Powering up Africa’s economies

A poor neighbourhood in Cape Town, South Africa, in the shadow of a high-tension power line: Africa’s poor need access to affordable, reliable electricity to improve their lives.

Photograph: Reuters / Mike Hutchings

People in Zanzibar danced in the streets in June to celebrate the resumption of power after a month-long blackout. Zanzibar, part of the United Republic of Tanzania, gets its electricity from the grid on the Tanzanian mainland, through underwater cables. The blackout occurred after cable lines supplying Zanzibar failed following a surge in demand. For a month, residents paid about $10 daily to fuel diesel generators for power. Small businesses requiring refrigeration or welding had to close because they could not afford the extra cost.

While Zanzibar has suffered the most prolonged recent blackout, its plight is not unique. In April 2008, the International Monetary Fund (IMF) reported that some 30 of the 48 countries in sub-Saharan Africa have “suffered acute energy crises” in recent years.

But solutions exist. Beyond building up basic generating capacity, countries are moving towards “power pooling.” Regional systems of power generation and distribution allow countries with high production capacity to transmit their excess electricity to countries with deficits. The larger market that a regional power pool could potentially serve is also more attractive for investors and donor organizations, compared to small national electricity grids that serve smaller populations. By connecting with neighbours, countries can also benefit from regional investments, instead of struggling to finance their own small and often inefficient power sectors.

Such regional solutions, notes Mr. Ram Babu, the chief power engineer at the African Development Bank (ADB), are “in the spirit” of the New Partnership for Africa’s Development (NEPAD), the continent’s blueprint for economic, social and political progress adopted by African leaders in 2001.

Faster growth, lagging capacity

According to Mr. Babu, recent power blackouts happen because the continent’s power infrastructure is poorly maintained, prone to collapse and unable to keep up with surging demand. Until recently, he told Africa Renewal, governments invested little in power utilities, but demanded that the utilities supply electricity to the public at low rates. As a result, he explains, “Many utilities are heavily indebted. They are selling power at a cost sometimes lower than that of production. So they are making losses and have hardly any resources with which to maintain their current infrastructure.”

The situation has been worsened by increasing demand, Mr. Babu adds, driven by Africa’s growing population, especially in urban settlements. “Unfortunately the power supply has not kept up.”

An electricity sub-station in Kenya: Much of Africa’s existing power generating capacity is aging and needs to be upgraded.

Photograph: Reuters / Antony Njuguna

Vijay Modi, an engineering professor at Columbia University in New York, cited another factor. “African economies,” he noted in an interview with Africa Renewal, “have been growing rapidly in the last couple of years.” That growth, however, has come after a long period of economic stagnation during which there was little new demand for power and thus little incentive to maintain existing infrastructure, let alone to create new means of generating electricity. “It is critical that just as economic growth rates pick up in Africa, energy access and supply does not become one of the bottlenecks,” Mr. Modi says.

According to the International Energy Agency (IEA), South Africa, the continent’s largest economy, accounts for 46 per cent of Africa’s power-generating capacity, North Africa for 34 per cent and the rest of Africa for only 20 per cent. Moreover, a quarter of sub-Saharan Africa’s power plants are not in operating condition and existing infrastructure rarely extends beyond the main cities. All of sub-Saharan Africa’s generating capacity combined does not exceed that of Spain.

Southern Africa hard-hit

Southern Africa, one of Africa’s most productive regions, has been hit especially hard. In January, South Africa experienced rolling blackouts that literally brought cities to a standstill as traffic lights went dark. Small businesses suffered and mining companies were asked to cut down their power use.

To meet internal demand, Eskom, South Africa’s state-owned power-generating utility, reduced power exports in January and early February, causing regional blackouts. This affected Botswana and Namibia in particular, since they import more than 50 per cent of their power needs from Eskom. Mozambique, Lesotho and Swaziland were also hit.

The blackouts were hardly unexpected. As early as 1998, the South African government acknowledged that it had to invest in electricity infrastructure or face a shortage by 2007. To address the issue, the government hoped to privatize Eskom to bring in new capital and make it more efficient. But parliamentary deputies opposed privatization, preferring to keep Eskom as a government-owned utility. With the question of privatization pending, no funds for expanding capacity were allotted in government budgets. By January 2008, the utility was unable to cope with demand.

Similarly, in January 2008, Joseph Raleru, then acting chief executive officer of the Botswana Power Corporation (BPC), revealed that while the authorities had anticipated the possibility of power shortages because of increased economic growth, they had seriously underestimated power requirements. “When we re-looked at the demand in 2006, it had increased significantly because of new mines, due to the high demand for copper on the world market,” Mr. Raleru said. “This rate of growth did not only take Botswana by surprise, but countries like Zambia also saw an increase in copper mining.”

Zambian Secretary to the Treasury Evans Chibiliti confirmed that assessment. He told the media that his country now faces “a serious power deficit, which poses a major risk to the sustainability and acceleration of recent gains made in the economy.”

According to the World Bank, the demand for power in Southern Africa is growing at about 4 per cent a year. To meet this growth, utilities in the region must not only maintain current capacity, but expand supply rapidly if they want to avoid holding back economic growth.

Huge investments needed

Expanding power production will not come cheap. The South African government estimates that just keeping up with growing demand from industries and the population will require doubling its generating capacity by 2025 at a cost of $171 bn. Of that amount, $45 bn will be needed before 2013.

To raise some of those funds, the government has approved power rate hikes of about 27.5 per cent since 2007. Further hikes of about 20–25 per cent are expected over the next three years. The increases have stirred alarm and protests from the powerful trade unions, which fear the impact on the poor and worry that mines and industries will have to cut power use, thus jeopardizing production and jobs.

Botswana currently imports most of its electricity from Eskom, through a contract that expires in 2012. While it has been cheaper for Botswana to import power than to produce it locally, the government is now supporting construction of an ambitious coal power station in Mmamabula, an area in the country with an estimated 3 bn tonnes of unused coal resources. The project will include two 2,500-megawatt power stations, a coal export unit and a coal-to-methane plant that is being developed by CIC Energy, a consortium of private investors.

But there have been problems. Securing an agreement with regional power suppliers to buy the extra production has taken time, pushing back the anticipated start of operations by two years, to 2013. Costs for the first phase also jumped from $5.5 bn to $9.5 bn. Nevertheless, Botswana’s image as a stable democracy with relative economic success has been vital in securing the private sector’s commitment to the project. When done, the $28 bn Mmamabula facility will be one of the largest independent power projects ever built. If successful, it would turn Botswana from a net importer into a power-exporting country.

The IEA estimates that overall, Africa needs about $344 bn to create additional electricity capacity, upgrade installed equipment and extend transmission and distribution networks to households and factories.

The massive scale of required investment has prompted governments to ask for assistance. At a meeting with officials of the World Bank’s International Finance Corporation (IFC) in February, Kenneth Konga, Zambia’s water and development minister, asked donor agencies to help the region meet the gap in financing power generation. “Zambia and the region are going through a challenging period,” Mr. Konga said. The deficit can only be resolved “if all the stakeholders come together and pull in the same direction.”

Zambia is estimated to need $2 bn to raise power output to meet its expanding demand. The country has sometimes been obliged to ration power to households and smaller industries to maintain supply to the copper and cobalt mines, the economy’s mainstay.

Africa’s paradox

According to David Donaldson, the IFC’s infrastructure manager for Africa, the problem is not that investors and donors are not willing to put money into the sector. On the contrary, the power sector “is an interesting sector for investors, banks, the private sector and even institutions such as the IFC.”

But some problems make investors hesitate, Mr. Donaldson told Africa Renewal. “The high figures that an investor would have to put in, the poor financial state of the utilities, their continued ownership or management by governments, the heavily controlled tariffs and lack of guarantees that the law would protect investments — all these make the risk of investing very high.”

Although the lack of funds limits the ability of utilities to expand supply, poor management is an even bigger issue, Eddy Njoroge, managing director of one of Kenya’s power companies, KenGen, said at a June meeting in Nairobi of African power utilities. Nearly three-quarters of African countries have experimented with privatizing management of their power infrastructure, and about two-thirds have formed independent corporations. Over half have appointed regulators to monitor how the sector works.

But few such reforms have been properly implemented, Mr. Njoroge argues. African governments continue to award contracts and to appoint people to head utilities not on the basis of merit, but because of political and personal connections. “Leadership and good governance have come short of expectations.” African governments, he added, have “refused to let go the management of these firms and continue to appoint people they can control and manipulate to give contracts and reward cronies.”

Nor are these the only challenges to attracting investors. Grand Inga, the huge hydropower dam first proposed in the Democratic Republic of the Congo (DRC) in the late 1980s, would have a projected capacity of 39,000 megawatts. But getting the project off the ground has been difficult. Beyond the vast sums of money needed — an estimated $80 bn — investors are hesitant because of the DRC’s political instability.

According to the IMF, it is one of Africa’s paradoxes that while endowed with huge resources for power generation, the continent is often unable to benefit. So while the DRC accounts for about 40 per cent of sub-Saharan Africa’s hydroelectric potential and Ethiopia another 20 per cent, both countries lack the needed investments to make that capacity a reality.

Sharing power

“This is why we are thinking in terms of regional integration,” says Mr. Babu of the African Development Bank. “In the spirit of NEPAD, regional integration helps to open up resources and markets.”

In the energy sector, he adds, “regional integration is best expressed in electricity power pooling.” Under such systems, governments commit themselves to regional projects based in countries with the highest potential for producing power. The power is then exported to the rest of the pool members at affordable costs.

Regional pooling would also help countries that lack hydropower generation or coal resources. These countries have suffered particular hardships in recent years because they rely on expensive thermal production methods — burning diesel or heavy fuel — to produce electricity. It currently costs Uganda $0.25 per unit to buy emergency power from British Aggreko, a private company operating one of Uganda’s older plants. A new plant, fuelled with cheaper heavy oil, is to start operations in September 2008, at $0.14 per unit.

But with rising world fuel prices, such national solutions may only be of temporary relief. Niger, Senegal and Nigeria have all seen their electricity production costs triple. However, “Pooling power at the regional level is economically rational, permitting savings estimated at $3–5 bn over 20 years,” states a joint report by the UN Industrial Development Organization and the UN Economic Commission for Africa.

The West African Power Pool (WAPP) is made up of 14 countries. WAPP is hoping to build a power sharing and trading network at an estimated cost of $4.6 bn. Towards that goal, the ADB signed an agreement in June 2008 for a $28.2 mn loan to finance some of the first pool projects, a power connection between Togo and Ghana and a transmission line from Benin via Togo to the Volta substation in Ghana. WAPP has also contracted the Korea Electric Power Corp (KEPCO) to build and operate for 20 years a power station in Benin. The project will likewise expand existing national infrastructure and increase power transmission capacity between Nigeria, Benin, Togo and Ghana.

Such a system will enable countries to trade electricity, making power supply more reliable and reducing costs, says Mandla Gantsho, the ADB’s vice-president for infrastructure and private sector development. The West African pool, he explains, will “allow for the movement of power from countries with the potential to produce cheap hydropower to other countries, which currently depend on thermal power stations running on expensive imported petroleum for their electricity supply.”

East African countries are also integrating their transmission networks. Kenya is already connected to Uganda and the two countries have traded electricity for several years. Kenya and Ethiopia began building a similar connection in April 2008. Ethiopia has the capacity to produce 1,875 megawatts of electricity, far above its current demand for 400 megawatts, and is building three hydropower dams to add another 1,155 megawatts of capacity production by 2010.

In Southern Africa, Zambia and Malawi have created a joint project through which Zambia can connect to the Malawian grid. The link will supply power to the town of Chama, which is currently not electrified, but holds large deposits of untapped oil and copper. While none of these efforts to pool resources is yet fully operational, says Mr. Babu, they represent one of Africa’s best options for resolving its power shortfall.