Africa Unplugged: Policy, institutional and investment challenges in powering the continent African Science Academy Development Initiative (ASADI) workshop Improving Access to Energy in Sub-Saharan Africa 17-18 March, Pretoria Prof Anton Eberhard Management Program in Infrastructure Reform and Regulation University of Cape Town

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1 Africa in perspective

Sub-Saharan Africa “Average SSA country” – Land area: Australia, Brazil, – Land area: around the Europe, Japan plus size of Texas USA

– Population: Europe, – Population: similar to Japan plus USA Belgium

– GDP: less than The – GDP: equivalent to Netherlands mid-sized OECD city

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Outline ______1. Africa’s chronic power problems 2. Improving sector performance 3. Investment & financing

Africa Infrastructure Country Diagnostic www.gsb.uct.ac.za/mir

2 1. Africa’s chronic power problems

 Infrastructure is underdeveloped  Electricity supply is often unreliable  Power costs are high, subsidies regressive and prices barely affordable plus hidden costs

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Power infrastructure is underdeveloped

• Installed capacity in SSA is 68 GW – Comparable to Spain – Without South Africa falls to 28 GW • Up to a quarter of capacity unavailable • Growth in capacity stagnant • Installed capacity per capita 10% of LA • Lowest electrification access, rates are declining with population growth

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3 Very low access to power

Source: Earthlights, 2000 www.gsb.uct.ac.za/mir

Source: Africa Infrastructure Country Diagnostic

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4 Source: Africa Infrastructure Country Diagnostic

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Power infrastructure is underdeveloped

• Consumption per capita barely 1% of high-income countries and declining • Large energy resources unexploited, distant from main centers of demand (eg. hydro in DRC & ) • Few economies of scale (33 out of 48 countries have <500MW, 11 <100MW)

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5 A global outlier

Generation capacity Electrification rate (MW per million population) (Percentage of households) 600 100 400 75 50 200 25 0 t 0 t A th a s ia A th a s ia S u i a s S u i a s S o s E A S o s E A S A S A Electricity consumption Power prices (kWh per capita per year) (US$ per kilowatt-hour) 1500 1200 0.15 0.12 900 0.09 600 0.06 300 0.03 0 t 0 h t A th a s ia A t ia s ia S u i a s S u s a s S o s E A S o A E A S A S Source: Africa Infrastructure Country Diagnostic

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History: SSA has fallen behind South Asia

Base Year Year 2000 SSA SAS SSA SAS

Paved arable density 717171 477 1,037 670

Total road density 1,525 757 2,556 1,408

Mainline density 444 2 222222 21

Generation capacity norm. 717171 26 737373 137

Improved water access 515151 72 636363 70

Improved sanitation access 303030 31 353535 47

Note: Base year varies by sector: roads 1960, ICT 1970, power 1980, WSS 1990

Source: Africa Infrastructure Country Diagnostic

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6 Supply is often unreliable

• Insufficient investment in maintenance and new capacity • WB Enterprise surveys reveal average of 56 days per annum with power interruptions – losses in forgone sales and damaged equipment • More than half of large firms have back-up generators • Own-generation now a significant proportion of installed capacity

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Low power reliability

Burundi Eritrea Malawi Tanzania Benin Madagascar Kenya Ethiopia Mauritania Swaziland Zambia Senegal Botswana Cape Verde Burkina Faso Mali South Africa Mauritius Niger Namibia

0 10 20 30 40 50 60 70 80 90 10 11 12 13 14 15 Power outages (days per year)0 0 0 0 0 0

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7 % of businesses that rely on back-up generation

Source: Estache, 2005, p.31. Evidence from the Investment Climate Assessments www.gsb.uct.ac.za/mir

Extent of crisis revealed in prevalence of emergency power leases

Emergency Percentage Cost as capacity (MW) total capacity percentage GDP Angola 150 18 1.0 Gabon 14 3 0.5 80 5 1.9 Kenya 100 8 1.5 Madagascar 50 36 2.8 Rwanda 15 48 1.8 Senegal 40 17 1.4 20 133 4.3 Tanzania 180 20 1.0 Uganda 100 42 3.3

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8 Power costs are high

0.50 0.50 0.40 0.40 0.30 0.30 0.20 0.20 0.10 0.10 0.00 0.00 el o s dr P PP P P ie y AP A AP AP D H C W E S 0.50 0.50 0.40 0.40 0.30 0.30 0.20 0.20 0.10 0.10 0.00 0.00 ll e a um g s d al m di ar nd e st S e L la ck a M Is lo o nd C La

Source: Africa Infrastructure Country Diagnostic

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High commercial power costs

0.80 Average 0.70 total cost of own 0.60 generated power 0.50

0.40 Average 0.30 price of power 0.20 purchased from utility

Averagepowerof cost (US$/kWh) 0.10

0.00

Mali Weighted Niger Benin Kenya Eritrea

Malawi average Zambia Uganda Senegal Mauritius Tanzania cost of Cameroon CapeVerde SouthAfrica power used BurkinaFaso

Source: Africa Infrastructure Country Diagnostic

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9 Access to energy by income quintile

100% 80% 60% 40% 20% 0% Q1 Q2 Q3 Q4 Q5

Electricity for lighting Wood/Charcoal for cooking Gas/LPG for Cooking Kerosene/Paraffin for Cooking

Source: Africa Infrastructure Country Diagnostic

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Rising costs but insufficient revenues

0.30 0.30

0.25 0.25

0.20 0.20

0.15 0.15

0.10 0.10

0.05 0.05

0.00 0.00 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005

Diesel Hydro Overall Diesel Hydro Overall Average operating cost Average revenue

Source: Africa Infrastructure Country Diagnostic

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10 Most tariffs do not recover costs

0.35

0.30

0.25

0.20

0.15

0.10 Average Effective Tariff ($/kWh) Tariff Effective Average 0.05

0.00 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 Historical Average Costs ($/kWh)

Source: Africa Infrastructure Country Diagnostic

www.gsb.uct.ac.za/mirSource: AICD 2008

Hidden or quasi-fiscal costs

4.5%

4.0% 3.5%

3.0% 2.5% 2.0% 1.5%

1.0% 0.5% 0.0%

Under-Pricing Unaccounted Losses Collection Inefficiencies

Source: Africa Infrastructure Country Diagnostic

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11 Power crisis exacerbated by

• Drought • High petroleum prices • Damage to infrastructure through wars • Rapid demand growth

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2. Improving performance

• Reforming state-owned enterprises • Rekindling private sector participation • Managing hybrid power markets • Targeting electrification • Expanding regional power trade

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12 Reforming state-owned enterprises

• State-owned utilities still dominant • Two-thirds of utilities have undergone some form of governance reform – Corporatisation – International accounting standards – Performance monitoring – Exposure to private capital markets • Reformed utilities perform better

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Impact of reform

Commercial efficiency Commercial efficiency

Cost recovery ratio Cost recovery ratio

Electrification rate Electrification rate

System losses System losses

Emergency power Emergency power

Reserve margin Reserve margin

Capacity utilization Capacity utilization

Operational plant Operational plant

0% 25% 50% 75% 100 0% 25% 50% 75% 100 High Low % With Without % SOE Governance Private Sector Participation

Source: Africa Infrastructure Country Diagnostic

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13 Integrated reform of SOEs

1. Clarification of roles and responsibilities • Separation and clarification of government’s different roles • Public entity management legislation • Codes of corporate governance • Performance contracts • Effective supervisory / monitoring agencies • Transparent transfers for social programmes

2. Changing the political-economy of the firm • Improved transparency and information • Corporatisation • Commercialisation • Structural reform and direct competition • Mixed-capital enterprises • Customer-owned enterprises

3. Improved regulatory design

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Learn the lessons of private participation

• 80% of AICD countries have enacted power sector reform law • 66% have regulators & these countries generally perform better • More than 40 IPPs across Africa, totaling 8000MW • Concessions, leases & management contracts – some disappointing • Cf. recent reviews

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14 Respond to challenges of hybrid markets

• Demise of standard model of reform • Incumbent SOEs remain dominant • IPPs introduced on margin • New challenges for securing investment – Responsibility for power expansion planning – Transparent criteria for allocating new build opportunities between SOE & IPPs – Institutional responsibility & capacity for procuring IPPs, use of international competitive bidding processes – Procedures for dealing with unsolicited bids – Institutional responsibility and capacity for contracting (non- exclusive Single Buyer Office?) – Transparent criteria for dispatch

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Target electrification efforts more effectively

• Only a fifth of population have access • Two-thirds population in SSA still rural • Cheaper to electrify urban areas, followed by higher density rural areas • Off-grid technologies (such as PV) still expensive • Focus on more cost-effective areas & technologies • Urban customers can cross-subsidize rural areas • Electrification funds & clear planning criteria NB • National grid electrification has been more effective than rural elec agencies & funds supporting decentralised private operators (Mostert 2008) – but national utilities need to be reasonably efficient

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15 Location of rural non-connected population

Source: Africa Infrastructure Country Diagnostic

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Countries / distances of population from grid

100%

90%

80%

70%

60%

50%

40%

30%

shares of rural ofpopulation shares rural 20%

10%

0% Benin Chad* Niger* Sudan Kenya Ghana Malawi Zambia Uganda Ethiopia Namibia Lesotho Senegal Rwanda Tanzania Cameroon Congo, DRC Congo, Cote d'Ivoire Cote Madagascar Mozambique South Africa South Burkina Faso Burkina remote: > 50 km from substation AND (not in power plant buffer AND > 10 km from lit urban area AND not lit pixel) isolated or off-grid: > 50 km from substation AND (in power plant buffer² OR < 10 km from lit urban area OR lit pixel) 20 - 50 km from substation¹ 10 - 20 km from substation¹ < 10 km from substation¹ or < 5 km from M V line

Source: Africa Infrastructure Country Diagnostic

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16 Potential for increased power trade

(a) Trade stagnation (b) Trade expansion

Source: Africa Infrastructure Country Diagnostic

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Benefits of regional trade

• Expanded trade facilitates least-cost development of power generation resources • Hydro will substitute for thermal and will thus lower carbon emissions – 70 mill tons CO2 per annum (i.e. about 20%) • Share of hydro capacity increases substantially with higher oil and carbon prices • Annual savings estimated as US$2,7 bn • High returns. Additional capital investment in SAPP recouped in less than a year. Other areas recouped in 3 to 4 years with 20- 33% returns • Countries with high domestic power costs have substantial benefits (e.g. Guinea-Bissau, Liberia and Niger could save 6-7 US c/kWh), also Angola, Burundi, Chad, Ghana, Malawi, Sierra Leone, Togo, etc • Export countries can earn significant revenues (e.g. DRC, Ethiopia, Guinea and Cameroon.

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17 Gains to import and export

2.5% 9% 8% 2.0% P 7% P D D G G f 6% f o o 1.5% e 5% e g g ta 4% ta n n e e 1.0% rc 3% rc e e P 2% P 0.5% 1% 0% 0.0% a n a a i C a ue d d e di A o ia a la op R d q n n w n S th ib ny o i D u bi a a ab ru R o m e g th S w g b u es a K An E am R U im B L N oz Z M Major Exporters Major Importers

Source: Africa Infrastructure Country Diagnostic

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4. Annual investment & needs and financing flows for power sector in SSA

Spending needs

$ billions % GDP Capex 26 4.2 Opex 14 2.2 Total 40.6 6.4

Existing financing flows Opex Capex Public Public Non Total Total sector sector ODA OECD PPI Capex Spending 7 2.4 0.7 1.1 0.5 4.6 11.6

Improving operational efficiencies: $3.3 bn; cost recovery - $2.2 bn

Financing gap $23 billion www.gsb.uct.ac.za/mir

18 Summary

• Power crisis is characterized by low capacity, low connection rates, high prices and poor reliability • Expanded regional trade will lower costs and expand access • Government fiscal resources, ODA, private investment and emerging sources of capital are not entirely plugging finance gap • Thus important for African utilities to improve their performance and financing • And new challenges in hybrid power markets need to be addressed to accelerate private investment

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http://www.infrastructureafrica.org

The Management Programme in Infrastructure Reform & Regulation (MIR) is an emerging centre of excellence and expertise in Africa. It is committed to enhancing knowledge and capacity to manage the reform and regulation of the electricity, gas, telecommunications, water and transport industries in support of sustainable development.

Prof Anton Eberhard Research, training courses, consultancy University of Cape Town

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