Executive Insight, Smart Grid

Power in Africa—The Energy Tetralemma

The opportunities and the challenges in the African power sector are unmatched in any other part of the world. There are some potential game-changers in the sector, but it is important to get a sense of the scale and scope of the issues involved.

After gaining independence, developing the power sector was not a priority for most African countries. This is because, despite most local people not having enough access to electricity, the economy had enough energy to service its extractive industries developed by the colonial powers.

Historically, energy infrastructure in African countries was tailored to suit the needs of the extractive sector, which means that the transmission infrastructure was not built to benefit the local communities. Today the extractive sectors continue to contribute to a significant portion of African countries’ GDP and continue to be priorities with regard to energy infrastructure. However, the lack of access to power directly influences the African attempts at economic diversification.

AFRICA’S POWER DEFICIT – A NEW COMMITMENT

Access to power is the connection needed for Africa to be firmly plugged into the global economy. A reliable electricity supply—as well as an efficient connection process—is linked to better firm performance, especially in industries that require a steady supply of electricity. In fact, a reliable electricity supply is associated with higher firm production efficiency and higher levels of foreign direct investment, according a 2011 report by the World Bank.

It is estimated that energy-sector bottlenecks and power shortages cost Africa 2 to 4 per cent of GDP per annum. In Tanzania and Ghana, businesses are losing 15 per cent of the value of sales as a result of power outages.  It is estimated that Africa’s installed capacity needs to increase by more than 7,000MW a year to meet supressed demand, projected economic growth and to provide electrification for all, the World Bank reported.

 To achieve such substantial capacity growth, the Africa Progress Panel estimates that an investment of USD55 billion (about 3.4 percentof Africa’s GDP in 2013) is required every year from 2016 until 2030 to meet Africa’s energy demand and to achieve universal access to electricity in Africa. As a direct result of supply and demand economics, the price of power in Sub-Saharan Africa is double that of other developing regions.[1]

Notwithstanding the above, African economies have experienced economic growth that surpasses other regions. However, in order to ensure that this growth is sustainable and for African countries to achieve their real growth potential, African governments need to prioritise the establishment of reliable and affordable electricity to industry and communities. Today, the importance of reliable and affordable electricity supply is recognised by African leaders as a necessity for economic development and poverty reduction.

.PLAYERS AND CHALLENGES

Power Utilities

Vertically integrated power utilities continue to play a dominant role in most African countries. One of the challenges is that these utilities are generally viewed as sites of political patronage and as vehicles for corruption. That being said, various countries have undergone or plan to undergo significant reforms by restructuring, unbundling and privatising these utilities. The unbundling of utilities has resulted in increased private sector participation in the sector. In 2011, there were 60 medium to long term power transactions involving the private sector in Sub-Saharan Africa, of which almost half were independent power producers. Private sector opportunities will continue to grow in the region.

Grid Infrastructure

One of the major challenges to decreasing Africa’s power deficit is that grid systems in various African countries do not function very well and are required to distribute electricity over large distances. This is largely due to the spatial planning of the energy distribution system during the colonial ere. Losses in transmission and distribution are as high as 50 per cent in some African countries, imagine the cross-border transmission losses over lines from for example South Africa to Zambia. These losses include technical losses (often due to poor maintenance, disruptions to energy supply and aging infrastructure) and losses as a result of theft.  For example, Nigeria has an installed capacity of 12.5 GW, but only 4.5 GW of this is available and working, according to the Africa Progress Panel.

If the functioning of the grid is not resolved, it affects the long term sustainability and financial viability of the power sector. That being said, the poor grid infrastructure and long distances that electricity needs to be distributed between creates an opportunity for off-grid and mini-grid power generation. In order to deal with this issue, it may be worth considering private participation in the construction and operation of grid infrastructure. However, at present, most African countries do not permit private entities to construct or operate grid infrastructure.  

The Energy Tetralemma

Due to the rapid economic growth and demand for electricity in Africa, the low levels of access to electricity and limited financial resources, African countries require energy technologies that will increase access to electricity the at the fastest rate at lowest cost. Accordingly, Africa is not only faced with the energy trilemma (three challenges), but the energy “tetralemma,” which indicates a touch choice among four possibilities. Africa requires an electricity-generating technology that provides security of supply, equity and affordability, sustainability and is able to come online quickly.

It has been argued that the generation and trade of electricity at the regional level would help to resolve the African energy challenge. Accordingly, various power pools have been established with ambitious plans to establish connections between countries.

In this regard, renewable energy technologies offer two key advantages in Africa —speed and decentralisation. They can operate both on-grid and off-grid. I would include some of the impressive stats on renewable energy potential —especially solar.

Due to its energy “tetralemma,” Africa is at the forefront of creating a unique hybrid energy supply system.  Innovation and technology, increasing energy demand and the rise of urbanisation could mean the creation of more resilient and diverse systems than those designed decades or centuries ago in other countries. These systems could have many modes, options and scalability. The African Progress Panel envisages a system where the grid still plays a significant role, supported by off-grid households and mini-grid communities where appropriate, and supplemented by a cross-border super grid.

CONCLUSION

After years of not being a priority, energy policy is starting to move to centre-stage in Africa. Governments are adopting ambitious targets for power generation, backed in some cases by far-reaching reforms of their energy sectors. Private investors, domestic and foreign, are seizing new market opportunities.[2]

By way of example, Rwanda expanded electricity access by 160 percent in just three years between 2008 and 2011, Mauritania increased power generation threefold since 2000 and Ethiopia increased net power generation from 1.3 billion kWh to 6.6 billion kWh in 12 years, according to the Africa Progress Panel’s 2015 report.

 As lessons are learned and best practices are developed in the African context, the African power deficit will continue to decrease.

Editor’s Note: DistribuTECH Africa, a Pennwell conference focused on the transmission and smart grid challenges and opportunities on the continent, will be July 18-20 at the Sandton Convention Centre in Johannesburg, South Africa.

About the authors: Noor Kapdi leads the Dentons team in South Africa. Noor is an experienced commercial lawyer with particular expertise in oil and gas and private equity. He has extensive experience in all aspects of the oil and gas upstream, midstream and downstream sectors. Noor has also been involved in all aspects of the private equity industry, including, buy-outs, venture capital, fund formation and management, fund investment and advice to professionals operating in this speciality.

 

Daniél Hofmeyr is an associate in Dentons South Africa and specialises in general corporate and commercial law, regulatory compliance, mergers and acquisitions, and banking and finance. Since joining Dentons South Africa she has gained substantial exposure in advising clients that operate in highly regulated environments, particularly clients in the energy, oil and gas, mining and financial services sectors.