Sector Report

Power in Africa

kpmg.com/africa

The series has the following reports:

OilandGasinAfrica

PrivateEquityinAfrica

ManufacturinginAfrica

Fast-MovingConsumerGoodsinAfrica

LuxuryGoodsinAfrica

TheAfricanConsumerandRetail

WhiteGoodsinAfrica

InsuranceinAfrica

AgricultureinAfrica

ConstructioninAfrica

BankinginAfrica

HealthcareinAfrica

Contents

IntRoduCtIon 1

CuRRent envIRonment 3

RegulAtoRy envIRonment 4

overview 4

Sector reforms 4

tariff structures 5

Recent developments 6

Key dRIveRS 7

government Initiatives 7

Public-Private Partnerships (PPPs) 9

Renewable energy 11

RegIonAl develoPmentS 12

north Africa 12

east Africa 12

Central and West Africa 13

Southern Africa 13

outlooK 15

SouRCeS of InfoRmAtIon 15

ContACt detAIlS back page

1|PowerinAfrica

Introduction

Africasbelatedeconomicdevelopmentcomparedtomostoftherestoftheworldisillustratedbyitsunderdevelopedpowersector,withmostresidentsofthedarkcontinentstillunabletoaccessareliablesourceofelectricity.Inadditiontothesocioeconomiceffectsofinadequatepowersupply,thelackofenergyinfrastructurehasalsoconstrainedeconomicgrowth.Electricityiscrucialinmostproductionprocesses,andtheinabilitytoaccessareliableenergysourcedetersforeigninvestment.Historically,energyprovisioninAfricahasbeenviewedasapublicgoodthatgovernment,eitherdirectlyorthroughstate-ownedenterprises,shouldprovide.Duetoundevelopedprivatesectorsandthepoliticalcapitalthatisgainedthroughprovidingsuchaperceivableservice,governmentshavebeenwillingtobeartheinvestment,financialandoperationalrisksinvolvedinsuchlargeprojects.However,notallgovernment-sponsoredprojectshavesucceededinimprovingdomesticenergysupplies,partlyduetofundingissues,butalsoduetomismanagementbypublicinstitutions.Thishaschangedinrecentyears,withtheadventofpublicprivatepartnerships(PPPs)allowingmanycontractualarrangementsforprivatesectorinvolvement.SomeAfricancountrieshavetakenadvantageofrenewedinterestfromforeignentitiestoprovidefundingand/ortechnicalassistancefortheimprovementofenergyinfrastructure,particularlyEthiopia,theDemocraticRepublicoftheCongo(DRC),andGhana,whileothercountrieshaverecognisedtheinvestmentpotentialinAfricaninfrastructure,mostnotablyChina.

Thecontinentishometoaround15%oftheworldspopulation,butonlyconsumessome3%oftheworldsenergyoutput.Furthermore,electrificationratesarelowwithonly25%ofthe

regionspopulationhavingaccesstopower,whilethedevelopingcountriesaverageis72%.Theaccompanyinggraphshowsthe2011productionofprimaryenergy(petroleum,naturalgas,solidfuels,andcombustiblerenewables)andprimaryelectricity,comparedtothe2011useofprimaryenergybeforetransformationtootherend-usefuels,forvariousAfricancountries.Allthecountriesinthegraphthatrecordenergysurpluses(excludingMozambique)areoilexporters.Theremainingcountriesallrecordenergydeficits,requiringenergyimports,eitherthroughhydrocarbonsorelectricity.InMozambique,post-warreconstructionofinfrastructurehasshownsignificantprogressinrecentyears,andMozambiqueisnowoneofthefewAfricancountriesthatconsistentlygenerateelectricityforexportpurposes.In2011,electricitywasthecountryssecond-largestexport,accountingforaround6.7%oftotalexports.Paradoxically,onlybetween15%and20%ofthecountryshouseholdshaveaccesstoelectricity.ThissituationisprevalentinmostAfricancountries,wheremostoftheelectricityisusedbycommercialclients,whilethepopulationremainsheavilyreliantonnon-commercialenergyortraditionalformsofenergy,suchaswoodandcharcoal.Inoil-producingCameroon,whichalsorecordsanenergysurplus,morethanhalfofthepopulationdoesnothaveaccesstoelectricity.Inruralareas,asmuchas85%ofpeoplearenotconnectedtotheelectricitygrid.Furthermore,currentestimatessuggestthaturbanelectrificationinanotheroilproducingcountry,Gabon,iscloseto80%,butthecountrysideremainsat35%.Inturn,Moroccocurrentlyimportssome95%ofitsenergyneeds,andthisaccountsforoveraquarterofitsimports,butelectrificationismuchhigherduetoarelativelyefficienttransmissionanddistributionnetwork.

PowerinAfrica|2

ItshouldalsobenotedthatsignificantenergylossescontinuetooccurbetweensourcesofsupplyandpointsofdistributioninSub-SaharanAfrica.Accordingtosomeestimates,theseinefficienciescouldcostuptoUS$5billionannually,andutilitiescanloseupto25%ofpowerconsumedcomparedtotheglobalaverageof10%.Thisnotonlymeansthatthereisconsiderableroomtoimprovetransmissionanddistributionnetworks,butalsothatthereisactuallyalargerdisparitybetweenenergyproductionandeffectiveenergyuseinmanyAfricancountriesthanelsewhere.Inaddition,asubstantialamountofenergyproducedinmostAfricancountriesiseitherdirectlyproducedbyordirectedtowardslargecommercialenterprisesinextractiveindustries.Thismeansthattheactualelectricitythatisusedbythegeneralpopulationissignificantlylowerthanthecountrysproductionfigures.Inaddition,theinadequatetransmissionanddistributionnetworksonlyallowelectrificationinurbancentres,andmostoftheland-area,andinsomecasesmostofthepopulation,hasnoaccesstoelectricity.

LookingatAfricaslargesteconomies,wecanseethatthesecountriesproducesignificantlymoreenergythanotherAfricanpeers.Againweseethattheoil-producingnationsrecordsubstantialenergysurpluses,butsimilartootherAfricancountrieswithenergysurpluses,asubstantialamountofenergyisexportedwithoutdomesticdemandbeingwidelysatisfied.InNigeria,thelackofoil-refiningcapacityandinfrastructurerequiredfurtherdowntheelectricityvaluechainleavesavacuuminthedomesticenergymarket,whilethecountryisAfricaslargestenergyexporter.Thisisexacerbatedbybeneficiariesofthecurrentstructurehamperingfurtherdevelopment,andtheappealofcrudeoil-drivenforeignexchangeearnings.ThesituationissimilarinAlgeriaandAngola.Inturn,SouthAfricasenergydilemmashavebeenwidelypublicised.Aftermanyyearsofunderinvestmentininfrastructure,powergenerationisasignificantconstraintonSouthAfricaslong-termgrowthpotential.Inordertoremedythiscriticalissue,whichcurrentlyseesmanyminesandheavyindustrialenterprisesstillrunon90%(orless)ofpowerneeds,state-ownedutilityEskomembarkedonthelargestcapacityexpansionprogrammeinitshistoryin2005.Thisisexpectedtoboostcurrentgeneratingcapacityof42,000megawatt(MW)to60,000MWby2018,withplans(butnocommitmentsyet)tobuildadditionalnuclearpowerplantsthereafter.

3|PowerinAfrica

Current Environment

Accesstoelectricityplaysasalientroleineconomicgrowthandinvestmentdecisions.InitsDoingBusiness2014report,theWorldBankmeasurestheeasewithwhichbusinessesin189countriescanaccesselectricity.Thegettingelectricityindicatorcapturestheprocedures,timeandcostinvolvedforabusinesstoobtainapermanentelectricityconnectiontosupplyastandardisedwarehouse.Inthisregard,Africaperformedrelativelypoorly,with38Africancountriesrankedoutsideofthetop100,andonly13countriesmanagingtorankinsidethetop100.Infact,21Africancountries,includingthecontinentstwolargesteconomies,namelySouthAfrica(150th)andNigeria(185th),didnotevenbreachthetop150countries.

ThebestperformingcountriesintheregionwereMauritius(48th),Rwanda(53rd),Tunisia(55th),andCameroon(62nd),whiletheworstperformingcountrieswereGuinea-Bissau(188th),Madagascar(187th),Nigeria(185th),andSouthSudan(184th).OtherlargeAfricaneconomiesthatperformedpoorlyincludeAngola(170th),Kenya(166th),andAlgeria(148th).However,itshouldbenotedthatsixoutofthe10countriesthathavenarrowedthedistancetothefrontierthemostsince2009areinAfrica,includingSierraLeone,Tanzania,Zimbabwe,Ghana,CentralAfricanRepublicandLiberia(thefrontieristhebestperformingcountryineachindicator).

note: the accompanying graph also shows the best and worst performing countries in the indicator globally for the purpose of comparison.

Whileaccesstoelectricityaffectsinvestmentdecisionsandconsequentlypotentialgrowth,thequalityofelectricitysupplyhasanimpactonproductivity,withfurtherimplicationsoneconomicdevelopment.Energynetworksthatprovidereliableandaffordableelectricityarealsoessentialbecausedisruptionsintheenergysupplycanimposelargecostsoncompanies,especiallylargemanufacturing,electricity-intensivebusinesses,whichneedtostopandrestarttheiroperationsafterapowerinterruption.FiguresfromthemostrecentWorldEconomicForums(WEF)2013/14GlobalCompetitivenessReport(GCR)showthat

onlyfiveAfricancountrieshavescoresabovetheglobalaveragewithregardstothequalityofelectricitysupply.OnlyNamibia,Morocco,Tunisia,MauritiusandSeychellesperformbetterthantheworldaverage,whileGuinea,Chad,Angola,Nigeria,BurundiandCapeVerdeareallrankedwithinthe10worstperformingcountriesintheindicator.Atleast30countriesinAfricaexperiencedailyelectricityoutages,whichcanresultinanannuallossofanywherebetween5%ofGDPincountrieslikeUgandaandMalawi,andbetween2%and5%ofGDPinTanzaniaandKenya.

PowerinAfrica|4

Regulatory Environment

Sector Reforms

overviewTheregulatoryenvironmentinAfricasenergysectorisquitecomplexanduncoordinated,differingsignificantlybetweencountries.Mostregulatoryenvironmentscreateuncertaintyandcloudinvestmentdecisions.Whilsteffortsarebeingmadetoremovetheseuncertainties,investorscontinuetosufferthecostofregulatoryburden.Bureaucracies,long-decisionandapprovaltimes,andotherregulatoryexternalitiesdonotprovideincentivestoinvestintheenergysector.

Furthermore,mostregulatoryinstitutionsareweak,withoutthenecessarytechnicalcapacityandlogisticstoexecutetheirmandates.Thereiscurrentlyageneraltrendtowardsliberalisation;thereviewoftariffstructures;andtheprivatisationandunbundlingofpowerutilities,butpowerutilitieshavesufferedunderfinancialstressfornumerousyears.Thishasregularlyunderminedtheabilityofnationalutilitiestoprovidegoodpartnershipswithprivateinvestors.

Sincethe1990s,variousAfricancountrieshaveattemptedtofollowthestandardreformmodelwithregardtotheenergysector.Themodeladvocatesthecreationofaverticallyintegrated,publicly-ownedmonopoly,whichthroughcommercialisation,andindependentregulation,isgraduallyunbundledwiththeintroductionofprivatesectorparticipationandeventuallycompetition.However,thestandardreformmodelhasnotbeenfullyimplementedinanyAfricancountry.Initialpowersectorreformplansareoftenstalledorreversed,andprivatesectorparticipationisstilloftenconstrained.Instead,hybridpowermarketshavedevelopedwhereincumbentstate-ownedutilitieshaveretaineddominantmarketpositions.Currently,around30Africancountrieshaveestablishedindependentelectricityregulators,includingEthiopia,Kenya,Uganda,Rwanda,Egypt,Senegal,Nigeria,Ghana,Gambia,BurkinaFaso,Mali,CameroonandCotedIvoire.Effectiveregulationwasseenaskeytoinfrastructurereformandattractingprivateinvestment.SomecountriesincludingKenya,Ghana,NigeriaandUgandahavealsounbundledtheirstate-ownedutilities,whileothers,includingTanzaniaandSouthAfricahavenotunbundled.MostAfricancountriesfacenumerousregulatorychallenges.Theseinclude:

LimitstoindependenceGovernmentdepartmentsmakefinaldecisions,tariffspoliticised,regulationofstate-ownedenterprisesdifficult;

Lackoftransparencyandparticipationnoexplanationofdecision-makingprocess,lackofstakeholderinput;

Institutionalfragilitymostregulatorsareonlyafewyearsold;and

Lackofcapacity/competencyarbitraryorinconsistentdecisionmaking.

InviewoftheincreaseofregulatoryagenciesforenergyacrossAfrica,theAfricanForumforUtilityRegulators(AFUR)wasestablishedin2000.TheAFURisaformalcollaborativearrangementforregulatorsthataimstosupportthedevelopmentofeffectiveutilityregulationinAfrica.ItseekstofacilitatetheexchangeofinformationandlessonsofexperienceamongAfricanregulatorsandtosupportcapacitybuildinginitiatives.TheAFURfocusesonissuesrelatedtoenergy,telecommunicationandwater&sanitation,andhasemphasisedtheneedforindependentorautonomousregulationwherepossible.

ThesubstantialinfrastructuregapbetweenavailableenergysupplyandactualdemandhasencouragedmostAfricangovernmentstoenactlawspermittingprivatesectorparticipationinpowergeneration.PrivateconcessionshavebeenusedincountriessuchasUganda,Cameroon,CotedIvoire,MaliandGabon,whilemanagementcontractshavebeenusedinNamibia,Lesotho,Rwanda,Tanzania,KenyaandNigeria.

5|PowerinAfrica

Regulatory Environment

Arecenttrendthatcouldsignificantlychangetheenergylandscapeistheregulatoryprovisionfortheuseofindependentpowerproducers(IPP)inmanyAfricancountries.Therearecurrentlyaround50IPPsacrossAfrica,producingenergyincountriesincludingKenya,Uganda,Tanzania,Ghana,CotedIvoire,Senegal,Nigeria,TogoandSouthAfrica(renewables).Infact,hybridpowermarketswiththeincumbentstate-ownedutilityactingasthesinglebuyerofelectricityfromIPPshavebecomethemostcommonindustrystructureinSub-SaharanAfrica.Almosthalfofmedium-tolong-termpowersector

transactionsinSub-SaharanAfricainvolveIPPs.Recognisingtherisksinvolvedinenergyinvestment,Africangovernmentshaverespondedtotheseconcernsbyembarkingonahostofregulatoryandsectorreformsaimedatunderwritingandinsomecasesde-riskingpowerprojectsonthecontinent.ThebiggestsignofthishasbeenthesteadyriseofIPPs,therestructuringoftariffframeworks,theoutsourcingofutilitiesmanagement,andimplementationofpre-paidmeters.

Thebiggestchallengeinmostcountriesoftheregionhasbeenthesubsidisedtariffstructuresforelectricity.Governmentshavehistoricallypricedtariffsbasedonwhatlow-incomeeconomicgroupscanafford,asituationthathasunderminedthecommercialviabilityoflargepowerprojects.Thishasbeenadisincentivefornewprivatesectorinvestmentasprivatecompaniesareunabletoremainperpetuallyunprofitable.Insufcientcostrecoveryhasalsoreducedthecapacityofstate-ownedutilitiestoproperlymaintainplantsandequipment,andhasleftvirtuallynoresourcestoexpandoperationsandadequatelyaddressgrowingdemand.Fromatariffstructureperspective,mostcountriesinSub-SaharanAfricaarehighlyregulated.AsurveyconductedbytheInternationalMonetaryFund(IMF)in2012suggeststhatmostcountriesimplementsomeformofadministeredpricingforelectricity,mostfrequentlythroughadhoc,non-automaticpricesettingschemes.Evenincountrieswithdejurepricingpoliciesbasedonanautomaticformula,theseautomaticmechanismsarefrequentlysuspendedorintervenedwith.Itappearsthatpolicymakersarereluctanttoadoptmarket-basedpricingpolicies,partlybecauseofconcernsrelatedtoaccess,affordability,andinstitutionalcapacity.

Toquantifytheextenttowhichprice-settingpoliciesareusedasindirectenergysubsidies,theIMFmeasuresthedifferencebetweentheactualrevenuechargedandcollectedatregulatedelectricitypricesandtherevenuerequiredtofullycovertheoperatingcostsofproductionand

capitaldepreciation.Thisprovidesaquasi-fiscaldeficitforthepowersector,reflectinggovernmentintervention.ThesurveyfindsthatcountriessuchasChad(0.3%),Botswana(0.4%),Rwanda(0.5%),SouthAfrica(0.5%),Niger(0.6%),Kenya(0.8%),andNamibia(0.8%)onlymarginallymanipulatetariffsinordertobringpricestolowerlevelsthanwouldbepresentinamarket-drivenenvironment.Inturn,countriessuchasZimbabwe(11%),Mozambique(7.2%),SierraLeone(3.5%),Zambia(3.4%),CapeVerde(2.9%),theDemocraticRepublicofCongo(2.8%),andCameroon(2.7%)haveamuchlargerimpactonenergyprices.Themedianquasi-fiscaldeficitfortheentireSub-SaharanAfricaregionisaround1.7%,meaningpricesarearound1.7%lowerthanwhatwouldberequiredtofullyrecoveroperatingcosts.

Oneformofpricingthathasgainedmomentuminsomecountriesistheuseoffeed-in-tariffs(FiTs).TheuseofFiTsisapolicymechanismdesignedtoaccelerateinvestmentinrenewableenergytechnologies.Itachievesthisbyofferinglong-termcontractstorenewableenergyproducers,typicallybasedonthecostofgenerationofeachtechnology.Ratherthanpayanequalamountforenergy,howevergenerated,technologiessuchaswindpower,forinstance,areawardedalowerper-kWhprice,whiletechnologiessuchassolarpowerandtidalpowerareofferedahigherprice,reflectingcoststhatarehigheratthemoment.ThegoalofFiTsistooffercost-basedcompensationtorenewableenergyproducers,providingpricecertaintyandlong-termcontractsthathelpfinancerenewable

tariff Structures

PowerinAfrica|6

PrivatisationofthepowersectormadesignificantstridesinNigeriain2013.Thephysicalhandovertoprivatetendersof10distributioncompaniesandfourlegacygenerationcompaniestonewownerson1November2013wasasignificantmilestone.Inaddition,therecentlylaunchedAccessPowerinitiativeofthefederalgovernmentandthesignatureofmemorandumofunderstandingsareexpectedtoenhancepowerinfrastructureandaccesstoelectricity.

TheAfricanDevelopmentBank(AfDB)hasrecentlyapprovedaUS$1billionloaninsupportoftheAngolangovernmentseffortstoreformthepowersector.Thereformsupportprogrammeaimstopromoteinclusiveeconomicgrowthbyimprovingoperationalandcostefficiencyinthesectorandconsolidatingpublicfinancialmanagementreforms.Ithasthreecomponents:restructuringtheenergysectorandimprovingitsregulatoryenvironment;fosteringprivatesectorinvestmentintheenergysector;andenhancingtransparencyandefficiencyinpublicfinancialmanagement.

energyinvestments.Morespecifically,KenyahasreviseditsFiTspolicyin2010and2012toincreasethearrayofrenewablesourcescoveredandtariffstoaccommodatemoreprojects,andindoingsotoattractinvestors.EstimatessuggestthatFiTscouldstimulateupto1,300MWofinstalledpowercapacityforsomeAfricancountries,andcapacity

levelsareforecasttorisefurtherasthesetariffsallowthecontinueddevelopmentofrenewablesourcesandthecorrespondingexpecteddecreaseinlong-termcosts.

Recent developments

7|PowerinAfrica

Key Drivers

ThereareafewkeydriversthatwillhaveasignificantimpactonthedevelopmentofthefutureenergylandscapeinAfrica.Whilenotallthesedriversarerecentphenomena,therehasbeen

renewedinterestinenergyprovisioninAfrica,withregulatoryandtechnologicalprogresssupportingthismovement.

TheProgrammeforInfrastructureDevelopmentinAfrica(PIDA)isacollaborationbetweenvariousstakeholders,includingtheAfricanUnionCommissionandtheAfricanDevelopmentBank(AfDB)todevelopavisionandstrategicframeworkforthedevelopmentofregionalandcontinentalinfrastructure.PIDAsPriorityActionProgramme(PAP)hasidentifiednumerousenergyprojectsitplanstoundertakeinAfrica,withthetotalcostsestimatedatUS$47.1billion.Theselectioncriteriaincludedtherespectiveprojectscontributiontoregionalintegration,thesynergywithotherinfrastructuresectors,andthattheprojectshouldbecompletedby2020.Furthermore,theUSrecentlyannouncedtheformationofPowerAfrica,

afive-year,US$7billioninitiativeaimedatsupportingeconomicgrowthanddevelopmentbyincreasingaccesstoreliable,affordable,andsustainablepowerinAfrica.Theprogrammeisamulti-stakeholderpartnershipbetweenthegovernmentsoftheUS,Tanzania,Kenya,Ethiopia,Ghana,NigeriaandLiberia,theUSandAfricanprivatesector,andtheAfDB.UnitedStatesAgencyforInternationalDevelopment(USAID)inclosecollaborationwiththeAfDBhastakentheleadinshapingthelistofpriorityPowerAfricatransactionsacrossthesixmainfocuscountries.Criteriaforselectingspecifictransactionsincludethepotentialtoreachamajormilestonewithin18-24months,amongstothers.

Inadditiontoinitiativesbyinternationalfinancialinstitutions,Africangovernmentshaveundertakenenergy-focussedinfrastructureinvestmentprogrammesatnationalandbilaterallevels.Approximately80%offundingforpower-sectorprojectsinAfricaisstillsourcedfromgovernmentcoffers,eitherdirectlythroughgovernmentinvestmentsorindirectlythroughpublic-ownedenterprises.Thisispartlyduetogovernmentregulationpreventingforeignparticipationinsuchastrategicallyimportantsector,andpartlyduetotheunwillingnessofforeigninvestorstocommitthesubstantialamountsofcapitalandtimerequiredintoaregionthatisgenerallyperceivedtobevolatile.

InearlyMarch2013,theSouthAfricagovernmentcompletedanagreementtobuy2,500MWofpowerfromthefirstphaseoftheIngapowerprojectbasedontheCongoRiver(DRC).TheagreementtobuymorethanhalfthepowerfromthefirststageoftheUS$80billionhydropowerprojectisexpectedtoenabletheDRCtosecuretheinitialUS$10billioninfinancingrequired.TheSouthAfricanfinanceministerhasputasideR200billionforthe40,000MWGrandIngaproject.InadditiontotheagreementwithSouthAfrica,miningcompaniesoperatingintheSouthernCongoleseprovinceofKatangaareexpectedtobuy2,300MWofpowerandatransmissionnetworkisexpected

government Initiatives

PowerinAfrica|8

tobebuiltthroughoutsouthernAfricatosupplyanumberofcountrieswithpower.WorldBankestimatessuggestthecomplexcouldsupplyenergytoasmanyas500millionhouseholdsacrossthecontinent.Oncecomplete,GrandIngawillgeneratealmostdoublethepowercomingfromtheThreeGorgesDaminChina,whichnowholdsbraggingrightsastheworldslargesthydropowercomplex,with22,500MWcapacity.

Thefinancingoflargeenergy-relatedinfrastructureprojectsremainsaconcernacrossmostAfricancountries.Whileexternaldonorsandlenders(particularlyChina)havemadetheresourcesavailabletocommenceconstructionoftheselargeprojects,thesustainabilityandeconomicviabilityofmanyprojectsremainuncertain.NumerousAfricancountries,includingRwanda,Gabon,GhanaandZambiahaveissuedEurobondswithapartoftheproceedsspecificallydirectedtowardsenergyinfrastructure.Thishasallowedthesecountriestotakeadvantageoftheglobaldemandforyieldsgiventhelowreturnsinindustrialisednations,consequentlylockinginlowerborrowingcosts.Inaddition,internationalfinanceinstitutions,specificallytheInternationalMonetaryFund(IMF)andWorldBankhaveprovidedfinancialsupportforenergyrelatedprojects,thusdecreasingtheburdenonfiscalaccounts.MostAfricancountriesshouldcontinuetoreceivesupportfromexternalsourcestofundenergy-relatedprojects,buttheefficiencyandeffectivenessofpublicinvestmentswillhave

asignificantimpactontheeconomicviabilityoftheseprojects.Publicandexternaldebtlevelswillbeprimaryareasofconcernwhenassessingthesustainabilityofprojects.

Somegovernmentinitiativeshavehadcounterproductiveeffectsondomesticenergymarkets.MostcountriesinSub-SaharanAfricahavehighlyregulatedelectricitymarkets.A2013IMFsurveyfindsthatmostSub-SaharanAfricacountriesimplementsomeformofadministeredpricingforelectricity,mostfrequentlyadhoc,non-automaticpricesettingschemes.Evenincountrieswithdejurepricingpoliciesbasedonanautomaticformula,theseautomaticmechanismsarefrequentlysuspendedorintervened.EvencountrieswithliberalisedmarketsforpetroleumproductssuchasSouthAfricaandUgandastillopttosetelectricitypricesadministratively.Furthermore,amajorityofcountrieshaveexplicitsubsidiesforelectricity,includingMozambique,Namibia,Angola,Nigeria,Niger,Cameroon,Ghana,andGabon.Energysubsidiescreateatleasttwosetsofproblems.Firstly,theyarepoorlytargetedthesubsidiesprovidebenefitstoallsegmentsofsociety,butthemainbeneficiariesarethebetteroff.Secondly,subsidiesoftencreateadisincentiveformaintenanceandinvestmentintheenergysector,perpetuatingenergyshortagesandlowlevelsofaccess.Somecountrieshaveundertakenelectricitysubsidyreforms,includingKenyaandUganda,whichhavebeenlargelysuccessful.

9|PowerinAfrica

Key Drivers

Public-Private Partnerships (PPPs)Duetobudgetaryconstraintsandincreasingdebtlevels,itisexpectedthatgovernmentsacrossAfricawillincreasinglyconsiderPPPsasfinancingoptions.Thelargegapbetweendemandandtheavailablesupplyofenergy,aswellasincreasingsupportbygovernmentstoincreasedomesticgenerationcapacity,offerssignificantpotentialforprivate-sectorledenergydevelopment.WhilenumeroushurdlesstillhinderPPParrangements,includinginadequatelegislation,regulatoryrestrictions,andopaquepoliticaldecisionmaking,thepotentialreturnoninvestmentoftenoutweighstheseconcerns.AccordingtoEcobankestimates,investmentcostsperMWforgenerationassetshaveaveragedUS$1.1millionacrosskeyemergingmarketsanddevelopedeconomies.However,someprivatisedandnewlybuiltassetsinAfricahavesoldforalmost50%and20%lessthantheglobalaverage,respectively.ThismeansthereisincredibleupsidepotentialtoreturnsoninvestmentinAfricanenergyprojects.Furthermore,tariffreforms,governmentfundingsupport,andinvolvementofinternationalfinancialinstitutionshaveprovidedfurtherincentivesforPPParrangements.Inadditiontoinvestmentopportunitiesintheprovisionofenergy,somelargemanufacturingandminingcompanieshaveundertakenenergyinfrastructureinvestmenttosupporttheirownproductionactivities.ThisisparticularlyprevalentintheDRC,whereinadequateenergysupplyisasevereconstraintonminingactivities.

RecentPPPsinenergyprojectsincludetheBujagalihydropowerstationinUganda,whichwascontractedbyBujagaliEnergyLimited(BEL)underaPPParrangement.BELisexpectedtoruntheplantandrecoupitsinvestmentin30years,afterwhichitwillhanditovertogovernmentatnocost.UgandaisworkingonaPPPlegislation,nowbeforeParliament,toregulatesucharrangements.Inaddition,thecompletionofthe25.5MWCabelicaProjectinCapeVerdewastheresultofthefirst

commercial-scale,privately-financedPPPwind-farmprojectinSub-SaharanAfrica.WiththecompletionoftheCabelicaProjectinmid-2012,CapeVerdewentfromroughly2%installedwindenergycapacityto20%,resultinginoneofthehighestwindenergypenetrationratesintheworld.Furthermore,inmid-2013,thegovernmentofTanzaniasignedamemorandumofunderstandingwithSymbionEnergytobuilda400MW,gas-poweredplant.TheUS$1billionprojectispartneredbyGeneralElectric,andexpectedtobecompletedinthreeyears.

ChinesecorporationshavealsoundertakenvariousenergyprojectsinAfricancountriesthatcanbeclassifiedasPPPs.TheChinesegovernmenthasbuiltstrongrelationshipswithnumerousAfricancountries,andChinesestate-ownedcompanieshaveprovidedfundingandservicesfortheconstructionofenergyprojectsacrossthecontinent.TheChinese-fundedBuihydroelectricpowerprojectinGhanawasinauguratedinmid-December2013.TheUS$622millionhydroelectricdam,whichwasfinancedprimarilybytheExport-ImportBankofChina,issettoincreaseGhanasenergycapacitybysome20%(400MW),whileenhancingthequalityandreliabilityofthesupplyofelectricityinGhana.Movingeast,inmid-2013,UgandasignedadealwithChinasSino-HydroGroupLtdfortheconstructionoftheUS$1.65billionKarunahydropowerprojectontheWhiteNile.This600MWinstallationisbackedbyChinesecreditworthareported15%ofthetotalcost.Furthermore,ChinahasalsoshowninterestinfundingelectricitygeneratingprojectsinEthiopia.TheExport-ImportBankofChinaprovidedaloanfortheUS$157millionAdamaWindPowerProject,projectedtoprovide51MWofelectricpoweroncecompleted,whiletheChinaElectricPowerEquipment&TechnologyCompanywillraise85%ofthetotalcostofUS$1.2billionforahigh-voltagetransmissionlinetotransferelectricityfromtheRenaissancehydroelectricplant.

11|PowerinAfrica

Key Drivers

Renewable energyAlthoughstillaproportionallysmallpartoftheenergymixinmostcountries,renewableenergyaccountsforalmost20%oftotalinstalledelectricitycapacityinAfrica,and,accordingtotheUnitedNations,66%ofallnewelectricitygeneratedintheregionpost-1998wasfromrenewablesources.Thecontinentboastssubstantialnaturalenergypotential,intheformofhydro,solar,windandgeothermalenergy.TheWorldBankestimatesthattheDRCalonehassome100,000MWinhydro-powerresources,whileitiscurrentlyestimatedthatEthiopiahasthepotentialtoproduce45,000MWofhydroelectricity,muchofwhichremainsuntappedatpresent.Inturn,thereisenormouspotentialforgeothermalenergyintheEastAfricanRift,whichisalmost6,000kminlengthandspansseveralcountriesinEastAfrica,includingEritrea,Ethiopia,Djibouti,Kenya,Uganda,andZambia.Furthermore,manyAfricancountriesreceiveonaverage325daysperyearofbrightsunlight.ThisgivessolarpowerthepotentialtobringenergytovirtuallyanylocationinAfricawithouttheneedforexpensivelarge-scalegridlevelinfrastructuraldevelopments.ThedistributionofsolarresourcesacrossAfricaisfairlyuniform,withmorethan80%ofthelandscapereceivingalmost2,000kWhpersquaremetreperyear.

EthiopiaandMoroccohavelargelyledthewaywithinvestmentsinavarietyofrenewableenergysectors,whileKenyahaspioneeredtheuseofgeothermalenergyonthecontinent.TheGrandEthiopianRenaissanceDam(GERD)isthecrownjeweloftheEthiopiangovernmentsinfrastructureprogramme.Thedamisexpectedtogenerate6,000MWatfullcapacity,makingitthelargesthydroelectricplantinAfricauponcompletion.Inaddition,thegovernmentofEthiopiahasrecentlyconcludedacontractualagreementtodevelopthecountrysfirstgeothermalfarm.

TheprojectisworthUS$4billion,andwhencompletedwillbethelargestgeothermalplantinAfrica.Theprojectwillbecompletedintwophases,eachhavingacapacityof500MW,withthefirstphaseexpectedtobecompletedby2018andthesecondphaseby2021.Whencomplete,theprojectwillbeEthiopiasbiggestforeigninvestment,runbyitsfirstprivatelyownedutility.NeighbouringKenyaiscurrentlythecontinentsleaderwithregardtogeothermalenergy.KenyaisendowedwithvastgeothermalresourceslocatedintheRiftValley.AccordingtotheMinistryofEnergy,Kenyahaspotentialgeothermalcapacityofbetween7,000MWand10,000MW.AsofDecember2011,theinstalledcapacityofgeothermalenergygenerationwas198MW,approximately13%ofthecountrystotalinstalledcapacity.ThisishoweverexpectedtochangeasKenyaElectricityGeneratingCompany(KenGen)isintheprocessofconstructingtheworldslargestsinglegeothermalpowerplant,theOlkariaI&IVPowerPlant,whichwillhaveatotalinstalledcapacityof280MW.Thecompanyprojectsthattheplantswillbeabletoprovideelectricitytothepowergridby2014.

TurningtoMorocco,thefirstcontractforthecountrysfiveplannedsolarpowerplantsinOuarzazatewasawardedinSeptember2012bytheMoroccanAgencyforSolarEnergy(MASEN)toaconsortiumledbytheSaudiInternationalCompanyforWaterandPower(ACWA).UndertheUS$1billioncontract,ACWAwillbuildandoperatea160MWsolarplant,supplyingelectricitytotheNationalOfficeforElectricityandWater(ONEE).Inaddition,constructiononthefirstConcentratedSolarPower(CSP)plantinOuarzazatebeganinMay2013andisexpectedtobecompletedin2015.MASENisnowfurthersolicitingbidsforanothersolarfacilityatOuarzazatewithacapacityof300MW.TheOxfordBusinessGroupwroterecentlythatMASENannouncedinAugust2013thatitwouldlaunchtendersfortwoCSPplantsintheOuarzazateregionin2013Q4.Theproposedprojectswouldhavetotalgeneratingcapacityof300MW,whichwouldpushtotalsolarcapacityinOuarzazatetoover450MW.Plansareforfourmoremega-scalesolarpowerprojectsatvariouslocationsacrossthecountrywithmodernsolarthermal,photovoltaicandCSPmechanisms.

PowerinAfrica|12

Regional Developments

north AfricaMostNorthAfricancountriesarehighlydependentonoilandgastosatisfydomesticenergyneeds.However,theregionishighlysuitableforbothwindandsolarenergygeneration.AccordingtotheGermanAerospaceCentre,asolargeneratingfacilitycoveringjust0.3%oftheareacomprisingNorthAfricacouldsupplyalloftheenergyrequiredbytheEuropeanUnion.Inaddition,EgyptandMoroccoarethetwocountrieswiththehighestwindpowercapacityinAfrica.InMorocco,aspartoftheNationalRenewableEnergyandEfficiencyPlan

launchedin2008,thegovernmenthopestoimprovegridefficiencyandgenerate42%ofitsenergyrequirementsfromrenewablesourcesby2020.Thiswouldnecessitate4,000MWbeinggeneratedfromrenewablesources,theexpectationbeingthatitwillbesplitequallybetweensolarandwindenergy.Inthisregard,theMoroccangovernmentisintheprocessofrecruitingforeigninvestorstofundaUS$9billionsolarpowerprojectinWesternSaharainadditiontodomesticwindandsolarenergyprojects.

TheEthiopiangovernmenthasbeenactivelyaddressingtheenergyprobleminthecountry,whichuntilrecentlyseverelyconstrainedeconomicdevelopment.Severalnewprojectshavebeeninitiatedwiththeaimofincreasingthecountryselectricityproduction.In2011,Ethiopiasprimeministerannouncedthatthecountryisworkingtowardsincreasingitsrenewableenergyoutputbyfive-foldwithinthenextfiveyears.TheproblemhasbeenaddressedtosuchanextentthatEthiopiawantstoincreaseitselectricityexportsasareliablesourceofprecioushardcurrency.ThevastnaturalresourcesandfavourableclimatecouldplaceEthiopiaatthecentreofanemergingelectricitynetworkacrosstheregion,drivenlargelybyrenewableenergy.Inturn,constructionoftheLakeTurkanaWindPowerprojectinKenyawillreportedlystartinthefirstquarterof2014.Theprojecthasbeendelayedforyearsduetofundingconcerns.Only120moftheprojectstotalcostoffinancingofsome600mstillneedstobeapproved.Iftheconstructiontimelinemovesaheadasplanned,thefirst50MWofpowercouldbegeneratedbythefirstquarterof2016,andtheramp-uptofullcapacityof300MWby2016Q4.Investorsremaincautiousaboutthistimeline,sayingitmightbetooambitiousandcanpossiblyleadtoamismatchbetweendemandandsupply.Whencompleted,LakeTurkana

couldbethelargestwindpowerprojectinAfrica.KenyaPowerhasannouncedthatitplanstoissueEurobondstohelpfinanceitsexpansionplansafteritobtainsacreditrating.Elsewhere,theTanzaniangovernmentrecentlyreleasedadocumentemphasisingthatthedomesticmarketwillbeprioritisedovertheexportmarketwithregardtogassupply,andasaresult,thatallliquefiednaturalgas(LNG)andotherprocessingfacilitiesbelocatedonshore.Thegovernmentalsoplanstofacilitatetheestablishmentofindustrialparkswherenaturalgaswillbeutilised.Tanzaniaalsoplanstostartexportingpowerin2015toneighbouringcountries.Completionofanewgaspipeline(expectedinDecember2014)shoulddoublethecountryselectricitygeneratingcapacityto3,000MW.

TheEastAfricanPowerPoolaimstoconnectthepowergridsofatleast10countries,includingEthiopia,Kenya,Rwanda,Uganda,Burundi,Tanzania,theDRC,Sudan,LibyaandEgypt.ItmayalsoextendtonorthernandsouthernAfrica.State-ownedEthiopianElectricPowerCorporation(EEPCo)recentlyannouncedarevised25-yearpower-sectorstrategy,aimingtoboostgeneratingcapacityto37,000MWannuallyby2037.Asubstantialamountisintendedtobesurpluspowerearmarkedforexport.

east Africa

13|PowerinAfrica

Regional Developments

Central and West AfricaTheprocessofprivatisationintheNigerianpowersectorhasmovedfrompolicymakingtoimplementationwiththeselection/approvalofseveralapprovedbidders.On22April2013,PresidentGoodluckJonathansignedagreementsfortransferringstateelectricityassetsto15biddingcompanies.Morerecently,on1November2013,Nigeriasgovernmenthandedoverprivatisedpowerassetstonewownersinthefirstphaseofaprocessaimedatalleviatingoneofthecountrysmostprevalentdevelopmentconstraints.Thenextphasewillsee10NationalIntegratedPowerProjects(NIPPs)completedandsoldtoprivateoperatorsbytheendofMarch2014.Thecountryspowersectorhasconsiderableroomfordevelopment.Nigeriasgenerationofaround3,575MWfallsfarshortofthealmost12,800MWrequiredtomeetpeakdemand,leavingconsiderableroomforprivateinvestors.TurningtoCameroon,accordingtoIntpow,thecountryhasthethirdhighestlevelofhydropowerpotentialonthecontinent,withgrosstheoreticalhydropowerpotentialof294,000GWh/year.ThisissignificantlylowerthanthatoftheDRCandEthiopia,wheregrosshydropowerpotentialisestimatedtobe1,397,000GWh/yearand650,000GWh/year,respectively.However,intermsofeconomicallyviablehydropowerpotential,IntpowreportsthatCamerooncouldpotentiallygenerate105,000GWh/year(about13.6%ofAfricastotaleconomicallyviablepotential),comparedtoEthiopiawith162,000GWh/yearandDRCwith145,000GWh/year.Thegovernment,incollaborationwithdonors,is

planningtospendUS$13.7billiontoincreaseannualelectricityoutputfromaround1,000MWcurrentlyto5,000MWby2020throughtheconstructionofhydroelectricdamsandthermalpowerplants.TwoparticularlyimportantprojectsaretheLomPangarHydroelectricventureandagas-firedpowerplantnearKribi.InGhana,thefinalphaseoftheChinese-fundedBuihydroelectricpowerprojectwasofficiallycommissionedon19December2013.TheUS$622millionhydroelectricdam,whichwasfinancedprimarilybytheExport-ImportBankofChina,issettoincreaseGhanasenergycapacitybysome20%(400MW),whileenhancingthequalityandreliabilityofthesupplyofelectricityinGhana.Ghanascurrenttotalinstalledcapacityis2,546.5MW.Thestate-ownedutilitycompany,VoltaRiverAuthority(VRA),planstoexpandgenerationcapacitybyaround1,000MWoverthenextfiveyears.TheseplansincludeconstructionoftheKponethermalfuelplant(200MW),andexpansionoftheTICO(T2)thermalplant(100MW).AsatJanuary2014,Ghanasinstalledelectricitygenerationsourceswereasfollows:VRAhydropower(47%),VRAthermal(36%),independentpowerproducers(IPPs,12%),Buihydropower(5%),andVRAsolar0.1%.

ThereareconsiderableinvestmentopportunitiesinregionaltransmissionnetworksinCentralandWestAfrica,asthepowertradeaccountsforonly5%ofthesub-regionstotalconsumption.Largeenergyinvestmentsintheregionandconsistentenergydeficitsinvariouscountrieswillnecessitateamoreefficientpowernetworkincomingyears.

TheSouthernAfricanPowerPool(SAPP)isacooperationofthenationalelectricitycompaniesinSouthernAfricaundertheauspicesoftheSouthernAfricanDevelopmentCommunity(SADC).ThemembersofSAPPhavecreatedacommonpowergridbetweentheircountriesandacommonmarketforelectricityintheSADC.WhileSouthAfrica,ZambiaandMozambiquearethelargestenergyproducersinthepool,SouthAfricahasoftenmadeuseofthefacilitytosupplementitsenergysupply.LargehydropowerprojectsinMozambiqueandZambiawillincreasetheavailableresourcesinthecommonpowergrid,allowingregionalcountriestotakeadvantageofthesedevelopments.

Inaddition,thehydroelectricplantswillallowothercountries,particularlySouthAfrica,toimprovetheircurrentcarbon-intensiveenergygenerationmixes.TheCahoraBassahydropowerplantontheZambezi(Mozambique)currentlyrepresents40%ofEskomscarbon-freegeneration.TurningtoAngola,attheendofSeptember2013,theAngolangovernmentrestateditscommitmenttoimprovingelectricityandwatersupplies.Accordingtotheenergyminister,thegovernmentwillspendUS$23billiononthepowersector,bothtoimprovegenerationandtoreformtheloss-makingandheavilysubsidisedutilitycompanies.Thisfigurehasbeenwidelyreportedbypro-governmentmedia,butdetailsremainscarce.

Southern Africa

PowerinAfrica|14

ThecountryalsoplanstoconnecttheprovinceofCabindawiththeDRCsIngahydroelectricplant,inadditiontobecomingaregionalenergyexporteroverthelongterm.Angolaselectricityoutputisexpectedtoreach5,000MWby2017,accordingtogovernmentfigures.Thelackofadequateelectricityweighsoneconomicgrowthbyincreasingthecostofdoingbusiness.Withregardtonuclearpower,

SouthAfricaistheonlycountryinAfricawithnuclearproductionfacilities.AccordingtotheBPStatisticalReview2013,thecountryconsumed14.2terawatthoursofnuclearenergyin2012.WhilesomeotherAfricancountriesalsoproduceuranium,particularlytheDRC,NamibiaandNiger,SouthAfricaremainstheonlycountrytoderiveelectricityfromthemineral.

15|PowerinAfrica

Outlook

Africascurrentenergydeficitandthecontinentsstronglygrowingenergyappetiteshouldresultintheregionhavingoneofthemostactiveenergysectorsglobally.Sub-SaharanAfricahasanaverageannualpercapitapowerconsumptionofaround120kWh,representingasixthoftheglobalaverage.However,withacurrentgrowthrateof4%p.a.,percapitaenergyconsumptioninAfricaisgrowingfasterthaninanyotherregionglobally.AccordingtoNewPartnershipforAfricasDevelopment(NEPAD)estimates,Africascurrentpowercapacitywillhavetoincreasebyfive-foldby2040inordertomeetdemand,withanannualinvestmentofaroundUS$42billion.Africaboastssubstantialnaturalresourcesthatcansignificantlyboostthecontinentsenergysupply,buttheroleplayedbyindividualgovernmentswillbecrucialinthesectorsdevelopment.Whilepublic

resourceswillcontinuetobedirectedtowardsenergyprojects,theinternationalprivatesector,particularlythroughPPPs,willplayanincreasinglylargeroleinthefutureenergymarket.Privatesectorlenders,equityinvestorsandprojectdevelopersallseekinvestmentsecurity,andonlythroughcrediblelegalandregulatoryframeworkscanthisbeachieved.Regional(multilateral)energyprojectsaddanotherlayerofcomplexitytotherisksinvolved,andgovernmentsneedtoguaranteeinvestmentsecurity.RenewableenergywillplayanincreasinglyimportantroleintheAfricanenergymix,andnumerousgovernmentshaveadoptedmulti-billiondollarinvestmentstrategiesdirectedatnaturalenergyinvestment.Theeffectivenessofgovernmentinvestments,andtheabilitytoattractprivatesectorparticipationinenergyprovision,willshapethefutureAfricanpowerlandscape.

BloombergBPStatisticalReview2013EcobankGermanAerospaceCentreInternationalMonetaryFundPPPBulletinInternationalManagingInfrastructureReformandRegulation(UniversityofCapeTown)NewPartnershipforAfricasDevelopmentNKCIndependentEconomistsUnitedNationsWorldBankWorldEconomicForum

Sources of Information

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