Africa's Power Infrastructure: Investment, Integration, Efficiency

by Anton Eberhard, Orvika Rosnes, Maria Shkaratan, Haakon Vennemo

Overview

Africa’s chronic power problems have escalated in recent years into a crisis affecting 30 countries, taking a heavy toll on economic growth and productivity. The region has inadequate generation capacity, limited electrification, low power consumption, unreliable services, and high costs. It also faces a power sector financing gap on the order of $21 billion a year. It spends only about a quarter of what it needs to spend on power, much of this on operating expenditure required to run the continent’s high-cost power systems, leaving little for the huge investments needed to provide a long-term solution. Further development of regional power trade would allow Africa to harness larger scale more cost-effective energy sources, reducing energy system costs by $2 billion a year and saving 70 million tons of carbon emissions annually. Economic returns to investments in cross-border transmission are particularly high. But reaping the promise of regional trade depends on a handful of major exporting countries raising the large volumes of finance needed to develop generation capacity for export. It would also require political will in a large number of importing countries that could potentially meet more than half their power demand through trade. Power sector inefficiencies are high, deterring investment in new capacity and electrification. There are three types of sector inefficiencies. First, there are utility inefficiencies, which include system losses, under-collection of revenue and over-manning. These result in a major waste of resources adding up to $4.40 billion a year. Under-collection is the largest component of utility inefficiencies amounting to $1.73 billion, following by system losses at $1.48 billion and by over-manning at $1.15 billion. The second type of sector inefficiency is under-pricing of power. By setting tariffs below the levels needed to cover the actual costs, SSA countries forego revenues of $3.62 billion a year. The third type of inefficiency is poor budget execution. Only 66% of the capital budgets allocated to power are actually spent, with about $258 million in public investment earmarked for the power sector being diverted elsewhere in the budget. Full cost recovery tariffs would already be affordable in countries with efficient large scale hydro or coal-based systems, but not in those relying on small scale oil-based plants. Once regional power trade comes into play, generation costs will fall, and full cost recovery tariffs could be affordable in much of Africa. One of the key policy challenges is to strengthen sector planning capabilities, too often overlooked in today’s hybrid markets. A serious recommitment to reforming state-owned enterprises should emphasize improvements in corporate governance more than purely technical fixes. Improving cost recovery is essential for sustaining investments in electrification and regional power generation projects. Closing the huge financing gap will require improving the creditworthiness of utilities and sustaining the recent upswing in external finance to the sector This book is based on extensive data collection undertaken between 2006 and 2008 by the Africa Country Infrastructure Country Diagnostic, an initiative of the Infrastructure Consortium for Africa delegated to the World Bank under the guidance of the African Union, African Development Bank and other multi-lateral and bilateral development institutions.

Product Details

ISBN-13:	9780821384558
Publisher:	World Bank Publications
Publication date:	04/11/2011
Series:	Directions in Development - Infrastructure
Pages:	348
Product dimensions:	6.00(w) x 9.00(h) x 0.80(d)

Table of Contents

About the AICD xvii

Series Foreword xix

Acknowledgments xxi

Abbreviations xxvii

Chapter 1 Africa Unplugged 1

The Region's Underdeveloped Energy Resources 1

The Lag in Installed Generation Capacity 2

Stagnant and Inequitable Access to Electricity Services 5

Unreliable Electricity Supply 7

The Prevalence of Backup Generators 7

Increasing Use of Leased Emergency Power 10

A Power Crisis Exacerbated by Drought, Conflict, and High Oil Prices 12

High Power Prices That Generally Do Not Cover Costs 12

Deficient Power Infrastructure Constrains Social and Economic Development 16

Notes 19

References 19

Chapter 2 The Promise of Regional Power Trade 23

Uneven Distribution and Poor Economies of Scale 24

Despite Power Pools, Low Regional Power Trade 26

The Potential Benefits of Expanded Regional Power Trading 28

What Regional Patterns of Trade Would Emerge? 31

Water Resources Management and Hydropower Development 33

Who Gains Most from Power Trade? 33

How Will Less Hydropower Development Influence Trade Flows? 38

What Are the Environmental Impacts of Trading Power? 39

Technology Choices and the Clean Development Mechanism 39

How Might Climate Change Affect Power Investment Patterns? 40

Meeting the Challenges of Regional Integration of Infrastructure 40

Conclusion 50

Note 50

Bibliography 50

Chapter 3 Investment Requirements 53

Modeling Investment Needs 54

Estimating Supply Needs 55

Overall Cost Requirements 58

The SAPP 64

The EAPP/Nile Basin 67

WAPP 70

CAPP 74

Notes 77

Reference 78

Chapter 4 Strengthening Sector Reform and Planning 79

Power Sector Reform in Sub-Saharan Africa 80

Private Management Contracts: Winning the Battle, Losing the War 85

Sector Reform, Sector Performance 87

The Search for Effective Hybrid Markets 88

The Possible Need to Redesign Regulatory Institutions 94

Notes 100

Bibliography 101

Chapter 5 Widening Connectivity and Reducing Inequality 103

Low Electricity Connection Rates 104

Mixed Progress, despite Many Agencies and Funds 105

Inequitable Access to Electricity 110

Affordability of Electricity-Subsidizing the Well-Off 112

Policy Challenges for Accelerating Service Expansion 119

References 129

Chapter 6 Recommitting to the Reform of State-Owned Enterprises 133

Hidden Costs in Underperforming State-Owned Enterprises 134

Driving Down Operational Inefficiencies and Hidden Costs 135

Effect of Better Governance on Performance of State-Owned Utilities 136

Making State-Owned Enterprises More Effective 137

Conclusion 147

References 148

Chapter 7 Closing Africa's Power Funding Gap 149

Existing Spending in the Power Sector 151

How Much More Can Be Done within the Existing Resource Envelope? 157

Increasing Cost Recovery 158

On Budget Spending: Raising Capital Budget Execution 160

Improving Utility Performance 161

Savings from Efficiency-Oriented Reforms 162

Annual Funding Gap 164

How Much Additional Finance Can Be Raised? 166

Costs of Capital from Different Sources 178

The Most Promising Ways to Increase Funds 180

What Else Can Be Done? 180

Taking More Time 180

Lowering Costs through Regional Integration 181

The Way Forward 182

Note 183

References 183

Appendix 1 Africa Unplugged 187

Appendix 2 The Promise of Regional Power Trade 199

Appendix 3 Investment Requirements 213

Appendix 4 Strengthening Sector Reform and Planning 239

Appendix 5 Widening Connectivity and Reducing Inequality 267

Appendix 6 Recommitting to the Reform of State-Owned Enterprises 291

Appendix 7 Closing Africa's Power Funding Gap 299

Index 305

Boxes

2.1 The Difficulties in Forging Political Consensus: The Case of Westcor 42

2.2 The West African Power Pool (WAPP) and New Investment 45

2.3 Difficulties in Setting Priorities in SAPP 46

3.1 Definitions 61

4.1 Kenya's Success with Private Sector Participation in Power 83

4.2 Cote d'Ivoire's Independent Power Projects Survive Civil War 84

4.3 Power Sector Planning Dilemmas in South Africa 90

5.1 Ghana's Electrification Program 106

5.2 Residential Electricity Tariff Structures in Sub-Saharan Africa 116