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Africa’s Power Problem; facts behind the figures (part 1)

Africa may be home to 15% of the world’s population, but it consumes just 3% of the world’s energy output, and generates less than 50% of the 74,000 MW of current peak demand requirement. In sub-Saharan Africa (SSA) electrification rates are low with only 25% of the region’s population having access to power; the average for developing countries is 72%. To plug this gap, at least $300 billion in investment will be required over the next two decades.

The large gap in power infrastructure and the component parts of the electrification value chain would suggest that the sector provides a ready play for investors seeking new and rewarding growth opportunities. Indeed the annual funding requirement for the region’s power sector between now and 2015 is estimated to  be at least US$40.6 billion, with an annual funding gap of around $20bn.

There is also a clear gap in generating capacity. In 2011 for instance, Nigeria, the second largest net generator of power in sub-Saharan Africa, generated just 25 billion kilowatt hours, compared to South Africa, the largest generator, which in the same year generated 242 billion kilowatt hours.  

While an estimated 80% of current funding sources for the power sector comes from public sources, primarily through taxes and tariffs, a spectrum of financial investors are looking to pitch tent in this fast-growing market. However, the average investment commitment in a single power project in the region is approximately $300mn.

Power demand and costs

The demand for electricity in Africa is likely to grow at an average annual rate of 3% over the next 20 years, though generating capacity has remained largely stagnant over the past 5 years. Sub Sahara Africa (SSA) has average power consumption per capita of 120 kilowatt hours (kwH) per person per year, representing a sixth of the global average. At its current 4% growth rate however, per capital energy consumption in Africa is growing faster than anywhere else in the world. This trend has been driven by even just limited improvements in infrastructure in many countries and overall rising levels of foreign direct investment (FDI) which have boosted economic growth. Large economies such as Nigeria have still posted average growth rates in recent years of between 6%-7% despite the severe outages and inefficiencies in the power sector.

Over the next 15 years, the continent needs to add an extra 300 gigawatts (GW) (or 300,000 MW) of capacity to meet demand growth, which would require any new capacity to double to around 7GW a year in the very near-term and perhaps quadruple by 2030 At least 30 countries in Africa experience daily outages, which cost anywhere between 5% of GDP in countries like Uganda and Malawi and between 2%-5% in Tanzania and Kenya.  At the level of enterprise the economic costs are even more startling.  

In SSA, the average firm incurs outage costs of up to $1.25 per kWh of interrupted electricity, which is equivalent to$3,650 per kW, and could also represent economic losses of up to 80 hours every month. Even if standard subsidised tariffs are replaced by cost-reflective tariffs, many businesses could still benefit and improve productivity if net outage costs are used for other purposes such as hiring new workers or purchasing new equipment. Outside of North Africa, the cost of energy services is much higher in Africa than in other parts of the developing world, where costs range from US$0.05-US$0.10 per kWh. The large dependence on petroleum products and frequent recourse to high cost, emergency power generation are key cost drivers.

For instance, firms and multinationals in natural resources and manufacturing have focused their early stage capital investments on captive power generation due to the lack of reliable electricity from many national grids. Meanwhile, a number of studies have documented the higher landed costs of petroleum products i.e. before tax, in African countries when compared with global prices for the same products.

Landed shipping costs of diesel at ports in Africa are typically 10%-15% higher than in Europe. In addition, the transportation of petroleum products from African coastal ports to landlocked African countries also adds to the cost burden. The region’s primary fuel source is diesel. More than 50% of the power generation capacity of Maurtiania, Equatorial Guinea and the DRC, and more than 17% in the West Africa region is based on diesel fuel. This could equate to generating costs of around USD$400/MWh, which in some cases is actually more expensive than most renewable energy technologies.

What industry models are best for the power sector in Africa?

Difficult question to answer fully; it depends on the country and the specific policy framework that exists. In terms of policy the most basic models have seen government attempts to improve metering and billing systems, conduct regular line inspections to tackle illegal connections, improve maintenance, create high voltage distribution systems, and embark on corrections to reduce losses. However a more fundamental question is whether the region’s current Transmission & Distribution (T&D) model is optimal, and how financial investors might benefit and realise returns on projects aimed at reducing T&D losses? 

 The move towards unbundling and privatisation in Africa has been beneficial in so far as it has helped to separate the monopolies in T&D from the generation component of the value-chain. However, this model has only made economic sense where the generation segment has proved to be competitive, and has operated efficiently. This has been a major challenge for Middle Africa, and thus a natural response has seen the emergence of hybrid models in some countries, where state utilities act as the sole purchases of electricity from IPPs.  However, the currently evolving cycle of private sector interest is likely to see a greater push towards models that allow other large customers and not just state utilities to purchase directly from IPPs.

One of the most critical drivers for growth in the power sector, will be access to liquidity and finance. The capital requirements are massive, and the hurdles project require to access long-term funding are equally numerous. A second part of this article will examine, the dynamics that impact access to finance for many projects, and the options that are available to project developers.


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