, and that the market penetration rates of the different fuels and supply sources are not hampered by artificial hindrances and obsta- cles, for example, barriers to entry. The key driving forces for institutional change in the power sector include: a general re-evaluation of regulated industries and a rethinking of how the introduction of competition might improve efficiencies; the wide disparity of electricity rates across states; and technological improvements that have led to a dramatic decline in the average size of generating units. Projected electricity demand growth, environmental considerations and power supply reliability are also factors that underlie the drive towards more competitive electricity markets. Williams and Ghanadan (2006) provide an overview of the driving forces of power-sector reform, and they also nicely contrast the context of power-sector reform in OECD and non-OECD countries. The prices of oil products have been deregulated in most industrialized countries, the exploration and exploitation of oil and gas deposits are open to competition, and the process of liberalization in this field has progressed.

88 OFID PAMPHLET SERIES 39 Regulatory reform is also used to promote technological innovation, productivity, structural adjustment and market contestability. Several aspects dominate the debate over regulatory reform and the objectives of regulation: • the move from command-and-control to incentive-based regulatory approaches based on the removal of entry barriers in com- IV petitive markets; • the design of efficient and competitively-neutral charges for accessing the fixed networks of incumbents; • the pros and cons of structural measures such as privatization, and vertical and horizontal separation of formerly integrated monopolies; • the ways to ensure achievement of important non-economic objectives (such as environmental protection and access to energy for the poor) in a more competitive environment at a minimum cost for society; and • the design of regulatory mechanisms and institutions.

A key objective of electricity reforms in developing countries has been to attract private-sector investments in order to improve the quality and reliability of electricity supply. In countries where quality and reliability of electricity supply is poor, self-generation capacity tends to be high. Figure 6 shows the

Self-generation shares in African enterprises Figure 6

100 percent Micro SME Large / 80 very large

0 Eritrea Ethiopia Nigeria Kenya Mozambique Tanzania Uganda Zambia Senegal

Source: Estache (2005)

OFID PAMPHLET SERIES 39 89 shares of African micro, SMEs, and large enterprises that maintain self- generation capacities. Even if self-generation is more costly than utility power it can make sense for industrial producers to self-generate electricity because of high losses associated with power outages. The burden of price subsidies, low service quality, low collection rates, high network losses and poor service coverage have meant that many governments are no longer willing or able to support the existing arrangements. In addition, international development agencies have engaged in the promotion and implementation of electricity sector reforms (Jamasb, 2006). It is critical to recognize that the fundamental interest of most developing countries in power-sector reform stems not from any desire to change ownership and/or to introduce competition for its own sake, but from the fact that they have no choice but to attract foreign private investors if their power systems are to grow fast enough to keep pace with demand. Often, governments have come under strong pressure from international financial institutions to privatize and liberalize the energy (and other network/infrastructure) industries. Most countries initiated reform plans, but few have enacted major changes. Others are at different stages of the reform process, but they show little enthusiasm and determination in this endeavor (Gabriele, 2004). In many cases the (imposed) restructuring of these industries can be considered a failure because the “textbook approaches” adopted from industrialized countries did not work in a developing country setting, for example, due to a lack of institutional capacity or simply a lack of political will to implement reforms. The African power sector is heavily dominated by North and Southern Africa, which together account for more than 80 percent of the continent’s generation capacity and 90 percent of power production (Table 12). The continent’s generation mix is largely thermal-based: coal accounts for 44 percent of electricity generation; natural gas’ share is 26.4 percent. In Southern Africa 94 percent of all electricity is produced in coal-fired plants. At present, Southern Africa’s two nuclear reactors are the only ones operating on the continent, accounting for about 3 percent of Africa’s total electricity generation. With the implementation of Structural Adjustment Programs (SAPs) in sub-Saharan (SSA) countries, the restructuring of the power sector has been part of a wider debate on the changing role of government and its eventual substitution by the private sector in the production of goods and services. A look at countries in the SSA region reforming their power sectors shows different industry and ownership/management structures. Table 13 shows the reform profile of selected countries in the region. From this table one can deduce that

90 OFID PAMPHLET SERIES 39 Size of African power sector Table 12

MW percent GWh percent

West Africa 9,498 10.01 21,190 6.26 IV Southern Africa 50,007 52.70 197,481 58.34

North Africa 28,905 30.46 101,688 30.04

East Africa 2,875 3.64 7,696 2.27

Central Africa 3,454 3.64 7,696 2.27

Totals 94,898 100 338,485 100

Source: Mkhwanazi (2003) countries in SSA are opening up the generation segment of the industry to private-sector generators, and have the power generated sold to publicly-owned utility companies through Power Purchase Agreements (PPA) (Turkson and Wohlgemuth, 2001). There are, however, no indications whether the sort of reform being put in place is a transition towards a more competitive industry structure or is the envisaged industry structure for their reforms. Regarding ownership/management structure, most countries have maintained their existing structure, while only a few have ventured into corporatization, commercialization or management contract for the power-sector companies. A crucial element of these processes has been the improvement in the technical efficiency of the sector.23 This has involved rehabilitation of equipment (power plants, transmission and distribution networks) and the introduction of a new pricing system that reflects the cost of supply. In order to give the right price signals for supply and demand decisions, in the long run prices have to include all costs (“full cost pricing”).24 A more detailed overview of the African power sector and its reform can be found in UN-ENERGY (2007).

23 System losses are generally very high, for example 37 percent in Uganda, 33 percent in Nigeria, and 27 percent in Tanzania. The South African electricity system, in contrast, appears to be quite efficient, with a system loss of about 7 percent (Bhagavan, 1999). 24 In a perfect market, with externalities fully reflected in energy prices, marginal cost pricing would be the socially optimal way to allocate resources. However, (energy) markets are not perfect. Government intervention in energy pricing is, therefore, sometimes justified to ensure competition or to achieve the goals of energy accessibility, availability and acceptability.

OFID PAMPHLET SERIES 39 91 Available data on the structure of power sectors in the region and the policies of different governments suggest that the pattern of vertically integrated monopoly enterprises with little or no autonomy from government to operate in a commercial manner is typical of SSA and indeed the whole of Africa (Wamukonya, 2002 and 2003). For example, the utility SONEL in Cameroon is about 93 percent state-owned, with the board of directors appointed by the government; Uganda Electricity Regulatory Authority handles generation, transmission and distribution and regulates itself; and the Power Holding Company of Nigeria (NHCN) is a state monopoly, with government controlling all pro- curements and foreign exchange transactions. Almost all countries in the region have opted for an electric utility industry that is an arm of government and generally vertically integrated. This structure of the sector is, however, changing.

Selected African countries’ restructuring profile Table 13

Country Type of structural Type of ownership/ Regulatory body change management change

Ghana Deintegration towards Public and private Public Utilities Regulatory wholesale competition independent power Commission (PURC) producers (IPPs) and joint ventures

Kenya Deintegration towards Public and private IPPs Electricity Regulatory Board competition at and management generation level contract

Côte d’Ivoire Vertically integrated (VI) Management contract Authorité Nationale de monopoly and IPPs Régulation du Secteur de l’Electricité

Mali VI monopoly Management contract Commission de Régulation de l’Eau et de l’Electricité

Uganda Partial de integration Public and private IPPs Electricity Regulatory with competition at Authority (ERA) generation level

Zambia VI monopoly Performance contract Energy Regulation Board (ERB) Zimbabwe Electricity

Zimbabwe VI monopoly Performance contract Regulatory Commission (ZERC)

Sources: Gutierrez (1996), Girod and Percebois (1998), SAD-ELEC (2004 and 2005), ESMAP (2005c)

92 OFID PAMPHLET SERIES 39 Private participation is now present in the form of IPPs (Ghana, South Africa, Tanzania), concessions (Mali, Uganda), and management contracts (Mali, Tanzania and, briefly, northern Namibia) (ESMAP, 2005b). Mebratu and Wamukonya (2007) note that “In some cases [price] rises of more than 100 percent have occurred within a year, and tariff increases have been a cause of public outcry in many African countries.” For the case of Nigeria, Amobi (2007) con- IV cludes that, “consistent with some of the other countries in sub-Saharan Africa, implementing a hastily convened competition policy will be a huge transaction cost, and one that will yield the country very little (if any) economic benefit.” Africa’s power sector is in need of reforms for commercial viability.25 Some countries have begun the process in different ways. These include the commercialization and privatization of state-owned utilities, unbundling energy production from distribution, opening markets to private investors and revising pricing policies. Strategies should address the issues of sustainable financing and regulatory risk – the regulatory framework (including social and environmental standards) should be clearly defined and predictable. In theory, the market should be sensitive to security risks and react accordingly. However, recent experience (Bertel, 2005) shows that the capabilities of liberalized markets to address energy security concerns can be doubted. The final verdict on the energy security effects of increased competition is still out, as impacts can go both ways. There is still an important role for the public sector to play in this important network industry.

8. Energy trade and regional cooperation

While energy commodities such as gas and oil are traded internationally, energy infrastructure is largely confined within national borders. Regional cooperation makes sense because: • The geography of energy resources does not correspond to political boundaries. • National markets may be too small to justify investment in particular energy supply opportunities. Combining national markets can provide economies of scale to overcome this. • The integration of small neighboring markets can provide the scale needed for effective competition, as markets mature.

25 South Africa may be an exception.

OFID PAMPHLET SERIES 39 93 • Cross-border energy supply can enhance the diversification of energy sources – a key element of energy security. • Joint energy project development can help build close ties between countries – less tangible, but important to international relations.

An important factor that could affect energy security is the extension of world trade liberalization to energy products and services. Interregional energy trade is dominated by exports of crude oil and petroleum products. According to the OECD (Steenblik, 2006), the value of trade in renewable energy goods is still relatively low, in the range of $4-5 billion. International trade in biofuels is mostly confined to ethanol, which is by far the most widely used of the biofuels (93.5 percent of total biofuels produced). However, vegetable oils have the largest potential for growth (UNCTAD, 2005b). Industrialized countries dominate the high-technology segment of exports. However, on the low-tech side and in biofuels, developing countries are major exporters. Here, one issue is the extent to which African countries can learn from the Brazilian experience with biofuels to position themselves as major exporters. Generally, an important developmental issue for African countries is how best to reap the potential benefits of globalization and new (energy) sources and technologies. International trade is seen to offer opportunities, either with other developing countries or with developed ones. However, there are considerable barriers to international trade: agricultural production subsidies, high tariffs, entry barriers (UNCTAD, 2005b).26 At a summit in Lusaka, in July 2000, African Heads of State took an important step by adopting two major policy documents: the Convention of the African Energy Commission, and NEPAD. While NEPAD aims to exploit and develop the hydro-power potential of African river basins and integrate transmission grids and gas pipelines to facilitate cross-border energy flows27 the Convention of the African Energy Commission aims to map out energy development policies, strategies and plans based on sub-regional and regional development priorities. The lesson from Africa’s nascent experience is that large regional supply systems can produce energy for member countries cheaply and reliably by exploiting economies of scale. Regional integration and cooperation can help address the continent’s insufficient supply of electricity. The importance of a well-developed regional energy infrastructure for industrial development has been increasingly recognized. Regional cooperation in the area of energy also has the potential to

94 OFID PAMPHLET SERIES 39 leverage the necessary external support for financing the huge public investment needed to develop the energy infrastructure.28 In Northern Africa, the linking of oil, gas and electricity infrastructure is well advanced. ECOWAS initiated regional cooperation in power supply in 2000 with the IV launching of the West African Power Pool (WAPP) project. The project, to be implemented over a period of 20 years, aims at increasing and stabilizing regional energy supply and at improving the connections between national electricity grids. (UNCTAD, 2007c). Project activities under this initiative are estimated to cost about $15 billion. The Southern African Power Pool (SAPP) has also improved energy generation and distribution in the region. The benefits for SAPP members include reduced fuel costs and better use of low-cost hydro-power resources, as well as mutual support in the event of electricity shortages. The SAPP and the WAPP under development both allow optimal use of complementary power generation facilities, using cheap hydro-power when it is available and sharing thermal generation when necessary.29 Furthermore, regional power pools increase the reliability of service, allowing neighboring systems to provide backup facilities in case of outage of one power plant (UNDP, 2007d). Mali, Mauritania and Senegal are cooperating, through the Organization for the Development of the Senegal River, in the construction of a dam for the production of electricity and the creation of a related network for power transmission to the capitals of the three countries. Another example of such cooperation in Africa is between the Gambia, Guinea, Guinea Bissau and Senegal

26 “In many countries, a policy for energy security is equated with self-sufficiency. This in turn conveniently leads to protection of domestic agriculture in industrial countries, since many view development of biofuels as a substitute for agricultural reforms required under international trade negotiations. But energy security objectives might be met by trading with a broad range” (Kojima et al., 2007). 27 The NEPAD Short Term Action Plan for infrastructure notes that the “Challenge is to develop fully the energy resources of the continent in order to provide affordable energy services. Africa’s rich energy resources will be developed through co-operation.” 28 There are several international initiatives aimed at promoting successful financing models, such as public-private partnerships (PPPs) and partnerships with civil society. These include the African Rural Energy Enterprise Development (AREED) initiative, the Global Village Energy Partnership (GVEP), the Renewable Energy and Energy Efficiency Partnership (REEEP), the Public-Private Advisory Infrastruc- ture Facility (PPIAF) and the Emerging Africa Infrastructure Fund (EAIF). 29 Bowen et al. (1999) estimate the benefits from a centralized and competitive dispatch to be about $100 million per year in the SAPP.

OFID PAMPHLET SERIES 39 95 Hydro-power construction in Africa Box 7

In 2006, the Export-Import Bank of China signed a memorandum of understanding with the government of Mozambique to provide a $2.3 billion loan package that would include construction of the 1,300-megawatt Mphanda Nkuwa hydro-electric dam on the Zambezi River. In addition, there are plans to expand the existing hydro-electric facility at Cahora Bassa and to construct a new North Bank Cahora Bassa dam. The African Development Fund has estimated that the additions could increase Mozambique’s installed generating capacity by 2,000 megawatts and raise its national electrification rate from 6 percent in 2006 to 20 percent in 2020.In Angola, there are plans to refurbish existing hydro-power facilities at Capanda and Cambambe and increase their capacity to 520 megawatts and 700 megawatts, respectively, in the near term. Nigeria has plans to expand its renewable generating capacity by 3,500 megawatts in the mid-term, mostly in the form of small hydro-electric projects, in an attempt to diversify the country’s energy mix away from oil and natural gas.

Source: EIA (2007)

India-Brazil-South Africa Declaration on Clean Energy Box 8

The second India-Brazil-South Africa (IBSA) summit was held in October 2007. At this summit, the three countries reached agreement to work together in the promotion of nuclear energy, clean energy technologies and other renewable energies and in the endorsement of climate change mitigation. In a presidential declaration, the countries noted agreement to pool resources to ensure a secure supply of safe, sustainable and non-polluting energy to meet global demand, particularly in developing countries. The declaration indicated that cooperation would include clean coal technologies and renewable energies such as biomass and innovative ways to transfer, develop and commercialize clean energy.

Source: http://www.iea.org through the Organization for the Development of the River Gambia. A common hydro-electric project is being prepared in combination with the regional integration of electric power grids in the four countries, which aims at ending the frequent power shortages and heavy dependence on imported petroleum products for the generation of electricity (UNCTAD, 2007c). Despite these examples of progress, African countries are yet to reap the full benefits from increased regional cooperation in energy. With the possibility of sustained high global oil and gas prices in the future, such cooperation will assume greater importance. Bilateral trade in energy among member countries is also growing. Côte d’Ivoire, for example, became a net exporter of energy to neighboring countries in 1995 (UNECA, 2006a).

96 OFID PAMPHLET SERIES 39 The West African Gas Pipeline is designed to transport natural gas from refineries in Nigeria through Benin and Togo to Ghana, substantially reducing the cost of generating energy in these countries and improving their energy security (UNECA, 2006a). Based on its success and economic benefits, it may be extended to other parts of the region. IV Cooperation among African countries in the field of power generation and distribution is increasing. Several African countries are planning to reinforce the interconnections between their grids/networks in order to optimize the use of their capacities, eliminate emergency purchasing of thermal units, make the most out of their regional resources, and increase energy efficiency – thereby making trade an “engine of growth.” The South and West African Power Pools are examples for regional energy integration that allow optimal use of complementary power generation facilities. In addition, these pools increase the security of supply by allowing neighboring systems to provide backup facilities. Although energy trading is increasing, more organized arrangements are needed. Activities within the existing sub-regional bodies, including the Com- mon Market for Eastern and Southern Africa (COMESA), the East African Com- munity (EAC), the Southern African Development Community (SADC), the Economic Community of West African States (ECOWAS), the Union Economique et Monétaire Ouest Africaine (UEMOA), the Union du Maghreb Arabe (UMA), the Economic Community of Central African States (ECCAS), and the Communauté Economique et Monétaire de l’Afrique Centrale (CEMAC) should be fully utilized and harmonized.

OFID PAMPHLET SERIES 39 97 Bibliography

AMOBI, M.C. (2007). “Deregulating the Electricity Industry in Nigeria: Lessons from the British Reform.” Socio-Economic Planning Sciences 41(4), 291-304.

BERTEL, E. (2005). “Nuclear Energy and the Security of Supply.” NEA News 23(2): 4-7.

BHAGAVAN, M.R. (ed.) (1999). Reforming the Power Sector in Africa. African Energy Policy Research Network (AFREPREN), Zed Books Ltd., London.

BOWEN, B.H., SPARROW, F.T. AND Z. YU (1999). “Modeling Electricity Trade Policy for the Twelve Nations of the Southern African Power Pool (SAPP).” Utilities Policy 8: 183-97.

BP (2007). BP Statistical Review of World Energy 2007.

BREW-HAMMOND, A. (2007). Challenges to Increasing Access to Modern Energy Services in Africa. Commissioned Paper for the Forum for Energy Ministers Conference on Energy Sustainability and Security, Maputo, Mozambique, March 28-30, 2007.

DAVIDSON, O. (2007). The Oil and Gas Sector: Energy Security and Sustainability in Africa. Com- missioned Paper for the Forum for Energy Ministers Conference on Energy Sustainability and Security, Maputo, Mozambique, March 28-30, 2007.

DOORNBOSCH, R. AND R. STEENBLIK (2007). Biofuels: Is the Cure Worse than the Disease? OECD Round Table on Sustainable Development, SG(SD/RT (2007)3.

EAC (2007). Strategy on Scaling Up Access to Modern Energy Services in Order to Achieve the Millen- nium Development Goals East African Community (EAC).

ECOWAS (2005). White Paper for a Regional Policy Geared towards increasing access to energy services for rural and peri-urban populations in order to achieve the Millennium Develop- ment Goals. Economic Community of West African States, Abuja.

EIA (1999). Energy in Africa. Energy Information Administration, Washington DC.

EIA (2006). International Energy Outlook 2006. Energy Information Administration, Washing- ton DC.

EIA (2007). International Energy Outlook 2007. Energy Information Administration, Washing- ton DC.

ESMAP (2005a). Advancing Bioenergy for Sustainable Development: Guideline for Policymakers and Investors Volumes I, II, and III. Energy Sector Management Assistance Program, Report 300/05.

ESMAP (2005b). Annual Report 2004. Energy Sector Management Assistance Program, Report 300/05.

ESMAP (2005c). Power Sector Reform in Africa: Assessing Impact on Poor People. Report 306/05, Washington DC.

98 OFID PAMPHLET SERIES 39 ESMAP (2005d). The Vulnerability of African Countries to Oil Price Shocks: Major Factors and Policy Options. The Case of Oil Importing Countries. Report 308/05, Washington DC.

ESTACHE, A. (2005). What do we Know about Sub-Saharan Africa’s Infrastructure and the Impact of its 1990s Reforms? Draft working paper, version 4.

ESTIF (2006). Solar Industrial Process Heat – State of the Art. European Solar Thermal Industry Federation. IV

EUROPEAN COMMISSION AND UNITED NATIONS DEVELOPMENT PROGRAM (1999). Energy as a Tool for Sustainable Development for African, Caribbean and Pacific Countries. Brussels and New York.

FEMA (2006). Energy and the Millennium Development Goals in Africa. The Forum of Energy Ministers of Africa.

FEMA (2007). Energy Security and Sustainability in Africa. The Forum of Energy Ministers of Africa, Trade Autoprint Ltd, Nairobi, Kenya.

GABRIELE, A. (2004). Policy Alternatives in Reforming Power Utilities in Developing Countries: A Critical Survey. United Nations Conference on Trade and Development, Geneva.

GIROD, J. AND J. PERCEBOIS (1998). “Reforms in Sub-Saharan Africa’s Power Industries.” Energy Policy 26(1): 21-32.

GTZ (2005). Liquid Biofuels for Transportation in Tanzania. Potential and Implications for Sustain- able Agriculture and Energy in the 21st Century.

GUTIERREZ, L. (1996). “How do Sub-Saharan African utilities Compare?” Proceedings on Sym- posium on Power Sector Reform and Efficiency Improvements in Sub-Saharan Africa. World Bank, ESMAP Report no. 182/96.

HABTETSION, S. AND Z. TSIGHE (2007). “Energy Sector Reform Initiatives and Implications in Eritrea.” Journal of Cleaner Production 15(2): 178-89.

HIRSCHHAUSEN, C. VON (2005). Strategies for Energy Security – A Transatlantic Comparison.

IEA (2004). Analysis of the Impact of High Oil Prices on the Global Economy. International Energy Agency, Paris.

IEA (2006a). Energy Technology Perspectives: Scenarios & Strategies to 2050. International Energy Agency, Paris.

IEA (2006b). World Energy Outlook 2006. International Energy Agency, Paris.

IEA (2007a). Contribution of Renewables to Energy Security. IEA Information Paper, International Energy Agency, Paris.

IEA (2007b). Energy Balances of Non-OECD Countries 2007 Edition. International Energy Agency, Paris.

IEA (2007c). Renewables in Global Energy Supply: An IEA Fact Sheet. International Energy Agency, Paris.

IEA (2007d). Tracking Industrial Energy Efficiency and CO2 Emissions. International Energy Agency, Paris.

OFID PAMPHLET SERIES 39 99 IEA (2007e). World Energy Outlook 2007: China and India Insights. International Energy Agency, Paris.

IMF (2007a). Regional Economic Outlook: Sub-Saharan Africa. World Economic and Financial Surveys, International Monetary Fund, Washington DC, October.

IMF (2007b). World Economic Outlook 2007. World Economic and Financial Surveys, Interna- tional Monetary Fund, Washington DC, October.

IMF/WORLD BANK (2006). Clean Energy and Development: Towards an Investment Framework.

IZAGUIRRE, A.K. (2005). Private Infrastructure: Emerging Market Sponsors Dominate Private Flows. Public Policy for the Private Sector, Washington DC.

JAMASB, T. (2006). “Between the State and Market: Energy Sector Reform in Developing Countries.” Utilities Policy 14(1): 14-30.

KALOGIROU, S. (2003). “The Potential of Solar Industrial Process Heat Applications.” Applied Energy 76: 337-61.

KAREKEZI, S., KITHYOMA, W. AND S. LEYIAN (2007). The Promise of Biofuels in Africa-States, Challenges and Opportunities. AFREPREN/FWD, paper presented at the First AU/Brazil/UNIDO seminar on biofuels at Addis Ababa, July 30-August 1, 2007.

KOJIMA, M., MITCHELL, D. AND W. WARD (2007). Considering Trade Policies for Liquid Biofuels. Energy Sector Management Assistance Program.

KRISHNASWAMY, V. AND G. STUGGINS (2007). Closing the Electricity Supply-Demand Gap. Energy and Mining Sector Board Discussion Paper no. 20. The World Bank Group.

LUKEN, R. AND P. HESP (2006). Review of Selected Industrial Environmental Initiatives of the United Nations System and Regional Banks. Issue paper for the United Nations Environmental Management Group.

LUKEN, R. AND F. CASTELLANOS-SILVERIA (2007). Energy Use by, and CO2 Emissions from the Manufacturing Sector in Selected Countries: Background Paper. United Nations Industrial Development Organization, Vienna.

MANGWENGWENDE, S. AND N. WAMUKONYA (2007). Challenges and Way Forward for the Power Sector in Africa. Paper presented at Forum of Energy Ministers of Africa (FEMA) Ministe- rial Conference on Energy Security and Sustainability, Mozambique, Maputo, March 28-30, 2007.

MEBRATU, D. AND N. WAMUKONYA (2007). “Electricity Sector Reform in Africa: Key Lessons and Emerging Trends.” Journal of Cleaner Production 15(2): 163-65.

MKHWANAZI, X. (2003). Power Sector Development in Africa, prepared for the Workshop for African Energy Experts on Operationalizing the NEPAD Energy Initiative, Dakar, Senegal, June 2-4, 2003.

NHETE, T.D. (2007). “Electricity Sector Reform in Mozambique: A Projection into the Poverty and Social Impacts.” Journal of Cleaner Production 15(2): 190-202.

100 OFID PAMPHLET SERIES 39 OECD (2006a). Agricultural Market Impacts of Future Growth in the Production of Biofuels. Work- ing Party on Agricultural Policies and Markets, Organization for Economic Co-operation and Development, Paris.

OECD (2006b). Aid for Trade: Making it Effective. Organization for Economic Co-operation and Development, Development Centre Studies, Paris.

OECD (2006c). The Ladder of Competitiveness: How to Climb It. Organization for Economic IV Co-operation and Development, Development Centre Studies, Paris.

OECD (2007a). African Economic Outlook 2006/2007. Organization for Economic Co-operation and Development, Paris.

OECD (2007b). OECD Contribution to the United Nations Commission on Sustainable Development 15. Energy for Sustainable Development. Organization for Economic Co-operation and Develop- ment, Paris.

OECD-FAO (2007). OECD-FAO Agricultural Outlook 2007-2016. Organization for Economic Co-operation and Development, Paris, and Food and Agriculture Organization, Rome.

OSCAL (2001). Energy for Sustainable Development of the Least Developed Countries in Africa. An Overview. Office of the Special Coordinator For Africa and the Least Developed Countries (OSCAL), United Nations, New York.

PAINULY, J.P. AND N. WOHLGEMUTH (2006). “Renewable Energy Financing – What Can we Learn from Experience in Developing Countries?” Energy Studies Review 14(2): 154-70.

PRAETORIUS, B. AND J.W. BLEYL (2006). “Improving the Institutional Structures for Disseminating Energy Efficiency in Emerging Nations: A Case Study for Energy Agencies in South Africa.” Energy Policy 34(13): 1520-31.

RIVM (2004). Conference Paper: Energy For Development.

SAD-ELEC (2004). Reform and Restructuring of the Electricity Supply Industry (ESI) in Southern and East Africa. Status Report as at November 2004, SAD-ELEC Ltd, Rivonia, South Africa.

SAD-ELEC (2005). Legal and Regulatory Framework of the Electricity Supply Industry (ESI) in South- ern and East Africa. Status Report as at February 2005, SAD-ELEC Ltd, Rivonia, South Africa.

SALEM, J. (2007). Solar Heat for Industrial Processes. United Nations Industrial Development Organization, Vienna, 2007.

SDC (2007). Biofuels, Opportunity or Threat to the Poor? Issue Paper Swiss Agency for Develop- ment and Cooperation.

SHAPIRO, H. (2007). Industrial Policy and Growth. DESA Working Paper no. 53, ST/ESA/2007/ DWP/53.

SMEETS, E.M.W., FAAIJ, A.P.C., LEWANDOWSKI. I.M. AND W.C. TURKENBURG (2007). “A Bottom-up Assessment and Review of Global Bio-energy Potentials to 2050.” Progress in Energy and Combustion Science 33: 56-106.

STEENBLIK, R. (2006). Liberalization of Trade in Renewable-Energy and Associated Technologies: Biodiesel, Solar Thermal and Geothermal Energy. OECD Trade and Environment Working Paper no. 2006-01, Paris.

OFID PAMPHLET SERIES 39 101 TURKSON, J. AND N. WOHLGEMUTH (2001). “Power Sector Reform and Distributed Gener- ation in sub-Saharan Africa.” Energy Policy 29(2): 135-45.

UN (2006). Energy for Sustainable Development, Industrial Development, Air Pollution/Atmosphere and Climate Change: Progress in Meeting the Goals, Targets, and Commitments of Agenda 21, the Program for the Further Implementation of Agenda 21, and the Johannesburg Plan of Implementation. United Nations Economic and Social Council, E/CN.17/2006/3, February 17.

UNCTAD (2005a). Biofuels – Advantages and Trade Barriers. United Nations Conference on Trade and Development. Geneva, UNCTAD/DITC/TED/2005/1.

UNCTAD (2005b). Report of the Export Meeting on Strengthening Participation of Developing Countries in Dynamic and New Sectors of World Trade: Trends, Issues and Policies. Geneva, TD/B/ COM.1/EM.26/3.

UNCTAD (2006a). Boosting Africa’s Growth through Re-Injecting “Surplus” Oil Revenue: An Alter- native to the Traditional Advice to Save and Stabilize. United Nations Conference on Trade and Development. Geneva, UNCTAD/DITC/COM/2006/10.

UNCTAD (2006b). Challenges and Opportunities for Developing Countries in Producing Biofuels. United Nations Conference on Trade and Development. Geneva, UNCTAD/DITC/ COM/2006/15.

UNCTAD (2006c). Economic Development in Africa. Doubling Aid: Making the “Big Push” Work. United Nations Conference on Trade and Development, Geneva.

UNCTAD (2006d). Meeting Trade and Development Challenges in an Era of High and Volatile Energy Prices: Oil and Gas in LDCs and African Countries. United Nations Conference on Trade and Development, Geneva, UNCTAD/DITC/COM/2006/12.

UNCTAD (2006e). The Emerging Biofuels Market: Regulatory, Trade and Development Implications. United Nations Conference on Trade and Development, Geneva.

UNCTAD (2006f). The Least Developed Countries Report 2006: Developing Productive Capacities. United Nations Conference on Trade and Development.

UNCTAD (2007a). Commodities and Development. United Nations Conference on Trade and Development, Geneva, D/B/COM.1/82.

UNCTAD (2007b). The Least Developed Countries Report 2007: Knowledge, Technological Learning and Innovation for Development. United Nations Conference on Trade and Development, Geneva.

UNCTAD (2007c). Trade and Development Report 2007. United Nations Conference on Trade and Development, Geneva. UNCTAD/TDR/2007.

UN-DESA (2007). Industrial Development for the 21st Century: Sustainable Development Perspectives United Nations Department of Economic and Social Affairs.

UNDP (2000). World Energy Assessment; Overview – Energy and the Challenge of Sustainability. United Nations Development Program, UNDP, UNDESA, World Energy Council, New York.

102 OFID PAMPHLET SERIES 39 UNDP (2006). Human Development Report 2006. Beyond Scarcity: Power, Poverty and the Global Water Crisis. United Nations Development Program.

UNDP (2007a). A Review of Energy in National MDG Reports. United Nations Development Programme, New York. UNDP (2007b). Energizing Poverty Reduction: A Review of Energy-Poverty Nexus in Poverty Reduc- IV tion Strategy Papers. United Nations Development Program, New York.

UNDP (2007c). Energizing the Least Developed Countries to Achieve the Millennium Development Goals: The Challenges and Opportunities of Globalization. United Nations Ministerial Confer- ence of the Least Developed Countries, Istanbul, July 9-11, 2007.

UNDP (2007d). Mainstreaming Access to Energy Services: Experiences from Three African Regional Economic Communities. United Nations Development Program contribution to CSD-15 for informational and discussion purposes.

UNDP (2007e). Human Development Report 2007/2008. Fighting Climate Change: Human Soli- darity in a Divided World. United Nations Development Program.

UNDP/ESMAP (2005). The Impact of Higher Oil Prices on Low Income Countries and on the Poor. World Bank, ESMAP report, Washington DC.

UNDP-GTZ (2005). Scaling Up Modern Energy Services in East Africa: A Strategy to Alleviate Poverty and Meet the Millennium Development Goals.

UNECA (2006a). Assessing Regional Integration in Africa: Rationalizing Regional Economic Com- munities. United Nations Economic Commission for Africa, Addis Ababa, Ethiopia.

UNECA (2006b). Sustainable Energy: A Framework for New and Renewable Energy in Southern Africa. United Nations Economic Commission for Africa, ECA/SA/TPUB/2005/6.

UNECA (2007). Economic Report on Africa 2007: Accelerating Africa’s Development through Diver- sification. United Nations Economic Commission for Africa.

UN-ENERGY (2007). Energy for Sustainable Development: Policy Options for Africa. UN- ENERGY/Africa publication to CSD15.

UNEP (2007). Global Trends in Sustainable Energy Investment 2007: Analysis of Trends and Issues in the Financing of Renewable Energy and Energy Efficiency in OECD and Developing Countries. United Nations Environment Program.

UNIDO (2001). Building Productive Capacity for Poverty Alleviation in Least Developed Countries (LDC’s): The Role of Industry. United Nations Industrial Development Organization, Vienna.

UNIDO (2004). Industrial Development Report 2004: Industrialization, Environment and the Mil- lennium Development Goals in Sub-Saharan Africa. The New Frontier in the Fight against Poverty. United Nations Industrial Development Organization, Vienna.

UNIDO (2006a). Energy Security in Least Developed Countries. CSD 14 Background Paper.

UNIDO (2006b). Industrial Development, Trade and Poverty Reduction through South-South Cooperation. United Nations Industrial Development Organization, Vienna.

OFID PAMPHLET SERIES 39 103 UNIDO (2007a). Industrial Diversification and Growth for Sustainable Development in Africa, prepared for discussion at the preparatory meeting for CAMI, United Nations Industrial Development Organization, Vienna.

UNIDO (2007b). Industry Matters for Sustainable Development. Background Paper for the UNIDO Side Event on Sustainable Industrial Development on May 8, 2007 at the Commission for Sustainable Development, United Nations Industrial Development Organization, Vienna.

UNIDO (2007c). UNIDO’s Biofuels Strategy: Sustainable Industrial Conversion and Productive Uses of Biofuels. United Nations Industrial Development Organization, Vienna.

UNIDO (2007d). UNIDO’s Energy and Climate Strategy: United Nations Industrial Development Organization, Vienna, 2007.

UNIDO AND REEP (2007). Sustainable Energy Regulation and Policy-Making for Africa. UNIDO/ REEEP Joint Publication, United Nations Industrial Development Organization, Vienna.

VAN BUSKIRK, R., HAGAN, E.B., AHENKORAH, A.O. AND M.A. MCNEIL (2007). “Refrig- erator Efficiency in Ghana: Tailoring an Appliance Market Transformation Program Design for Africa.” Energy Policy 35(4): 2401-11.

VICTOR, D.G. (2005). The Effects of Power Sector Reform on Energy Services on the Poor. United Nations Department of Economic and Social Affairs, Division for Sustainable Development, New York.

WAMUKONYA, N. (2002). Power Sector Reform in Developing Countries: Mismatched Agendas. UNEP Collaborating Centre on Energy and Environment, Risø National Laboratory, Roskilde, Denmark.

WAMUKONYA, N. (2003). “African Power Sector Reforms: Some Emerging Lessons.” Energy for Sustainable Development 7(1): 7-15.

WEC (2005). WEC Statement 2005: Delivering Sustainability: Challenges and Opportunities for the Energy Industry. World Energy Council, London.

WILLIAMS, J.H. AND R. GHANADAN (2006). “Electricity Reform in Developing and Transi- tion Countries: A Reappraisal.” Energy 31: 815-44.

WORLD BANK (2004). Emerging Infrastructure Policy Issues in Developing Countries – A Survey of the Recent Economic Literature. Washington DC.

104 OFID PAMPHLET SERIES 39 Energy Access in Rural Areas V Phil U. Chineyemba

1. Introduction

1.1 Status of Africa’s energy sector Africa has a landmass of over 30.3 million km², an area equivalent to the United States of America, Europe, Australia, Brazil and Japan combined. As of 2004, Africa housed 885 million people (World Bank, 2005) in 53 countries of various sizes, socio-cultural entities, and resource endowments, including fossil and renewable energy resources. Most of these energy resources are yet to be exploited, and that is a reason why the continent is the lowest consumer of energy. Africa is faced with the challenge of providing adequate and modern energy services to its rural communities in an effort to improve their standard of living through increased potential for income and employment generation. The relatively low income levels in rural areas make the provision of modern energy services unaffordable to most communities. Sub-Saharan Africa (SSA) has 16 percent of the world’s population, and is responsible for 2.5 percent of world economic activity. It comprises 47 countries, most of which have a high percentage of low income and largely rural agrarian communities. The use of modern energy services is closely linked to economic development, poverty reduction and the provision of vital services. However, consumption of modern energy sources in SSA is extremely low (WEC, 2005) owing to the region’s reliance on traditional biomass. The region consumes 2.7 percent of world commercial primary energy. It has 2 percent of world proven oil reserves, 3 percent of world proven gas reserves and 6 percent of world proven coal reserves. There is a large hydro- power potential in excess of 1,383 GWh/a. Other energy resources include uranium deposits and a consistently high level of solar insolation. Despite these

OFID PAMPHLET SERIES 39 105 extensive primary energy resources, commercial energy use is the lowest in the world and the average per capita final commercial energy consumption is less than 700 kg of petrol equivalent per inhabitant, compared with 7,844 kg in North America and the world average of 1,674 kg (IEA, 2006). The main forces driving the demand for energy are population growth and economic development. The exposure to and vulnerability of the SSA economies contributed to the severe economic downturn during the high oil prices in the 1970s and early 1980s. The distribution of primary energy resources across the region is uneven. Nigeria and Angola have 32 percent of Africa’s proven oil reserves, while virtually the rest, 65 percent, is in North Africa. Nigeria has 33 percent of Africa’s proven gas reserves, while North Africa has 56 percent. South Africa has 88 percent of Africa’s proven coal reserves. Of the 308 GW of hydro- power potential, 64 percent is located in East and Central Africa and 34 percent in West Africa. Regional trade in both fuels and electricity is relatively low (WEC).

1.2 Main characteristics of African energy use The most striking feature of the African energy situation is over-consumption of low-grade traditional energy sources (fuelwood, charcoal and non-woody biomass), on the one hand, and under-consumption of high-quality modern

Energy consumption in Africa in percent in 2001 Figure 1

Petroleum 25%

Biomass Electricity 8% 59%

Gas 4%

Coal 4%

TypeNorth Africa Sub-Saharan Africa Southern Africa Biomass 4.1 81.2 16.5 Petroleum 61.5 14.5 29.3 Electricity 15.1 2.9 25.9 Gas 18.0 1.0 1.6 Coal 1.3 0.5 26.8

Source: International Energy Agency, 2003 and Karekezi, et al. (2004).

106 OFID PAMPHLET SERIES 39 fuels (coal, Liquefied Petroleum Gas (LPG), natural gas, NRSE) on the other. Large disparities exist among countries in SSA, with only five accounting for 70 percent of total modern energy consumption for the region. National per capita modern energy consumption varies by a factor of more than 10 between the highest user and the lowest (IEA, 2006). Enormous disparities also exist between urban poor and rural users and the higher income groups throughout the region. V Africa accounts for 3 percent of world energy consumption – the lowest per capita modern energy consumption in the world (50 percent of world average).On the other hand, Africa has the highest share of biomass in total energy consumption in the world (59 percent of total energy consumed). Africa is a diverse continent. There is considerable variation in energy consumption among the different regions and countries. For example, the share of biomass energy in total energy exceeds 81 percent in Africa compared to only 4.1 percent in North Africa and 16.5 percent in Southern Africa. Figure 1 illustrates that Southern Africa and North Africa have high levels of modern energy consumption, while SSA countries continue to rely heavily on biomass and traditional energy. This heavy reliance on traditional energy sources means a low level of energy efficiency; heavy deforestation and biodiversity loss; greater health hazards due to indoor air pollution; and reduced capacity to mitigate climate changes.

2. Status and prospect of energy access

2.1 The situation of access to energy services When approaching “energy” for rural areas many people think of this in terms of provision of electricity or “bringing in the power grid.” But energy covers a number of different forms, for example, direct light, heating, cooling, shaft power as well as electricity. Others are a huge number of different tasks (cooking, lighting, water pumping, refrigeration and communications) and end-users (domestic, businesses, basic social services, transportation etc.). Because energy is just the “ability to work,” demand for energy is a “derived demand”; people do not want energy in itself but the “energy services” provided. This wide range of services is made possible by different fuels and technologies and can have a major impact in facilitating livelihoods, improving health and education in rural areas of developing countries and helping to reduce poverty.

OFID PAMPHLET SERIES 39 107 2.2 Basic needs of energy in rural areas The benefits deriving from energy services are often diverse and complex. They range from: • The direct benefits of contributing to increased production and reducing “sweat energy”; • The contribution that energy can make to health and human capital, for example, in terms of pumping water or providing lighting and other services to health facilities and schools; • More intangible benefits of “security” (via street lighting, back-up energy supplies, or pumped water reducing risks from drought); • A sense of “inclusion” in the modern economy (via the communications media).

2.3 The problems of increasing the ability to pay for improved energy services in rural areas Large numbers of people suffer from a “vicious circle” of energy poverty. They are “energy poor” because they do not have the means to buy improved energy services, even if they have access to them (in the sense of being in close prox- imity to a supply source). Furthermore, even people who can afford improved energy supplies still may not be able to afford the “conversion technology” that makes that energy useful (for example, a stove, radio, light bulb or motor). This is illustrated vividly in Figure 2 below. Increased access to cash becomes crucial, because improved energy services at the household level frequently necessitate switching to an energy technology that costs money from one that does not. Even where improvement in lighting results in cash savings, because the new source replaces more costly but less effective supplies (such as batteries and candles), there is frequently a net increase in money expenditures because people make more use of the improved energy services. This means that attempts to reduce energy poverty (particularly by using electricity supply technologies) face a particularly difficult challenge in terms of the stated preferences of intended beneficiaries. When rural people express their needs for improved energy services they often give high priority to lighting, a perfectly understandable position for those forced to live much of their lives in the semi-darkness provided by candles or kerosene. But the most financially sustainable, decentralized electricity supply options are likely to be those

108 OFID PAMPHLET SERIES 39 that provide power to productive enterprises that can sell their products/ services profitably. Generally, village wealth will not increase unless goods and services can be sold outside the village; this implies that roads and transport are likely to be necessary “complementary inputs.” An important conclusion follows from this: the cycle of energy poverty V will often be broken only by combining improved energy services with end uses that generate cash incomes. These are likely to be the productive energy end- uses that enhance production activities, either by increasing productivity, extending the range of outputs or improving output quality. This might be labeled a “virtuous circle,” and is illustrated in Figure 3. Clearly, the vicious cycle of energy poverty (as with other forms of poverty) can be broken through the redistribution of wealth by means of grants and subsidies. But the level of funds available from government, aid donors and non-governmental organizations (NGOs) is likely to be far less than those required to provide all people with adequate energy services. There is something further to take into account when planning pro-poor energy interventions. It is important to consider the means of using the energy to secure cash incomes at an early stage of the development process, and only subsequently to see how the impact of improved energy services can be

The vicious circle of energy poverty Figure 2

No energy to run machines results in low productivity, poor quality and range of output. The issue is deepened by “time poverty,” meaning women's labor time cannot be released for economic activity. 1

No money to buy improved Low productivity, energy supplies or energy 3 2 low surplus, conversion equipment. little cash.

Source: ESMAP World Bank, 1999

OFID PAMPHLET SERIES 39 109 A virtuous circle to break out of energy poverty Figure 3

Increased access to improved energy services.

Money to buy improved 1 Increased productivity. energy supplies, service Women gain time for or energy equipment. economic activity. 5 2

Increased sales, Increased income. 43surplus and profit.

Source: ESMAP World Bank, 1999 extended to the other aspects of sustainable livelihoods. It has proven extremely difficult to produce financially sustainable results with energy projects if they are started with the mindset of “social development” (akin to feeder roads, clinics and schools) that are free at the point of service. Such projects often fail when the governments, aid agencies and NGOs who finance them initially cannot sustain their support for recurrent expenditures.

3. Overcoming the barrier to energy access

3.1 The role of intermediation There are clearly many ways in which overall energy supply and use might be conceptualized. The most effective method of increasing energy services in rural areas is to use the policy instrument. This approach extends the idea of financial intermediation, technical intermediation, social intermediation and organizational intermediation.

Financial intermediation: This involves putting in place all the elements of a financial package to build and operate decentralized rural energy supply companies (RESCOs). The process is sometimes referred to as “financial engineering” and covers: • The transaction costs of assembling the equity and securing loans;

110 OFID PAMPHLET SERIES 39 • Obtaining subsidies; • The Assessment and assurance of the financial viability of schemes; • Assessment and assurance of the financial credibility of the bor- rower; • Management of guarantees; V • Establishment of collateral (“financial conditioning”); and • Management of loan repayment and dividends to equity holders.

Technical intermediation: This involves both improving the technical options by undertaking research and development activities and importing the technology and know-how “down” through the development of capacities to supply the necessary goods and services. These goods and services include: • Site selection; • Systems design; • Technology selection and acquisition; • Construction and installation of civil, mechanical and electrical components; • Operation & maintenance; • Trouble-shooting, overhaul and refurbishment.

Organizational intermediation: This involves not only the initiation and implementation of programs, but also lobbying for the policy change required to construct an “environment” of regulation and support in which the energy technology and the various players can thrive. This means putting in place the necessary infrastructure and getting the incentives correct in order to encourage owners, contractors and financiers. Organizational intermediation must include the development of regulatory support and incentive structures, which can specifically address the energy needs of the poor in rural areas. Furthermore, organizational intermediation is usefully distinguished from social intermediation, which involves identification of the owners and beneficiaries of projects and the “community development” necessary to enable a group of people to acquire the capabilities to take on and run each individual investment project, obtaining for them a voice in project identification, design and management of programs.

OFID PAMPHLET SERIES 39 111 3.2 The Role of subsidies In addition to overall poverty in rural areas, the number and range of “intermediation tasks,” low density of demand and remoteness of location raises the costs and reduces profitability of energy supplies to rural areas. Furthermore, a certain amount of “social overhead investment” almost always has to be put in place to support such schemes (training, technical assistance and capacity building within communities). The burden of these overheads will be particularly high for innovative schemes, though they may eventually be spread across a large number of enterprises. A report from The World Bank confirms the view of many people involved in the practical implementation of rural energy schemes when it says: “It is illusory to expect that increasing access to electricity for a significant part of the population traditionally excluded from grid-based electricity can be financed only by the private sector.” (ESMAP World Bank, 1999)

If the cost of energy is too expensive for poor people who need it, then the issue of subsidies and/or grants cannot be avoided. The political acceptability of subsidies has undergone wild fluctuations in recent years. All governments provide subsidies, and it is clear that some have done more harm than good (destroying markets and benefiting people who are already better off). However, the essential question that has emerged from the ideological postur- ing of recent years is less about the rights and wrongs of subsidies in principle, but rather as to whether a particular form of subsidy is actually likely to achieve its intended purpose. The arguments for using money that is supplied at less than full commercial rates of interest are overwhelming if large numbers of people are to be given access to improved energy services. This “soft money” will be required to enable people with insufficient purchasing power to gain access to electricity, and to other more convenient forms of energy. If the case can be made for subsidies, experience suggests that the use of soft money can both help the expansion of decentralized energy supply options and harm them. As always, the “devil is in the detail” and in the specifics of each context. Hence the phrase “smart subsidies” (ESMAP World Bank, 1999) has been coined to put some distance between current forms of subsidy and the earlier forms, for example, subsidies on grid-based electricity, kerosene and diesel, that have been shown to stultify innovation, destroy markets and support the already more well-off.

112 OFID PAMPHLET SERIES 39 3.3 Pricing Perhaps, one of the most critical issues in rural energy development is the non- monetized nature of many aspects of the rural economy, in particular, the bulk of energy supplies in the form of fuelwood and other biomass fuels. The limited cash that rural people do have needs to be spent on a variety of goods; because energy has traditionally been considered a free resource, it may not enjoy the highest priority. At the same time, the introduction into rural societies of mod- V ern energy sources carries a cash price. While the ability and the willingness of rural people to make the transition from traditional to modern energy sources may be contingent upon their financial resources, their prospects of achieving higher income levels are, in turn, often constrained by the extent to which such a transition is achieved. Energy and rural development may thus find themselves in a state of mutual dependence, and represent one aspect of the poverty cycle that pervades many rural areas. Breaking this deadlock is one of the major challenges faced by developing countries in developing their rural areas. Pricing rural energy services is an issue to ponder. High prices for the services will be beyond the affordability of rural people and low pricing will result in it being difficult to induce the necessary investment from commercial banks and private investors. In most cases, the immediate priority of dealing with rural energy poverty is to provide a minimum amount of energy to meet people’s basic needs, irrespective of their ability to bear the costs of supply and delivery. So, subsidies on prices are one measure used to lower the cost of energy service in the rural area. For example, in the Chinese village solar power program implementation, the government proposed a price subsidy that enables the rural people to pay only the operating cost, while the government pays the investment cost.

3.4 The enabling environment The local government clearly plays a crucial role in the provision of subsidies, even where it has been “rolled back” from direct involvement in providing energy services to the poor. However, subsidies should not be considered in isolation from other aspects of government intervention. Although the climate is becoming more favorable to decentralized energy supply options, in most countries the existing regulatory framework is often the major barrier to such development. It can be hostile, contradictory or uncertain. Taxes and subsidies often

OFID PAMPHLET SERIES 39 113 still undermine markets, rather than encourage them. The supporting infrastructure of training institutions or finance may be non-existent or inaccessi- ble. Competitors may be able to gain privileged access to subsidies that enable them to sell their products below cost. Without changes to this policy environment, the flow of private-sector finance and innovation will be restricted. These are the areas currently under the focus of much analysis, innovation and reform.

3.5 The role of the energy regulator The overall role for an energy sector regulator in a liberalizing power market is to ensure a level playing field and to overlook the proper functioning of the power market.

4. Models for increasing energy services in rural areas

Although some developing countries have long recognized the importance of energy in rural development, it was only after the so-called energy crisis in the early 1970s that rural development policy makers began to show greater concern for the energy constraints facing them. The world suddenly entered an era of rising energy prices and unstable petroleum-based fuel supplies. These factors threatened to accelerate the perceived gradual environmental depletion associated with rural people’s heavy reliance on fuelwood and agricultural residues to meet their basic energy needs. As supplies of petroleum-based fuels became more costly and unreliable, it was believed that people would have to switch back to traditional or natural energy sources. Therefore, the option in most developing countries became to increase energy services by using different business models.

4.1 Market-based models There are very limited successful stories for increasing energy services in a sustainable fashion to rural areas using a market-based model. This is due to the distributed service and limited profit on investment in this area. However, international aid agencies have developed several market-based business models to increase energy access to rural areas. The general implementation flow of most market-based models is shown in Figure 4. Other market-based models could be the “concession approach” and “rental approach” as shown in Figure 5.

114 OFID PAMPHLET SERIES 39 Implementational flow of market-based models Figure 4

Fund from international Business service Local energy Rural users aid agencies companies service companies

International or local commercial banks or investors V

Concession and rental approach of market-based models Figure 5

Government control

Subsidy for poorest Concession (area and no. years)

Village Power Village Power RESCO bidder Supplier / End-user Supplier / End-user

Energy service Rental based on real tariffs for SHS or small village PV system

A concession approach has been demonstrated in Argentina (TPAEPRA ,1995- 2000 and PERMER 2000-2005), where an award would be given to the most qualified RESCO bidder to provide the energy services as a regulated monopoly in certain areas and over a certain number of years, thereby operating in a “controlled” free-market environment. The tariffs should be real, reflecting the actual costs of service, but subsidies for electricity used could be extended to the poorest (based on household spending for lighting in the absence of electricity or on household willingness to pay) and then reduced over time during the concession period.

OFID PAMPHLET SERIES 39 115 4.2 Government-led model A government-led model can take on several forms. For example, for the Mexico PRONOSOL program, the government maintained control of the program and the private sector only participated as a vendor of goods and services and never as the owner-operator. A “bottom-up” approach was taken allowing awareness building on RE and participation of communities, and this effort has increased the rural electrification level with over 40,000 solar home systems (SHS) disseminated.

Government-led model in China – financial flow Figure 6

Selecting the Government Install system installation companies budget for rural users by bidding

Local rural energy service companies (RESCOs)

In this model, the government is the financial agency and the installation company, while the local service company plays a crucial role for supply energy service in the rural areas. However, the sustainability of this model depends very much on continuing government support.

4.3 Private company participation In the developing countries, the task of ensuring adequate energy supplies is increasingly being left to the private sector. This is primarily the result of structural adjustment programs, central to which is the privatization of publicly- owned utilities and the elimination of costly subsidies. In the absence of carefully defined contractual relationships between the new private utilities and the state, reliance on the private sector to provide energy services to the rural poor may result in their continued neglect. This is because potential returns on investment in rural areas may be lower than in other areas, or non-existent in some extreme cases. Despite this, there are examples of private commercial RE successes in the provision of energy services in rural areas: SELCO (Solar Energy Light Company), active in India, Sri Lanka, Vietnam, and SOLUZ are good models, using fee-for-service and customer financing and leasing approaches (www.selco-intl.com).

116 OFID PAMPHLET SERIES 39 4.5 Subsidies Finally, subsidies, which are provided by the central and local governments, are one of the most popular economic incentives for increasing energy to rural areas in developing countries. The typical subsidies are: Management and administration: Governments would finance agencies that manage the energy planning, regulation and price as well as other services V for increasing energy to rural areas, such as IREDA and the Ministry of Non- conventional Energy Sources (MNES) of India. Direct cost for R&D: There are some subsidies for rural energy research and development in many developing countries. Project subsidies: In some cases, special financial agencies have been set up for rural energy project financing, such as IREDA in India, which offers soft term loans varying at present from 2.5–14 percent. In 1987, IREDA secured international funding for the solar photovoltaic and thermal, small hydro and wind sectors through the World Bank and the Asian Development Bank.

5. Conclusion

Financing is a key form of intervention in the bid to increase the access of rural people to energy services. Many renewable technologies best suited to providing energy services to remote rural areas use non-monetized fuel, but have a prohibitive initial capital cost. At the same time, many developing country governments are actively promoting the replacement of fuelwood by subsidizing other energy sources. However, the success of such fuel substitution and energy access programs basically depends on two factors largely beyond government control. These are economic growth and the corresponding increase in personal incomes that would permit consumers to switch fuels. The substitution process in many countries is hampered by high import costs resulting from the inefficient procurement of small quantities of renewable energy technologies. Subsidies are a conventional means of overcoming the financial obsta- cles, but this approach presents various difficulties. The welfare objective embodied in subsidies for rural electricity, or commonly used fuels such as kerosene, LPG and diesel, can often fail in its purpose. This may be because of the diversion of these energy sources to unintended uses, or their dispropor- tionate use by the more affluent, who could anyway afford the real costs of energy supply.

OFID PAMPHLET SERIES 39 117 A reduction or removal of pricing subsidies to overcome this problem is, however, not straightforward because of the potentially adverse impact on the poor. The partial withdrawal of kerosene price subsidies in Sri Lanka and Myanmar, for example, forced people in some rural areas to return to the use of fuelwood. Both these countries suffer from deforestation and this could have serious environmental implications for them in the long run. Private sector participation is always the most important option for energy access by rural people, and in most of the developing countries, private investments become the crucial measure to ensure energy supply to rural people. There is a clear need for planning integration between rural electrification authorities, ministries and transmission and distribution system operators. An independent or semi-independent energy regulator, being an essential partner for the national government in implementing the energy policies, should be given the mandate and resources to coordinate the consultation process. In summary, rural development in general and rural energy specifically need to be given much higher priority by policy makers and regulatory agencies. Also, rural energy development must be decentralized to put the rural people themselves at the heart of planning and implementation; and rural energy development must be integrated with other aspects of rural development. Meet- ing Africa’s energy challenges requires a radical scaling-up of access. This calls for an improved enabling environment, effective policy and regulatory frameworks, improved management capacity and financially healthy utilities.

118 OFID PAMPHLET SERIES 39 Bibliography

ARVIDSON, A., NORDSTROM, M., FORSLUND H., SYNGELLAKIS K. AND G.WOODS- WORTH ET AL. (2006). Scaling-up of Energy Services Access in East Africa to Achieve the Millen- nium Development Goals. ENABLE & SIDA0, June 2006.

CURES (2004). The Future is Renewable. Declaration for the International Conference for Renewable Energies (Renewables 2004). V DFID (2002). Energy for the Poor, Underpinning the Millennium Goals. August 2002.

ENPOGEN REPORT (2003). Energy, Poverty and Gender: A Review of the Evidence and Case Studies in Rural China.

GARDNER, G. (2002). State of the World 2002 (Worldwatch). Chapter 1: “The Challenge for Johannesburg: Creating a More Secure World.” February 2002.

GREENPEACE AND THE BODY SHOP (2001). Power to Tackle Poverty. June 2001.

INTERNATIONAL ENERGY AGENCY STATISTICS DIVISION (IEA) (2006). Energy Balances of OECD Countries (2006 edition) and Energy Balances of Non-OECD Countries. Paris.

LI JUNFENG & SIMON. Policy Options for Increasing Access to Energy Services in Rural Areas.

TAYLOR, D.B., Chinese Renewable Energy Industries Association, Beijing, China.

WORLD BANK (2005). World Development Indicators 2005. Washington DC.

WORLD ENERGY COUNCIL AND FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS (1999). The Challenge of Rural Energy Poverty in Developing Countries.

WORLD ENERGY COUNCIL (2001). The Challenge of Rural Energy Poverty in Developing Countries. Worldwatch Institute – State of the World, January 2001.

WORLD ENERGY COUNCIL (2002). World Energy Assessment, 2002. United Nations Devel- opment Programme, United Nations Department of Economic and Social Affairs.

WORLD ENERGY COUNCIL (2004). World Energy Assessment: Overview 2004, Update. United Nations Development Programme, United Nations Department of Economic and Social Affairs.

OFID PAMPHLET SERIES 39 119 Internet Resources

The ENABLE project: building capacity in energy in the health, water and education sectors for poverty reduction in sub-Saharan Africa: www.enable.nu

Global Village Energy Partnership: www.gvep.org

Greenpeace International: www.greenpeace.org/international

The UK Government’s Department for International Development (DFID): www.dfid.gov.uk

United Nations Statistics division: unstats.un.org/unsd/default.htm

United Nations Human Settlement Programme: www.unchs.org

Worldwatch Institute, independent research for an environmentally sustainable and socially just society: www.worldwatch.org

Renewable Energy and Energy Efficiency Partnership: www.reeep.org

The EU Energy Initiative: www.euei.org

Agenda 21: www.un.org/esa/sustdev/documents/agenda21/index.htm

The World Bank Group: www.worldbank.org

The Millennium Development Goals: www.un.org/millenniumgoals

IEA: www.iea.org

120 OFID PAMPHLET SERIES 39 Expanding Energy Access through Sustainable Energy Enterprises in Africa: VI Financing, Capacity-building and Policy Aspects Lawrence Agbemabiese

1. Introduction

The African Rural Energy Enterprise Development (AREED) program was launched in 2001 by the United Nations Environment Programme (UNEP). Though not initially envisaged, AREED is now in its second phase. This paper is based on the initial phase, which was completed in mid 2007. During that period, AREED was implemented in five partner countries, namely, Ghana, Mali, Senegal, Tanzania and Zambia. AREED was created to promote energy-efficient and renewable energy technologies to widen access to clean energy services by rural and peri-urban communities. The main instrument of AREED is the small-and medium- sized enterprise (SME) and the key actors for achieving the objectives of AREED are the AREED implementing institutions in the partner countries, non-governmental organizations (NGOs), development organizations, national governments, financial institutions and SMEs. The AREED program has achieved good results since its inception. How- ever, it has also faced severe challenges due to inadequate national policies to support effective energy SME development as well as weakness in the program implementation framework by AREED partner institutions, namely, CEEEZ in Zambia, Enda TM in Senegal, Mali Folkecenter in Mali, KITE in Ghana, and TaTEDO in Tanzania. The purpose of this policy-makers’ paper is to make appropriate recommendations to enable policy makers to address the constraints facing the development of energy SMEs in the partner countries and Africa in general. These recommendations are drawn from the experience and challenges encountered in the implementation of the AREED program. The policy-makers’ paper

OFID PAMPHLET SERIES 39 121 includes background information on the AREED program as well as a succinct summary of achievements and challenges facing the AREED program, particularly in creating an enabling environment for the development and growth of viable energy SMEs that will serve the rural and peri-urban markets. The conclusions and recommendations focus on the roles of key policy actors and the respective instruments that could be adopted to achieve the identified goals.

1.1 Background on AREED The provision of electricity and clean fuels for both urban and rural populations is a major policy priority for all governments in Africa. However, in most SSA countries, access to electricity and modern fuels (Liquefied Petroleum Gas (LPG), improved biomass, biofuels, etc.) is skewed towards the urban population. The consequence is that the majority of the rural and peri-urban populations depend on traditional fuels, mainly firewood, charcoal and agricultural waste for cooking and heating; and kerosene and dry cell batteries for lighting and radio listen- ing, respectively. African governments have initiated programs to promote clean energy services based on energy-efficient technologies, modern fuels and renewable energy sources for electricity generation and cooking as well as domestic and industrial heating. These programs, however, face major challenges, including inadequate funding as well as weak institutional frameworks, implementation and management. Energy sector restructuring has been initiated as a recommen- dation to address these challenges. As part of measures to create an enabling environment for private-sector companies to participate effectively in the provision of rural energy services, and introduce new technologies and decentralized renewable energy sources, governments have established new institutions and agencies. The Agence Malienne pour le Développement de l’Energie Domestique et de l’Electrification Rurale (AMADER) has been established in Mali, Agence Senegalaise d’Electrification Rurale (ASER) in Senegal, Rural Energy Agency (REA) in Tanzania, Rural Electrification Authority in Zambia, and a new Rural Electrifi- cation Agency is to be established in Ghana under the current World Bank-funded Ghana Energy Development and Access Project (GEDAP). In support of the efforts of various national governments at ensuring access to clean energy services for all populations and recognizing the potential of energy as a cross-cutting input for sustainable socio-economic development, the United Nations Environment Programme (UNEP) in 2001 launched the AREED program. The overarching aim of AREED is to promote the development

122 OFID PAMPHLET SERIES 39 of energy-efficient technologies and renewable energy sources (solar energy, biomass, wind, hydro, biofuels etc.) for the provision of clean energy services in peri-urban and rural communities, through the development and capacity enhancement of SMEs. The specific objectives of AREED are to: establish and strengthen enterprises (private sector, public-private partnerships) that offer clean energy services in mostly rural and peri-urban areas; increase the capacity of local NGOs and development organizations offering enterprise development services that are critical to small and medium-size energy enterprises dur- VI ing their start-up phase; and engage local and regional financial institutions investing in the clean energy sector so as to leverage the efforts of local, regional and national governments that provide support for business-like solutions to the delivery of sustainable energy services to SMEs. The AREED program was launched under the joint auspices of UNEP, the United Nations Foundation (UNF), E+Co, and UNEP Risoe Centre. Being the program initiator, UNEP facilitates and mobilizes funding for the AREED program; E+Co pioneered the enterprise development model and manages the Rural Energy Enterprise Development (REED) seed fund; while the UN Founda- tion and other agencies (SIDA, BMZ and the Dutch government) have donated funds to AREED. In the partner countries, where the AREED program is being implemented, there has been an acknowledgement of the potential contributions that SMEs can make to overall national development. In Senegal, the government has gone one step further down the institutional line to draw an SME charter. In Zambia, the government has indicated its intention to reduce the current barriers to the growth and expansion of SME development. The government of Ghana has created a special private sector ministry and singled out private sector development as one of the President’s Special Initiatives (PSIs), aimed at contributing to economic development and poverty reduction. Mali and Tanzania have outlined a number of incentives in SME policy documents intended to boost entrepreneurial culture and lay the foundation for a strong and effective industrial base. In spite of the strong political will to make SMEs an engine of growth, little attention has been focused on energy SMEs as an instrument for widening access to clean energy services. Existing policies and regulations have provided few resources to stimulate growth in energy SMEs and this, to a certain extent, has constrained implementation of the AREED program. Notably, the AREED partner institutions have made little inroads in engaging NGOs and development organizations, as well as local, regional and national governments.

OFID PAMPHLET SERIES 39 123 Vent et Eau pour la Vie (VEV) in Senegal Box 1

This enterprise supplies potable water to rural populations through a wind-pumping system. The enterprise is currently the main actor in the maintenance and installation of wind pumps in the rural areas of Thies, Louga, Diourbel and other surrounding villages. The enterprise also takes part in the sensitization of the population on the management of the pumps and access to potable water. According to the annual activity report, VEV repaired many wind systems and installed new wind pumps. Difficulties faced by the enterprise include the inability of some rural communities to find a good management system. Some wind pumps are not functioning because of lack of funds to pay the repair expenses.

SODIGAZ: Butane gas distribution in Mali Box 2

Since 2003, SODIGAZ has been repaying, on schedule, the loans contracted from AREED. The financial state of the enterprise is good in spite of the arrival of two competitors in the distribution of butane gas. During the first quarter of 2005, the enterprise realized 380 million FCFA as turnover by selling 10,500 bottles of butane gas, subsidized by AMADER. In 2005, SODIGAZ obtained from E+Co a second loan dispensed in two tranches to purchase 25,000 bottles of butane gas to supply rural populations.

Biomass Energy Tanzania Limited (BETL) Box 3

Making cement is an energy intensive business, where energy is often supplied by fossil fuels. In Tanzania, however, the Tanga Cement Company Limited (TCCL) wanted to source some of their energy from biomass and turned to Peter Gathercole, a mechanical engineer with 24 years experience, who is also the founder and Managing Director of Biomass Energy Tan- zania Limited (BETL). BETL is an energy service company based in Dar es Salaam. BETL began operations on receipt of a $50,000 AREED investment in June 2003. The AREED partnership provided BETL with business planning support and assisted in filling in certain gaps in the operational structure of the business. The company was established primarily to develop the business of turning waste products with no value into marketable products. The company aims at producing thermal energy from solid biomass that is environmentally friendly. It developed a concept of providing industrial clients with alternative fuel source from the biomass. Since then, the company has been sourcing and supplying a range of agricultural and other biomass wastes for use as fuel. Mr. Gathercole believed he could profit from a Tanzanian law that demands that production industries remove biomass waste, which is not only expensive but also a potential environmental hazard. TCCL on the other hand, chose to follow international trends by using biomass waste for their thermal needs in the cement production process. Such a policy led them to commission the engineering department to design and build a suitable facility at the plant so that large volumes of biomass could be utilized. The policy also resulted in cost savings to TCCL and reduced greenhouse gas emissions, while giving a 40 percent gross profit margin to BETL. Similar opportunities exist in Tanzania, and the business model and knowledge can be replicated in other AREED countries, such as Ghana, where large-scale deposits of biomass (from sawmills) are currently unused. BETL has signed a new two-year contract, increasing volumes from 500 tons per month (original contract) to 1,200 tons per month. BETL has also begun a small pilot project with a group of women in the Kigamboni suburb in Dar es Salaam to begin carbonizing coconut husks. BETL will buy the carbon from them as a source of raw material for briquettes. AREED investments 2000–06 Box 4

Between 2000 and 2006, AREED granted loans to a number of clean energy enterprises to finance their business concepts, commercialization or expansion in the partner countries. The bar chart below demonstrates the energy enterprises and amounts (in dollars) financed.

Enterprises Sodigaz (LPG) Eco‘Home (ELighting) VI AB Mgt (EEfficiency) Gladym (ELighting) Motagrisol (SPV) Lambark (LPG) LMDB (LPG) Seeco (SPV) KBPS (Biomass) Chavuma (EEfficiency) Anasset (LPG) RESCO (LPG) M38 (LPG) Mona (SPV) Aprocer (Cookstoves) Concept Bansim (LPG) Commercialization Kalola Farms (Wind Pump) Expansion AME (SThermal) Energie R (SPV) Fee Hi (LPG) Fadeco (SThermal) BETL (Biomass) Prosoleil (SThermal) VEV (Wind Pumps) Foyers Amel. (LPG-Stove) Translegacy (LPG-Stove) Rasma (Cookstoves) USISS (Crop Drying) Ubwato (Cookstoves) Bagani (Biofuel) TSADC (SThermal) RCI (Biofuel)

Size ($) 50,000 100,000 150,000 200,000

OFID PAMPHLET SERIES 39 125 1.2 Achievements and challenges of AREED The AREED program has achieved good results since its inception. It has suc- ceeded in developing an ingenious plan of loan provision, building capacity in bankable business plan development, analyzing market conditions and identifying efficient energy systems for SMEs. By May 2006, AREED had approved about $2 million for 33 enterprises with a potential market base of about 224,000 people in over 40,000 households in the five partner countries – Ghana, Mali, Senegal, Tanzania and Zambia. By June 2007, about 39 enterprises with market potential of 331,000 people in various areas, including wind pumps in Senegal (Box 1), LPG distribution in Mali (Box 2) and biomass energy in Tanzania (Box 3), had benefited from AREED financing. AREED’s investments during 2000-06 are also presented in Box 4.

Amount financed by AREED and annual repayments Box 5

The graph shows the total amount financed annually by AREED for the 39 companies in Ghana, Mali, Senegal, Tanzania and Zambia during the first phase up to June 2007. The annual payments received are impressive, as the initial loan repayments started in 2003. Thus AREED is a commercially sustainable program, as shown again by the Ghana and Tanzania case studies.

Annual finance Annual repayment 400,000 $

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0 2000-01 2002 2003 2004 2005 2006 2007

126 OFID PAMPHLET SERIES 39 Experts estimate that AREED’s support to energy SMEs providing clean energy services (energy efficient and renewables) has yielded some environmental benefits, including annual savings of about 422,000 tons of carbon dioxide emissions and 263,000 tons of charcoal and firewood. Box 5 shows a summary of the total amount financed annually by AREED and repayments by the 39 enterprises during the first phase up to June 2007. The annual repayments are impressive, as the initial loans were largely repaid during 2003-04 and additional loans were granted. Thus AREED is potentially a commercially sustainable program. VI In spite of the stated achievements, there are several challenges and barriers facing energy sector businesses in the AREED partner countries. They include a lack of relevant policies and institutional frameworks to provide sufficient leverage for entrepreneurs to consolidate or tap into new energy business ventures; lack of capacity building in energy system development and commercialization; limited rural energy market; inherently high initial cost of renewables and energy-efficient products. Others are poor access to clean energy sector financing; the long and arduous administrative processes involved in energy enterprise creation; lack of effective communication between relevant government institutions and energy SMEs; and perception of the provision of energy services as the purview of government.

2. Policies for enhancing enterprise development and market access

AREED has the potential to contribute to overall national development priorities and, in particular, the goal of widening access to clean and sustainable energy services for under-served communities through effective SMEs. This will require dynamic policy initiatives and mobilizing of the capital and human resources needed to develop and enhance energy SMEs. Decision makers in government, the private sector, civil society and AREED institutions should make the effort to address these barriers facing SME development in general and, in particular, energy SMEs. Given this context, the following policy recommendations are made to address the challenges that need priority attention.

2.1 Establish relevant policies and institutional frameworks for energy SME development National governments and parliaments are responsible for the formulation of policies, institutional frameworks and legislative measures to support enterprise development and expansion. The objectives, principles and resources required to establish and strengthen energy sector enterprises present a number

OFID PAMPHLET SERIES 39 127 of challenges. These challenges differ from country to country depending on local conditions and concerns. However, the following areas are recommended for attention in the development and enhancement of energy SMEs: • Translating policies into actions (having clear-cut paths for budgetary support and implementation strategies). • Integrating private sector (SMEs) into policy-making processes. • Making consistent political commitment to widen national energy access particularly for peri-urban and rural communities. While the policy and institutional settings seem to be in place in the various countries, there are still considerable difficulties in translating policies into actions. Moreover, the policies lack clear-cut paths for budgetary support and implementation strategies. Also, actions contained in existing institutional frameworks are not properly streamlined to address the peculiar needs of energy SMEs. This could be partly addressed through establishing financing frameworks within Rural Energy Agencies/Authorities that clearly include support for SME participation. There is growing recognition that improving the policy environment of the private sector can foster strong links with public-sector decision-makers, and this can unlock resources that have the potential to boost the performance of energy SMEs. However, this needs to be complemented with clear implementation strategies, where the responsibilities of both private and public-sector stakeholders are well defined. Research evidence suggests that the lack of consistent political commitment to widen national energy access is likely to constrain energy sector businesses due to low investor confidence. This needs to be underpinned in the master plans and development budgets thereof to mitigate the short-term effects caused by a change of government or cabinet reshuffles. In addition, it is important to support professional watchdog groups as these serve as monitoring bodies.

2.2 Build human and institutional capacity in energy system management It appears that there is the political will to create a positive business environment for the private sector to function as the engine of growth for job and wealth creation. However, more needs to be done. In this regard, it is recommended that national governments in collaboration with development agencies should implement relevant capacity building programs by way of training and international exposure in energy systems application and management.

128 OFID PAMPHLET SERIES 39 In most of the AREED partner countries, the institutions that are agents of change, for example, the National Board for Small-Scale Industries (NBSSI) in Ghana and the Small Enterprise Development Board (SEDB) in Zambia, are faced with several constraints. These include inadequate resources, poor coordination and limited capacity. Notably, these institutions are often located in environments that are not accessible to SMEs and have inadequate experience dealing with energy SMEs. There is need for governments to restructure SME support institutions (such as NBSSI, SEDB) by recruiting appropriate experts to their boards and providing logistical support to enable them build the capac- VI ities of SMEs and offer the needed technical support.

AREED loans and repayments in Ghana Box 6

The graph shows the loans granted by AREED to clean energy entrepreneurs in Ghana during the period 2001 to June 2007, and the repayments, including principal and interest. Eleven companies identified as A, B, C, etc., were granted loans and the years loans were granted are indicated as 01, 02, 07, etc. Companies awarded a second loan after successfully paying off the first are also identified. Thus, company B got its first loan in 2002, completed payment with interest and was awarded a new loan in 2007. Similarly, company E has successfully paid off two loans identified as 03E1 and 04E2. Two new companies were awarded loans in 2006, which they have started paying off.

300,000 $ Amount financed by AREED Total payments received 250,000

200,000

150,000

100,000

50,000

0 01A 02B 07B2 02C 04D 04E2 03E1 04F 04G 06H 06I Year loan granted and company identification

OFID PAMPHLET SERIES 39 129 AREED loans and repayments in Tanzania Box 7

The graph below shows AREED loans and repayments in Tanzania up to June 2007. Again, the recovery rate is excellent. The interest rates are similar to the case of Ghana, varying from 5 to 12 percent.

60,000 $

50,000 Amount financed by AREED Total payments received

40,000

30,000

20,000

10,000

0 A02 B05 C03 D04

2.3 Develop functional market systems To develop functional energy markets, particularly in the rural areas, explicit national policies and procedures to guide and stimulate energy equipment development are needed. In addition, the small size of the rural market and the scarcity of energy equipment result in high prices of goods and services. It is proposed that relevant government ministries, departments and agencies should dialogue with private-sector associations and trade unions to put in place financial and fiscal incentives. These should include micro credits, hire purchase schemes, soft loans and tax exemptions to stimulate public-private sales outlets and support services in rural communities. The nature of the cash economy in rural Africa is such that uptake of energy efficient and renewable energy technologies will remain slow due to the uneven, uncertain and seasonal nature of incomes. One of the available policy options is that costs are brought down by targeting main initial investments towards energizing public facilities and community welfare initiatives. In addition, packaging energy services with income generating possibility is cost- effective. This is demonstrated by the graphs showing the loan repayments

130 OFID PAMPHLET SERIES 39 made by 11 energy enterprises in Ghana (Box 6) and four energy enterprises in Tanzania (Box 7). There is growing evidence that quality and uninterrupted solar PV lighting is likely to enhance working hours and create income generation opportunities for rural enterprises located in off-grid communities. In Tanzania and Ghana, the governments have applied a tax waiver on solar energy equipment. Also, import duty has been removed as a measure to reduce cost and promote widespread use of solar PV systems. In Mali, high poverty incidence has resulted in the provision of energy services with a subsidy rationale. VI In Senegal, unclear taxation rules influence energy entrepreneurs to factor in other costs in their overall pricing. This undoubtedly limits energy access by the rural poor, especially when they purchase the equipment upfront. Therefore, lobbying for policy change is useful.

2.4 Address long administrative procedures to enhance energy enterprise creation Emerging evidence from Ghana, Mali, Senegal, Tanzania and Zambia indicates that enterprise creation is often a long and arduous process [2]. For energy entrepreneurs who sell LPG, the procedures are relatively long and daunting. They necessitate obtaining several permits and approvals, including land and building permits, site inspection approval and fire service reports. Clearly, the running of LPG business is associated with risks and requires careful safeguards and strict adherence to safety standards. It is nevertheless recommended that local licensing authorities, in consultation with government agencies, should endeavor to reduce the duration of obtaining permits, licensing and approvals before starting an LPG business. Putting together the different legal papers and licenses (company regis- tration, license for VAT, trading license, energy regulatory board certificate, authorization from fire service, approvals for telephone and water supply) is perceived as time-consuming and costly. To ensure that proper safeguards are put in place, entrepreneurs who apply for loan facilities are required to provide additional documentation, namely a business plan (five years for first-time applicants and three years for renewal), audited financial statements, certifica- tion of authority, proof of funds and a list of shareholders and directors. These procedures call for administrative intervention by stakeholders comprising town and country planners, licensing authorities and relevant local government agencies. The aim is to reduce regulations and simplify bureaucratic processes, as well as develop zoning and site plans that would serve as a guideline and direction to encourage potential energy investors.

OFID PAMPHLET SERIES 39 131 3. Fiscal incentives for energy SMEs

Energy SMEs tend to require a great deal of investment to operate. However, most entrepreneurs are constrained by the difficulty in mobilizing start-up financial capital. The difficulty in mobilizing funds necessitates making the investment on a hire-purchase basis and this requires information and guidance from financial experts. In an effort to obtain bank loans or credits, transaction costs may overshadow potential gains from high-interest loans. To reduce high capital cost and investor risk, national governments should institute investment incentives like capital grants or third-party finance arrangements where the governments assume risks or provide low interest loans (see Box 8 – Terms of AREED loans in Ghana). Favorable lending schemes, in which banks guarantee the cash flow of a project, thus reducing investor risk, are equally effective. Financing energy projects would require long-term, low-interest loans. However, taking on such long-term commitments is difficult for small entrepreneurs, who are more concerned with day-to-day survival. In addition to

Terms of AREED loans in Ghana Box 8

The interest rates and payment duration in years are shown in the graph below. The interest rates vary from 5 percent for four-year terms to a maximum of 12 percent for five-year terms. These terms are low compared with market rates in the AREED partner countries.

Percent Interest rate 10

0 5.5 4 5 4.5 4 2 3.5 4 4 4 4 Loan payment years

132 OFID PAMPHLET SERIES 39 supporting energy SMEs, investment incentives can also be used to reduce the capital cost of clean energy technologies to consumers. For example, for distributed, modular technologies such as solar water heaters and PV, incentives such as a grant from government can be directed toward the consumer to bring down the initial cost. Furthermore, low capital cost is crucial for overcoming the constraint of high initial capital and can reduce the burden of high up-front costs of energy service delivery equipment. VI 4. Other essential policies

4.1 Create facilities to foster information and knowledge exchange Knowledge deficit is a key factor that is preventing potential entrepreneurs from participating effectively in the clean energy service market. Owing to the limited knowledge of potential entrepreneurs on energy market opportunities, mainly because of low awareness of energy resources among SMEs and potential consumers, national governments remain the key players. In Zambia, research evidence suggests that open bids for energy projects are usually not very competitive, because energy sector companies as well as other potential bidders have little knowledge of operating an energy business. This is primarily because the energy sector is a relatively “opaque” territory to SMEs and non- state actors. As such, there is the need for national governments and intergovernmental organizations to support the capacity development of local actors, particularly NGOs and CBOs, to disseminate information on energy resource availability, level of technology development, manpower expertise in maintenance, and potential application areas of clean energy services. Recent experience suggests that lack of knowledge on clean energy technology options is all-pervasive, ranging from the financial sector to government ministries. Officials in the various government energy ministries have different career profiles with several of them becoming experts through training. In this regard, there is the need for national governments to create incentives and encourage public officials to participate in seminars, work- shops and international meetings to update their knowledge on sustainable energy technologies, business, policies and targets linked to national development goals. There is a lack of understanding of the financial systems and processes that are relevant to the development of the energy sector market. When financial mechanisms are created they are often subject to diverse interpretation. It is recommended that energy ministries, departments and agencies should work

OFID PAMPHLET SERIES 39 133 closely with private-sector actors to furnish local banks, particularly the commercial banks, with evidence-based data on the costs and benefits of investments in clean energy technologies for cooking, heating or industrial processes. In-depth knowledge and information to local banks will help to raise awareness, increase acceptance and reduce the perception of energy-sector businesses as a high risk territory. Existing educative media programs on poverty reduction and sustainable development efforts (income generation, social empowerment of women and environment protection) should be targeted and piggy-backed to deepen knowledge and understanding of energy-related issues. Given the knowledge deficit that is pervasive in the energy sector, there is the need to devote time to the preparation of fact sheets, leaflets and training manuals that would specifically target a wide range of stakeholders to commu- nicate the benefits of clean energy services, particularly renewables to the public. This would increase knowledge on the link between energy and development. Efforts should also be made to diversify training materials to include short video clips that would give potential entrepreneurs, local and international organizations, civil society groups (scientific organizations, profession- als) an idea of the range of energy resources, their application and potential business opportunities.

4.2 Increase public confidence in the energy sector Public confidence in energy business should be increased as emerging evidence suggests a low self-assurance in operating energy-sector companies. This calls for public policies and laws that would provide fiscal and monetary incentives (tax exemption, soft loans, hire-purchase schemes, etc.) and less bureaucratic support services that can be accessed by potential entrepreneurs. Given that the policy environment is generally not sufficiently conducive for private-sector operatives seeking to provide clean energy services to under-served communities, this tends to affect public confidence and ability to be fully involved in energy businesses. In the case of renewable energy technologies, particularly the sale of solar PV systems, small rural markets and limited profits tend to heighten the vulnerability of entrepreneurs. This is in spite of a new attitude towards energy services as essential input for achieving the Millennium Devel- opment Goals (MDGs).

134 OFID PAMPHLET SERIES 39 5. Conclusion and policy recommendations

Emerging evidence from the AREED program in the five partner countries suggests that national policies and regulatory framework for the development of energy SMEs, energy sector market and fiscal incentives depend on greater awareness by policy-makers. Nonetheless, experience also suggests that rural energy market development requires a long time and that growing domestic energy-sector companies are required to work out effective technical and operational challenges of energy SMEs. This requires the support of national VI governments, financial institutions, NGOs and development organizations. Such backing would help to ensure that sustainable regulatory mechanisms, policies, financing, adequate skills and knowledge are continuously developed and strengthened. The difficulties of developing commercially oriented energy enterprises that focus on rural and peri-urban communities and the provision of clean energy products that have high initial costs, even for the urban middle class, pose severe challenges to the promotion of sustainable energy. This paper has identified both the challenges and successes achieved by the AREED approach. To further enhance energy SME development in Africa and widen access to clean and renewable energy services, particularly for under-served communities, policy makers are encouraged to adopt and improve the AREED approach by working towards achieving the following key recommendations: • National governments should establish relevant policies and institutional frameworks and translate them into implementation strategies and budgetary support. They should also improve the policy environment of the private sector to foster stronger links with public-sector decision-makers and make a conscious political commitment to widen national energy access, particularly for peri-urban and rural communities. • National governments should implement relevant capacity- building programs (training and international exposure in energy systems application and management) for SME support institutions. Governments should restructure SME support institutions (such as NBSSI in Ghana, SEDB in Zambia, etc.) by recruiting appropriate experts to their boards and providing logistical support to enable them to build the capacities of SMEs and offer the required technical and expert support.

OFID PAMPHLET SERIES 39 135 • There is the need to develop functional energy markets, particularly in the rural areas, through explicit national policy incentives and procedures to guide and stimulate energy equipment development. In addition, energy services should be packaged with income-generating possibilities as this improves financial viability. This is demonstrated by the graphs showing the loan repayments made by 11 and four energy enterprises in Ghana and Tanzania, respectively. • Government agencies, authorities, commissions and organizations mandated to manage various electrification funds and other energy-related funds should explore innovative interventions to reduce the costs of renewables and energy-efficient technologies through increasing investments in product and market development. • To address the lack of understanding of the financial systems and processes, energy ministries, departments and agencies should work closely with private-sector actors to furnish local banks, particularly the commercial banks, with evidence-based data on the costs and benefits of investments in clean energy technologies to raise awareness, increase acceptance and reduce the perception of risks in the energy business. • To reduce high capital cost and investor risk, national governments should institute investment incentives: capital grants or third party finance arrangements whereby the governments assume risks or provide low-interest loans.

136 OFID PAMPHLET SERIES 39 Acknowledgements

This paper has benefited immensely from a report by F. Denton, titled: “Analysis of Policies and Institutions and Linkages with Energy SME Development in Ghana, Mali, Senegal, Tan- zania and Zambia.” In addition to a review of reports on AREED, the author of this report vis- ited institutions in the various countries and interacted with stakeholders, including officials in ministries, departments and relevant agencies. Also, useful information was gathered from various AREED partner institutions in Ghana, Senegal as well as the E+Co representative in Ghana and Dr. Lawrence Agbemabiese through the Seminar Series on AREED, organized from September to November 2007 by the Energy Centre at the Kwame Nkrumah University of VI Science and Technology, Kumasi, Ghana. The author acknowledges the invaluable contributions by Dr. Njeri Wamukonya, UNEP; and Prof. Abeeku Brew Hammond, Kwame Nkrumah University of Science and Technology, Kumasi, for their critical reviews of the various drafts of the paper. Finally, information was also collected from the AREED website.

Bibliography

AGBEMABIESE, L. (2007). Rural/Renewable Energy Enterprise Development. REED Seminar Series, Kumasi, College of Engineering, KNUST, October 2007.

DENTON, F. (2006). Analysis of Policies and Institutions and Linkages with Energy SME Develop- ment: Ghana, Mali, Senegal, Tanzania and Zambia. AREED Policy Review, Denmark, Risoe National Laboratory, February 2006.

OFID PAMPHLET SERIES 39 137

Africa’s Power Supply Crisis: Unraveling the Paradoxes* VII Waqar Haider

Africa’s power sector in international perspective

Sub-Saharan Africa (SSA) faces major infrastructure challenges, the most severe of which are arguably those in the power sector. Not only is SSA’s energy infrastructure meager compared with other regions’ but electricity service is costly and unreliable. Indeed, in recent years, more than 30 of the 48 countries in the SSA region have suffered acute energy crises. This paper presents preliminary findings from the Africa Infrastructure Country Diagnostic (AICD) (see Box 1 for further details) that aims to unravel the paradoxes of SSA’s troubled power sector. The entire generation capacity of the 48 countries of SSA, at 63 gig watts (GW), is comparable to that of Spain. If South Africa is excluded, SSA’s generation capacity falls to 28 GW, which is about the same as Argentina’s. Normaliz- ing for population, and subtracting South Africa, the installed capacity of SSA is only one third of South Asia’s, and about a tenth of that of other developing regions (Figure 1.1a). Moreover, SSA’s generating capacity has been stagnant for many years; its growth rates are barely half of those in other developing regions (Yepes, Pierce and Foster, 2008). To make matters worse, as much as one-fourth of SSA’s plant is currently not in operating condition.

* This paper was prepared by the World Bank’s Africa Region Sustainable Development Department. The team consisted of Vivien Foster, Tjaarda Storm van Leeuwen, Cecilia Briceno-Garmendia, Daniel Camos, John Gabriel Goddard, Robert Mills, and Karlis Smits. The research draws on the Africa Infra- structure Country Diagnostic (AICD), a multi-stakeholder knowledge program supported by the Infrastructure Consortium for Africa. The AICD will include a much more extensive power-sector review to be published later in 2008. This work represents the views of the authors. David Dunn contributed from the IMF.

OFID PAMPHLET SERIES 39 139 Rates of electrification are correspondingly low. Some 24 percent of SSA’s population has access to electricity versus 40 percent in other Low-Income Countries (LICs), and electrification is proceeding more slowly (Figure 1.1b). Electricity consumption in SSA is a fraction of consumption in other regions (Figure 1.2) and, excluding South Africa, is only about 124 kilowatt-hours (kWh) a year, less than a tenth of China’s. Although electricity tariffs in some SSA countries have been kept low, the cross-country average tariff is rather high at $0.13 per kWh – about double those in other parts of the developing world and almost as high as in OECD countries. Nevertheless, the prices fail to cover costs.

Evolution of power infrastructure in SSA relative to other regions Figure 1.1

A) GENERATION CAPACITY 1,200 MW per million inhabitants

1,000

800 ECA SAS MENA SSA 600 EAP SSA-SA LAC 400

200

0 1980 1985 1990 1995 2000 2006

B) ELECTRICITY COVERAGE 100 Percent households 80

40 ECA EAP SAS MENA LAC SSA 20

0 1990 - 1995 1996 - 2000 2001 - 2005

Source: Yepes Pierce and Foster 2008

140 OFID PAMPHLET SERIES 39 Introducing the Africa Infrastructure Country Diagnostic Box 1

Comparatively little is known about Africa’s infrastructure sectors, with sparse coverage of information in most standard international databases. The Africa Infrastructure Country Diagnostic (AICD) aims to reverse this situation, by creating a comprehensive infrastructure database for the continent and associated body of analytical work. AICD is a two year multi-stakeholder knowledge program – currently nearing completion – that is sponsored by the Infrastructure Consortium for Africa as well as the African Union, NEPAD, and Regional Economic Communities. The project covers all major economic infrastructures – energy, information and communication technologies, irrigation, transportation, water and sanitation – in 24 countries that together account for 85 percent of the Gross Domestic VII Product (GDP), population, and infrastructure aid flows of SSA. The scope of data collection and analysis for each sector and country includes public expenditure, investment needs and sector performance. The underlying data and associated studies will be made available to the public through an interactive website. It is expected that AICD will provide a baseline against which future improvements in infrastructure services can be measured, as well as a more solid empirical foundation for prioritizing investments and designing policy reforms in the infrastructure sectors in Africa. Phase II of the AICD project will extend the coverage to additional African countries.

Electricity prices and consumption in Africa relative to other regions Figure 1.2

A) AVERAGE RESIDENTIAL PRICE B) AVERAGE ELECTRICITY CONSUMPTION

0.16 $/kWh 8,000 kWh/capita/year

0.14 7,000

0.12 6,000

0.10 5,000

0.08 4,000

0.06 3,000

0.04 2,000

0.02 1,000

0.00 0 SAS EAP ECA LAC SSA OECD Africa Asia LAC China MNA ECA OECD

Source: Eberhard and others (2008)

Acronyms from Figures 1.1. and 1.2. ECA Europe and Central Asia, MENA Middle East and North Africa, EAP East Asia and Pacific, LAC Latin America and the Caribbean, SAS South Asia, SSA Sub-Saharan Africa, SSA–SA Sub-Saharan Africa – Southern Africa

OFID PAMPHLET SERIES 39 141 As a result of such low power consumption, the contribution of SSA’s power sector to global CO2 emissions is no more than 520 million tons per year, with South Africa being by far the major contributor. In all other SSA countries, the bulk of greenhouse gas emissions come from land use and deforestation. While power consumption in SSA will need to grow substantially to meet unsatisfied demands, a significant share of the increment could be met from hydro-power, thereby mitigating the climate change impact. For example, in Southern Africa alone, it has been estimated that greater regional trade could reduce incremental carbon emissions by 40 million tons per year. Also, unreliable supply adds to the cost. African manufacturing enterprises report power outages on an average of 56 days a year, costing firms 5-6 percent of revenues. That is why many firms operate their own diesel generators, at a cost of about $0.40/kWh. In the informal sector, where firms rarely have the capital for backstop generation, lost revenues from power outages can be as high as 20 percent. Deficient power infrastructure dampens economic growth and weakens competitiveness by, for example, the detrimental effect on productivity. Escribano, Gausch and Pena (2008) estimate the impact of infrastructure on firm productivity relative to other variables and also decompose the contribution of various components of infrastructure. They find that in most SSA countries, infrastructure accounts for 30-60 percent of the adverse impact on firm productivity, well ahead of factors like red tape and corruption. Moreover, in half the countries analyzed, power accounted for 40-80 percent of the infrastructure effect. In another study (Calderon 2008), simulations based on panel data show that if the quantity and quality of power infrastructure in all SSA countries were improved to that of a better performer (Mauritius), long-term per capita growth rates would be higher by as much as 2 percentage points. The scarcity of power in SSA also affects delivery of social services and the quality of life. Without electricity, clinics cannot safely deliver babies at night or refrigerate essential vaccines. Lack of illumination restricts the ability of chil- dren to study at night and fosters crime in peri-urban areas.

Africa’s acute power problems

Africa’s overstretched electricity systems have become exceedingly vulnerable to supply shocks, resulting in widespread outages and load shedding (Figure 2.1). With economic growth in the past decade raising demand for electricity, the lackluster expansion of generation and transmission facilities has

142 OFID PAMPHLET SERIES 39 stripped away any cushion from excess capacity that may have existed. In recent years, when droughts reduced power in the hydro-dependent countries of East Africa, prolonged blackouts became commonplace. In countries like South Africa, plant outages for maintenance have had serious consequences (Box 2). Countries whose power infrastructure has been damaged by conflict have also suffered severe shortages. And high petroleum prices have created enormous cost pressure in countries like those of West Africa that depend on imported oil products for electricity generation. VII

Countries affected by acute power-sector crises in recent years Figure 2.1

Main cause or trigger A) COUNTRIES AFFECTED Natural causes (droughts) by power-sector crises by cause Oil price shock System disrupted by conflict High growth, low investment/structural issues

Western Sahara

Mauritania Burkina Faso Eritrea Senegal Guinea Bissau Guinea Benin Nigeria Central African Sierra Leone Republic Uganda Kenya Liberia Togo Somalia Ghana Côte d’Ivoire Democratic Republic of Congo Rwanda Congo Burundi B) FREQUENCY DISTRIBUTION for load shedding as percentage demand Malawi 30 Percentage of countries Zambia

25 Namibia Zimbabwe Madagascar 20 Botswana

15 Swaziland 10 South Africa Lesotho 5 0 <1 1-3 3-5 5-10 >10 Percentage

Source: Briceno-Garmendia (2006); Eberhard and others (2008)

OFID PAMPHLET SERIES 39 143 Regional and economic effects of Box 2 South Africa’s power-supply crisis

South Africa has long been a sizeable producer of low-cost electricity, reflecting its abundant coal reserves. It is by far the region’s biggest producer and consumer of electricity, accounting for over half of electricity production in SSA. Electricity prices for both households and industry are exceptionally low, which has been an important factor in the development of South Africa’s energy-intensive mining and mineral processing sectors. However, South Africa’s electricity supply has remained stagnant in recent years while demand has continued to increase, resulting in power shortages. Attempts to encourage greater investment in generation by the private sector proved to be unsuccessful (partly because South Africa’s low electricity tariffs were unattractive to independent power producers) and at the same time resulted in delays in investment by the state-owned electricity provider, Eskom. As a result, the spare capacity (or “reserve margin”) in the system to cope with peaks in demand has declined, leaving the country prone to periodic rounds of rolling power cuts, sometimes with very little warning. This has resulted in gridlock on the roads as traffic lights fail, millions of Rands lost as businesses cannot operate, and houses regularly without power for up to 12 hours. Elec- tricity supply to large industrial users was also reduced in January 2009, resulting in a tem- porary shutdown of production in the mining sector, causing global prices for gold and platinum to spike. South Africa exports about 5 percent of its electricity production to neighboring countries – such as Botswana, Namibia, and Swaziland – that import at least half of their electricity needs from South Africa. These countries have been affected by a similar regime of rolling blackouts; moreover, some South African opposition and union groups have called for a complete halt on power exports. The government’s response to the crisis involves a series of measures to manage demand in the short and medium term until new capacity comes on stream. This will involve power rationing, modeled on Brazil’s response to its energy crisis in 2001, with a view to reducing demand for electricity by 12.5 percent. Large mines have already been rationed to 90 percent of their normal electricity supply. Eskom also plans to increase its generating capacity by some 50 percent over the next 9–10 years. Electricity prices are likely to increase substantially over the next several years to help finance investment (and reduce demand). Nev- ertheless, the supply-demand balance is likely to remain tight for the next few years.

Source: IMF Staff, 2008

144 OFID PAMPHLET SERIES 39 Emergency power generation in SSA Table 2.1

Contract Emergency Total installed Estimated annual Country Date duration capacity capacity (%) cost (% GDP)

Angola 2006 2 years 150 18.1 1.04

Gabon 14 3.4 0.45

Ghana 2007 1 year 80 5.4 1.90 VII Kenya 2006 1 year 100 8.3 1.45

Madagascar 2004 Several years 50 35.7 2.79

Rwanda 2005 2 years 15 48.4 1.84

Senegal 2005 2 years 40 16.5 1.37

Sierra Leone 2007 1 year 20 133.3 4.25

Tanzania 2006 2 years 180 20.4 0.96

Uganda 2006 2 years 100 41.7 3.29

Source: Eberhard and others (2008)

An increasingly common response to the crisis has been short-term leases for emergency power generation to a handful of global operators (Table 2.1). Though this capacity can be put in place within a few weeks, it is expensive. The costs of small-scale diesel units, for example, are very high, typically about $0.35/kWh. The equipment is typically leased for up to two years, after which it reverts to the private provider. An estimated 700 MW of emergency generation are currently operating in SSA; this represents more than 20 percent of installed capacity. The total price tag ranges from 0.5 percent of GDP in Gabon to 4.3 percent in Sierra Leone. The recent energy crises are symptoms of a deeper malaise, the causes of which need to be understood and addressed. Four paradoxes shed light on the very complex challenges that need to be faced: abundant energy but little power; high prices but even higher costs; widespread but ineffective reform; and high expenditure yet inadequate financing.

OFID PAMPHLET SERIES 39 145 Paradox 1: abundant energy but little power

Ironically, SSA is richly endowed with both renewable and exhaustible energy resources. At present, for instance, it exploits only 8 percent of its gross hydro- power potential of 3.3 million gigawatt-hours (GWh) annually. The countries on the Gulf of Guinea hold 4.9 percent of the world’s proven oil reserves (some 60 billion barrels) and 7.8 percent of proven natural gas reserves (some 14 trillion cubic feet); if converted to electricity, the natural gas currently flared during oil production could itself meet a substantial share of Africa’s power needs. Southern Africa is rich in coal. Botswana, South Africa and Zimbabwe together hold 5.6 percent of the world’s proven reserves (more than 50 billion tons). There is also significant geothermal potential in the Rift Valley. However, the continent’s energy resources tend to be concentrated in a handful of countries whose physical and political barriers to trade make it difficult for them to access centers of power demand. And their economies are too small for them to develop their own resources. For example, the Democratic Republic of Congo (DRC) alone accounts for about 40 percent of SSA’s hydroelectric potential, and Ethiopia accounts for another 20 percent. But both are far from the economic centers in Southern, Western, and Northern Africa, and the multi-billion dollar investments needed to exploit hydro-potential are too big for their economies. Moreover, in most SSA countries, energy markets are too small to take advantage of efficiencies from large-scale electricity production. With today’s technology, full economies of scale in thermal power generation begin at about 400 MW; national power systems meet this threshold in only 14 countries in SSA. In another 14, power systems have only 100 MW of capacity. With relatively little cross-border trade, many SSA countries use technically inefficient forms of generation (Figure 2.2). In Eastern and Western Africa, about a third of installed capacity is diesel-based generators. These countries have few domestic energy resources of their own, even though there are sufficient hydro and gas resources in neighboring countries to support much lower-cost forms of generation. The consequences of this technically inefficient pattern of power generation become evident when average operating costs of different types of power systems are compared (Figure 2.2b). The average for predominantly diesel-based power systems is as much as $0.20/kWh more expensive than the cost of hydro- based systems. Similarly, the operating cost penalty for countries with national power systems of less than 200 MW installed capacity can run up to $0.30/kWh,

146 OFID PAMPHLET SERIES 39 Drivers of operating costs for SSA power systems Figure 2.2

A) BY REGIONAL POWER POOL B) BY TECHNOLOGY

0.50 $/kWh 0.50 $/kWh

0.40 0.40

0.30 0.30

0.20 0.20

0.10 0.10 VII

0.00 0.00 CAPP WAPP EAPP SAPP Overall Predominantly Predominantly Overall diesel hydro

C) BY SCALE OF POWER SYSTEM D) BY GEOGRAPHICAL CHARACTERISTICS

0.50 $/kWh 0.50 $/kWh

0.40 0.40

0.30 0.30

0.20 0.20

0.10 0.10

0.00 0.00 Small Medium Large Overall Islands Landlocked Coastal Overall

Source: Eberhard and others (2008)

relative to countries with power systems above 500 MW. An additional cost penalty for landlocked and island states relative to coastal nations is the much higher cost of importing fossil fuels. That is why regional power pools have been formed in Central (CAPP), Eastern (EAPP), Southern (SAPP) and Western (WAPP) Africa. The pools are at very different stages of development, both technically and institutionally. The political process is most advanced in the WAPP, supported by political agreements at the Heads of State level through the Economic Commission of West African States (ECOWAS). The pools, particularly the WAPP and SAPP, have facilitated significant cross-border exchanges of power. A number of countries, such as Botswana and Niger, rely on imported power; others, such as Nigeria and Mozambique, are major exporters of power. However, none of the pools is yet at the point where the arrangements are fully competitive.

OFID PAMPHLET SERIES 39 147 Paradox 2: high prices but even higher costs

The variation in electricity charges across SSA countries is huge. It spans some of the cheapest power in the world (at less than $0.05/kWh in hydro-based systems and in South Africa based on cheap coal) to some of the most expensive power in the world (at over $0.30/kWh in countries with diesel-based systems and landlocked or island geography such as Chad and Madagascar). Nevertheless, looking across countries, the average charges today look high by international standards and are a result of recent increases reflecting higher oil prices and tightening supply conditions worldwide. The overall average revenue has risen from $0.07/kWh in 2001 to $0.13/kWh in 2005. In countries reliant on diesel-based power generation systems, average revenues have risen from $0.08 to $0.17/kWh. Yet the average revenue in SSA countries still falls significantly short of covering the average operating costs of $0.27/kWh (Figure 2.3). This is even though average revenue in hydro-based countries has risen dramatically, from $0.02 to $0.07/kWh. Despite such comparatively high average revenues, the vast majority of SSA countries are doing little more than covering average operating costs (Figure 2.4). The correlation between average revenue and average operating cost is as high as 90 percent, indicating that operating cost recovery is usually the driving principle behind power pricing. Nevertheless, once average operating costs exceed $0.20/kWh, there is a tendency to price below the 45 degree line as shown in Figure 2.4A. The implication is that past capital costs of power-sector development have historically been almost entirely subsidized by the state. Nonetheless, a comparison of current average revenues and average operating costs misrepresents the long-term cost recovery situation for two critical reasons. First, because of major inefficiencies in revenue collection, the average revenue collected per unit of electricity sold is substantially lower than the average effective tariff that is being charged. Second, owing to major inefficiencies in generation technology and the growing trend towards regional trade, the average incremental cost of power in SSA for many countries is somewhat lower than the average historic cost of power production (including both historic operating and capital costs). Thus, a truer picture of the long-term cost recovery situation is gained by comparing the average effective tariff with the average incremental cost as shown in Figure 2.4B. The result shows that in the case of many (but certainly not all) countries, even the current tariff would be adequate for cost recovery purposes, if only revenues could be fully collected, and the power system could transition towards a more efficient structure of production.

148 OFID PAMPHLET SERIES 39 Electricity costs and revenues by type of power system Figure 2.3

A) AVERAGE OPERATING COST B) AVERAGE REVENUE FROM TARIFFS

0.30 $/kWh Predominantly diesel 0.25 Predominantly hydro Overall 0.20 0.15 0.10 0.05 VII 0.00 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005

Source: Banerjee and others (2008)

Average power-sector revenue and various cost benchmarks Figure 2.4

A) AGAINST AVERAGE OPERATING COST B) AGAINST AVERAGE INCREMENTAL COST ($/kWh) ($/kWh)

80 70 60 50 40 30 20 Average effective tariff effective Average 10 Average operatingAverage revenue 0 0 1020304050607080 0 1020304050607080 Average operating cost Average incremental cost

Source: Eberhard and others (2008)

The presence of large historical capital subsidies to the sector raises questions about their distributional incidence. In a recent study, Wodon and others (2008) use evidence from household surveys to establish the distribution of such subsidies in 18 SSA countries. In all the countries, power-sector subsidies were found to be highly regressive. Across the bottom half of the income distribution, barely 10 percent of households have access to electricity. Because the poor are almost entirely excluded from service, they cannot possibly benefit directly from subsidies (Figure 2.5).

OFID PAMPHLET SERIES 39 149 Electricity service coverage in SSA Figure 2.5

A) BY GEOGRAPHIC AREA B) BY HOUSEHOLD BUDGET QUINTILE

100 Percent households Low income 80 Middle income 60 Overall

0 Rural National Urban First Second Third Fourth Fifth

Source: Banerjee and others (2008)

In the urban areas of the low income countries (LICs), around a third of households lack access to electricity. At least half of these unserved urban population areas live physically proximate to an electricity grid. This suggests that demand- side barriers – such as connection charges or household tenure – are contributing to restrict access (Banerjee and others 2008). In the rural areas of LICs, only 12 percent of the population has access to electricity, and for at least 17 countries, the figure is under 5 percent. The dispersed nature of the rural population means that grid extension does not always prove economical, although a handful of countries – most notably Ghana and South Africa – have had successful large-scale grid-based electrification programs, anchored on technically and financially strong utilities and careful policies that address affordability. The concentration of power services in upper-income echelons might suggest that full-cost recovery pricing is feasible. However, the reality is more complex. In low-income SSA countries, even households in the highest income bracket have monthly budgets of only $260 to support families typically comprising five people. Banerjee and others (2008) estimated the affordability problems of SSA households in different pricing scenarios, assuming modest consumption of 50 kWh/month. Bills are considered affordable if they do not absorb more than 5 percent of household budgets. With cost recovery prices of about $0.25, as is currently the case in high-cost countries, a subsistence monthly bill would be $12. Except in a relatively small group of middle-income and better-off LICs (Cameroon, Cape Verde, Côte d’Ivoire, Republic of Congo, Senegal, and South

150 OFID PAMPHLET SERIES 39 Africa), a substantial share of the population would be unable to afford cost recovery tariffs. Today, household spending on electricity service is significantly below this level (Figure 2.6). However, if costs could be reduced to $0.12/kW – in line with SSA’s average incremental cost of power – the monthly bill of $6 would be affordable to most of the population, except in LICs like Burundi, Democratic Republic of Congo, Ethiopia, Malawi and Uganda.

Electricity service expenditure in SSA Figure 2.6 VII A) BY GEOGRAPHIC AREA B) BY HOUSEHOLD BUDGET QUINTILE

16 $ per month Middle income 12 Overall Low income 8

0 Rural National Urban First Second Third Fourth Fifth

Source: Banerjee and others (2008)

Although residences account for 95 percent of power utility customers in Africa, they contribute only about 50 percent of revenue. Thus, the pricing of power to commercial and industrial consumers is just as important to cost recovery. The average revenue raised from low- and medium-voltage customers seems to be similar, but high-voltage customers tend to pay only about half as much. Glob- ally, this relative price differential is not unusual. It reflects the fact that high- voltage customers do not use as much of the distribution network and hence do not create such high costs for the utility. Nevertheless, it suggests that in absolute terms, neither residential nor commercial and industrial customers are close to paying full-cost recovery prices. Moreover, a number of SSA countries have historically sold power at highly discounted rates to large-scale industrial and mining customers like the aluminum smelting industry in Cameroon and Ghana and the mining industry in Zambia. These arrangements were initially justified as ways of locking-in base load demand to support large-scale power projects that went beyond the immediate demands of the country, but they are increasingly questionable as local demands have grown to absorb capacity. Given the problems of SSA power systems, cost recovery needs to be discussed along with measures to reduce costs, improve revenue collection and increase reliability.

OFID PAMPHLET SERIES 39 151 Paradox 3: widespread but ineffective reform

Although they are somewhat behind the reform programs in other regions of the world, SSA countries also embarked upon the path power-sector reform orthodoxy. This included reform legislation and sector restructuring to pave the way for competition in generation and private sector participation across the electricity supply chain. As of 2006, more than 80 percent of SSA countries had enacted a power-sector reform law, 75 percent had experienced private participation in power, about 66 percent had corporatized their state-owned utilities, more than half had established a regulator, and over a third had independent power producers (Figure 2.7a). Yet a few countries have adopted the full range of reform measures (Figures 2.7b).

Evaluation of power-sector reform Figure 2.7

A) Prevalence of power-sector reform components B) Frequency distribution for reform index

100 Percentage of countries

0 Other PSP Regulatory Vertical Six Five Four Three Two One No oversight unbundling Components

Source: Eberhard and others (2008)

The lack of results has forced a rethinking of whether certain reform principles and programs apply in SSA. One reform that has not been widely adopted in SSA is unbundling of generation, transmission, and distribution functions to create competition in generation and supply. Besant-Jones (2006) in his global review concluded that restructuring the power sector to advance competition only made sense in countries large enough to support several generators above minimum efficient scale. The power systems in most SSA countries are so small that this prescription is largely irrelevant for them. Nevertheless, even in the largest countries, where unbundling could work, there has not been much progress. There have been nearly 60 medium- to longer-term power-sector transactions with the private sector in SSA, not counting emergency power generation leases (Table 2.2).

152 OFID PAMPHLET SERIES 39 Private participation power-sector transactions in SSA Table 2.2 (review basic information)

Type of private participation Number of Problem Total value Countries affected transactions transactions ($m)

Management or lease contract 17 4 5 Chad, Gambia, Gabon, Ghana, Guinea-Bissau, Kenya, Lesotho, Madagascar, Malawi, Mali, Namibia, Rwanda, São Tomé, Tanzania, Togo VII

Concession contract 12 5 1,598 Cameroon, Comoros, Côte d’Ivoire, Gabon, Guinea, Mali, Mozambique, Nigeria, São Tomé, Senegal, South Africa, Togo, Uganda

Independent power project 24 2 2,293 Angola, Burkina Faso, Congo, Côte d’Ivoire, Ethiopia, Ghana, Kenya, Mauritius, Nigeria, Senegal, Tanzania

Divestiture 4 - 938 Cape Verde, South Africa, Zambia, Zimbabwe

Overall 57 11 4,834

Note: Problem transactions are defined as projects that are now distressed or were prematurely canceled. Source: World Bank Private Participation in Infrastructure Database, 2007.

Almost half of these have been independent projects, with the utility signing Power Purchase Agreements with the private sector to build green-field generation plants. With more than $2 billion of private investment these have provided nearly 3,000 MW of new capacity, which is a substantial contribution to available capacity. An independent assessment concluded that these projects can be relatively costly due to technology choices, procurement problems, and currency devaluation, and are often subject to renegotiation (Gratwick and Eberhard, 2006). A poorly documented issue is the extent to which Power Pur- chase Agreements are creating contingent liabilities for the state. The rest of the transactions have been concession, lease, or management contracts typically for operation of the entire national power system. These have had a relatively high failure rate; because about one-third of the contracts

OFID PAMPHLET SERIES 39 153 are currently in distress or already canceled. However, in the more successful transactions performance has improved noticeably. The usual reasons for failure are the lack of financial viability or creditworthiness of the utilities – governments have been unwilling or unable to adjust tariffs to enable cost recovery or pay subsidies to make up the difference – and the lack of access to funding for priority investments to improve efficiency or expand services. Thus, the fundamental factors for making private participation work were absent. Perhaps the single most relevant institutional consideration is the governance of the national power utility. It is possible to rate SSA power utilities by the extent to which they are managed on sound commercial principles (IMF, 2004a). The rating is based on whether utilities have managerial autonomy with respect to (i) labor policy and (ii) market decisions relating to production and sales; whether utilities are financially viable, measured in terms of the (iii) absence of subsidies and (iv) tax breaks and the requirement to be (v) profitable and pay (vi) market rates for debt; and whether utilities are accountable, producing (vii) published audited accounts, and being (viii) publicly listed on the stock exchange to protect the rights of (ix) minority shareholders. These good governance practices are not widespread in SSA utilities (Fig- ure 2.8), though the majority do report freedom with respect to labor policies, and a sizeable minority can make their own market decisions. While most util-

SOE governance characteristics Figure 2.8

A) Prevalence of good governance characteristics B) Frequency distribution for IMF governance index

Labor policy Nine criteria Market rate debt Eight criteria Profitability requirement Seven criteria Public audited accounts Six criteria Market decisions Five criteria No tax breaks Four criteria Publicly listed Percentage Three criteria Percentage of countries of countries Two criteria Minority shareholders One criterion No subsidies 0 20 40 60 80 100 0 20 40 60 80 100

Source: Eberhard and others (2008)

154 OFID PAMPHLET SERIES 39 Frequency distribution of power-sector efficiency indicators Figure 2.9

A) SYSTEM LOSSES B) COLLECTION EFFICIENCY

60 Percentage of countries 50 40 30 20 10 VII 0 10-20% 20-25% 25-30% <30% <60% 60-80% 80-90% 90-100%

Source: Eberhard and others (2008)

ities report that they are required to be profitable and pay market rates for debt, in practice, the vast majority benefit from sizable subsidies and tax breaks and are not in a position to borrow at all. Only 60 percent publish audited accounts, while stock exchange listing is unheard of. The typical utility in the sample meets only about half the criteria (Figure 2.8b). Poor governance is reflected in deficient performance. In well-performing utilities around the world, system losses can be as low as 10 percent. However, two-thirds of SSA utilities report losses of more than 20 percent. Similarly, well- run utilities collect close to 100 percent of what is owed them; whereas 40 percent of SSA utilities collect less than 90 percent (Figure 2.9) The inefficiency of SSA utilities generates substantial hidden costs. These hidden costs can be quantified (Ebinger, 2006) by comparing the revenues a utility raises against those raised by an ideal utility that prices at full economic cost and keeps distribution and collection losses to best practice levels. In many SSA countries, hidden costs can be as high as 2 percent of GDP (Figure 2.10a). About 50 percent of the costs stem from collection losses and another 30 percent from distribution losses (Figure 2.10b). The dividend from improving utility performance is often very high. The contribution of under-pricing to these hidden losses is relatively small, although it depends on the country. Given the large scale, long lead times, and extensive preparation required to build power infrastructure, careful planning is crucial. However, many SSA countries lack ministerial capability for long-term power-sector planning. SSA’s current power shortages were to a large extent foreseeable, but action was not

OFID PAMPHLET SERIES 39 155 Hidden costs of power-sector inefficiency Figure 2.10

A) FREQUENCY DISTRIBUTION BY OVERALL SIZE B) DECOMPOSITION BY SOURCE

50 Under- Collection 18% 40 Percentage of countries pricing losses

20 52% 10 30%

0 Distribution <1%1-2% 2-4% >4% of GDP losses

Source: Eberhard and others (2008) taken far enough ahead to avert them. Even today – notwithstanding the strong case for power-sector development – there is a shortage of bankable electricity generation projects because of bottlenecks in project preparation. To some extent, power-sector planning has been a casualty of the 1990s reform model that emphasized market-led infrastructure development and allocation of human resources to regulatory, rather than planning functions. Effective power-sector planning recognizes critical upstream linkages with fuel supply industries. Security of supply is subject to interrelated infrastructure and incentive problems. For countries with access to natural gas, lack of pipeline capacity and vandalism have been a growing concern. In Nigeria, for example, these problems have reduced the gas available for domestic electricity generation by independent power producers and limited gas trade in the WAPP. Inadequate incentives in gas pricing have also deterred private investment in infrastructure to gather natural gas and in pipelines. For countries that rely on imported diesel fuel, deficient port facilities and transport links add greatly to their costs. The lack of competition and transparency in fuel procurement also exacerbates costs. The OECD Competition Committee has flagged collusive tendering of oil and price fixing as major issues in a number of African countries.

156 OFID PAMPHLET SERIES 39 Paradox 4: high expenditure but inadequate finance

SSA countries on average spend 2.7 percent of their GDP on power; and a significant number spend more than 4 percent (Table 2.3). Typically, more than 90 percent of this spending is channeled through the national state-owned utility; while less than 10 percent appears on the central government budget. Oper- ating costs absorb 75 percent of total spending. As a result, public investment in the sector is very low; on average only 0.7 percent of GDP. The contribution of Official Development Assistance (ODA) to public investment in power has been modest, averaging only $700 million a year for VII the last decade. Also, support has been highly volatile, amounting to only a few hundred million dollars a year in the late 1990s, but rising toward $1 billion annually, in recent years. Despite the substantial number of private transactions, their value has averaged only about $300 million a year for the last decade, and once again the flows have been highly volatile because these investments are lumpy. Thus, total external capital flows to the power sector in SSA amount to no more than 0.1 percent of the region’s GDP (Figure 2.11). In recent years, the China Export-Import Bank has emerged as a major new financier of power infrastructure in SSA. Between 2001 and 2006, Chinese commitments averaged $1.7 billion a year, more than ODA and PPI combined, and equivalent to about 0.2 percent of the region’s GDP. Most of the Chinese financing has gone to six large hydro-power projects with a combined generating capacity of over 7,000 MWs. Once completed, these projects will increase SSA’s installed hydro-power capacity by 40 percent. China is also financing 2,500 MW of thermal power, and the India Export-Import Bank has financed significant thermal generation projects in Nigeria and Sudan.

Power-sector expenditure Table 2.3

Central State-owned Public Operating Percent GDP Total government enterprise investment costs

Average 2.72 0.21 2.51 0.67 2.05

Lower quartile 1.90 0.04 1.83 0.20 1.70

Upper quartile 3.45 0.36 3.29 0.79 2.65

Source: Briceno-Garmendia and Smits (2008)

OFID PAMPHLET SERIES 39 157 Numerous econometric analyses show that the elasticity of power-sector demand with respect to economic growth is close to unity. With GDP growth rates in SSA averaging above 5 percent a year in recent years, power generation capacity should be growing at a similar rate to keep pace with demand. How- ever, since 1980, annual growth in power-generating capacity in SSA has averaged only 2.9 percent. A recent study constructs a series of optimization models for each of Africa’s major regional power pools to simulate the expenditures required (Econ Analysis, 2008). The model is flexible enough to consider different assumptions about the extent of regional power trade, the pace of economic growth, the extent of political ambitions for universal access, and the price of inputs like oil and gas. Table 2.4 reports baseline results for a scenario where full advantage is taken of regional power trade and all countries aim for an access rate of 35 percent by 2015. Each year, SSA would thus need to add about 3,000 MW of new generation capacity and connect about three million new households. This scenario costs 6-7 percent of SSA’s GDP, equivalent to $47 billion annually. The amount is split almost evenly between investment and operations and with about two-thirds of the cost coming from power generation needs. Current spending on power averages less than 3 percent of the region’s GDP. Investment accounts for more than half that, equivalent to at least 2 percent of GDP, compared with current power-sector investment amounting to less than 1 percent of GDP on average. However, despite significant expansion in access, the bulk of the expenditure is associated with generation.

Long-term trends in external finance for the SSA power sector Figure 2.11

1,500 $m ODA commitments 1973-2006 PPI commitments 1995-2006

1,000

500

0 1973 1980 1985 1990 1995 2000 2006

Source: OECD, 2006, Infrastructure Consortium for Africa, 2007 and World Bank Private Participation in Infrastructure Database, 2007

158 OFID PAMPHLET SERIES 39 Annualized power-sector expenditure requirements to 2015 Table 2.4 Percent GDP Operating Transmission and Total Investment expenditure Generation distribution

CAPP n/a n/a n/a n/a n/a

EAPP 4.9 2.5 2.4 3.7 1.2

SAPP 3.8 2.0 1.8 2.3 1.5 WAPP n/a n/a n/a n/a n/a VII Overall * 6.7 3.4 3.3 4.5 2.2

n/a = not available * Preliminary estimate for the whole of SSA based on results currently available for EAPP and SAPP

Source: Africa Infrastructure Country Diagnostic, 2008

The regional averages conceal huge variations between countries. As power trade grows, the burden of investment falls disproportionately on countries with abundant resources. In a handful of cases, the annualized expenditure requirement exceeds 10 percent of GDP, mostly for investment in generation for export. The most prominent examples are Ethiopia and the Democratic Repub- lic of Congo, which would each become major exporters of hydro-power in their pools. The financing would not necessarily need to be raised from domestic resources but could be underwritten to some degree by importing countries. Thus, there is major potential for expansion of cross-border power trade. For example, in the Southern Africa Power Pool alone, the volume traded internationally could rise from the current 45 TWh to 141 TWh per year if trade were exploited to its full economic potential. Trade necessitates investments in cross-border transmission links but also allows for significant savings from accessing lower-cost power sources. It is therefore possible to calculate the gains from trade as the rate of return on cross- border investments. These have been estimated at 20 percent in Eastern Africa to 167 percent in Southern Africa. Both cases exceed typical hurdle rates for public investment (Econ Analysis, 2008). While such trade would still only represent about 8 percent of total power demand, under such trading scenarios some smaller countries would depend on power imports to meet more than 50 percent of their domestic demand. The savings in the annualized cost of the power sector from trade is relatively small at less than 10 percent, but the gains for individual countries in terms of cheaper power can be substantial. Most countries would reduce the

OFID PAMPHLET SERIES 39 159 average cost of power by a few cents/kWh – resulting in a 20-60 percent saving. For a handful of countries, power costs would be reduced by more than 60 percent or $0.10/kWh. The main effect of trade in power is to support development of more large-scale hydro-power schemes that would not be viable for a single nation. As a result, the composition of the generation portfolio shifts toward hydro- power by 10-15 percentage points relative to the case without expanded trade. The additional hydro-power would displace natural gas generation in Eastern Africa and coal generation in Southern Africa. It would also increase the share of power production coming from exporting countries like Ethiopia and the Democratic Republic of Congo. Irrespective of trade development, however, the major power consumers – Egypt, Nigeria, and South Africa – continue to be by far the main producing countries in their regional power pools.

The way forward

The power sector in Africa is characterized by a set of paradoxes. There are abundant sources of power, significant levels of government funding, and notable efforts at reform. Yet, electricity access rates are very low compared to other developing regions, prices are high, and the power supply insufficient and unreliable. The policy choices that best address these paradoxes are not clear-cut. The traditional model that predominates in the SSA power sector – vertically- integrated, state-owned monopolist utilities – has yielded disappointing results. Yet reform to increase efficiency and boost competition through private participation has in many cases failed to deliver the expected results. For example, unbundling is limited, failures of transactions and projects frequent, and there has been minimal additional investment. The lesson that emerges is that success in tackling the challenge is not a simple function of the model adopted. The power sector in Africa needs to move to a “mixed economy,” characterized by a range of structures, regulation, and technologies adapted to each country’s context. Successful interventions will tackle several problems simultaneously to put the sector on a positive trajectory of improved sector and utility management, financial viability, new investment, and better customer service. This means recognizing that the power sector has quasi-monopolistic characteristics – particularly in grid-based distribution and to a lesser extent in transmission. Furthermore, incumbent utilities will continue to be the largest players in the sector for the foreseeable

160 OFID PAMPHLET SERIES 39 future. But interventions also need to be innovative and ambitious, recognizing that meeting customer needs means multiple providers, financial viability, and new forms of external financial assistance. Where certain preconditions are in place – including appropriate regulatory frameworks for public-private partnerships, reformed tariff frameworks and sufficient security of investment for investors-sector reforms can do much to facilitate the entry of strategic private partners. Consequently, the starting point is sustained and concerted action on three strategic priorities: (i) regional scaling-up of generation capacity, (ii) improving the effectiveness and governance of utilities, and (iii) expanding VII access through sector-wide engagement. The three priorities are interdependent and must be tackled together. Efforts to boost generation and regional power trade will stumble if the utilities, which will continue to be central actors in the sector, remain inefficient and insolvent. Expanding electricity distribution systems without taking measures to tackle the shortages in generation and to improve transmission capacity would clearly be futile. And focusing exclu- sively on utility reform would be fruitless unless a start is made on substantial, long-gestation investments in both generation and access to improve quality of service and render the utilities viable. In short, these strategic priorities must progress together. At the same time, the period required to yield results from these actions is such that they need to be complemented by important short- term measures. These include demand-side management, for example, the introduction of energy-efficient bulbs and loss-reduction programs such as enhanced bill collection and initiatives to tackle electricity theft.

Regional scaling-up of generation capacity

The first strategic priority is to tackle the generation capacity deficit head-on. Africa’s considerable hydro, gas and coal resources remain under-exploited. The best way to scale-up power generation at the lowest unit cost is to develop a new breed of large-scale projects. An initial wave of projects could include candi- dates like Inga III in the Democratic Republic of Congo, which is expected to add about 3,800 MW of capacity; the Temane Gas-powered Plant in Mozam- bique, 750 MW; Gilbe Gibe III Hydropower in Ethiopia, 1,800 MW and further development of generation capacity based on natural gas from Nigeria. How- ever, individual countries do not have the necessary investment capital, or even the electricity demand, to move forward with these large projects. A project finance approach, predicated on regional power off-take in which private sector participation and donor funding are blended, is needed.

OFID PAMPHLET SERIES 39 161 Expanded generation capacity is redundant unless the power can be transmitted to users. This is where regional power pools play a critical enabling role. Challenges common to all the pools are rehabilitation and expansion of the cross-border transmission infrastructure to increase the potential for trade, and harmonization of regulations and system operating agreements. Equally important is the formulation of market trading mechanisms so that the additional energy generated from large projects can be priced and hence allocated in an efficient and fair way (for example, via competitive pool arrangements). While the economics of regional large-scale generation projects are convincing, they may give rise to significant political challenges. The gains from trade are much larger for some countries than for others, and considerations of self-sufficiency sometimes have more political weight than access to low-cost power. These factors need to be addressed early in the project development cycle. Large-scale regional energy schemes have deep financing requirements. Capital expenditure for Inga III, for example, is estimated at $4-5 billion. This is beyond the capacity of public-sector concessional financiers, even after significant increases in aid. Private participation will be pivotal. Yet successful private investments in energy projects have been rare in Africa, and increased private investment will not materialize simply because of large infrastructure financing gaps. The lessons learnt from past failures need to be addressed, as private investment will only flow where rewards demonstrably outweigh risks. Large-scale regional generation projects would have several attractions in this respect: • Large investments benefit from economies of scale. For example, for a given amount of generation capacity, the total costs (design, engineering, capital items, civil works, safeguards and others) for one large plant are lower than for several smaller plants with the same aggregate capacity. All else being equal, investments in larger projects are therefore likely to be more profitable. • The investments would primarily be in stand-alone generation projects that present fewer risks compared to investments in vertically integrated utilities whose operational and regulatory risks (organizational inefficiency, lack of financial transparency, geographical distribution of personnel and assets, governance risks, political interference, and contingent risks like an uncertain legal framework) are far harder to price.

162 OFID PAMPHLET SERIES 39 • There is increasing realization that investment in new generation capacity cannot be undertaken in isolation from other efforts in the sector. Capital is more likely to be forthcoming in an environment where other factors – such as the tariff structure, power-purchase agreements, and reliable transmission interconnections – have been addressed. Utilities that are better run will eventually be able to move beyond covering operating expenses to invest in system expansion, making the whole sector more viable. Public-sector financiers like the World Bank are also becoming more nimble in their deployment of tools to help VII crowd-in the private sector, such as risk-mitigation instruments.

There are early but encouraging signs that scaling-up generation capacity through large private-sector-led projects is starting to gather speed. A prominent example is the privately owned 250 MW Bujagali Hydro Power Plant in Uganda, supported by World Bank Group guarantees and funded by a private consortium. At the same time, ambitious regional projects undoubtedly present technical, financing and political risks, and will continue to be complemented by investments at the national level.

Improving the effectiveness and governance of utilities

Shortcomings in how the power sector operates lead directly to many of the sub- optimal outcomes detailed in this chapter. Tackling these shortcomings will require improvements in the regulatory and tariff framework at the sector level, as well as better management in utilities. The lack of strategic policy and planning for the electricity sector at central government level is a critical weakness. Interventions have been piecemeal rather than integrated. For example, many countries have focused on generation without investing in efficient transmission and delivery of power. A well- articulated plan for the sector will allow governments to move beyond the “fire- fighting” that has reduced their ability to plan for exogenous shocks, such as drought or high oil prices. Financial viability of incumbent utilities – and hence creditworthiness and access to domestic and international private capital – is important for the overall development of the sector. It demands that utility revenues allow at least the recovery of operating costs and ideally some contribution to capital costs. It means that in many cases, tariffs need to be gradually adjusted to lev-

OFID PAMPHLET SERIES 39 163 els that will allow these goals to be met, while remaining sensitive to the needs and capacity to pay of poorer households. The corollary of tariff adjust- ments is the need to significantly reduce operating costs to lessen the financial burden on consumers and of efforts to recover costs. Operational efficiency programs are needed to reduce the high rates of technical, non-technical (electricity theft) and collection losses. These can include capacity building and technical assistance to improve management, business practices and planning. Priority areas are improved load management (to better match supply with priority customer needs), theft-reduction initiatives and increased revenue collection through enhanced metering and better-run customer service units. Capital expenditure can also be driven down by using low-cost technology, as undertaken in Mali and Guinea. Innovations have included adjusting technical design standards to meet the reduced requirements of low-load systems, maximizing the use of material provided by local communities (such as locally sourced wooden poles), as well as the use of local employees and supervisors recruited from the community. Past efforts at improving utility management focused too heavily on technical issues to the exclusion of governance and accountability. Good governance practices in SSA utilities are often observed in the breach. Trans- parency and accountability depend on solid financial management, procurement, and management information systems. Examples are, requiring the auditing and publication of financial accounts and the use of comprehensive cost-based accounting systems that allow functional unbundling of costs and a clearer sense of cost centers. Oversight and transparency also need to be enhanced by better corporate governance, for example, by reforming how senior managers are appointed, insisting on conflict of interest disclosures, and making staffing practices more transparent and effective. Many of SSA’s newly established energy regulators can play an important role in this area, even in the absence of private participation in the sector. Reforms to ensure financial and managerial autonomy from state interference in commercial decisions are also needed in some countries. In practical terms, even with appropriate tariffs, reduced operating costs and better governance, the combination of expensive, maintenance-intensive equipment and the inability of even moderately wealthy households to pay for the full capital cost of domestic grid extension means that full cost recovery in Africa is not yet possible. Often, capital subsidies will still be needed, whether from governments or donors. Therefore, governments must be able to articu- late, in their strategic policy framework, the economic benefits of subsidies to

164 OFID PAMPHLET SERIES 39 the sector, as well as the path to eventual full-cost recovery. Governments must also recognize that some households connected to the grid cannot afford even the variable costs of their service. Accordingly, carefully targeted and calibrated lifeline subsidies may be a vital part of power-sector strategy.

Expanding access to electricity through sector-wide engagement

The fact that power is often unavailable to lower-income groups means that those who do not have access are not benefiting from government or external financing. From a social, poverty-reduction and political perspective, it is there- VII fore imperative to expand access. Yet financing expansion to lower-income households will further strain the financial viability of the power sector. Tackling this dilemma will require both significantly higher concessional financing from development partners for access programs, in addition to tariff increases and operating cost reductions. Given the scale of investments needed, a systematic approach to planning and financing new investments is critical. The current project-by-project, ad hoc approach in development partner financing has led to fragmented planning, volatile and uncertain financial flows, as well as duplication of efforts. Engagement across the sector in multi- year programs of access roll-out supported by multiple development partners as part of a coherent national strategy will channel resources in a more sustained and cost-effective way to the distribution subsector. Coordinated action by development partners will also reduce the unit costs of increasing access. Such action will also create new sources of demand that will further make the case for large generation projects at the supranational level. Since universal household electrification is still decades away in many countries, it is equally important that sector-wide programmatic approaches ensure that the benefits of electrification touch the poorest households, particularly deep in rural areas. While grid extension is often not economical for dispersed populations, off-grid models based on innovative renewable technologies can be cost-effective. For example, low-cost portable solar lanterns are one consumer product that could be accessible and affordable to the rural public, and the “Lighting Africa” initiative is supporting the development of the market. Solar-powered electrification of clinics and schools that provide essential public services to low-income communities is another way of directly bringing them the benefits of investment in electrification. Finally, it is important to recognize that most of the measures described above are medium term in nature, and cannot be implemented overnight. As

OFID PAMPHLET SERIES 39 165 strong economic performance continues to escalate power demand, many SSA countries will continue to face a very tight demand-supply balance in the coming years. It is therefore critical that longer-term efforts should redress the underlying structural causes of SSA’s current power supply crisis. These endeav- ors should be complemented by shorter-term measures to soften the economic and social impact of power scarcity. Recent experiences from countries such as Brazil show that well-designed demand-side management measures can go a considerable way towards trimming peak demand, thereby substantially reducing the extent of power rationing at relatively low economic and social cost. A good example of such measures is a quota system with price signals, combined with a public energy-efficiency campaign.

166 OFID PAMPHLET SERIES 39 Bibliography

ADENIKINJU, A. (2005). Analysis of the Cost of Infrastructure Failures in a Developing Economy: The Case of the Electricity Sector in Nigeria. AERC Research Paper 148, African Economic Research Con- sortium, Nairobi. BANERJEE, S., WODON, Q., DIALLO, A., PUSHAK, T., UDDIN, H., TSIMPO, C. AND V. FOSTER, (2008). Access, Affordability and Alternatives: Modern Infrastructure Services in Sub-Saharan Africa. Africa Infrastructure Country Diagnostic. VII BESANT-JONES, J. E. (2006). Reforming Power Markets in Developing Countries: What Have We Learned? Energy and Mining Sector Board Discussion Paper 19, World Bank, Washington, DC. BOSTON INSTITUTE FOR DEVELOPMENT ECONOMICS (2006). Impact of Privatization in Africa: Synthesis of Eight Case Studies. Public Private Infrastructure Advisory Facility BRICENO-GARMENDIA, C. AND K. SMITS (2008). Fiscal Costs of Infrastructure in Sub-Saharan Africa. Africa Infrastructure Country Diagnostic. CALDERON, C. (2008). Infrastructure and Growth in Africa. Working Paper, Africa Infrastructure Country Diagnostic. EBERHARD, A. (2005). [Paper From Cape Town Conference And Others] EBERHARD ET AL. (2008). Review of the State of the Power Sector in Sub-Saharan Africa. Africa Infra- structure Country Diagnostic. EBINGER, J. (2006). Measuring Financial Performance in Infrastructure: An Application to Europe and Central Asia. Policy Research Working Paper No. 3992, World Bank, Washington DC. ECON ANALYSIS (2008). Costing Power Infrastructure Investment Needs in Sub-Saharan Africa. Africa Infrastructure Country Diagnostic. ESCRIBANO, A., GUASCH, J.L. AND J. PENA (2008). A Robust Assessment of the Impact of Infra- structure on African Firm’s Productivity. African Infrastructure Country Diagnostic. FOSTER, V. AND J. STEINBUKS (2008). Paying the Price for Unreliable Power Supplies: In-House Gen- eration of Electricity by Firms in Africa. Africa Infrastructure Country Diagnostic. GRATWICK, K.N. AND A. EBERHARD (2006). An Analysis of Independent Power Projects in Africa: Understanding Development and Investment Outcomes. Working Paper, Graduate School of Business, University of Cape Town. IMF (2004). Public Investment and Fiscal Policy. Board Paper, Fiscal Affairs Department, International Monetary Fund, Washington DC. KAREKEZI, S., AND D. MUTISO (1999). “Information and Statistics on the Power Sector and the Reform Process in Sub-Saharan Africa.” In M. Bhagavan, ed., Reforming the Power Sector in Africa (331–352). London: Zed Books Ltd., in association with African Energy Policy Research Network. WODON ET AL. (2008). Electricity Tariffs and the Poor: Case Studies for Sub-Saharan Africa. Africa Infrastructure Country Diagnostic. YEPES, T., PIERCE, J. AND V. FOSTER (2008). Making Sense of Sub-Saharan Africa’s Infrastructure Endowment: A Benchmarking Approach. Africa Infrastructure Country Diagnostic.

OFID PAMPHLET SERIES 39 167

Why Africa Lags Behind in the Energy Sector VIII Steve Olumuyiwa

Introduction

Africa is the world’s second largest and second most populous continent. It is home to over 900 million people of diverse racial stock – the largest, of course, being the black race, who are the aboriginal owners of the continent. From the Arab states in the north to the multiracial nation of South Africa in the south, Africa has 53 countries of diverse economic capabilities. These include off-the-mainland island countries such as Madagascar, Seychelles, the Comoros Islands and Cape Verde. Africa is endowed with vast and diverse primary energy resources – more than enough to meet all her energy needs. Oil and gas, estimated at 60 billion barrels and 11.4 trillion cubic meters respectively, are concentrated mainly in the north and west regions of the continent. The southern regions of the continent host the bulk of her coal reserves estimated at over 55,000 million tons, while the eastern regions of Africa display tremendous geothermal potentials especially along the great Rift Valley. In Kenya, for example, there is a park strangely called “Hell’s Gate National Park,” where the heat from the over 3450C hot plasma deep below the Rift Valley, manifests in strange rock formations amidst spouts of hissing steam and nearby lakes that bubble as if on the boil. Africa’s uranium deposits, estimated at over 600 kilo tons, are among the largest in the world. South Africa, Namibia and Niger Republic are currently ranked among the 10 leading global producers of uranium, which is the main fuel for nuclear energy production.

OFID PAMPHLET SERIES 39 169 Africa also hosts in its Western, Central and Eastern regions some of the largest river courses of our world. These are the Nile, Congo, Niger, Volta and Zambezi river systems. This makes Africa’s hydroelectric potentials most attractive, especially as a renewable energy source. The hydroelectric potentials of the Democratic Republic of Congo (DRC) alone, is estimated to be sufficient for over 300 percent of current Africa energy consumption. Indeed, some parts of Europe are already thinking of subscribing to cheap hydroelectric power imports from the DRC. Africa also has tremendous solar energy potentials, because of the prox- imity of a greater bulk of its land mass to the equator. At this privileged center of the earth’s location, Africa has most of its land mass exposed to nothing less than 325 days of strong sunlight. In spite of all this impressive primary resource content, Africa is embar- rassingly behind in electrical energy production and consumption. Speaking at the 8th Pan African Power Congress in 2006, Ghana’s Volta River Authority (VRA) CEO, Mr. Joshua Ofedie, stated that “Despite its abundant energy resources, Africa generates only 3.1 percent of the world’s electricity, less than any other region of the world.” In October of the same year, Mr. Azanaw Abreha,Vice Chair of the UNECA Commission on Sustainable Development (CSD) at the 14th session of CSD, stated that almost one-third of the estimated 1.6 billion people living without access to electricity reside in Africa. Mr. Abraha, earlier in his opening statement at the opening session of Africa’s regional implementation meeting of that year, had said, “If concerted efforts are

Total primary energy supply Figure 1 The world in 1973 and 2005: regional shares of total primary energy supply

1973 Region / Percent 2005

61.3 OECD 48.5 7.1 China 15.2 5.6 Asia 11.2 1973 14.2 Former USSR 8.6 2005 3.5 Africa 5.3 3.7 Latin America 4.4 1.1 Middle East 4.4 1.9 World Marine Bunkers 1.5 6,128 Mtoe 1.6 Non-OECD Europe 0.9 11,435 Mtoe

Source: International Energy Agency, Key World Energy Statistics 2007

170 OFID PAMPHLET SERIES 39 not made to improve access, 650 million people in sub-Saharan Africa would be without electricity by 2030.” A BBC report in April 2005 quoted the Kenyan National Power Company (KENGEN) as saying that 85 percent of Kenyans do not have access to electricity. However, this situation is not unique to Kenya. Currently, aside from South Africa, Egypt, and perhaps Nigeria, not more than 20 percent (and in some countries as few as 5 percent) of Africans have direct access to electricity. The rural areas fare even worse as only an average of 2 percent of rural dwellers has access to electricity. Even in those cities and rural communities where African governments have engaged in rural electrification, appropriate pricing of the product makes it unaffordable for many. The continent’s New Partnership for VIII African Development (NEPAD) in its development blueprint, emphasizes that, to achieve the desired socio-economic prosperity, African countries must boost access to cheaper and more reliable electricity for its citizens and industries. In summary, Africa, while being home to 13 percent of the world’s population and producing 7 percent of its commercial primary energy, accounts for only 2 percent of the world’s Gross Domestic Product (GDP) and 3 percent of global commercial energy consumption. Most of the commercial primary energy Africa produces is exported to other continents, sometimes with minimal benefit to local populations. South Africa accounts for nearly half (46 percent) of all the electricity consumed on the whole continent and Egypt, Libya and Algeria between them account for a further 30 percent. Most of Africa is extremely poorly served with electricity. The production of electricity for many African countries is equivalent to that of a small town in Europe or the USA. Also, Africa’s per capita consumption of electricity is minuscule. It is as small as 24 kilowatt-hours (kWh) per capita per annum in some countries. The major energy resource in Africa is wood fuel, used with low efficiency through traditional technology and with associated environmental, health and development burdens.

Africa’s current electrical power production status

Total installed capacities in all of Africa’s power stations as at 2005, stood at 106,543 MW. This shows a growth of roughly 140 percent over the last 25 years when compared to electricity installed capacities of 44,468 MW in 1980. How- ever, compared to one country in Asia – Japan – this is an abysmally low level of power-generating capacity. Japan in 1980 had a total installed capacity of 129,751 MW. This by 2005 had grown to 247,946 MW. India, whose total installed capacity in 1980 was below all of Africa at 33,316 MW had overtaken

OFID PAMPHLET SERIES 39 171 Africa by 2005 with a total installed capacity of 137,578 MW – a stupendous 313 percent growth in just one country in Asia. Individual national installed capabilities in Africa south of the Sahara are not very impressive. Aside from ESKOM of South Africa, whose total installed capacity grew from 18,383 MW in 1980 to 44,683 MW in 2001 only to drop off to 40,481 MW in 2005, the rest of Africa south of the Sahara generally sports below 5,000 MW installed capacities, except for Nigeria, whose installed capacity grew from 2,240 MW in 1983 to a peak of 5,959 MW in 1992, only to drop off to 5,898 MW in 2005. Even at these nominal installed capacities, most of Africa’s real generating output is poor due to low availability of figures, which in most cases is in the range of 30-40 percent of the installed capacities. The consequences of low generating capacities tend to manifest in frequent power cuts, load shedding and at times, outright grid collapses. Total energy generated in all of Africa in 2005 was 503 TWh. This is just 3 percent of world energy generation figures of 16,695 TWh that year. In that same year, South America, whose population is about half that of Africa, generated a total of 761 TWh. Total Africa per capita electricity production averaged 563 kWh/capita. This is about 22 percent of world average per capita energy production in that year. Now, when compared to North America, Canada, for example, with a total population of 32.27 million, generated a total of 558.5 TWh that year resulting in an impressive per capita electricity production of 17,307 kWh, about 667 percent of the world average (see Table 2). The United States of America in 2005 generated a total of 4,046.6 TWh, a whopping 24 percent of total world production – making it the largest electrical energy producing nation in 2005,

1973 and 2005 regional shares of electricity generation Figure 2

1973 Region / Percent 2005

72.9 OECD 56.9 2.8 China 13.9 2.6 Asia 8.8 1973 15.0 Former USSR 7.7 2005 2.6 Latin America 5.0 0.6 Middle East 3.5 1.8 Africa 3.1 1.7 Non-OECD Europe 1.1 6,116 TWh 18,325 TWh

Source: International Energy Agency. Key World Energy Statistics 2007

172 OFID PAMPHLET SERIES 39 World demographic and total energy Table 1 consumption indicators: selected indicators for 2005

Region / GDP Energy Net Elec. Country Population GDP PPP prod. imports TPES cons. CO2 million billion billion Mtoe Mtoe Mtoe TWh Mt of CO2 $2,000 $2,000

World 6,432 36,281 54,618 11,468 -11,434 16,695 27,136

OECD 1,172 28,394 30,321 3,834 1,813 5,548 9,800 12,910 Middle East 187 786 1,362 1,496 -979 503 558 1,238 VIII Former USSR 285 525 2,099 1,551 -565 980 1,199 2,303

Non-OECD Europe 54 152 428 63 43 105 167 263

China 1,311 2,098 8,057 1,641 124 1,735 2,363 5,101

Asia 2,080 1,974 7,089 1,114 199 1,286 1,343 2,591

Latin America 449 1,620 3,193 680 -168 500 761 938

Africa 894 731 2,069 1,088 -475 605 503 835

PPP = Purchasing power parity

Source: International Energy Agency with an impressive per capita electricity generation of 13,640 kWh. In Europe, Germany produced 586 TWh thereby averaging 7,111 kWh per capita. In Asia, India’s production for 2005 was 525.93 TWh averaging 480 kWh per capita, while industrial giant Japan produced 1,214.19 TWh to achieve a high per capita average of 8,233 kWh. On the other hand, one city state, Singapore, produced 36.29 TWh to average a high 8,358kWh per capita. Compared to these world figures, as low as Africa’s total averages are, they are even far worse at the country-by-country level. The total Africa figure of 563 kWh per capita was made up largely by two nations. One is Egypt in the North with a total 2005 production of 90.73 TWh 18 percent of all Africa averaging at 1,226 kWh per capita. The other and Africa’s highest producer is South Africa whose production in 2005 was 227.3 TWh to average at 4,848 kWh per capita – about 860 percent of all Africa per capita generation (Table 2). In West Africa, Nigeria, the most populous nation on the continent (140 million), ranked sixth in Africa’s gross electricity generation in 2005 at a total production of 17.90 TWh averaging a poor 136 kWh per capita – one of the

OFID PAMPHLET SERIES 39 173 Selected world electrical power production statistics Table 2

Country/Region Population Total energy production Energy production Million TWh kWh/capita Total World 6,432.00 16,695.00 2,596 Total Africa 894.00 503.00 563 Latin America 449.00 761.00 1,695 India 1,094.58 525.93 480 China 1,304.50 2,322.72 1,781 Malaysia 25.35 83.67 3,301 Japan 127.76 1,214.19 8,233 Singapore 4.34 36.29 8,358 Israel 6.92 46.80 6,759 United Kingdom 60.22 376.63 6,254 Italy 58.53 332.23 5,676 France 62.70 483.23 7,707 Finland 5.25 84.57 16,123 Germany 82.46 586.41 7,111 Canada 32.27 558.50 17,307 United States 296.68 4,046.60 13,640 South Africa 46.89 227.30 4,848 Egypt 74.03 90.73 1,226 Algeria 32.85 29.52 899 Libya 5.85 19.53 3,336 Morocco 30.17 19.40 643 Nigeria 131.53 17.90 136 Zimbabwe 13.01 12.50 961 Zambia 11.67 8.28 709 Ghana 22.11 5.99 271 D.R. Congo 57.55 5.35 144 Kenya 34.26 4.93 144 Cameroon 16.32 3.49 214 Tanzania 38.33 2.36 61

Source: International Energy Agency (IEA)

174 OFID PAMPHLET SERIES 39 Selected world energy and environment indicators Table 3

Region / TPES/ Elec. CO2/ Country Pop. GDP GDP (PPP) Cons. Pop. TPES Pop. GDP GDP (PPP)

toe/ toe/000 toe/000 KWh/ tCO2/toe CO2/ kg CO2/ kg CO2/ capital $2,000 $2,000 capital capital $2,000 $2,000

World 1.78 0.32 0.21 2,596 2.37 4.22 0.75 0.50

OECD 4.74 0.20 0.18 8,365 2.33 11.02 0.45 0.43

Middle East 2.69 0.64 0.37 2,980 2.46 6.62 1.58 0.91 Former USSR 3.44 1.87 0.47 4,209 2.35 8.08 4.39 1.10 VIII Non-OECD Europe 1.94 0.69 0.25 3,086 2.50 4.87 1.73 0.61

China 1.32 0.83 0.22 1,802 2.94 3.89 2.43 0.63

Asia 0.62 0.65 0.18 646 2.01 1.25 1.31 0.37

Latin America 1.11 0.31 0.16 1,695 1.88 2.09 0.58 0.29

Africa 0.68 0.83 0.29 563 1.38 0.93 1.14 0.40

lowest in the West Africa region that year. Nigeria has, over the years, embarked on one of the most ambitious rural electrification programs on the continent, with many rural communities either connected to the grid or with stand-alone community power schemes. The problem, however, is that the poor availability of generating capacity results in poor reliability of supply and frequent blackouts. For the most part, the Africans who live in the nations south of the Sahara do not have access to electricity.

Why Africa lags behind in electrical energy production

The foregoing state of electrical energy production and use in Africa is caused by a number of factors, many of which are interrelated. The most prominent of these factors are: 1. Poor economic status of African states especially south of the Sahara. 2. Poor governance or unstable governments. 3. Wars, regional and domestic social and ethnic conflicts.

OFID PAMPHLET SERIES 39 175 Whichever way the nations of the world are rated, African countries south of the Sahara stand at the bottom, most of the time. Although it has abundant natural resources, Africa remains the world’s poorest and most underdeveloped continent, due largely to the effects of tropical diseases, the slave trade, corrupt governments, failed central planning, the international trade regime and geopolitics. Other factors that have retarded Africa’s development are widespread human rights violations, the negative effects of colonialism, despotism, illiteracy, superstition, tribal savagery and military conflicts (ranging from wars, civil wars, guerilla warfare and genocide). According to the United Nations Human Development Report 2003, the bottom 25 ranked countries (151st to 175th) were from Africa. Widespread poverty, illiteracy, malnutrition and inadequate water supply and sanitation, as well as poor health, affect the majority of the people who reside in Africa, where 36.2 percent of the population is living on or under $1 per day. Africa is by far the world’s poorest inhabited continent, and on average, in 2003, it was poorer than it was in 1973. Some areas, notably Botswana and South Africa, have experienced economic success. The latter has a wealth of natural resources, being the world’s leading producer of both gold and diamonds, and having a well-established legal system. South Africa also has access to financial capital, numerous markets, skilled labor and advanced infrastructure in much of the country. Also, South Africa is home to one of the major stock exchanges in the continent – the Johannesburg Stock Exchange. Over a quarter of Botswana’s budget (also a major diamond producer) goes toward improving the infrastructure of Gaborone, the nation’s capital, and largest city, as well as one of the world’s fastest growing cities. Other African countries are making comparable progress. Nigeria has one of the largest proven oil reserves in the world and has the highest population among nations in Africa, with one of the fastest-growing economies in the world. From 1995 to 2005, economic growth picked up, averaging 5 percent in 2005. However, some countries experienced much higher growth (10 percent) in particular, Angola, Sudan and, Equatorial Guinea. All three have recently begun extracting their petroleum reserves or have expanded their oil extraction capacity. Nevertheless, the economic situation is grim in some countries. Zim- babwe is an example, with 80 percent of its citizens unemployed. The economic crisis has forced about two million Zimbabweans to migrate to Botswana and South Africa. Since 1998, Zimbabwe’s per capita GDP has slid from about $700 to less than $200.

176 OFID PAMPHLET SERIES 39 In consequence of the foregoing, many in Africa cannot afford appropriately priced electricity. Many power utilities in Africa are wholly government owned, financed and operated. Until very recently, electricity in most of Africa was produced as a social amenity, heavily subsidized by government. The result has been that the heavy cost of infrastructural expansion to meet growth, though frequently executed with loans from world bodies such as the World Bank etc, could not be sustained because the utilities were producing power and selling at inappropriate prices. This, coupled with the corruption content of public services in Africa became a crippling combination for electrical power development. In those countries where electricity was appropriately priced, most Africans whose economic ratings were such that they had to live on less than VIII $1/day, could not afford it. These economic factors are the reasons why most electrical systems in many African countries are quite obsolete, as they date from the colonial era. The bulk of power-plant transmission and even distribution facilities was built in the 1950s and 1960s. Low-level investment and poor maintenance has left the infrastructure in a very sorry state across most of Africa south of the Sahara. The many ethnic and regional conflicts in Africa have also taken their toll on energy production. Wars have left equipment damaged and transmission lines cut. For example, a large portion of Liberia’s generation and distribution infrastructure was damaged or destroyed during its long civil war. Liberia’s national electricity company estimates it will cost more than $107 million and take over five years to fully restore the system. Sierra Leone’s Bumbuna Hydro- electric Project was nearly complete when civil war disrupted construction. In Nigeria, ethnic militancy in the Niger Delta Region, where most of the country’s oil and gas exploitation takes place, has resulted in blowing-up of gas and oil pipelines, thereby disrupting supplies to thermal-fired power stations. The instability occasioned by these conflicts has also been largely the reason why Africa has not attracted the necessary foreign and institutional investments required for electrical power development.

Current power management options in Africa

Nigeria, Ghana and Côte d’Ivoire are the largest generators of electricity in West Africa. Nigeria’s major sources of energy are petroleum, natural gas and hydroelectricity. Although the country exports electricity to neighboring Niger, poor availability results in frequent national blackouts. Ghana primarily relies on hydro-power from its Akosombo Dam on the Volta River about 80 kilometers upstream from the coast. Ghana supplies Benin and Togo with the majority of

OFID PAMPHLET SERIES 39 177 their electricity. In Côte d’Ivoire, thermal generating facilities powered primarily by oil and gas, provide most of the electricity. Countries connected to the Ivorian grid include Mali, Burkina Faso, Benin and Togo. The three landlocked and sparsely populated countries of Mali, Burkina Faso and Niger are not particularly well served with energy, mainly because they are relatively poor and are at least partially situated in the Sahara Desert. Energy development is also very limited in the small coastal countries of Liberia, Sierra Leone, Guinea and Guinea-Bissau because of the small economies, political strife and conflicts. In East Africa, regional cooperation on electricity supply has helped sustain current levels of energy use in the countries of the region. The greater part of this was derived from the Nalubaale (formerly Owen Falls) hydro scheme in Uganda. More recently, the East African Community, consisting of Kenya, Uganda and Tanzania, has initiated the preparation of an East African Power Master Plan with the assistance of the World Bank and the Swedish Interna- tional Development Agency. Recently, Uganda and Kenya agreed to an increased supply of electricity to Kenya, once the planned Bujagali scheme is commissioned, hopefully in 2011 by latest estimates. Kenya also hosts the Ol Karia Power Station, which is the continent’s biggest geothermal power-generating plant. Ol Karia currently has an installed capacity of 125 MW. In Southern Africa, the South African Power Pool (SAPP) established since 1995, has helped to network a large number of nations in the region. These include South Africa, Namibia, Botswana, Lesotho, Swaziland, Mozambique, Zambia, Zimbabwe and Malawi.

Recommendations and solution options for improving African energy production

Safety and stability issues Without regional peace and stability within Africa, there can be no meaningful development. This is a vital first precondition that will create the environment for infrastructural development of any kind on the continent. Physical security is of even greater importance for integration projects. South Africa experienced this directly when Renamo rebels destroyed 1,200 power pylons in Mozambique during the 1970s and 1980s. The action put the Caborra Bassa Hydro scheme effectively out of commission for a considerable period of time. Power lines and pipelines are vulnerable to damage. A lot of willful damage is being inflicted by ethnic militias in Nigeria’s Niger Delta with dire consequences for the West African Power Pool (WAPP) plans. The success of inter-

178 OFID PAMPHLET SERIES 39 connected power lines across the continent, whether built in West Africa by WAPP, or in Southern Africa by SAPP or any other systems of interconnections, is totally dependent on the safety of the transmission systems. The southern transmission axes are still sensitive. Peace is not simply the absence of war, and signing peace treaties does not necessarily end wars. Years of civil readjustment may be required before sustainable peace can prevail. The Hydro potentials of the DRC and the Inga Dam scheme is to send many lines across the continent. Northwards, the line to Egypt needs to cross countries that have long histories of political unrest. The transmission lines will need protection, a difficult challenge across the distances envisaged. Even established lines are not safe as seen in various countries of Africa, though it VIII should be borne in mind that not all damage to installations is malicious. Poor maintenance is as much a cause of damage in Africa as terrorists and vandals. Conflict resolution initiatives should be prioritized by African Heads of Government. Also, the African Union (AU) should be strengthened towards ending the many senseless wars and conflicts on the continent. The drive towards attaining genuine democratic dispensations will help stability. Africa suffers too much from the abandoned projects syndrome where regime changes almost always mean that developmental efforts of outgoing governments will either suffer unreasonable delays with consequential escalation of project costs, or outright abandonment. Connected to this is the terrible level of institutionalized corruption that trails government projects within Africa. The fight against corruption has to be taken seriously if Africa is to experience the needed growth in energy production infrastructural development. In addition, Africa needs visionary and responsible leadership to drive these needed paradigm shifts in governance.

Appropriate commercial pricing of energy and privatization of national power utilities Electrical power production and distribution to end users is a very capital- intensive venture anywhere in the world. Power production infrastructure include the following: 1. Power stations. This is the point where we consider the primary or secondary energy to deploy and is the most intensive point of environmental and climate consideration. 2. Power transmission lines that carry grid power across vast distances at variously graded extra high voltages.

OFID PAMPHLET SERIES 39 179 3. Transformer substations and switching stations where the power lines connect with other lines from other parts of the grid to form the power pool. 4. Distribution networks that consist of lines and transformers at lower voltages for connection to the various consumer load points. The scale of funding required for any of these stages, or all of them together, can be quite daunting for the small economies of Africa. For example, the Eco- nomic Commission of West African States’ (ECOWAS) estimate in 2005 for the proposed WAPP was put at $11.8 billion. This figure, which by now will be much higher, is required to build the power stations, substations and power lines that will stretch for some 5,600 km. Ghana’s plan for expanding its hydroelectric generating facilities along the Volta River with a 400 MW plant at Bui is estimated to cost $700 milion. This is why governments in Africa need to divest from the power sector so as to enable a more businesslike approach to power development on the continent. Although many governments have embraced privatization of the power sector in principle, there is a lot of foot-dragging and lack of resolve to conclude this and to do it properly. Privatization itself is a topic on its own; therefore, I will not attempt to discuss it here. The reality on the ground, however, is that most African governments cannot come up with the required massive local and foreign capital investment. Certainly, private capital is needed. Thus, private involvement, foreign governmental and institutional donors and lending agencies need to be appropriately coordinated. This will guarantee that the eventual electrical power will be reasonably priced to ensure project profitability and power that is affordable for the customer.

Power through integration Traditionally in many countries, energy planning has been undertaken on a purely national basis. This is reinforced in Africa’s case by the desire for self- sufficiency in the immediate post-independence phase. The fact is that even in traditional energy planning, it is always cheaper to generate power at the loca- tions where the primary energy supply is cheap. The electricity is then trans- ported along power lines to load centers that are usually distant. Another approach is in the case of oil and gas-fired generating stations. These could be sited close to load centers, while the oil or gas is piped long distances from the source. But the cheapest energy source for a country might lie just across its border in another nation. This is the case for cross-border energy networks, where

180 OFID PAMPHLET SERIES 39 countries with surplus cheap power could run their stations at optimum output without risking oversupply. Conversely, countries with limited generation capacities could access affordable power without building costly facilities. Power pooling also diversifies energy alternatives, ensuring optimum economic power production and end user pricing. Currently, Africa has a number of regionally integrated power pools either existing or already at various stages of planning. North Africa’s energy infrastructure is already reasonably well integrated, particularly regarding the electricity and gas sectors. Energy cooperation between North African countries was first initiated in the 1950s when Algeria and Tunisia linked their electricity networks to exchange power in emergencies. Similar cooperation progressed VIII steadily over the years in the whole of North Africa. Though integration in West Africa is not as far advanced as in North Africa, two major projects are set to lay a strong foundation for West African energy integration in the near future. They are the West African Gas Pipeline (WAGP) and the envisaged WAPP. There are also a number of other regionally integrated power pools operating in Eastern, Central and Southern Africa.

The Inga Hydro Power Project The Inga Hydro Power Project has been discussed for a long time. First studies were done in the 1960s. These site development studies recommended the construction of four hydroelectric power stations in two phases. The first phase concerned the building of three power stations in the Nkokolo Valley, namely

Location of the Inga Hydro Power Project Figure 3

Tshela KINSHASA

INGA 225 km Mbanza-Ngungu

150 km

Moanda Boma Matadi

OFID PAMPHLET SERIES 39 181 Inga I (351 MW, commissioned in 1972); Inga II (1,424 MW, commissioned in 1982) and Inga III (about 3,500 MW, currently in the project design phase). High voltage lines transmit the generated power to Zambia, Zimbabwe, the Republic of South Africa and the Republic of Congo (Brazzaville).

The potential of the Grand Inga Project Apart from the two existing sites and the one currently under development, the total potential of the Grand Inga Project amounts to about 39,000 MW. This can provide sufficient electricity to the African continent. Furthermore, it could help Africa export energy through possible interconnection links to Southern Europe. Three major African interconnection projects were identified in the feasibility studies. 1. Northern Highway (between Inga site and Egypt) 2. Southern Highway (between Inga site and South Africa) 3. Western Highway (between Inga site and Nigeria)

A project like this satisfies all the climate concerns of the world today. Africa contributes very minimally to climate issues. The AU initiatives such as NEPAD are structured to help Africa integrate their individual national plans for the corporate benefit of all, as in this case of Inga.

Financing the project and incentives The development of a project like the Grand Inga needs huge investments. The estimated costs of the entire project could be between $30 billion and $70 billion, depending on the scope. Nevertheless, for example, the price per kWh generated at the Inga site and transmitted to the Italian border would be lower than the market price in Italy today. Already a number of finance institutions such as the Africa Development Bank (AfDB) have begun to invest in the project. The conflict in the Congo and the Great Lakes region of Africa is also gradually coming under control. Attracting adequate funding from global finance institutions and nations in Europe that are already eyeing this project should be easier to arrange now. This project alone holds a lot in terms of potential for African unity and prosperity. If Africa were to concentrate on its rich renewables, such as the many hydro schemes, and the Rift Valley geothermal potentials, the continent would soon find itself a net exporter of affordable electrical power even to Europe. Abundant energy in Africa can only lead to a more prosperous Africa. The way forward is integration through regional and continental collaboration that

182 OFID PAMPHLET SERIES 39 concentrates on maximizing our renewable energy sources. Doing so would ensure that Africa remains the least contributor to climate problems, more especially in the face of rising global oil and gas prices. Africa for the foreseeable future should stick to relatively easier-to-manage technology. Nuclear power generation will remain contentious in the region.

Conclusions

Africa is rich, not poor, in many primary sources of fossil fuels as well as renewable energy sources such as geothermal, wind, hydro-power, etc. Regional and inter-ethnic conflicts all over the continent have combined with and exacer- VIII bated the economic poverty of most of SSA. This has given rise to the current dismal levels of electrical power generation in the continent. Corruption and unstable governments have also made many African nations unable to execute power projects in good time. The result has been escalating project costs. The low level of private-sector involvement in the power sector, run at ridiculously low pricing, has meant that many of the power infrastructures acquired from the colonial and immediate post-colonial era, have neither been upgraded nor adequately maintained. Consequently, this has led to diminishing availability of electricity from the installed capacities featured in many African nations. The regional and continental integration initiatives that exist in the continent such as the AU with its many organs, ECOWAS, SADC, etc, are the best way forward. These have the potential of fostering conflict resolution towards continental political harmony as well as fast-tracking the development of the many eco-friendly, renewable energy sources in the continent. While nations in Africa should ensure that their internal power development plans are commercially viable at completion, it is evident that power through integration is the best way forward for Africa to attain economic prosperity. The involvement of the private sector through properly negotiated and regulated financial participation has now assumed added urgency. Such participation will go a long way to provide funding for executing the many projects such as the Inga Dam project. Furthermore, private-sector involvement will ensure that power is run as a business that is both profitable for the operators as well as affordable for the people.

OFID PAMPHLET SERIES 39 183

Promotion of Public-Private Partnership to Improve Energy Access IX for Poverty Reduction and Growth in Sub-Saharan Africa Adeola Adenikinju

1. Introduction

It is now widely accepted that energy and development are intertwined. Access to adequate and affordable energy services is positively correlated to economic development and poverty reduction. The history of development shows con- vincingly that no country has substantially reduced poverty without massively increasing the use of energy. The United Nations (2005) shows how energy interacts with sustainable development in its various phases – economic, social and environmental. Energy facilitates economic development at the local level by improving productivity and enabling local income generation through improved agriculture development and through non-farm employment, including micro-enterprise development. At the national level, energy pro- motes stable economic development, attracts Foreign Direct Investment (FDI) and allows access to global markets. Also, energy has an impact on the national and global environment. However, lack of energy access also leads to a vicious circle of poverty as seen below in Figure 1.

Energy access and poverty links Figure 1

No money to buy Lack of energy • Energy services, or • To run machines for • Energy conversion equipment income generation activities • For improved living standard

Poverty • Very low income • Poor living standard

OFID PAMPHLET SERIES 39 185 The central role of energy in the achievement of the Millennium Development Goals (MDGs) is well acknowledged and documented. Energy is directly or indi- rectly linked to all the MDGs. According to the UN Commission on Sustainable Development (UN-CSD), “to implement the goal accepted by the international community to halve the proportion of people living on less that $1 per day by 2015, access to affordable energy services is a prerequisite.” Hence, to achieve the MDG targets of halving global poverty level by 2015, there is the need for an urgent focus on increasing poor people’s access to appropriate, affordable and efficient energy services. Achieving the MDGs, therefore, means reaching the poorest and most isolated communities that are mostly in the rural and peri-urban areas in developing countries. Improving energy access substantially in sub-Saharan Africa (SSA) between now and 2015 and beyond will require considerable investment, often beyond the reach of most of the countries. Unfortunately, SSA receives only a small share of private investment for infrastructure. This is due to the low credit worthiness of most African countries, the shallow local financial markets and risk profiles of energy infrastructure. The limited resources available in SSA imply that all resources must be mobilized to be able to make significant impact on the prevailing energy access situation. The Public-Private Partnership (PPP) remains one of the most innovative options that can be used to mobilize more resources – local and foreign – for energy infrastructure development. This paper discusses the role of PPP in expanding energy access in SSA. The rest of the paper is organized into five sections. Section 2 provides some statistics on the state of energy access in SSA. This is followed in Section 3 by a discussion on the constraints limiting energy access in the region. Section 4 discusses the various initiatives and opportunities at the global and regional levels to address energy access in developing countries. The fifth section provides some discussions on PPP, its benefits and challenges, and areas where it can assist the energy goals of the subcontinent. The last section concludes the paper.

2. State of energy access in SSA

The statistics on energy access and development in SSA are frightening. The SSA region ranks very poorly in relation to other continents of the world in matters of energy access and economic development. The subcontinent is home to some of the poorest people of the world. Correspondingly, the energy access base is also among the lowest in the world. For instance, 80 percent of people

186 OFID PAMPHLET SERIES 39 in SSA have no electricity. Lack of access to modern energy has imposed significant productivity constraints on the rural poor of SSA. Also, poor people spend up to a third of their income on energy, mostly to cook. In rural SSA, many women carry twenty kilograms of fuel wood an average of 5 kilometers every day (cited in ITDG). The opportunity cost of this time can be measured by the time that could have been spent on income generation, childcare or education. The problem here is both of overall energy access as well as the quality and reliability of available energy supply. At the broad macro level, these have translated into significant constraints on the economic performance and competitiveness of domestic firms. In most parts of SSA, poor electricity supply is perhaps the greatest infrastructure problem confronting the business sector. For instance, the typical Nigerian firm experiences power failure or voltage fluctu- IX ations about seven times per week, each lasting for about two hours, without the benefit of prior warning. This imposes a huge cost on the firm from idle workers, materials spoilage, lost output, damage to equipment and restart costs. The overall impact of this is increased business uncertainty and lower returns on investment. For the aggregate economy, it reduces the attractiveness of the economy to foreign investment (Adenikinju, 2003). Lee and Anas (1992) report that manufacturing establishments in Nigeria spend on average 9 percent of their variable costs on infrastructure, with electric power accounting for half of this share. Usually, small firms bear a relatively higher cost of infrastructure failures. A 1991 survey of small enterprises in Ghana cited power outages, transportation costs, and other infrastructure problems among the top four

Electrification rate in various regions (2002) Figure 2

100 Percent

Africa OECD World countries Transition Developing Middle East economies Latin America Developing Asia

OFID PAMPHLET SERIES 39 187 Electrification rates by region Table 1

1970 1990 2000 2015 2030

North Africa 34 61 90 98 99

Sub-Sahara 9 16 23 33 49

Africa 14 25 34 43 56

South Asia 17 32 41 53 66

Latin America 45 70 87 94 96

East Asia/China 30 56 87 94 96

Middle East 36 64 91 97 99

Developing countries 25 46 64 72 78

World 49 60 73 78 83

Source: IEA (2002) problems of operations (behind taxes), with this response strongest among “micro” and small firms. Electricity outage was ranked by very small firms among their top four constraints to expansion (Steel and Webster, 1991). No doubt, the low access to modern energy in SSA has played a major role in the high incidence of poverty in the region. If we take electricity as a proxy for modern energy services, only 40 percent of the total population currently has access to power. The access figure is less than 10 percent when we consider only the rural areas. Figures 2 and 3 show the comparative figures on electrification rates among various regions of the world and the percentage of rural population with access to electricity. Figure 3 shows that Africa has the least electrification access. Its electricity access rate is half of the figure for Latin America and also below the developing countries and world averages. Figure 3 shows that the same trend holds when we compare electricity access for the rural population alone. The regional differences are even more pronounced here. While China has over 90 percent of her rural population connected to electricity, in SSA, the figure is less than 10 percent. Latin America and South Asia respectively have about 30 percent and 20 percent of their rural population with electricity access. Another feature of electricity access in SSA is the sharp inequality in its access, both across geographical spheres (rural and urban divide), as we

188 OFID PAMPHLET SERIES 39 Regional comparison of rural population access to electricity Figure 3

100 Percent

0 South Asia China Sub-Saharan Africa Rest of Africa Latin America IX

Access to electricity for upper income households Figure 4 among selected countries in SSA

100 Percent 80

Ghana Kenya Ethiopia Namibia Nigeria Senegal Tanzania Uganda Zambia Cameroon Zimbabwe Côte d’Ivoire South Africa mentioned earlier. Perhaps more important is the inequality in access based on income divide. This is amply demonstrated in Figures 4 and 5, which shows that 100 percent of the richest 20 percent of the population have access to electricity in Côte d’Ivoire, Namibia, and South Africa.1 In Ghana, Cameroon, Nigeria and Zimbabwe, 99 percent of the richest 20 percent of the population have access to electricity. Comparatively, Figure 5 shows that the bottom 40 percent

1 Electricity access is defined generally to cover the number of households that have electricity in their homes. It includes commercially sold electricity – both grid and off-grid as well as self-generated electricity.

OFID PAMPHLET SERIES 39 189 Income distribution of access to electricity in selected countries in SSA Figure 5

Percent Population: Poorest 2nd poorest Richest 100

Ghana Kenya Ethiopia Namibia Nigeria Senegal Tanzania Uganda Zambia Cameroon Zimbabwe Côte d’Ivoire South Africa of the population has no access to electricity in SSA (Karekezi and Majoro, 2002). In many countries, rural access to electricity is less than 2 percent as can be seen in Figure 3. Figures relating to electricity access do not even reveal the quality of supplies, which is often very poor in many areas of the continent. According to the ITDG estimate, it will take more than 40 years to electrify South Asia and almost 80 years for SSA, going by the current trend. However, if the international community is to intervene and support current reform efforts as well as energy access initiatives, electricity could be provided to the entire SSA at a faster pace. In Africa, more than 80 percent of the population relies primarily on biomass – wood, dung, crop waste – for their domestic needs (see Figure 6). Biomass

Electrification trend in selected countries in SSA Table 2

Country Population (millions) Coverage (%) Years to 100%

Tanzania 34.0 8 Infinity

Uganda 24.4 4 1,275

Malawi 11.8 5 183

Kenya 31.3 15 42

Source: ITDG

190 OFID PAMPHLET SERIES 39 Dependence on biomass fuels Figure 6

3,000 Millions Population using biomass (millions) Percent 100 Percentage share in total population 2,500 75 2,000

1,500 50

1,000 25 500

0 0

China India IX Indonesia countries NorthMiddle Africa East Developing Rest of Africa Latin America Rest of South Asia Sub-Saharan Africa for cooking is often used inefficiently and emits a large amount of smoke. When this is done in poorly ventilated surroundings, as is often the case, it can be a significant source of indoor pollution, with dangerous amounts of toxic substances like carbon monoxide, sulphur and nitrogen oxides (Davidson and Sokona, 2002).

3. Constraints to improving energy access

The central question we will examine in this section is: what are the factors that are responsible for the low energy access rate in the subcontinent? There are several reasons that can be adduced for this. First, energy access should be seen holistically rather than just in terms of electricity provision. There has been an extensive focus on the provision of electricity to the poor people. However, electricity is not always the most appropriate form of energy, nor is it the quickest or the most cost-effective way of providing energy services to the poor (UN, 2005). Providing clean, modern energy services to poor communities will require the expansion of choice of energy options, including conventional and non-conventional sources. A corollary to the above is that the approach adopted for expansion of the electricity system is not appropriate. The conventional approach to electrification, through centralized power plants and power-line distribution, often bypasses rural communities because they are located too far away from the grid

OFID PAMPHLET SERIES 39 191 (ITDG, 2004). About 70 percent of people in SSA live in rural areas. Rural population densities are generally low, levels of demand are limited and the cost of providing energy supply is high compared with densely populated areas. Thus, electricity companies – public or private – have little or no incentive to provide services to these areas. Third, while current reforms in the energy sector and the economy are making fairly good progress in several parts of the continent, there is inadequate attention given to meeting the energy needs of the poor. The issue of expanding energy access to the poor has been relegated to the background in the wave of World Bank and International Monetary Fund (IMF) inspired economic reforms that swept through the continent in the 1980s and 1990s. The examples of Kenya and Senegal presented in Figure 7 are illustrative of this experience. The pace of providing electricity to the poor has assumed little or no importance. Hence, there is an urgent need to sequence the reform process so that consideration for expanding energy access to the poor progresses in tan- dem with other components of the reforms. Furthermore, in the past, energy access was perceived as simply a technical problem. This has limited the success rate of past initiatives in expanding energy access. Energy access must not be addressed simply as technical and economic issues only. It is important to take a people-centered approach, by looking at how energy affects peoples’ lives directly. Hence, there is need for a par- ticipatory approach where the sensitivities of the people to cultural, social and economic factors are taken into consideration in the choice of technologies for energy delivery.

Impact of reforms on the pace of electrification of the poor Figure 7

20 Percent

15 Kenya Senegal 10

0 Pre-reforms Post-reforms

192 OFID PAMPHLET SERIES 39 Fourth, there is also the role of financial constraint. Most of the countries in the region are very poor. Per capita income in the region is among the lowest in the world. Worse still, many of the countries are quite small: therefore their capacity to provide electricity for their people beyond the capital city and a few other cities is very limited. This implies that regional coordination of energy policies and programs to cover for financial, skills and technical gaps is imperative. Fifth, the perceived high investment risk in Africa has limited the continent’s ability to be a destination for private investment in the power sector. These countries are seen as lacking strong contract enforcement legislation, have an undeveloped regulatory environment and have significant potential economic or political weaknesses. The dispersed population in rural areas, with low spending power, does not present an interesting opportunity for international private IX investors, but can represent a market for local investors and small local companies which understand the market and can provide cost-effective services (ITDG). In addition, past energy access initiatives have also failed because of lack of proper coordination among the various ministries, government departments and agencies (MDAs). Energy access was seen as a singular preserve of the line ministry in charge of energy. Hence, there was little coordination between sectors. Inter-sectoral coordination of investment is of paramount importance if there is to be any real impact on poverty reduction and development. A significant amount of past investment for energy infrastructures failed to deliver expected results, because they were dissociated from investments for social, productive or domestic use; besides that, the potential services could not find markets and therefore energy infrastructure viability was compromised. Finally, the extant renewable energy resources available in the continent have not been actively developed towards meeting the energy needs of the people. There are various barriers to the development of local and renewable energy sources. These barriers include financial, shortage of local expertise, no local production of equipment and components. Others are institutional and regulatory barriers including non-incentive fiscal framework.

OFID PAMPHLET SERIES 39 193 4. Existing initiatives and opportunities

There are several initiatives currently at both global and continental levels to address the energy poverty problem of the subcontinent. Some of these initiatives are highlighted in this section.

International initiatives to get energy to the poor Table 3A

UN Commission for Sustainable Development 9th Session Acknowledged that access to sustainable energy services is an essential element of sustainable development stating that: “To implement the goal accepted by the international community to halve the proportion of people living on less than $1 per day by 2015, access to affordable energy services is a prerequisite.”

G8 Renewable Energy Task Force Commissioned by the G8 in 2000 to report on how the barriers to the expansion of renewable energy can be overcome particularly in the south and how the G8 should support the dissemination of renewable energy for the world’s poor. It made significant policy recommendations on how to achieve access to renewable energy supplies for 800 million people in developing countries. Unfortunately the recommendations were not fully supported by all G8 members, but they do represent the views of a large group of recognized international experts in the field from governments, industry and NGOs.

UNDP and the World Energy Council Have published the World Energy Assessment with recommendations about how the provision of energy to poor people could be accelerated. In addition, a series of UNDP publi- cations, “Energy for Sustainable Development: A Policy Action Agenda” discusses critical energy policies, illustrated with concrete examples, necessary to address development objectives, including economic growth, equity and environmental protection.

The European Union Initiative on Energy for Sustainable Development Aims to contribute to providing the access to energy necessary for the achievement of the MDGs. The EU proposes to work with developing countries towards creating the necessary economic, social and institutional conditions in the energy sector to achieve their national development goals, in particular by providing and improving energy services for the “energy poor.”

The Department for International Development in the UK Published its “Energy and the Poor” paper at The World Summit on Sustainable Develop- ment (WSSD). This emphasizes the important role of energy as an enabling factor for achieving the MDGs.

194 OFID PAMPHLET SERIES 39 Other bilateral agencies such as DANIDA (Denmark), USAID, DGIS (Netherlands), BMZ (Germany) and SIDA (Sweden) These bilateral agencies are also actively involved in small-scale renewable energy activities for poverty reduction as well as other energy-access programs.

National Governments Developing countries are preparing Poverty Reduction Strategy Papers (PRSPs) as part of conditions from International Development Agencies. These define countries’ commitment to reducing poverty and make proposals for the actions needed to provide improved services in a number of sectors to achieve the MDGs. The first completed PRSPs show that while only 50 percent of the papers make a specific priority of the need for energy investment, IX energy will be an essential enabling factor in the achievement of the strategy for all other sectors and all MDGs .

The UN Conference on Finance for Development at Monterey, March 2002 Declared a financial commitment to fund the achievement of the MDGs, each of which requires investment in improved energy services, although the conditions attached to divest- ment of financial resources, particularly those from the US, raise questions about its value. Furthermore, the vast majority of industrialized countries fall far short of meeting the UN goal of 0.7 percent of GNP for development aid contribution. Official development aid to Africa has fallen by some 6 per cent each year since 1995.

Organization of Economic Co-operation and Development (OECD) Issued a statement of intent to participate in a global effort to provide energy services to those currently without access and to encourage the involvement of private finance. How- ever, the International Energy Agency observes that with current policies there will be little improvement in the availability of modern energy to those who currently lack access, particularly in SSA and South Asia, where growth prospects are limited by affordability.

The World Bank’s new energy strategy Proposes direct help to the poor by providing financial and technical assistance for: facilitating access to modern fuels and electricity; supporting energy needed for social services (education, communications, health); improving the macro and fiscal balances by replacing inefficient application of public funds by more directed subsidies for the poor; encouraging private investment; improving regulation of the energy industry; and removing market barriers to renewables. For the areas of the world with the most acute problems of access to energy services (Africa and South Asia), the World Bank will focus on demand-driven infrastructure investments through such mechanisms as “Community-Driven Development” (COD) (currently $2 billion per year in all sectors), Social Investment Funds (SIF), reform and privatization of transmission and distribution, and investment in rural energy and renewables.

Sources: ITDG, ECOWAS White Paper

OFID PAMPHLET SERIES 39 195 African regional initiatives to get energy to the poor Table 3B

NEPAD To meet the challenges facing African countries, NEPAD sets the objectives of increasing the African population’s rate of access to energy from 10 percent to 35 percent over the next 20 years. i.e. bring the number of people served from 60 million to 300 million (NEPAD, 2001).

African energy ministers At a meeting in New York, the African energy ministers committed to working together to fulfill the following aims over the next 10 years in order to enable Africa to achieve the MDGs: • 50 percent of Africans living in rural (and peri-urban) areas and using traditional biomass to fuel their cooking will have access to improved stoves and kerosene or efficient cookers in order to cut internal pollution. • 50 percent of the urban and peri-urban population must have access to a reliable modern energy service that enables them to meet basic needs such as lighting, communication, community and productive activities. • 50 percent of schools, clinics and community centers in rural areas must have access to a modern energy service to fuel lighting, refrigeration, information and communication amenities, etc. The centers must also be equipped with productive energy capacities services (Africa and South Asia).

Common Energy Policy (CEP) The CEP, which was adopted in 2001 is in conformity with UEMOA mandate before implementation of the national sector reforms, which changed the relationships between energy actors and public authorities. The CEP plans to: implement an integrated energy planning system, promote renewable energies, speed up the interconnection of electricity grids in collaboration with and under the wing of ECOWAS.

The West African Power Pool (WAPP) system In accordance with the May 1992 decision on the Community energy policy, whose aims are to harmonize Member States’ energy policies and increase collective energy autonomy, ECOWAS adopted, in December 1999, the principle of setting up a West African Power Pool System (WAPP). This stand led to the formulation of a master plan allowing for the development of energy production means and interconnecting electricity grids with a view to boosting Member States’ interconnection with the capacity and multiply it by four between 2005 and 2020. The WAPP is to interconnect national grids across 5,600 km in most West African countries (Nigeria, Benin, Togo, Ghana, Côte d’Ivoire, Niger, Burkina Faso and Mali). Total required investment in all infrastructures will amount to $11.8 billion over 19 years. The result- ant facility will equip the ECOWAS region with an installed capacity of some 17,000 MW, enough to satisfy estimated demand until 2023 (ECOWAS, 2005).

The West African Gas Pipeline (WAGP) project No doubt this work takes advantage of the 18 billion m3 of natural gas that Nigeria currently flares. It stands as a complement to the WAPP regional strategy for the development of WAPP hydro-electricity. The 687 km pipeline, whose cost is estimated at $617 million, will serve to supply thermal power stations in Benin, Ghana and Togo, and yield a capacity of 3,000 MW in

196 OFID PAMPHLET SERIES 39 20 years’ time. It will be built, run and be the property of the West African Gas Pipeline Com- pany (WAPCO), a public-private partnership with the following shareholders: Chevron Texaco West African Gas Pipeline Limited (38.2 percent), Nigerian National Petroleum Corporation (26 percent), Shell Overseas Holding Limited (18.8 percent), Takoradi Power Company (17 percent); SOBEGAZ (Benin) and SOTOGAZ (Togo) are also to take shares in the consortium.

ECOWAS/UEMOA Energy Partnership Agreement ECOWAS and UEMOA signed in August 2005 a collaboration agreement that covers wide areas including poor people’s access to energy. Activities provided for in the agreement relate to: WAPP; access to energy services in rural and peri-urban zones; cross-border oil and gas pipelines in West Africa; promotion of renewable energy sources; regional energy information systems; improvement of hydrocarbons supply; energy control; human and institutional capacity building; raising development partners’ awareness, and fundraising for energy projects. The Regional Solar Program (RSP) IX The objective here is to use modern energy services to provide the population with drinking water. It was launched in the late 1990s by the lnterstate Committee for Drought Control in the Sahel (CILSS) and was backed by the European Union. The program aims at promoting the use of photovoltaic (PV) solar power, particularly for water pumping, in order to meet the needs of the main urban centers of the Sahel.

The Regional Program for the Promotion of Household and Alternative Energies in the Sahel (PRADES) This program is implemented by CILSS and Sahelian Governments, with the support of the European Union and the German Cooperation Authority. Prades’ objective is to help Mem- ber States design, adopt and implement their Domestic Energy Strategy.

The Multi-Functional Platforms project (MFP) Aims at bringing motive power to rural areas. The project was initiated in Mali in 1996 with the backing of UNDP and UNIDO, and has since been extended to Senegal, Burkina Faso, Ghana, Nigeria and Guinea. Its goal is poverty reduction as a whole but specifically among rural women, by allowing them to engage in income-generating opportunities through supply of energy services.

The Regional Biomass Energy Program (RBEP) This is a program whose objectives are poverty reduction and environment protection. It is implemented by UEMOA with the support of Dutch cooperation. The RBEP aims at helping Member States conceive and implement projects and programs on modern uses of biomass.

Regional Center on Small Hydro Power for the African Region A UNIDO initiative to promote the study and application of small hydro for electricity generation in the sub-region.

Debt forgiveness initiatives A number of heavily indebted poor countries in the subcontinent have benefited from debt forgiveness initiatives provided by the rich countries and international financial organizations. These hopefully provide a pool of resources that these countries can commit to poverty reduction and providing modern and efficient energy to the poor in these countries.

Sources: ITDG, ECOWAS White Paper

OFID PAMPHLET SERIES 39 197 5. Expanding energy access: What role for public-private partnership (PPP)?

The initiatives listed in the previous section present some opportunities for delivering modern energy to the poor. We also note the increasing interest of the private sector in energy investment in the developing countries. The total annual global private investment in PPPs in developing countries between 1990 and 2003 was about $97.7 billion (see Figure 8). This translates to an annual mean of $6.98 billion. However, due to a number of developments in the international scene, most especially the Asian financial crisis, private investment flow for power generation in developing countries declined from the height of $16 billion in 1996 to an average of $4 billion in 2003. This investment is concentrated in generation and divestiture (privatization) in Latin America and East Asia. Only a quarter of FDI in energy goes to South Asia and Africa, and even then, the larger chunk of this goes to the oil and gas sub-sector. Thus, for SSA to efficiently integrate into another wave of global private finance in the power sector of developing countries, it needs to make the continent attractive to investors and reduce perceived high-investment risks in the continent. Fortunately, the reform programs in various countries in the subcontinent have started to address concerns of investors in this regard. The legislative and institutional environment in the continent has changed significantly in recent years.

Private investment in power generation in developing countries Figure 8

16,000 $ million

12,000

8,000

4,000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

198 OFID PAMPHLET SERIES 39 5.1 Public-Private Partnerships – a definition

“A Public Private Partnership is an arrangement between a government entity (central or sub-national) and a private entity established for the purpose of providing an essential service facility to the public. The goal of this arrangement is to provide the service or facility more efficiently and at a lower cost to the end user than either entity could provide the service on its own. The arrangement will try to allocate the risks of the venture fairly between the private and government entities, based on each entity’s ability to manage these risks and to provide rewards to each party based on the risks they have assumed.” (Spicer, 2005) There are different options open to SSA in adopting a framework for PPP. These options vary in terms of the level of government involvement in the pro- IX vision of the service. The particular option to be adopted will depend on a number of factors that will influence the success of the PPP option. • Technical assistance: In this case, the private sector provides limited advice to the government on how to offer more efficient operations. However, the relevant government agency continues to provide the services. • Management contract: Here, the private sector takes a more active role in the management of the agency providing the services. However, this type of PPP does not impose any new investment on the private sector. • Lease contract: Under lease contract, the private sector pays for use of the system. However, the public sector pays the operations fees. • Concession contract: This is one of the most intensive PPP operations. Usually, the private sector commits significant investment into the project. The private sector then exercises a period of ownership control. Ultimately the assets revert to the public sector. • Sale of assets: Public sector sells system ownership to private sector and retains regulatory authority.

One of the key issues in PPP is determining an appropriate framework for the allocation of risks between the government and the private sector. Usually, the government assumes non-commercial risk, while the private sector takes care of the commercial risks. Table 4 shows the sources of resources and allocation of risks under the various PPP options discussed above.

OFID PAMPHLET SERIES 39 199 Sources of resources and allocation of risks Table 4 under various PPP options

PPP Option Labor Capital Contract Output Investment investment/ duration risk * risk ** Financing

Service contract Private NA 1-2 years Public Public

Management contract Private Public 3-5 years Public Public

Operating lease to private sector Private Public 5-15 years Public Public

Concession (DBFO) Private Private 15-25 years Public Private

Concession (BOOT) Private Private 15-25 years Private Private

* Output risk: quality, minimum unit costs and secure availability ** Investment risk: competitive return on equity capital

Source: Feig and Finlayson, 2008

There are several benefits of PPP, which make it one of the important options to addressing the infrastructure shortages in developing countries. Multilateral agencies are also in support of the PPP and are willing to shore up its application in several infrastructure projects in developing countries. The justifications and benefits of PPP are several. First, due to budgetary constraints and several alternative calls on their limited resources, it is very clear that African countries are unable by themselves to address the energy challenges that they face. This is even complicated by declining Official Development Assistance (ODA) in recent years. Therefore, PPP provides an opportunity for the private sector to complement available public capital. Second, PPP offers an incentive for the private sector to engage in infrastructure provision. Infrastructure by its nature is not an attractive option to the private sector due to the large capital requirements, long gestation periods and how to recover the costs of their provision. Some of these problems are resolved under the PPP through fair allocation of risks between the government and the private sector. The government can assist also to address issues of resettlement, community disruptions and distrust, as well as land conflicts, among others. Off-take agreements also assure the private providers of sales of output. Third, it is generally accepted that the private sector is more efficient in the provision of services. The discipline of the market imposes production and technical efficiency on the private sector in the provision of goods and services. Hence, PPP provides an opportunity to harness the efficiency of the private

200 OFID PAMPHLET SERIES 39 sector. The issue of access by the poor to modern energy services can also be addressed through tariff support for the poor. The government can pay the difference between the cost recovery price and the price affordable to the poor so that the private sector can continue to provide the service. A good example of this is the Pamir Energy case in Tajikistan. Here, aware that due to the extant poverty of the people, it was going to be difficult for 80 percent of the population to afford tariff payment for electricity consumed, the government, with the support of the World Bank and the government of Switzerland, pays the private company, Pamir Energy, a lifeline tariff from a tariff fund if it delivers electricity and it is paid by users. This is an example of output-based aid (OBA).

IX Types of government guarantees Table 5

Exclusivity The government may agree to preclude competition within the concession for an agreed period of time that may extend to the full life of the concession given. Construction cost guarantee Government protects a private entity from potential cost overruns in the construction phase of a project. Revenue guarantee Government sets a minimum variable income for the private operator, typically the income derived from user fee payments by end-use customers. Cash subsidy Government agrees to provide the private concessionaire a total lump sum or fixed amount per new connection, and payments can be either in installments or paid all at once up front. Payment guarantee Government agrees to fulfill the obligations of a purchaser (typically an SOE) with respect to the private concessionaire in the case of non-performance by the purchaser, e.g. an off-take agreement.

Debt guarantee Government agrees to secure the debt of the private concessionaire by guaranteeing repayments to creditors in the cases of a default. Exchange rate guarantee Government protects the private concessionaire from fluctuations in the value of the local currency.

Source: Operations Evaluation Dept of ADB and World Bank

OFID PAMPHLET SERIES 39 201 Direct subsidy is not the only option open to government in managing PPP. The private sector under the PPP arrangement often requires different types of guarantees from the government to enable it to commit resources to the provision of infrastructure services. Usually the nature of the guarantees is spelt out in the agreements between the government and the private sector. In the case of the electricity sector, this is sometimes contained in the Power Purchase Agreement (PPA). Table 5 shows different types of government guarantees. However, the government needs to develop the capacity to evaluate proposals from the private sector and determine the appropriate guarantee to extend to particular projects in the interests of the country.

5.2 Barriers to PPP in expanding energy access in the rural sector

However, it is important to realize that there are certain barriers that have dogged the successful implementation of PPP in the rural electricity sector. These barriers include the continuous existence in some of these countries’ statute books of old laws, policies and regulations that inhibit competition and an enabling environment for the market to flourish. In some cases, the private sector is banned from taking part in some economic activities or at times the cost and time of complying with the regulations become prohibitive. Second, government sometimes lacks the capacity to be able to fully engage the private sector in the design and implementation of the PPP arrangement. Another barrier has to do with appropriate pricing for the services provided under the PPP. By the nature of some of these services (sometimes seen as public or merit goods), the government will want to encourage maximum access to them. However, given the level of poverty in most parts of SSA, it will be difficult for full cost-recovery through pricing for these services. Hence, the government may have to support the provision of the services through subsidies or budgetary allocation. A corollary of the above is the low effective demand for modern energy services in rural areas. This is complicated by years of habit to traditional methods that are perceived as “cheap and inexpensive,” thereby making transition to modern energy more difficult. In addition, private-sector operators are usually unwilling to take some uninsured risks. Operating in Africa and in rural areas in particular poses challenges. Hence, investors are not generally disposed to taking those risks. Furthermore, the limited capacity and low depth of the domestic financial market also places a major constraint on the operation of private investment. Infra- structure in general is highly capital intensive, and is traditionally funded from a mix of equity and debt. However, banks are generally reluctant to provide

202 OFID PAMPHLET SERIES 39 lending for long-term, high-risk activities such as infrastructure provision. The capital market is either non-existent or too shallow to provide an alternative source of funding for local entrepreneurs. Finally, there is limited experience of local entrepreneurs in the areas of decentralized off-grid solutions.

5.3 PPP intervention – critical success factors

The history of PPP intervention in SSA is still very recent. There are a number of ongoing experimental projects in different parts of the subcontinent, with varying levels of success. What then are the critical factors for successful PPP in the continent? In this section, we identify some of these factors. These

IX Examples of off-grid power plant technologies Table 6

Technology Applications Pros Cons Diesel engines - Water pumps - Easy maintenance - High fuel costs - Mills - Continuous energy - Noxious and CO2 - Refrigeration services (24 hours emissions - Lighting and a day) communication - Allows for income- generating activities

Small biomass plants - Water pumps - Allows for - Noxious emissions - Mills income-generating - Refrigeration activities - Lighting and - Base load operation, communication continuous operation possible

Mini-hydro - Mills - Long life, high - Site-specific - Lighting, reliability - Intermittent communication - Allows for water availability and other income-generating activities

Wind - Lighting and - No fuel cost - Expensive batteries communication - Intermittent energy - Mills services - Pumps

PV/Solar - Basic lighting - No fuel cost - High capital costs and electronic - High cost of battery equipment replacement - Needs further R&D

Source: IEA (2002)

OFID PAMPHLET SERIES 39 203 include formulation of an appropriate regulatory framework that will protect private property and ease the bottlenecks for the private sector to operate. There is also the need for a government agency that is well equipped and has the capacity to coordinate electrification activities in the rural areas. For example, in Nige- ria, there is the Rural Electrification Agency (REA). The REA will then serve as the government’s focal point to negotiate contractual agreements with the private sector in all manners relating to rural electrification. The agency must be well- equipped and staffed to be able to effectively perform this function. Solutions to electricity access in the rural and peri-urban areas will require a combination of both grid and off-grid approaches. Grid extension to areas that are far away from existing grid structure may take too long in coming or be

Possible IPP outcomes Table 7

COUNTRY OUTCOME: POSITIVE COUNTRY OUTCOME: NEGATIVE

Country attracts competitive Country IPP obligations excessive, and sustainable investments unnecessary or expensive

Contracts payments are made Contract payments are made as originally agreed as originally agreed

Examples: Examples: Thailand, Egypt, Brazil (Hydro IPPs) Turkey, Malaysia

Country wins, investors win Country loses, investors win INVESTMENT OUTCOME – POSITIVE

Country attracts investment Country IPP obligations are excessive, that produces electricity unnecessary or expensive

Private investors do not make Mismanagement deters a reasonable return on investment future investment and quit the country Private investors do not make a reasonable return on investment or project canceled

Examples: Examples: China India (Dahbol Power), Poland, Kenya

INVESTMENT OUTCOME – NEGATIVE Country wins, investors lose Country loses, investors lose

Source: Adapted from Adegbulugbe, 2005

204 OFID PAMPHLET SERIES 39 very costly. Hence, options using various non-grid methods can be explored based on relative costs, technology and resource availability (see Table 6 for different technology options for off-grid electricity). Generally, to successfully attract foreign investment for the development of PPP on a sustainable basis, the outcome of partnership projects must be positive for the investors and the country. On the investors’ side, they must enjoy a reasonable return on their investment. For the country, the cost that the government has to bear must not be excessive. Experiences of PPP development in developing countries show that not all projects result in this desirable win-win situation. As shown in Table 7, the outcome of projects in the upper left-hand corner is successful for both the country and the investor (win-win situation). At the other extreme, the projects in the lower right corner resulted in a lose- IX lose situation for both the country and the investor. Energy access is not an end in itself but a means to an end for economic development and poverty reduction. Therefore, an effective energy access program must be seen and implemented within a broader perspective in a coordinated manner. This calls for an integrated and bundled approach that includes: • complementary infrastructure such as roads, communication facilities, and water supply; • availability of income generation activities especially through small-scale enterprises; • access to market and credit; and • promotion of private sector/community initiatives for energy supply.

Other essential factors include: development of local capital market and establishment of specialized or guaranty funds for infrastructure development that can be easily accessed by private investors; design of appropriate incentive structures for private investors; continuation and deepening of macroeconomic reforms; increased funding of research and development and local production of electricity equipments and materials; and, training of engineers and technicians in local communities that can repair and maintain renewable energy infrastructure. African countries must continue on the path of credible and sustained economic and political reforms in order to reduce “country risk” and other “investment risks” that constrain foreign capital flow into the energy sector. DFID claims that “there is no lack of capital to invest; the challenge is how to make it attractive for private investors to invest in energy in developing countries.”

OFID PAMPHLET SERIES 39 205 5.4 PPP: areas of intervention There are a number of key areas where PPP can start to make an impact. One important area is in terms of a program to develop technology to improve biomass-based fuel in the subcontinent. Biomass will continue to play an important role in household energy use in SSA. The key, however, is to improve on the sustainable use of biomass in a way that cannot constitute a health hazard to users. For example, distribution of improved stoves through PPP has been working in some parts of Uganda and Kenya. In most of SSA, energy prices are much higher in the rural areas or, at times, modern energy products and services are not even available because of poor distribution systems. The distribution network of energy products discrim- inates against the people in the rural areas. Also, PPP efforts should be concentrated in developing capacity for local production of electricity components. This is one of the key successes of the rural electrification program in China. PPP can also focus on the area of developing pilot projects to test innovative institutional and financing options. Furthermore, SSA can benefit from knowledge transfer from experiences available around the globe. Likewise, governments should invest in developing micro-credit systems that will empower beneficiaries of PPP projects in the rural areas to be able to afford them and thus sustain the virtuous cycle of prosperity.

6. Conclusion

Clearly, PPP remains a critical option for addressing energy access problems in SSA. It provides an opportunity for the subcontinent to harness the comple- mentarity between the public and private sectors. Energy access is central to the achievements of the MDGs. In this paper, we have identified key elements that are central to accelerating energy access for the vast number of poor people living in the rural and peri-urban areas of SSA. The PPP remains one of the most innovative options that can be deployed to mobilize more resources for energy infrastructure development. Also, PPP has several other benefits. It provides a means of mobilizing funds to develop the vast backlog of investment required in the energy sector, which government alone cannot finance due to fiscal constraints. It allows the private sector to offer outputs in competitive markets and to introduce efficiency into the provision and delivery of energy services. In addition, PPP contracts provide a mechanism to ensure that risks are efficiently allocated between the public and

206 OFID PAMPHLET SERIES 39 private sectors. Also, there is a reasonable degree of certainty on the tariff mechanisms and private sector return on investment. Opportunities for PPP adoption in SSA energy sector exists. These include deployment of Renewable Energy Technology (RET) such as solar, wind and mini-hydro. Others are local production of electricity components, development of an efficient modern distribution system, efficient billing and collect- ing systems, and development of more efficient biomass technology. However, there are a number of critical success factors for PPP. These critical factors are necessary in order to maximize the potentials of PPP in the sub- region. These factors include: a good regulatory framework that will minimize “regulatory risk” in the sub-region; promotion of capacity building in Research and Development (R&D) and in the operation and maintenance of electricity IX equipment; enlightenment and education on the importance of renewable energy; improved profitability of projects to attract private investment; a credit support system such as a low-interest fund; and, micro credit. In addition, community participation very early in the project is critical. Increasingly, many countries in the sub-region are realizing the potential that PPP arrangements hold to utilize the huge natural endowments extant in SSA to boost access of their citizens to modern energy. Political leaders must exercise necessary political will to put in place legislative and regulatory policies to ensure the success of PPP. There must also be a departure from the previous strategy of simply seeing electricity provision as a social service. Rather, the focus should be a “bundled approach” where emphasis is on the provision of electricity to generate income and boost the productivity of recipients. This, in the long run will guarantee the sustainability of the PPP model in SSA.

OFID PAMPHLET SERIES 39 207 Bibliography

ADEGBULUGBE, A.O. (2005). Work Programs, mimeo.

ADENIKINJU, A.F. (2003). “Electric Infrastructure Failures in Nigeria: A Survey-based Analysis of the Costs and Adjustment Responses.” Energy Policy, vol. 31: 1519-30.

DAVIDSON O AND Y. SOKONA (2002). A Sustainable Energy Path for African Development – Think Bigger, Act Faster. EARc/ENDA Tiers, University of Cape Town, Cape Town.

FEIG, H AND B. FINLAYSON (2008). The Special Evaluation Study of ADB Assistance to Public Private Partnerships in Infrastructural Development. Asian Development Bank, mimeo.

INTERNATIONAL ENERGY AGENCY (IEA) (2002). World Energy Outlook: Energy and Poverty. Paris: OECD.

KARAKEZI, S. AND L. MAJORO (2002). “Improving Modern Energy Services for Africa’s Urban Poor.” Energy Policy 30: 1015-28

LEE, K.S AND A. ANAS (1992). Impacts of Infrastructure Deficiencies on Nigerian Manufactur- ing: Private Alternatives and Policy Options. Infrastructure and Urban Development Depart- ment Report no. 98. World Bank, Infrastructure and Urban Development Department, Washington DC.

SPICER, M. (2005). “Public Private Partnerships: IFC Global Experience.” Paper presented in Moscow, February.

STEEL, W.F AND L.M. WEBSTER (1991). Small Enterprises Under Adjustment in Ghana. World Bank Technical Paper no.138, Washington DC.

UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT (USAID) (1988). Power Shortages in Developing Countries: Magnitude, Impacts, Solutions, and the Role of the Private Sector. USAID Report to Congress. March.

WORLD BANK (2005) cited in WOODHOUSE, E.J. (2005). A Political Economy of International Infrastructure Contracting: Lessons from the IPP Experience. Working Paper.

208 OFID PAMPHLET SERIES 39 Energy and Poverty in Sub-Saharan African Economies: X Supply-side Issues Akin Iwayemi

1. Introduction

Sub-Saharan African (SSA) economies, with the exception of South Africa, Botswana and Mauritius, are characterized by low income and energy consumption per capita among other human development indicators.1 This unsatisfactory condition despite the region’s substantial human and natural resources has generated extensive discussions.2 A key question and the subject of much research is why most SSA countries are poor, partly captured by low comparative income and energy indicators, when they should be rich? Paradoxically, low income and energy-poor Africa currently finds itself entangled in another major global economic and energy development largely defined by higher energy and food price trends.3 The coincidence of higher world energy and food prices has significantly eroded the hard-earned economic and social gains of recent economic and social reforms in the region, and exacerbated its fragile economic and energy conditions. Eliminating the income and related energy poverty conditions has arguably posed enduring economic and political challenges for SSA countries. There is substantial evidence that expanded energy access, propelled by relatively inexpensive energy supply, played a significant role in the large gains in productivity and rapid economic growth and poverty reduction witnessed in the world economy in the last century.3 However, the era of inexpensive energy

1 See UNDP (2006) World Bank (2006). 2 See Collier and Gunning (1999) and Easterly and Levine (1997) for more discussion on this issue. 3 For further discussion see Jorgensen (1984) and Toman and Jemelkova (2003).

OFID PAMPHLET SERIES 39 209 is gone, caused by oil market developments of the post-1970 period. In spite of this development, increased supply and use of energy services are still regarded as an integral part of the development process. In addition, a strong correlation between energy consumption per capita on the one hand and economic growth and living standards on the other used to be conventional wisdom.4 Though correlation does not imply causality, it is widely recognized that significant expansion in supply and access to adequate and reliable energy services is fundamental to the quest of SSA economies to achieve rapid and sustained economic growth, significant poverty (income) reduction, noticeable improvement in living standards and sustainable development, as embodied in the Mil- lennium Development Goals (MDGs). Successful and widespread adoption of appropriate mechanized technologies that should underpin the significant increase in productivity growth that small-scale industries and the informal sector need to generate large output growth to minimize income and energy poverty, is contingent on expanded access to adequate and reliable energy supply. Notably, small-scale industries and the informal sector activities provide livelihoods for the bulk of the population, and dynamic output and income changes in these sectors will positively impact poverty in the region. The relatively fragile state of economic and social conditions in SSA, the world’s poorest region that is just recovering from almost two decades of poor economic performance and deepening poverty, provides an important perspective on the energy and poverty problem, the subject matter of this paper. Against this background, the marked and sustained rise in world market prices of energy and food products and the need to fast-track sustainable human development in the region in the context of the MDGs, the debate on Africa’s energy and poverty situation is bound to intensify. The dramatic increases in world energy market prices since 1999 have made Africa’s drive to achieve affordable and expanded access to energy and sustainable development as embodied in the MDGs, more difficult. For example, higher energy prices have pushed refined petroleum products beyond the reach of hundreds of millions of low-income households in the region. Consequently, this has constituted an important obstacle to significant improvement in living standards and economic well-being of the people. In no other region of the world are the adverse effects of higher world energy prices on domestic energy supply, access, economic growth and sustainable development, more severe. Given the low human development indicators that characterize the SSA region, the adverse impact of higher energy prices on economic growth, improved living standards and economic well-being, is self-evident. Poor access to modern energy services constitutes a major constraint to the exploitation of economic opportunities,

210 OFID PAMPHLET SERIES 39 and consequently, sustained economic growth and achievement of higher living standards, in most African countries. The weak, though steadily improving economic conditions in most SSA countries in recent years, implies that the region has limited degrees of freedom in taking offsetting actions to mitigate the impact of higher energy prices. In addition, there are the additional challenges posed by the requirements of economic globalization for the poor in the region. Furthermore, SSA energy supply-demand outlook and socio-economic overall development prospects present significant policy challenges, given the current low level of regional energy consumption by global development standards. For most African countries, whose population is largely impoverished with limited access to adequate quantity and quality of modern energy services, the issue of increased supply and expanded access assumes great urgency in the context of the MDGs.5 Against this background, the response of Africa’s development partners to the chal- X lenges posed by the region’s low development and energy indicators is important in achieving a marked reduction in poverty and a noticeable increase in the well-being of the poor who constitute the majority of the population. Clearly, the New Partnership for Africa’s Development’s (NEPAD’s) key objectives of rapid and sustainable growth and development and the elimination of extreme poverty in Africa, will remain a mirage until the problem of energy access is solved. The nature and content of the responses to these policy challenges will largely shape the energy and economic future of Africa. Accordingly, the current poor energy and income conditions in SSA raise several questions regarding Africa’s quest for achieving expanded access to affordable energy. Among these are: What do we know and what have we learnt about the patterns, trends and characteristics of energy supply and demand in SSA? Can Africa achieve the objective of expanded energy supply and access elimination of duality in the energy economy, which should drive its sustainable energy and development future? How can supply capacity be increased in the context of sustainable energy and human development future? What are the technical, financial and manpower challenges to a reliable and adequate energy supply to meet Africa’s energy needs for economic growth and development? What are the policy and institutional requirements for overcoming the persistent energy and income poverty and the establishment of efficient and sustainable energy supply?

4 However, after a threshold e.g. advanced level of economic development the correlation weakens as energy use per unit of output declines over time. 5 The importance of energy in achieving MDG is UNDP (2005).

OFID PAMPHLET SERIES 39 211 This paper seeks to illuminate some of the issues embodied in these questions albeit in a generalized manner given its limited scope. Primarily the paper will highlight the key supply-side issues in the design and implementation of coherent policy reforms and programs for a viable energy industry. The SSA remains one of the regions whose energy problems have been grossly under-researched. In addressing this research gap, this paper proceeds as follows. First, is a brief review of the energy, economic and social context of the problem with focus on appraising the energy and economic growth and poverty trends, patterns and characteristics in Africa. This is followed by a brief discussion of some of the key issues, challenges and constraints to expanded supply in the region’s quest for sustainable exploitation and utilization of SSA’s energy resources for economic development. Situating Africa’s non-renewable and renewable energy exploitation in the context of sustainable energy future and the MDGs, is particularly important for a better and more precise appreciation of the challenges that confront policy makers, sector operators and other stakeholders. Finally, the paper discusses an action plan for achieving expanded energy supply. The degree of success of the strategies adopted will determine the extent to which Africa will share in the gains from increasing material prosperity associated with globalization, and more importantly, achieve the MDGs.

2. Background to the problem

The discussion in this section will highlight SSA’s energy (with focus on oil and gas) dependence and vulnerabilities in the context of its economic and social conditions. In addition, it seeks to provide a framework for a better appreciation and understanding of the magnitude and complexity of Africa’s energy problems in the context of the MDGs.

2.1 The nature and character of Africa’s energy and development problems

The socio-economic context of the problem is highlighted in Table 1. The poor development indicators such as per capita income, life expectancy, and mortality rate evident in the data, is compelling. This is the context of SSA’s comparative energy poverty, which is the subject of the following discussion. Aggregate primary energy consumption in Africa in 1965 was 58.7 million metric tons of oil equivalent (Mtoe). This grew at an average annual rate of 4.7 percent to reach 73.7 Mtoe in 1970. By 1980, energy consumption had almost doubled to reach 141.5 Mtoe, representing an annual growth rate of

212 OFID PAMPHLET SERIES 39 almost 8 percent. In the 1990s, consumption of commercial energy decelerated to 2.5 percent. In 2003 and 2004, growth of over 4 percent was experienced. However, this was followed in 2005 by a sharp decline in growth to 1.5 percent. In comparison, the increase in primary energy consumption in China was an impressive 16.2 percent and 15.9 percent in 2003 and 2004, respectively. There was a slowdown in China’s energy consumption to 9.2 percent in 2005. Even then, this was about six times more than the increase in the African region. The global consumption growth of 3.1 percent between 2000 and 2005 was propelled by China’s consumption growth of 10.8 percent. Africa’s energy consumption grew at the global rate while that for Asia was 6.6 percent. In the Euro- pean Union (EU) and Organization for Economic Co-operation and Develop- ment (OECD) there was a marginal consumption growth of 1 percent. It is conventional wisdom that expanded access to commercial energy is a fundamental factor in achieving sustainable development in any country. The X contrasting pattern in energy-economy relationships between African countries and other countries is illustrated in Table 2, which shows data on energy per capita and income per capita for selected developed and developing countries. It is evident that African countries feature mostly at the lower end of the ladder. They are characterized by low energy and low income per capita. The low energy consumption-economy relationship in African countries by global development standards, reveals some dimensions of the scope of the quantum increase in oil and gas consumption per capita required to catch-up with the newly industrializing economies of Asia and Latin America. Achieving vastly improved access to modern energy services on a sustainable basis in the short to medium term, is fundamental to sustained and rapid growth in income and a marked increase in the well-being of the population.

OFID PAMPHLET SERIES 39 213 Key socio-economic development indicators in Africa Table 1

Population Land GNI per Growth Life Mortality Countries 2004 area capita rate expectancy rate ’000 km2 $ Annual At birth Under 5 2004 average years per 1,000 Oil and gas exporting countries

Angola 15.5 1,247 930 4.6 41 260.0

Algeria 32.4 995 1,250 71 40.0

Cameroon 16.0 465 810 2.7 46 149.4

Cape Verde 0.5 4 1,720 40.0 70 36.4

Chad 9.4 1,259 250 3.6 44 200.0

Congo, Dem. Rep. 55.9 2,267 110 0 44 205.0

Congo, Rep. 3.9 342 760 -0.5 52 108.0

Côte d'lvoire 17.9 318 760 -2.4 46 193.6

Egypt, Arab Rep. 72.6 995 1,250 0 70 36.0

Equatorial Guinea 0.5 28 - 0 43 204.0

Gabon 1.4 258 4,080 0.3 54 91.0

Libya 5.7 1,760 4,400 0 74 20.0

Nigeria 128.7 911 430 2.7 44 196.6

São Tomé and Príncipe 0.2 1 390 2.3 63 118.0

Sudan 35.5 17 1,660 -0.7 57 91.4

Oil and gas importing countries

Benin 8.2 567 4,360 5.7 55 152

Botswana 1.8 274 350 0.3 35 116

Burkina Faso 12.8 26 90 0 48 192

Burundi 7.3 465 810 2.7 44 190

Central African Republic 4.0 623 310 0.3 39 193

Comoros 0.6 2 560 -0.1 63 70

Djibouti 0.8 23 - 0 53 125.6

Eritrea 4.2 1,000 110 1.3 54 82

Ethiopia 70.0 258 4,080 0.3 42 166.4

Gambia 1.5 10 280 0.8 56 122

Ghana 21.7 228 380 2.4 57 112

214 OFID PAMPHLET SERIES 39 Table 1

Population Land GNI per Growth Life Mortality Countries 2004 area capita rate expectancy rate ’000 km2 $ Annual At birth Under 5 2004 average years per 1,000 Guinea 9.2 246 160 1 54 155

Guinea Bissau 1.5 28 160 3.8 45 203.0

Kenya 33.5 569 480 0.3 48 119.5

Lesotho 1.8 30 730 1.9 36 112.2

Liberia 3.2 96 120 -2.8 42 235.0

Madagascar 18.1 582 290 -1.5 56 122.6

Malawi 12.6 94 160 -0.3 40 175.2 Mali 13.1 1,220 330 2.3 48 219.0 X Mauritania 3.0 1,025 530 4.0 53 125.0

Mauritius 1.2 2 4,640 2.9 73 15.2

Morocco 29.8 446 1,570 3.0 70 43.0

Mozambique 19.4 784 270 6.2 42 151.6

Namibia 2.0 823 2,380 3.2 47 63.4

Rwanda 8.9 25 210 0.3 44 203.0

Senegal 11.4 193 630 1.6 56 136.6

Seychelles 0.1 0 8,190 -2.3 - 13.5

Sierra Leone 5.3 72 210 5.3 41 282.8

Somalia 8.0 627 - 0 47 67.0

South Africa 45.5 1,214 3,630 2.2 45 67.0

Swaziland 1.1 17 1,660 -0.7 42 126.0

Tanzania 37.6 884 320 4.6 46 126.0

Togo 6.0 54 310 -0.7 55 139.6

Tunisia 9.9 155 2,650 3.4 73 25.0

Uganda 27.8 197 250 1.8 49 137.8

Zambia 11.5 743 400 0.3 49 137.8

Zimbabwe 12.9 6,736 1,784 0 37 129.0

Sub-Saharan Africa 726.4 23,619 600 2.0 46 168.2

North Africa 160.5 2,382 2,270 3.0 71 32.8

All Africa 876.9 29,358 803 1.9 50 137.6

Source: World Bank African Development Indicators 2005

OFID PAMPHLET SERIES 39 215 Per capita energy and income for selected developed Table 2 and African countries

Per capita gross Per capita Per capita gross Per capita national income energy national income energy Country 2005 2004 Country 2005 2004

Norway 59,590 424.0 Congo Rep. 950 4.9 United States 43,740 342.7 Côte d'Ivoire 840 6.5 Sweden 41,060 257.9 India 720 14.5 Japan 38,980 177.7 Senegal 710 5.8 United Kingdom 37,600 166.5 Sudan 640 3.8 Netherlands 36,620 251.4 Comoros 640 2.3 France 34,810 186.1 Mauritania 560 16.9 Germany 34,580 178.3 Nigeria 560 8.1 Italy 30,010 142.3 Kenya 530 5.3 Hong Kong 27,670 159.1 Benin 510 4.0 Singapore 27,490 444.6 Zambia 490 11.1 Kuwait 24,040 470.0 Ghana 450 6.6 United Arab Emirates 23,770 925.4 Burkina Faso 400 1.4 Korea, South 15,830 185.5 Chad 400 0.3 Saudi Arabia 11,700 236.5 São Tomé and Príncipe 390 8.1 Seychelles 8,290 147.7 Mali 380 1.0 Libya 5,530 133.0 Guinea 370 2.4 Mauritius 5,260 45.0 Togo 350 6.5 Botswana 5,180 32.6 Central African Republic 350 1.4 Gabon 5,010 29.4 Zimbabwe 340 16.9 South Africa 4,960 115.2 Tanzania 340 2.0 Malaysia 4,960 107.1 Mozambique 310 7.3 Namibia 2,990 27.5 Gambia, The 290 2.6 Tunisia 2,890 33.4 Madagascar 290 2.1 Algeria 2,730 38.6 Uganda 280 1.5 Swaziland 2,280 18.2 Niger 240 1.4 Cape Verde 1,870 5.5 Rwanda 230 1.5 China 1,740 45.9 Eritrea 220 2.5 Morocco 1,730 13.8 Sierra Leone 220 2.5 Angola 1,350 12.2 Guinea-Bissau 180 3.8 Indonesia 1,280 19.7 Malawi 160 2.0 Egypt 1,250 33.1 Ethiopia 160 1.2 Djibouti 1,020 55.8 Liberia 130 2.6 Cameroon 1,010 5.2 Congo (Kinshasa) 120 1.5 Lesotho 960 2.7 Burundi 100 1.0

Source: Energy Information Administration for Energy: and World Bank, World Development Indicators for income

216 OFID PAMPHLET SERIES 39 2.2 African oil production and consumption in global perspective

The trends in African oil production and consumption in comparative perspective are shown in Figure 1 and Figure 2. The generally upward trend in Africa’s share in global production is shown in the graph. Oil consumption in Africa was 531 thousand barrels per day in 1965 compared to 3.25 million barrels per day in Asia, almost 12 million barrels per day in Europe and 13 million barrels per day in North America. Oil consumption tripled to 1.7 million barrels per day in 1985. By 2005, consumption level was about 2.8 million barrels per day. Oil consumption in North America was nine times that of Africa in 2005. Africa’s share

Africa’s share in world oil production 1965–2005 Figure 1

14 Percent share X 13 12 11 10 9 8 7 6

1965 1970 1975 1980 1985 1990 1995 2000 2005

Source: BP Statistical Review of World Energy 2006

Africa’s share in world oil consumption 1965–2005 Figure 2

3,5 Percent share

3,0

2,5

2,0

1,5

1965 1970 1975 1980 1985 1990 1995 2000 2005

Source: BP Statistical Review of World Energy 2006

OFID PAMPHLET SERIES 39 217 of global consumption in 2005 was only 3.4 percent compared to a production share of about 12 percent. Africa’s share in global production has been between 10 percent and 12 percent. This compares disappointingly with 3 percent of global oil consumption in the past decade. In fact, prior to the 1990s, the share of Africa in the world oil consumption was less than 3 percent. Most African countries are net energy importers. For most of them, the sharp increase in the cost of energy imports, coupled with the increasingly scarce sources of traditional energy due to rapid depletion, have created what can be called a double energy squeeze. The severe impact has eroded some of the gains in economic reforms in recent years and exerted strong pressure on macroeconomic stability and economic growth.

2.3 African gas in global perspectives

Total gas production in Africa in 2005 was 163 billion cubic meters, 43 percent more than the production level in 1990. Africa’s role in global gas supply has become more significant in recent years. Africa’s gas producers have not grown in size and number as in the case of oil because of the more expensive nature of gas investment through pipeline or liquefaction and shipping through LNG. There is substantial regional disparity in geographical distribution of the production driven by location of reserves. West Africa (Nigeria) dominates SSA’s gas production. Total gas consumption in Africa in 2005 was 6.9 billion cubic meters, 86 percent more than the consumption level in 1990. Natural gas consumption is low in Africa and the region’s role in global gas consumption is minimal. How- ever, there are good prospects for increased regional consumption of gas as illustrated by the West African Gas Pipeline project (WAGP). The expensive nature of investment in domestic and regional gas infrastructure through pipeline is the major constraint on more significant gas consumption. More gas to power projects is the key to greater use of gas in the African region. There is wide regional disparity in geographical distribution of gas consumption because demand is largely driven by gas infrastructure and location of reserves in Africa.

2.4 Electricity consumption Electricity consumption and production data reveal another dimension of SSA’s energy conditions. Tables 3 and 4 present useful information to highlight the low level of energy consumption in SSA. The low level of electricity consumption per capita is an indicator of energy poverty in the region.

218 OFID PAMPHLET SERIES 39 Electric power consumption (kWh per capita) Table 3 in African countries 1970–2001

Country 1970 1980 1990 2000 2001

Algeria 115.25 288.41 492.53 637.72 662.16

Angola 91.02 64.87 64.65 100.96 108.60

Benin 11.56 34.29 38.90 68.12 76.01

Cameroon 149.91 195.65 194.31 170.34 160.88

Congo, Dem. Rep. 172.35 127.69 58.14 46.57 43.16

Congo, Rep. 53.52 51.03 150.54 75.15 82.32 X Egypt, Arab Rep. 204.71 414.32 707.05 1,024.15 1,072.51

Ethiopia 17.84 17.00 17.66 22.03 25.32

Gabon 167.78 750.34 789.78 790.45 804.31

Ghana 307.67 403.43 303.02 340.72 297.21

Kenya 65.96 96.36 117.47 116.77 120.31

Libya 164.37 1,058.29 1,703.71 2,300.01 2,250.27

Morocco 121.29 233.00 355.41 461.16 475.19

Mozambique 47.17 33.49 48.34 266.06 341.19

Nigeria 28.99 47.73 83.77 69.49 68.17

Senegal 69.65 99.71 98.45 132.68 135.11

South Africa 2,062.04 3,288.59 3,618.20 3,774.51 3,860.14

Sudan 23.67 31.60 48.87 67.00 74.17

Tanzania 30.05 37.75 54.38 58.49 62.14

Tunisia 145.54 398.46 617.32 992.81 1,018.91

Zambia 1,015.84 1,053.52 730.50 537.04 583.05

Zimbabwe 662.29 965.16 789.86 809.97 831.40

NOT AVAILABLE: Botswana, Burkina Faso, Burundi, Cape Verde, Central African Republic, Chad, Comoros, Côte d'Ivoire, Djibouti, Equatorial Guinea, Eritrea, The Gambia, Guinea, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Namibia, Niger, Rwanda, São Tomé and Príncipe, Seychelles, Sierra Leone, Somalia, Swaziland, Togo, Uganda Source: World Bank WDI

OFID PAMPHLET SERIES 39 219 Electric power transmission and distribution losses Table 4 (percent of output) in African countries 1970–2001

Country 1970 1980 1990 2000 2001

Algeria 10.7 11.7 15.1 16.3 15.7

Angola 25.1 25.0 28.6 14.5 14.5

Cameroon 5.2 7.6 13.9 25.7 23.1

Congo, Dem. Rep. 5.1 12.7 13.7 3.8 3.5

Congo, Rep. 4.5 31.0 18.8 65.3 69.5

Egypt, Arab Rep. 9.8 12.9 10.1 13.4 13.4

Ethiopia 6.9 5.4 10.0 10.0 10.0

Gabon 1.8 0.8 10.2 17.8 17.8

Ghana 6.1 4.7 8.6 14.7 24.0

Kenya 17.9 14.6 15.7 21.3 21.0

Libya 33.1 35.0 28.4 20.1 20.1

Morocco 10.6 11.1 5.0 6.4 6.5

Mozambique 29.7 78.4 6.4 3.0 8.3

Nigeria 13.2 49.3 37.6 38.7 37.8

Senegal 6.1 9.5 13.9 17.3 7.4

South Africa 7.1 7.1 6.5 7.7 7.8

Sudan 24.6 20.1 23.9 15.3 15.3

Tanzania 13.6 12.1 21.6 25.0 23.5

Tunisia 13.3 12.6 10.4 11.1 10.6

Zambia 19.3 5.5 3.7 2.9 2.9

Zimbabwe 6.1 10.3 7.1 21.3 21.4

NOT AVAILABLE: Benin, Botswana, Burkina Faso, Burundi, Cape Verde, Central African Republic, Chad, Comoros, Côte d’Ivoire, Djibouti, Equatorial Guinea, Eritrea, The Gambia, Guinea, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Namibia, Niger, Rwanda, São Tomé and Príncipe, Seychelles, Sierra Leone, Somalia, Swaziland, Togo, Uganda Source: World Bank WDI

220 OFID PAMPHLET SERIES 39 2.5 Dimensions of the energy problem in Africa: duality in the energy economy

Energy access is widely recognized as a key factor in achieving sustainable human development and significant improvement in human well-being across the globe. Historically, this was the case for the developed countries during their growing process. In the following discussion, we shall use access to electricity to illustrate the scope of Africa’s energy access problem. The relatively low level is clear when compared to other parts of the world. Even SSA countries with a relatively high level of economic development also consume more electricity per capita. Most African countries exhibit poor access to electricity. Access is less than 25 percent for the total population for the period 2000 to 2004. However, the countries in the North Africa region have a very high access rate. In fact, these countries have almost full access in both urban and rural areas. The prob- X lem of access is more acute in rural areas in the other parts of Africa as shown in Figure 3. Yet, the majority of the population live in the rural areas and the problem of poverty is often more acute in the rural areas. Notably, wide access to electricity is fundamental to sustainable development and poverty reduction in the region.

2.6 Energy import dependence in African countries

The degree of energy import dependence in African economies in recent years is shown in Table 5. Although the ratio of oil imports to total imports ranges from less than 1 percent in a few countries, to over 25 percent in several other countries, the information reveals a substantial dependence on oil imports in many countries. Table 6 shows African countries in terms of their share in oil imported into the region. Although most African countries are net oil importers, South Africa is the leading oil importer in the region. It accounts for almost one in every four barrels of oil imported in the region. South Africa’s level of economic development is a major factor in this occurrence.

2.7 Biomass energy use in SSA The final indicator of energy poverty is the share of biomass energy in relation to total energy consumption in the region. It is the highest in the world. There is a strong correlation between the level of economic development and the share of biomass in energy production and demand.

OFID PAMPHLET SERIES 39 221 Access to electricity in selected countries in Africa Figure 3

1) TOTAL POPULATION 2) URBAN RURAL

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Central African Republic Chad Comoros Congo, Dem. Rep. Congo, Rep. Côte d’Ivoire Egypt Eritrea Ethiopia Gabon Gambia, The Ghana Guinea Guinea-Bissau Kenya Lesotho Libya Madagascar Malawi Mali Mauritania Mauritius Morocco Mozambique Niger Nigeria Rwanda Senegal Sierra Leone South Africa Sudan Swaziland Tanzania To g o Tunisia Uganda Zambia Zimbabwe

Percent0 20 40 60 80 100 0 20 40 60 80 100

Source: World Bank: African Development Indicator 2006

222 OFID PAMPHLET SERIES 39 Energy imports (percentage of commercial energy use) Table 5 in African countries 1970–2001

Country 1970 1980 1990 2000 2001 Algeria -1,034.7 -415.8 -326.1 -390.9 -387.2 Angola -132.1 -118.4 -370.9 -413.5 -484.8 Benin 9.7 -6.7 -5.9 29.1 30.7 Cameroon 10.9 -107.5 -127.2 -93.7 -82.7 Congo, Dem. Rep. 12.4 0.7 -0.6 -5.4 -4.8 Congo, Rep. 25.6 -448.7 -736.2 -1,294.7 -1,330.0 Côte d’Ivoire 34.4 22.1 23.9 5.6 0.4 Egypt, Arab Rep. -108.8 -103.4 -71.0 -17.9 -14.1 X Ethiopia 5.8 5.3 6.4 7.4 7.5 Gabon -498.1 -433.0 -1,151.5 -788.4 -698.1 Ghana 23.1 20.4 15.8 26.7 28.4 Kenya 17.3 18.6 16.7 18.4 16.0 Libya -8,184.0 -728.7 -492.2 -297.1 -271.7 Morocco 74.6 82.9 88.1 94.5 94.5 Mozambique 9.3 5.8 4.6 1.7 0.0 Namibia - - 66.6 74.6 74.7 Nigeria -208.4 -115.0 -111.1 -126.2 -101.4 Senegal 38.6 42.9 37.5 44.2 43.4 South Africa 16.7 -12.3 -22.6 -31.7 -29.1 Sudan 18.5 15.1 15.9 -56.7 -57.8 Tanzania 9.7 8.9 7.4 6.6 7.3 Togo 18.1 19.0 20.3 27.9 29.8 Tunisia -140.4 -76.1 -24.3 16.4 16.1 Zambia 21.4 10.0 8.9 4.0 4.9 Zimbabwe 6.9 14.7 10.2 13.7 13.2

NOT AVAILABLE: Botswana, Burkina Faso, Burundi, Cape Verde, Central African Republic, Chad, Comoros, Djibouti, Equatorial Guinea, Eritrea, The Gambia, Guinea, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Niger, Rwanda, São Tomé and Príncipe, Seychelles, Sierra Leone, Somalia, Swaziland, Uganda Source: World Bank World Development Indicators 2005

OFID PAMPHLET SERIES 39 223 Share of fuel in merchandise imports 2000–04 Table 6

Benin 17.4 Namibia 10.4 Botswana 6.5 Niger 16.9 Burkina Faso 24.4 Nigeria 16.0 Burundi 16.5 Rwanda 15.6 Cameroon 17.8 Senegal 18.3 Cape Verde 13.1 Seychelles 26.3 Central African Republic 11.0 Sierra Leone 39.7 Comoros 4.1 South Africa 14.5 Côte d'Ivoire 17.1 Sudan 3.1 Ethiopia 12.0 Swaziland 12.6 Gabon 3.2 Tanzania 16.5 Gambia 10.6 Togo 23.0 Ghana 1.6 Uganda 10.0 Guinea 21.7 Zambia 11.2 Kenya 24.3 Zimbabwe 13.7 Madagascar 23.3 Algeria 0.9 Malawi 2.7 Egypt 8.3 Mali 21.9 Libya 0.7 Mauritius 13.2 Morocco 16.7 Mozambique 11.7 Tunisia 10.3

NOT AVAILABLE: Angola, Chad, Congo, Dem Rep., Congo Rep., Djibouti, Equatorial Guinea, Eritrea, Guinea Bissau, Lesotho, Liberia, Mauritania, São Tomé and Príncipe Source: World Bank: African Development Indicator 2006

The current energy situation illustrates the dimension of Africa’s effort required to achieve widespread access to adequate and reliable commercial energy at affordable prices for the millions of its low-income people. Without vastly improved access to affordable energy services, of which oil and gas constitute the dominant input, sustainable development and improved living standards in the Africa region would be difficult to achieve.

224 OFID PAMPHLET SERIES 39 Biomass energy consumption (percent of total energy) Table 7 in African countries for selected years 1970–2001

Country 1970 1980 1990 2000 2001 Algeria 0.2 0.1 0.1 0.3 0.2 Angola 81.2 77.6 69.5 68.4 67.8 Benin 90.3 90.6 94.1 70.9 69.3 Cameroon 85.8 78.3 77.3 78.8 79.2 Congo, Dem. Rep. 82.2 82.7 85.0 93.5 93.6 Congo, Rep. 71.1 67.8 69.5 61.6 67.3 Côte d’Ivoire 65.1 63.1 72.4 65.8 66.0 Egypt, Arab Rep. 8.3 4.5 3.5 2.7 2.6 X Ethiopia 93.9 94.4 93.1 91.7 91.7 Gabon 45.0 38.6 60.5 60.6 61.9 Ghana 68.7 68.8 74.6 66.3 66.4 Kenya 82.3 80.2 79.4 77.6 80.1 Libya 5.8 1.6 0.9 0.8 0.8 Morocco 5.2 5.1 5.4 4.1 4.2 Mozambique 88.1 91.7 94.7 88.3 86.1 Namibia - - 16.0 15.2 15.2 Nigeria 93.9 79.9 78.2 79.8 79.1 Senegal 61.4 57.1 62.2 55.8 56.6 South Africa 10.4 9.7 11.1 11.5 11.2 Sudan 81.2 84.3 83.3 83.6 79.8 Tanzania 90.0 90.3 91.1 91.5 90.7 Togo 81.8 80.8 79.7 72.1 70.2 Tunisia 33.0 21.7 19.5 15.2 15.3 Zambia 64.1 66.0 73.7 81.9 81.3 Zimbabwe 55.7 56.3 48.0 57.4 59.0

OFID PAMPHLET SERIES 39 225 3. Sustainable energy and development future in Africa: supply-side issues

The considerable interest in the provision of adequate, reliable and efficient energy infrastructure services derives from its essential role in achieving rapid economic growth and sustainable development. Arguably, the lack of adequate growth-promoting energy infrastructure systems is one of the major factors explaining the elusive quest for sustained economic growth and prosperity in SSA.

3.1 Policy issues and challenges

Figure 4 provides an overview of the interlocking nature and complexity of the issues associated with energy supply in SSA. For the purpose of this discussion, we shall categorize the issues and challenges into three sets. Set A denotes complex energy issues that need specialized analysis by experts. Widely acceptable solutions can be found for such issues. Set B encompasses difficult issues where there is wide divergence of objectives and premises on which decisions are made. Set C consists of politically controversial issues. The intersection of Sets A, B and C yields the subset labelled VII, which indicates the complex, difficult and controversial nature of the interaction between politics, economics, law, environment and engineering. These factors are associated with tackling SSA’s sustainable energy and development questions.

Interlocking issues in sustainable energy supply in SSA Figure 4

Set A Complex issues I

IV V VII

IIVI III Set C Set B Politically controversial Difficult issues issues

226 OFID PAMPHLET SERIES 39 Energy resources in Africa Table 8

Type of energy Reserves estimates

Crude oil 117.20 billion barrels

Natural gas 14.08 trillion cubic meters

Coal 50.34 billion metric tons

Source: BP Statistical Review of World Energy 2006

The scope of the investment problem and enormity of the policy challenges associated with electricity crisis have provided three stylized facts: the current low level of electricity and energy consumption per capita by global development standards; the dismal state of socio-economic conditions in an economy X just recovering from almost two decades of poor performance and deepening poverty; and the low human development indicators. Clearly, anything short of energy poverty elimination, given that wider access to regular and reliable electricity is a key element of this strategy, would be unacceptable. The investment and capacity expansion needed to achieve energy poverty elimination is large. Coping with SSA’s future energy supply challenges involves complex economic, political, technological, institutional and environmental factors. This would involve the interactions of the four principal actors that are active in the energy markets, namely, consumers, producers, investors and the government. But, the scope of this paper limits our discussion to supply issues. One of the basic factors in securing the electricity future is the energy mix over the next decades. Table 8 provides some estimates of fossil fuel reserves. There are also significant alternative renewable energy resources, consisting of large and small-scale hydro, solar, wind, geothermal and biofuel potentials. The abundance of primary energy resources compared to the energy needs of the economy and society is incontrovertible. While both energy resources will be used in the future, the continued dominance of fossil fuels supplemented by hydroelectricity is envisaged for the foreseeable future. Coal, hydro, solar, biomass, wind and nuclear energy technologies are alternative electricity generation options under consideration. However, developing and deploying cleaner energy should be part of the medium-term investment strategy. The focus, however, should be to progres- sively adopt cleaner fossil fuels and with increasing focus on renewable energy sources, to meet rural electricity demand. Of interest is the intention of some

OFID PAMPHLET SERIES 39 227 countries in the region to achieve 10 percent of electricity supply to be derived from renewable resources by 2025. Coal and nuclear energy are also on the options list. We shall now discuss some of the emerging issues in the design of a strategy to propel SSA to a new energy level in the search for eliminating energy and income poverty. First the shift to a new institutional arrangement, where much of modern energy services would be driven by the private sector, is apparent in recent reforms. Public provision of electricity service has been an abysmal failure in SSA as evident from the earlier discussion. So, what should be done given the resource endowment, the political, economic, technological, environmental constraints in the region? Two Economic Commission of West African States (ECOWAS) initiatives, the West African Power Pool (WAPP) and West African Gas Pipeline (WAGP) and the South African Power Pool (SAPP) suggest new and attractive investment and supply directions in the region. However, meeting the challenges of providing an adequate, reliable and widely accessible energy service involves more than summing up numbers (the megawatts, barrels, cubic meters and investment figures) and getting other technical issues right. Second, the investment challenge has several dimensions, namely, size, source, plant mix, security of investment and input supply. Others are human resource requirements, investor/producer incentives, for example, electricity tariff level and structure, regulatory framework and macroeconomic environment. The current level of demand underestimates the true level of interruptions given the high level of suppressed electricity demand. The estimation of potential level and growth in demand must incorporate these factors for greater forecasting accuracy. Based on these factors and the current decay in the energy system grid, the numbers look staggering by historical standard. For example, generating capacity approaching 6,000 GW may be required by 2030 to eliminate current electricity poverty and raise electricity per capita from the current extremely low level. The investment challenge must be appropriately situated in the context of a constrained multi-objective incentive compatible with regional optimization problems. The mobilization of the financial resources to support transforming these natural resources to “energize” the economy on its path of sustainable human development is a major issue that would pose significant challenges. A dramatic scaling-up of investment in energy infrastructure capacity is required in the next three decades. The amount of investment to meet the region’s energy system expansion could exceed $1 trillion in the next few decades. This financing

228 OFID PAMPHLET SERIES 39 requirement will be huge by regional standards. Besides, the capital requirement must be situated within the context of the global capital market competitiveness and risks in the industry. This investment is enormous given the antecedent of the industry in the past decades. While the investment scale is daunting, it is not insurmountable. The right institutional framework, policy consistency, appropriate incentive structure and security of investment and input would guarantee the flow of required investment. The example of the telecommunication industry provides strong support for this position. The success achieved in turning around moribund public telecommunication systems to a vibrant industry with one of the fastest system growth rates in the world, has been due to the combination of the right institutional framework, policy consistency and appropriate incentive structure. Both domestic and foreign investors and producers have important roles to play in achieving sustainable energy future in SSA. A supply system underpinned by full deregulation and X privatization and anchored on price competition is now the conventional wisdom. The region has little choice in following this policy direction. However, there is no universal one-fits-all model, though most energy systems are private-sector driven. A public-private sector mix can also be a viable option. This may be particularly pertinent in the development of pro-poor and environmentally clean renewable energy resources such as solar, wind, wave and other clean energy forms. Third is the pricing of energy services, especially oil, gas and electricity from both conventional and non-conventional sources. There has been a tendency for Independent Power Producers (IPP), which are mostly private sector owned, to lock high tariff into their Power Purchase Agreement (PPA) for unnec- essarily long periods notwithstanding production from more efficient plants in the future. They prey on the difficult domestic environment to extract high monopoly profits from PPA. The key principle should be energy pricing that guarantees attractive rate of return to investors adjusted for industry risk and security of investment. A fourth consideration concerns risks associated with investment to strengthen energy supply. They are in four dimensions: economic, socio- political, technological and environmental (methane leaks, post-Kyoto protocol requirements and climate change compatibility, nuclear accidents spills). Optimal sharing of these risks among the three principal actors in the electricity market, namely, consumers, investor/producers and the government, is essential for efficient allocation of resources in the industry-sustainable electricity future in SSA.

OFID PAMPHLET SERIES 39 229 A fifth issue is the human resource requirements of a robust and reliable energy supply system, which is fundamental to a sustainable electricity future in SSA. The demand on local and foreign skilled workers will be immense. However, as in the telecom industry, having the appropriate incentive structure is essential, given the globalized, regional and national demand for electrical, mechanical, computer engineering and other skills. These are needed to support a vibrant industry at the center of the African energy map. In summary, several policy challenges emerge from the foregoing discussion. The creation of an efficient, reliable and environmentally sustainable energy industry that efficiently meets the demand that will rise substantially in the next decade requires the construction of more power plants and sizable expansion of the transmission and distribution systems in the next decade. The economic and political environment must be conducive to make the goal of a sustainable and secure electricity future affordable. Market-responsive pricing of energy services is central to securing a sustainable energy future in SSA. Given the nature of the additional capacity expansion, the large amount of investment required must be private-sector driven. Energy sector reforms based on market competitiveness should provide sufficient new opportunities for domestic and foreign investors who should align their investment objectives to the needs of Africa. Domestic demand must be integrated into a regional energy framework, and supply policies in the region must be mutually consistent and coordinated.

4. Energizing the human development process in Africa: outline of an action plan

The policy agenda to support a sustainable energy future anchored on market competition would be shaped by a number of considerations: • The current initial economic and energy conditions highlighted by low human development indicators and energy access, pose significant challenges to achieving sustainable energy future in a relatively short time. • Oil and gas supply will remain a central factor in the quest for a sustainable energy future in which expanded energy access is a key goal. • World energy markets will be characterized by market price uncertainty in the near future. • A large amount of investment is required to rationalize and make SSA energy industry more globally competitive.

230 OFID PAMPHLET SERIES 39 • The political, economic and institutional framework for pro- active sub-regional and regional approaches to economic and energy development is relatively weak. Membership overlaps in several regional economic organizations are a reflection of this problem. • Finally, there is the greater competition for the increasingly scarce private capital in the world economy.

Can Africa achieve the objectives of expanded energy supply and access, and also eliminate duality in the energy economy that should drive its sustainable energy future plan, given the multi-dimensional challenges described above? The answer lies in the design and implementation of appropriate policy strategies embodied in an action plan. Before elaborating on the action plan it is important to identify a number of principles that should X underpin such a plan. First, the plan must be based on deepening the current economic, social and political reforms. The importance of that for the twin objectives derives from the role of sound economic and social policies for sustainable development. Second is an improved alignment of economic and energy development policies in the country, at sub-regional and regional levels. The central role of expanded energy access in achieving the MDGs strengthens the argument for this principle. Third is the promotion of increased domestic value added to oil and gas in Africa through the expansion of downstream activities to meet both regional and export demand. This must go beyond refineries to petrochemical industries and other higher-end-value products in the sector. Fourth is deepening integration efforts to create dynamic inter- and intra-regional markets for goods, including energy. This must address the issue of competitiveness. Open- ness and transparency in oil and gas that minimizes transaction costs in domestic, sub-regional and regional energy markets is another principle that should guide the action plan. Fifth is the convergence of the fiscal and legal framework for energy market operations and regulation in the region. The sixth principle concerns the need to be aware of the moral hazard problem associated with providing financial resources to countries affected by higher energy prices. Such resources have the potential to reduce the incentives of beneficiaries from taking the required policy measures for the emergence of a more efficient domestic energy market that helps to reduce vulnerability to external oil market shocks. Seven, there should be defined roles for key stakeholders in the region, among which are the African Union, the AUC, African Development Bank (AfDB), United Nations Development Program (UNDP) and other development

OFID PAMPHLET SERIES 39 231 banking institutions such as the World Bank, the OPEC Fund for International Development (OFID), the European Union (EU) and other development stakeholders. Finally, and perhaps the most important, is long-term and credible regional and sub-regional commitment to a sustainable energy vision anchored on the emergence of efficient oil and gas markets in the next few decades.

4.1 Outline of an action plan Important elements of an action plan based on short and medium-term measures can be sketched around the following imperatives. Short term • Establishment of an appropriate institutional infrastructure to support the mobilization of financial, human and institutional resources that will help to mitigate the short-term impact of energy price shocks. • Establishment of quick disbursing funds to provide disadvantaged countries relief through grants and loans to import oil as emergency strategy to mitigate the adverse balance of payment effects of price shocks. Accordingly, we propose an African Energy Fund. This Fund would be a central element of the strategy to mitigate the short-term impact of energy price shocks in the African energy supply. However, one must be aware of the moral hazard problem associated with providing financial resources for countries affected by higher oil and gas prices. • Promoting the use of financial market instruments through the spot and futures markets to hedge against price volatility and its impact on supply that occur from time to time. Developing the capacity to use this sophisticated instrument demands resource pooling, possibly on a sub-regional basis. • Promoting price-shock mitigating mechanisms that will minimize the moral hazard problem associated with providing financial resources for countries that are severely affected by higher oil and gas prices. This will help to promote and strengthen the incentives for such countries to take the necessary policy for the emergence of a more efficient domestic energy market that helps to reduce their vulnerability to oil price shocks.

232 OFID PAMPHLET SERIES 39 Medium to long term • Establishment of appropriate institutional infrastructure to support the medium-term dimensions of expanded energy supply and access and their sustainability; • Development of human resources and institutional and financial assistance to support a viable and competitive energy industry; • Encouraging extensive sharing of knowledge and technology on upstream and downstream activities in the energy industry in the region; • Promoting the harmonization of economic and energy policies with sustainable energy future integrated into the development processes and policies at the country, at sub-regional and regional levels; X • Promoting the fast-tracking and strengthening of energy integration initiatives to create dynamic inter- and intra-regional markets for energy and other energy goods; • Revamping of policies and practices in the production, procurement, trade and distribution of imported energy; • Promoting the rationalization of the supply and distribution of oil products at country and sub-regional levels to ensure industry revitalization in contrast to the current industry state that is characterized by poorly maintained and utilized production capacity producing sub-optimal product mix; • Elimination of the fragmentation in energy markets across countries and regions in Africa with the focus on the establishment of a competitive African energy market; • Adding more value to energy resources in Africa through expansion of production and export of refined oil and gas products and petrochemicals to meet domestic, regional and export demand; • Sustaining improved governance in the energy industry especially the hydrocarbon industry based on openness and transparency thereby further strengthening the current Extractive Industry Transparency Initiative (EITI) to which many oil producing countries have subscribed. This will help to minimize transaction costs in domestic, sub-regional and regional energy markets;

OFID PAMPHLET SERIES 39 233 • Creation of an environment where doing business will be attractive in contrast to the current situation where the region is identified as among the most difficult for business to operate; • Alignment of the fiscal and legal framework for energy market operations and regulations at the sub-regional and eventually at the regional level; • Promoting price-shock mitigating and other mechanisms that will help to promote and strengthen the incentives for the emergence of a more efficient domestic energy market that helps to reduce their vulnerability to external oil-market shocks; • Promoting an environmentally responsible development of energy resources; • Promoting research and information collection and dissemination required on energy demand and supply by end users, prices, costs, inventory movement management, investment and regional and international energy trade flows on a timely and consistent basis. The economics of the downstream segment of the oil and gas industry needs in-depth analysis; and • Promoting the development of alternative energy with focus on renewable energy including biofuels.

Certainly, a new partnership between the public and private sectors would have to be forged to meet these challenges. In any case, the substantial reduction in public-sector resource availability forecloses a high profile government participation in the provision of the economic infrastructure services. Half-hearted policy measures can only compound the enormous problems in the sector at escalating social cost.

5. Concluding remarks

There is plenty of catching up to do for African countries. The region’s current development crisis suggests economic growth rates that far exceed its historical experience if it must get close to the MDGs. Annual per capita Gross Domestic Product (GDP) growth of 4 percent might have been acceptable a decade ago and 2 percent long-run growth half a century ago. However, achieving an annual per capita GDP of less than 4 percent will be grossly inadequate to match the growth of human aspirations in the region. In fact, achieving the MDGs implies an exponential growth at 7 percent yearly. Clearly, increased energy

234 OFID PAMPHLET SERIES 39 supply and demand anchored on a more efficient utilization of resources and backed up by a market-driven incentive structure is essential to achieving sustainable energy and human development. Success in achieving a sustainable energy and economic future in Africa must be based on the design and implementation of appropriate and harmonized regional and national policies backed up by adequate financial, technical and other support from the international community. The international community must view the regional effort as an important element in the global strategy for achieving sustainable human development. Hence, identifying and finding innovative ways of tackling the constraints to efficient, environmentally responsive, affordable and expanded access to energy services must be seen as a regional and global initiative by policy makers and development partners in the SSA region in the next few decades. The degree of success of the strategies adopted will determine the extent to which Africa will share in the gains X from the material prosperity associated with globalization, and more importantly, achieving the MDGs. Obviously, no issue is more pressing at this very early but critical juncture of the 21st century, than a solid understanding of the multi-faceted nature of Africa’s oil and gas problem. This is particularly so, given the central role oil and eventually natural gas will play in advancing human well-being and economic development in the foreseeable future. Besides, in a multi-ethnic and often polarized and impoverished society, the use or misuse of this non-renewable natural resource would remain an important factor in the existence (or lack) of social harmony and political stability in the medium term. Understandably, efficient and effective management of Africa’s oil wealth to serve as a strong anchor for achieving sustainable economic freedom and livelihoods in an environment currently defined by serious oil and gas-induced environmental degradation, poverty and low living standards, large-scale unemployment and numerous social conflicts, will be the prime challenge of the first half of this century. The main conclusion of this paper is that Africa can eliminate the sub- standard state of modern energy services and ensure the supply of the large investment required to support sustainable energy development that underpins a significant reduction in poverty. However, sustainable energy development that underlines a significant reduction in poverty is contingent on several conditions. There must be a strengthening of the institutional infrastructure, governance structure and accountability to support allocative and technical efficiency, as well as restrain arbitrary rent-seeking government interventions in the economy. In addition, the creation and sustenance of an incentive-based

OFID PAMPHLET SERIES 39 235 competitive market system supported by market responsive energy pricing that guarantees adequate risk-adjusted rates of return for investors but that minimizes deadweight loss associated with market monopoly power, is of utmost importance. The establishment of a well-targeted support system (partly in the form of subsidies) to drive expanded supply of clean energy based on renewable energy resources is a key policy issue. Finally, there is a need to foster a strategic PPP to drive a new energy paradigm that is anchored on renewable energy sources that will minimize carbon emission and climate change. The emergence of sustainable energy and human development in SSA goes beyond delivering adequate and reliable energy services to end-users. It also involves giving the population wide accessibility to environmentally friendly and reliable energy supply. In conclusion, a number of observations are necessary. First, energy development must be integrated into sustainable development in which sustained improvement in the general well-being of the people and enlarging their social choices are key elements. Second, the expanding of social and economic opportunities based on energy resource wealth must take cognizance of the natural and social environment of wealth creation. The environmental consequences of extracting and using energy should be incorporated in economic planning and public policy. Third, sustainable development is also about economic, social and political freedom. Fourth, the well-being of the poor and disadvantaged people is of utmost importance and must be explicitly factored into the process of development of energy resources. It is clear that “Africa’s energy question” is not only complex and difficult, but also politically controversial as it involves a set of economic, social, political and environmental goals that are not necessarily mutually reinforcing. Finally, sustainable development is about a better world for all citizens supported by advances in skills, knowledge, capability and choice. Africa’s energy wealth must be used to achieve rising income per capita, better education, better health, higher life expectancy, full employment and social stability achievable in the shortest time possible. The AfDB and AU aided by international financial institutions such as OFID have complementary strategic roles to play in making a success of Africa’s energy and development future. Africa faces immense multi-dimensional challenges in achieving a sustainable energy and economic future embodied in the twin objectives of elimination of income and energy poverty and expanded energy access. However, the alternatives are few, considering the current development divide that Africa has to bridge. The key message is that success or failure depends critically on the political will of the leadership to permanently erase the ghost of economic and political marginalization that has characterized the region in the past.

236 OFID PAMPHLET SERIES 39 Bibliography

AYO GU, M . (2006). Infrastructure Development in Africa: Prospects and Challenges. Paper presented on Economic Development in the Millennium, AERC-AfDB Project on Africa’s Development, African Development Bank, Tunis, November 2006.

BRICENO, CECILIA, ANTONIO ESTACHE AND NEMAT SHAFIK (2004). Infrastructure Services in Developing Countries: Access, Quality, Costs, and Policy Reform. World Bank Working Paper Series no. 3468, Washington, DC.

COLLIER, P. AND J. GUNNING (1999). “Explaining Africa’s Economic Performance.” Journal of Economic Literature, 37: 64-111.

EASTERLY, W. AND R. LEVINE (1997). “Africa’s Growth Tragedy: Policies and Ethnic Divisions.” X Quarterly Journal of Economics, 112(4): 1203-50.

JORGENSON, D.W. (1984). “The Role of Energy in Productivity Growth.” The Energy Journal 5(3): 11-26.

TOMAN, M.A. AND B. JEMELKOVA (2003). “Energy and Development: An Assessment of the State of Knowledge.” The Energy Journal 24(43): 93-112.

UNDP (2005). Energy for Sustainable Development. UNDP. New York.

WORLD BANK (1994). Infrastructure for Development: World Development Report 1994. The World Bank and Oxford University Press.

WORLD BANK (2000). Can Africa Claim the 21st Century. The World Bank, Washington DC.

WORLD BANK (2003). Making Services Work for the Poor People. World Development Report 2004. The World Bank and Oxford University Press, Washington DC.

OFID PAMPHLET SERIES 39 237 Acronyms and Abbreviations

AfDB African Development Bank AFREC African Energy Commission AIES African Energy Information System AMADER Agence Malienne pour le Développement de l’Energie Domestique et de l’Electrification Rurale AREED African Rural Energy Enterprise Development ASER Agence Senegalaise d’Electrification Rurale AU African Union CAPP Central African Power Pool CSD Commission on Sustainable Development DFI Development Financial Institutions EAPP East African Power Pool ECOWAS Economic Commission of West African States EIA Energy Information Administration EU European Union FDI Foreign Direct Investment FEMA Federal Emergency Management Agency GDP Gross Domestic Product GEDAP Ghana Energy Development and Access Project HIP Heavily Indebted Poor HV High Voltage IEA International Energy Agency IFI International Financial Institutions IPCC Intergovernmental Panel on Climate Change KENGEN Kenyan National Power Company LDC Least Developed Countries LIC Low Income Countries LPG Liquefied Petroleum Gas MDGs Millennium Development Goals MTOE Metric Tonnes of Oil Equivalent NBPF Nile Basin Power Forum NBSSI National Board for Small-scale Industries

238 OFID PAMPHLET SERIES 39 NEPAD New Partnership for Africa’s Development NGO Non-Governmental Organization ODA Official Development Assistance OECD Organization for Economic Co-operation and Development OFID OPEC Fund for International Development OMVG Gambia River Basin Development Organization OMVS Senegal River Development Organization OPEC Organization of the Petroleum Exporting Countries PPA Power Purchase Agreement PPP Public-Private Partnership PRSP Poverty Reduction Strategy Papers PSI President’s Special Initiative REA Rural Energy Agency REC Regional Economic Communities RESCO Rural Energy Supply Companies SAPP South African Power Pool SEDB Small Enterprise Development Board SME Small and Medium-sized Enterprises SSA Sub-Saharan Africa TPES Total primary energy supply UN United Nations UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Program UNECA United Nations Economic Commission for Africa UNEP United Nations Environment Programme UNF United Nations Foundation UNFSTD United Nations Financing System for Science and Technology UNIDO United Nations Industrial Development Organization VRA Volta River Authority WAGP West African Gas Pipeline WAPP West African Power Pool

OFID PAMPHLET SERIES 39 239 About the authors

Akin Iwayemi holds a PhD in Economics and is a Professor of Economics at the University of Ibadan, Nigeria. His research and teaching interests include energy, environmental and development economics, areas in which he is extensively published. Professor Iwayemi is the immediate past president of the African Econometric Society (2007 – 2009) and the current president of the Nigerian Association for Energy Economics.

Suleiman J. Al-Herbish has been Director-General of the OPEC Fund for International Development (OFID) since November 2003. Before joining OFID, he was Governor of Saudi Arabia (with rank of Deputy Minister) to OPEC for 13 years. Mr. Al-Herbish has a BA in Economics and Political Science from the University of Cairo, Egypt, and a Master’s in Economics from Trinity University, Texas, USA. He is a vocal proponent of energy poverty eradication.

Roger M. Gaillard is a lead infrastructure officer at the African Development Bank. A civil engineer by profession, Mr. Gaillard is a graduate of the High Institute of Technology, Lausanne, Switzerland. His specialist fields are energy, hydropower and dams.

Pradeep Monga is an energy expert with over 35 years experience in the fields of energy policy, strategic planning and technology cooperation. He is presently working as Director of Energy and Climate Change at the United Nations Industrial Development Organization, Vienna, Austria. Dr. Monga has a PhD in Renewable and Rural Energy.

Phil U. Chineyemba is a maintenance specialist at Mobil Producing Nigeria, a subsidiary of Exxonmobil, where he has worked since 1984. His area of focus is rural energy access.

Lawrence Agbemabiese is a program officer with the United Nations Environment Program, where he is responsible for UNEP’s energy enterprise development projects in Africa and China. His multidisciplinary knowledge has been directed primarily at promoting investments in small and medium-size enterprises as tools for poverty eradication.

Waqar Haider is a senior energy specialist at the World Bank. He has over 25-years of professional experience in energy planning and management, sectoral restructuring and reform, regulatory regime development, and private sector participation and the privatization of utilities.

Steve Olumuyiwa is a special technical assistant to the Minister of State for Power of Nigeria. He is a system operations specialist with considerable experience in the construction and operation of hydro power stations, transmission lines and substations.

Adeola Adenikinju holds a PhD in economics from the University of Ibadan, Nigeria, where is a Professor of Economics. Dr. Adenikinju’s research interests include petroleum and energy economics, macroeconomic modeling and economic development issues. He has consulted for organizations such as the European Union, the United Nations and the World Bank, among others.

240 OFID PAMPHLET SERIES 39

Parkring 8, A-1010 Vienna, Austria P.O. Box 995, A-1011 Vienna, Austria Telephone: (+43-1) 515 64-0 Fax: (+43-1) 513 92 38 www.ofid.org