African challenges and trends in power sector reform and regulation

Prof Anton Eberhard/Peter TwesigyeGraduate School of Business

University of Cape Town

5 July 2021

@AntonEberhard www.gsb.uct.a.za/mir

Outline

1. Africa’s power challenges

2. Drivers of reform

3. Power sector reform: taking stock

4. Ongoing challenges in utility performance, regulation & investment

5. A new wave of reforms

1. Key power challenges

q Power infrastructure is underdeveloped

q Electricity supply is often unreliable

qAccess to electricity is low and unequal

q Power costs are high

Africa has 15% of global population but only 3% of power

Sub-Saharan Africa 85GWSouth Africa 44GW

There are large power imbalances within Africa

A handful of countries account for most power in SSA:the majority of countries have tiny power systems

• Total is around 85GW• Without S. Africa only 40GW• Spain has more• 12 counties account for 90% of capacity• 27 have grid-connected power systems

smaller than 500MW• 14 smaller than 100MW • Few economies of scale• Large energy resources remain

undeveloped

Per capita electricity consumption is low

Installed power generation capacity in SSA:flat in the 1990s, but now accelerating

0

20

40

60

80

100

12019

9019

9119

9219

9319

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9519

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0220

0320

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0520

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1120

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GW

SSA (excl. RSA) SSA (incl. RSA)

Africa is short of grid-power: many firms rely on back-up generators

0.0

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40.0

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Angola (2010)

Botswana (2

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Cameroon (2009)

Central A

frican

Republic (2011)

Chad (2

009)

Congo, Dem. R

ep. (2013)

Ethiopia (2011)

Gabon (2

009)

Ghana (2013)

Kenya (2

013)

Mauritius (

2009)

Namibia (2

014)

Nigeria

(2014)

Senega

l (2014)

Sierra Le

one (2009)

Tanzania (2

013)

Uganda (

2013)

% firms with generators % electricity from back-up generators

Source: World Bank Enterprise Surveys (2014)

Extent of crisis revealed in prevalence of emergency short-term power leases

11Source: Trimble, Chris, Masami Kojima, Ines Perez Arroyo, Farah Mohammadzadeh.“Financial Viability of Electricity Sectors in Sub-Saharan Africa: Quasi-Fiscal Deficits and Hidden Costs” 2016. Policy Research Working Paper, World Bank

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

Total cost Opex Capex

Source of energy

Predominantly oil based

Predominantly non-oil based

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

Total cost Opex Capex

Geography

Coastal Landlocked Island

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

Total cost Opex Capex

System size

<150 MW 150-1000 MW >1000 MW

Note: The figure excludes three countries with a large portion of domestic power purchases classified as opex (Republic of Congo, Ghana, and Mozambique).

Electricity costs are impacted byfuel source, geography and system size

2 out of 3 Africans still do not have electricity

Source: Earthlights, 2000

Electricity access is high in the north and south,some countries making good progress, but not enough

0

10

20

30

40

50

60

70

80

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Perc

enta

ge (%

)

Total electricity access Urban electricity access Rural electricity access

Progress in electrification is steady but not rapid enough, especially in rural areas

0

50

100

150

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400

450

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1990 2000 2010 2016

Progress in electrification in different Africa countries

Population without access to electricity remains high

The highest income quintile has the highest access to electricity

0%

20%

40%

60%

80%

100%

Q1 Q2 Q3 Q4 Q5

Electricity for lightingWood/Charcoal for cookingGas/LPG for CookingKerosene/Paraffin for Cooking

Power crisis exacerbated by

• drought• volatile petroleum prices• damage to infrastructure through wars• rapid demand growth

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Generation capacity (MW per million population)

Electrification rate (Percentage of households)

Electricity consumption (kWh per capita per year)

Power prices (US$ per kilowatt-hour)

Source: Africa Infrastructure Country Diagnostic

The power sector in SSA is a global outlier

2. Drivers for power sector reform

• Need to improve the performance of utilities– Inefficiencies in capex execution and operations– High technical and commercial losses, poor billing/collections– Soft budgets, poor governance, regulatory failure, no competition, few

incentives for efficiency improvements or cost reductions– Deterioration or collapse of services

• Need to finance capacity expansion and electrification– Public resources insufficient– Development Finance Institutions remain important – Private investment has to be accelerated

3. The “standard model” of power sector reform

Vertically-integrated, publicly-owned monopoly

Commercialisation and corporatisation

Independent regulation

Unbundling to separate potentially competitive elements from non-competitive elements

Private sector participation

Introduction of competitionIPPs for the market

or wholesale competition in the marketeventually customer choice and retail competition

MODEL 1:NATURAL MONOPOLY

MODEL 4:RETAIL COMPETITION

MODEL 3:WHOLESALE COMPETITION

MODEL 2:SINGLE BUYER

ss

s

Utilities are vertically integratedGeneration, transmission and distribution are not subject to competitionNo-one has choice of supplier

s

s

s

Single buyer chooses from various generators (IPPs)Access to transmission xxx not permitted for sales to final customersSingle buyer has monopoly over transmission networks and over sales to final customer

s

s

s

s

s

Distribution companies buy direct from generator (IPPs)Distribution companies have monopoly over final customersOpen access to transmission wiresGenerators compete to supply powerPower pool established to facilitate xD

s

ss

s

All customers have choice of supplierOpen access to T & D wiresDistribution is separate from retail activityRetail industry is competitive

Generation (G)

Transmission (T)

Distribution (D)

Customer (C)

IPP IPP

Single buyer G & T

D D

C

G GG

TPower poolexchange

Franchisecustomers

(FC)

Largecustomers

(LC)

D

C

D

LC

D

C

G GG

TPower poolexchange

Reality in Africa is different from “standard model”

• Power sector reform in many developing countries has not followed the standard model– Few countries have fully unbundled their utilities– Private sector participation often limited to IPPs, concessions– Wholesale and retail competition often absent

• Instead, mostly hybrid power markets have developed– Incumbent state-owned utilities have retained dominant market positions– Independent Power Producers (IPPs) are being introduced on the margin– i.e. both State Owned Enterprise (SOEs) and IPPs are involved in new

generation investments

Vert

ical

ly

inte

grat

ed CARGuinea-BissauLiberiaMauritania

ChadDRCDjiboutiLibya

Congo-Brazzaville Niger

Vert

ical

ly in

tegr

ated

w

ith P

SP

Botswana Burkina FasoBurundi Egypt

GabonGambiaMadagascarMalawi

RwandaTanzaniaTunisia

CameroonCote d’Ivoire

South AfricaNamibia

Morocco ZambiaBeninGuineaMali

MozambiqueSenegalTogo

Vert

ical

ly u

nbun

dled

No PSP Private sector participation (PSP)

Lesotho Ethiopia Uganda Nigeria Kenya

AngolaSudan

AlgeriaGhana Zimbabwe

4. Ongoing challenges in utility performance, regulation and investment

The performance of many African utilities is still poor, exacerbated by the absence of structural reforms

• Old vertically-integrated, state-owned utility model no longer fit for purpose

• Changes in power and ICT technologies, plus financial markets mean that:– Old economies-of-scale in power plants mostly no longer apply– New gas, renewable energy & storage technologies modular and

cost effective– Power system increasingly decentralized / distributed– ICT innovation allows for coordination of system even if unbundled– Growth in financial markets has generated new sources of finance

• Electricity sector no longer considered a natural monopoly – possible to have competition in generation and in customer choice

Utility T & D losses

Source: Trimble, Chris, Masami Kojima, Ines Perez Arroyo, Farah Mohammadzadeh.“Financial Viability of Electricity Sectors in Sub-Saharan Africa: Quasi-Fiscal Deficits and Hidden Costs” 2016. Policy Research Working Paper, World Bank

Source: Trimble, Chris, Masami Kojima, Ines Perez Arroyo, Farah Mohammadzadeh.“Financial Viability of Electricity Sectors in Sub-Saharan Africa: Quasi-Fiscal Deficits and Hidden Costs” 2016. Policy Research Working Paper, World Bank

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$0.09 $0.14

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$0.12 $0.14

$0.11 $0.07

$0.19 $0.11

$0.06 $0.08

$0.15 $0.21

$0.23 $0.33

$0.09 $0.20

$0.25 $0.23

$0.18 $0.22

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$0.14 $0.26

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$0.44 $0.51

$0.54 $0.55

$0.61 $0.66

$0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70

ZambiaLesotho

South AfricaMozambique

GhanaSudan

ZimbabweUganda

CameroonMalawi

TanzaniaEthiopia

Congo, Rep.Swaziland

NigerCentral African Republic

BurundiMauritius

Côte d'IvoireNigeria

BotswanaKenyaGabonBenin

SeychellesMadagascar

MaliTogo

Burkina FasoMauritania

SenegalGuinea

RwandaGambia, TheCape Verde

São Tomé and PríncipeSierra Leone

ComorosLiberia

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CapexOpexAverage cash collectedTotal Cost

Total costs of supply vs cash collected ($/kWh billed)

• Only two countries have a financially viable electricity sector (the Seychelles and Uganda)

• Only 19 countries cover operating expenditures

• Several countries lose in excess of US$0.25 per kilowatt-hour sold

• In this context, it will be difficult for utilities to maintain existing assets, let alone facilitate the expansion needed to reach universal access goals.

Collection and technical losses, overstaffing and underpricing

29

Effective regulation is vital and should at least make a difference in…..

• Main areas which concern electricity consumers:– access to the grid– reliable, quality supply & service– competitively priced “affordable” electricity

• Enabling utilities to provide the above through being– efficient– financially viable– adequate and timely investments

We need a more critical evaluation of regulatory performance

The “how” of regulationLegal design and institutional

arrangements of regulatory system andprocesses of regulatory decision-making

The “what” of regulationlicences, tariffs

supply & service standards

Credibility, legitimacy,and transparency ofregulatory decisions

Quality & robustnessof regulatory decisions

Impact on sector

Adapted from Brown, Stern, Tenenbaum & Gencer, 2006

Competitively priced, reliable infrastructure servicesFinancial viability, new investment

Regulatory substanceRegulatory governance

1. Clarification of roles and responsibilities• Public entity management legislation• Corporatisation• Codes of corporate governance• Performance contracts• Effective supervisory / monitoring agencies• Transparent transfers for social programmes

2. Changing the political-economy of the utility(cf Gomez-Ibanez)

• Improved transparency and information• Structural reform and direct competition• Mixed-capital enterprises

Effective regulation of state-owned utilities requires complementary governance reforms

Meanwhile, power requirements in SSAwill double by 2030 and treble by 2040

Source : IEA, 2015

400

514

640

812

1020

1297

2015 2020 2025 2030 2035 2040

IPPs & China are fastest growing sourcesof power investments in Sub-Saharan Africa

US$ Million – 5 year rolling average, excluding South Africa

0500

100015002000250030003500400045005000

1994

1995

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2004

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2012

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2014

2015

2016

2017

IPPs (excl. RSA) Chinese Funding

IPPs + Chinese funded power projects in SSA(US$ millions in year of financial close)

China 2015:CaculoCabaca

Hydropower Project

(Angola)Lamu Coal

Power Plant (Kenya)

China 2013:Zungeru

Hydropower Project

(Nigeria) Kajbar

Hydropower Project (Sudan)

China 2014:Karuma

Hydropower Project (Uganda)

AyagoHydropower (Uganda) –

Cancelled in July 2017

China 2017:Kafue Gorge

Lower Hydropower

Project (Zambia)Chemba

Hydropower Project

(Mozambique)

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Tota

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S$ m

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South African IPPs Chinese funded projects IPPs in rest of SSA

Kenya

Nigeria

South Africa

Ghana

Uganda

Senegal

Cote d’Ivoire

Zambia

Mauritius

< USD 80 mil

USD (120 – 325) mil

USD (500 – 700) mil

USD 800 mil – 1.3 bil

USD (2 – 3) bil

> USD 15 bil

0

IPPs investment in SSA

Why have some countries been more successful than others in attracting private investment?

• Power market reforms - unbundling, privatisation, competition, independent regulation - are still relevant, but there are additional interventions that are important in attracting investment

• Key to accelerating investment is dynamic power planning, effective procurement practices, adequate contracting capacity and financially viable off-takers

• Competitive procurement of IPPs more often than not results in better investment and price outcomes than unsolicited or directly negotiated projects

• DFIs contribution to IPPs is significant and important for risk mitigation

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Renewable energy is breaking through:record low auction prices for solar and wind energy

(US$ c/kWh)

Solar PVWind energy

4,3c

6.0c

6.0c

2.9c

5. A new wave of power sector reforms?

Reforms need to be strengthened

• Standard prescriptions for power sector (unbundling, privatisation and competition) have not been fully adopted in many developing countries

• Poor utility performance and insufficient investment remain the key challenges

• Some key reform elements remain important– Independent regulation = but quality NB– Governance reforms of state-owned utilities– Unbundling where there is conflict between state & private Gencos– Competition FOR the market– Private sector participation

• But need to tailor designs to country circumstances

Rate of change in power sector is unprecedentedand has profound implications for further reforms

• Regional integration of grids is being strengthened• Progress towards universal access is accelerating• Variable low-cost renewable energy is breaking through• Growing presence of distributed resources and distributed control• Demand growth is changing and shifting in shape and location• Both RE and DER can act fast in relation to new price signals• Consumers will face more choices• What’s needed are new market designs and system operations

which can handle large shares of variable renewables plus complementary centralized and distributed flexible resources, espin Africa

Prof Anton EberhardGraduate School of Business

University of Cape Town

@AntonEberhard www.gsb.uct.a.za/mir

Thank you for your attention