Solving the energy poverty problem in sub-Saharan Africa
John O. Ifediora.
Sub-Saharan Africa has the dubious distinction of having the lowest electricity generation capability, and its inhabitants suffer the most debilitating energy poverty in the world. Of the over one billion residents of the sub-continent, an estimated 631 million of them are without reliable access to electricity; millions more rely on solid biomass for cooking and generating light. To bridge the electricity gap, urban and rural areas are dotted by a variety of portable generators powered by fossil fuels, with attendant environmental and noise pollution. For the few connected to power grids, or have access to off-grid renewable power sources, the average annual consumption of electricity in the region is 489 Kilowatt hours per capita, which is approximately 5% of per capita consumption in the United States. With increasing urbanization and population growth, demand for electricity grew by 35% between 2000 and 2010; the International Energy Agency predicts that demand would continue to grow by 4% every year through 2040; at this date half a billion Africans are expected to remain without access to steady-state electricity unless corrective measures are taken.
That sub-Saharan Africa suffers from acute electricity shortage is common knowledge, but this need not be the case for a region incredibly rich in fossil fuels, and endowed with an abundance of renewable energy sources. More distressingly, however, is that electricity and how it is generated and distributed, except for renewable power, are old technologies readily accessed with relative facility. Put differently, if it is presented by a secondary school student as a science project it should deservedly not win any prize. Then what explains the demand-supply mismatch of this basic service in African countries?
The problem is simple enough, but the solution is not, for it implicates a host of policy driven responses, a collective will to dedicate needed resources to the energy sector, and access to financing and modern technologies that enable an efficient coupling of on-grid and off-grid infrastructure. Given the region’s vast fossil fuel reserves, and the abundance of renewable energy sources, it has the potential to generate up to 11,000 GW of electricity through a combination of solar power, wind energy, natural gas and hydroelectricity. Unlocking this potential is the proper domain of policy makers and invested interests in the private sector.
The Why Factor.
As is true with most development projects in sub-Saharan Africa, the absence of a national will to follow through with dedicated effort, and responsive institutional oversight afford, at the first instance, the primary source of the abysmal state of electricity generation and distribution in the continent. Poor planning and distortionary regulatory policies in the power industries have led to persistent electricity shortages that have retarded economic development across the region. In point of fact sub- Saharan Africa has far more energy resources to meet its current and future needs if judiciously managed. As of 2012, the International Energy Agency (IEA) estimates that the region has the capacity to generate approximately 11 gigawatts (GW) of electricity from different sources: Solar (10,000 GW), Geothermal (15 GW), Wind (109 GW), Hydroelectric (350 GW), Natural Gas (400 GW), and Coal (300 GW). This cumulative endowment of potential generation capacity is, however, not evenly spread across the sub-continent; many of the nation-states in the region are indeed resource-poor, and would require trans-national connectivity to meet their respective electricity requirement.
But real economic growth is always and everywhere positively related to industrialization and the ability to manufacture tangible products; it is thus impossible to envision a realistic pathway to development, growth and sustainable productivity in the region without a regime of steady-state supply of electricity.
Africa’s electricity generation capacity is seriously burdened by a host of factors, of which poor management of inherited centralized model of electricity supply, now discredited for its inefficiency, is the most obvious. In a centralized model, a government-run monopoly generates power and feeds it to a centralized national grid network from which electricity is distributed to end users. This has been the African experience. Coupled with incompetent leadership and corrupt practices, Africa’s utilities became a bastion of bloated monopolies without improper regulatory oversight, and unresponsive to the energy needs of consumers. Because they rely on costly fossil fuels such as oil and gas that are subject to price volatility, and consistently lost power from inefficient grids, power supply remains erratic; with high tariffs, and unpaid electric bills by institutional customers, the utilities soon became financially unstable. The ones that relied substantially on hydropower did not fare better due to climate change that gave rise to periodic lows and highs of water levels in the dams.
Calling in Market Forces.
In recognition of the problems and inefficiencies that accompany a centralized power supply system, African governments have grudgingly embraced privatization of their energy industries. But here again bad policies get in the way. Take the case of Nigeria. For over a decade, the government began the process of breaking-up the old centralized power supply network and relinquished two segments of the power supply chain to private investors. But it retained control of the national grid system which receives generated power, and then decides which of the privatized distribution companies would get the generated power, and how much. In this special Nigerian case, only the generating and distribution arms of the energy sector are privatized; the transmission segment is retained by the government.
This is problematic for two reasons; first, it leaves the heart of the power supply chain in the hands of an agency not driven by market incentives, and susceptible to politics and corrupt practices. Secondly it defeats the essence of privatization, which in the normal run of things, forces all invested interests in the industry to be efficient and attentive to consumer demands. The practical effect of this norm is that the transmission system which constitutes the national grid network has at its peak a limited capacity of approximately 6000MW; this means that even if the privatized generation segment manages to generate more than this level of power, the national grid is incapable of accommodating more; the rest goes to waste. A profit-driven entity would expand the grid capacity as a matter of course.
The awful result is that the expected benefit from privatizing Nigeria’s power sector did not materialize, and power supply to end users remain unchanged, and in many instances lower than pre-privatization era. A genuine privatization initiative would require the transmission segment to be in private hands.
Addressing Africa’s Energy Poverty.
To effectively address the shortfalls of Africa’s electricity generation, and debilitating energy poverty, a unified effort by policy makers and private sector actors is needed to marshal current scientific knowledge, technical expertise, and informed public policy on renewable energy. Such unified will of purpose, as it were, facilitates identification of areas of underinvestment at local, regional, and national levels, and more importantly, stress the importance of regulatory policies and institutional capacities in tackling the energy problem. The added benefit of this approach is that it enables the formulation of energy pathways in Africa that recognize long-run implications of current energy policy decisions, for they invariably have determinative impacts on future development strategies.
As sub-Saharan African utility firms embark on modernization and capacity enhancement, they have the option to stay with fossil fuel technology and boost supply with renewable sources of power; this is a more likely option but there are challenges that must be recognized. The volatility in oil and gas prices would not go away and would lead to more volatility in the energy system; it also allows more carbon emission into the environment. Renewables are intermittently available; solar power when sunshine is available, and wind power when there is adequate wind force to drive the turbines. A smart grid is thus necessary to bring these renewables on line when they are functional, and reduce the demand placed on gas and oil driven turbines.
A natural monopoly model to the rescue
One undeniable fact in the energy industry is that the fixed cost of generating power, storage and distribution is prohibitively high. And since this cost constitutes approximately 80% of the total cost of electricity (associated variable cost for gas, solar, wind, biomass to drive turbines are relatively low), the market for electricity does not lend itself favorably to market completion. Competition in this instance would lead to higher prices to consumers because all firms would be in competition for a given pool of consumers (the population of a geographic area is fixed at any given time). This would necessarily force them to produce at higher average costs (Average cost = total cost/customers; the larger the customer base the lower the average cost).
However, if one electricity company is given the exclusive right to service a particular area, subject to government oversight, it can profitably generate, store and distribute electricity to its robust customer base. This guarantees lower average cost, and such savings are passed on to consumers as lower prices for electricity. For maximum efficiency, each of these companies would be able to trade bulk electricity amongst themselves…..those with more power than needed for its customers would sell it to other firms operating in other parts of the country. Since operators of these firms are profit-driven, it is unlikely that they would allow their equipment to fall into disrepair; this would run contrary to their self-interest. It is in this special sense that these firms are referred to as natural monopolies, for their average cost of production falls continuously as their customer base rises.
This model of privatization where one firm has exclusive right to provide electricity to a geographic competence allows the firm the flexibility to seek efficient ways to generate and supply power; this is a superior model to the one currently adopted in parts of Africa. In Nigeria, as discussed earlier, generation and distribution of electricity are privatized while leaving the national grid network in the hands of the federal government. This, unfortunately, has done nothing to improve the power poverty in the country since those who control the national grid also determine which areas of the country receive electricity, and worse yet, there is no incentive to improve capacity and serviceability of the grid system. Privatization of the national grid network would have a positively marginal impact but it would not solve the underlying problem of energy poverty. A different approach, as suggested above would be a good start….a natural monopoly model.