Financial Gazette (Harare)
16 May 2007
opinion
Harare — AFRICA is battling a serious power crisis on her doorsteps, whose impact is now more pronounced in the Sub-Saharan region, where Zimbabwe now risks plunging into total darkness if nothing is done to improve her power-generation capacity.
In this serialised paper, presented in Maputo at the Forum of Energy Ministers of Africa (FEMA) summit, Engineer Simba Mangwengwende, former ZESA chief executive officer, and contributing author Dr Njeri Wamukonya, explore the energy crisis in greater depth, providing useful insights to policy-makers.
THE African power sector is a microcosm of the African paradox - a continent that is rich in everything and yet is also poor in everything. It has become a cliché repeated ad nauseum that Africa has all the human and material resources to end poverty but is poor in using the resources for the benefit of all the people.
Although Africa is home to 14 percent of the world's population it only generates and consumes 3 percent of the world's electricity. Unless there is a radical paradigm shift in macroeconomic and energy planning and development it is estimated that by 2020 Africans will comprise 16 percent of the world population and yet still only account for an insignificant 3.5 percent of electricity generation in the world.
The low electricity consumption levels in Africa are due to economic under-development and low electricity access rates. The performance of the power sector is characterised by poor security and reliability, high distribution losses, negative financial rates of return and poor cash collection.
Power sector reforms have helped in providing emergency generation, but have marginalised the local private sector and not given priority to electricity access by the poor.
Regulatory agencies are weak and have not succeeded in making the power sector sufficiently attractive to get adequate investment resources from the private sector.
To turn around the performance of the power sector there are three major challenges to be addressed -- replacing existing project wish lists with bankable projects, establishing regulatory policies that improve country investment attractiveness and establishing institutions that have clear roles and are appropriately resourced.
Although droughts, declining terms of trade and heavy debt service burdens are contributory factors to the security and reliability problems in the power sector, these are all symptoms of weaknesses in planning, regulation and institutions.
The paper demonstrates how bankable projects can be developed by promoting value added manufacturing and focusing on regional projects supplying the larger economies or exploiting economies of scale.
Because efforts to achieve the required investment levels through Official Development Assistance (ODA) and Foreign Direct Investment (FDI) have not met expectations, it is proposed that the way forward lies in increasing the local private sector participation.
It is that private sector, more than government efforts, which will succeed in increasing FDI inflows in the economy in general and the power sector in particular. If local entrepreneurs in the power sector start making money FDI inflows will be assured. This is one of the key messages of this paper.
To attract private sector investment it is necessary to put in place regulations that ensure that efficient operators can make money. The effectiveness of regulatory policies and agencies needs to be measured in terms of the continent's ability to attract investment.
The paper concludes with general recommendations on issues that need to be attended to at individual country levels and specific recommendations that FEMA should take up at regional and continental level.
There is a critical need for countries to develop and disseminate information and data required to replace project wish lists with bankable projects that also support regional cooperation. Institutional role clarity is essential to avoid duplication of effort and wastage of scarce human and financial resources. The importance of developing the capacity of the local private sector is emphasised.
The African Power Sector is facing development challenges at a time when there is greater awareness of the adverse impacts of the different energy resources on the environment.
Africa has an excellent chance of following a truly least-cost development path that has minimum impact on global warming and can have the benefit of international best practice in utility management and regulation.
INTRODUCTION
Challenges Facing African Power Sector
African Paradox - Poverty in the midst of plenty
Africa is endowed with abundant energy resources that are more than sufficient to meet current and projected demand including exports for the foreseeable future.
In 2005 Africa's installed electricity generation capacity was estimated to be just over 105 000 Megawats (MW) and energy generation just over 510 TWh/year (IAEA International Atomic Energy Agency, 2006: Annex A). This level of demand represents energy resource utilisation levels that are a minute fraction of what is available.
The Democratic Republic of the Congo (DRC) has more than 400 TWh (Terawatt)/year of economically exploitable hydropower resources, followed by Ethiopia with 260 TWh/year and Cameroon with 103 TWh/year (WEC - World Energy Council, 2005).
Africa has 55 billion tonnes of proven coal reserves, the bulk of which are in South Africa (49 billion). The largest proven oil resources in Africa in millions of barrels are in Libya (29 500), Nigeria (22 500), Algeria (10 040), Angola (5 412) and Egypt (4 150) (ibid.).
More environmentally friendly power could be generated using natural gas of which the largest reserves in billion cubic metres are found in Algeria (4 522), Nigeria (3 515), Libya (1 313) and Egypt (1 223) (ibid.).
At present fossil fuels account for over 80 percent of the electricity generated in Africa (Table 1).
Hydropower development is potentially the least-cost option for meeting demand being a renewable resource with less adverse impacts on climate change than fossil fuels. There are also associated ancillary benefits such as irrigation, water supply, flood control, navigation and recreation. Adverse social and environmental impacts can generally be adequately mitigated. Other regions of the world are far ahead of Africa in exploiting these advantages of hydropower (Table 2).
In contrast to this energy wealth Africa has the greatest energy poverty in the world in terms of utilisation. The continent is home to 13.8 percent of the world's population, and yet only accounts for 6 percent of the world's energy consumption and 3 percent of electricity generated (IAEA, 2006) (Annex A: Tables A1 & A2).
Per capita consumption of electricity is only 0.6 MWh compared to a world average of 2.6 MWh. By 2020, unless there is a dramatic shift in the pattern and rate of economic growth, the projection is that Africa will have over a billion people or 15.8 percent of the world's population but its share of electricity generated is only expected to be 3.5 percent (Ibid., Table A2, Annex A).
The major contributory factor to low power consumption is the continent's economic under-development. In 2004 Africa's total Gross Domestic Product (GDP) was US$685 billion (2000 US$), which was less than 2 percent of the world GDP of US$35 025 billion (IEA, 2006).
If North Africa and South Africa, which account for two thirds of Africa's GDP, are excluded, the combined GDP of all the remaining countries in Sub-Saharan Africa (SSA) is less than that of medium sized industrialised countries such as Turkey, Sweden or Switzerland.
The second major but related reason for the low power consumption in Africa is the low electrification rate (Table 3) which means that the majority of the African population do not have access to electricity. In SSA access levels are significantly low in the rural areas.
The population that has access to electricity suffers from poor supply quality with frequent power supply interruptions.
The power interruptions result in significant economic losses. Kenya, for example, is estimated to lose 9 percent of its annual output to power outages (World Bank, 2006).
The losses include the cost incurred by companies in purchasing and running standby generating facilities. During 2000-2004, over 70 percent of the firms in Kenya owned or shared generators.
The share of firms that own or share generators has been rising in many other countries. In Sierra Leone for example nearly every business facility in Freetown has a diesel generator. A significant number of businesses in Rwanda fall in the same category and more recently this trend has been witnessed in Ghana.
In South Africa the national utility, ESKOM, has had to bring into service old and expensive power plants that had been mothballed.
The African power sector is also characterised by high levels of distribution losses. The average distribution losses are 11 percent of energy supply compared to 7 percent in the Organisation for Economic Cooperation and Development (OECD) countries and 9 percent globally (IEA, 2004: Annex B).
Excluding South Africa, which accounts for half the continent's power consumption but has low losses of 6 percent, the African average loss levels rise to 15 percent. Some countries experience losses that are more than one third to one fifth of energy generated and sent out into the system.
Although information on financial performance is generally difficult to obtain, what is available shows that many state owned power companies operate at huge losses and have problems in cash collection. - To be continued next week
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