The state of the power sector in Africa: Re-assessing regulation, investment and sector performance Africa Power Colloquium Cape Town 28-30 November 2010 Prof Anton Eberhard Management Program in Infrastructure Reform and Regulation University of Cape Town Outline 1. Africa s power challenges 2. The response: power sector reform 3. Reviewing regulatory performance 4. Improving state-owned utility performance 5. Accelerating private sector participation as well as non-oecd investment 1
But GDP of Sub- Saharan Africa equivalent to just one small OECD country the Netherlands 1. Africa s power challenges Power infrastructure is underdeveloped Electricity supply is often unreliable Power costs are high Access to electricity is low and unequal 2
Power infrastructure is underdeveloped Installed capacity in SSA is around 80 GW Spain has more South Africa accounts for more than half Installed capacity per capita 10% of LA Up to a quarter of capacity unavailable Growth in capacity stagnant Power infrastructure is underdeveloped Consumption per capita barely 1% of highincome countries and declining Large energy resources unexploited, distant from main centers of demand eg. hydro in DRC & Ethiopia Few economies of scale 33 out of 48 countries have <500MW 11 countries <100MW 3
A global outlier Generation capacity (MW per million population) 600 400 200 0 A S S t h u o S ia s A t s a E ia s A Electricity consumption (kwh per capita per year) 1500 1200 900 600 300 0 A S S t h u o S ia s A t s a E ia s A Electrification rate (Percentage of households) 100 75 50 25 0 0.15 0.12 0.09 0.06 0.03 0 A S S A S S t h u o S ia s A t h u o S ia s A t s a E ia s A Power prices (US$ per kilowatt-hour) t s a E ia s A Source: Africa Infrastructure Country Diagnostic Supply is often unreliable Insufficient investment in maintenance and refurbishment WB Enterprise surveys reveal average of 56 days per annum with power interruptions losses in forgone sales and damaged equipment More than half of large firms have back-up generators Own-generation now a significant proportion of installed capacity 4
Days in year with power interruptions Source: World Bank Enterprise Surveys % of businesses that rely on back-up generation Source: Estache, 2005, p.31. Evidence from the Investment Climate Assessments 5
High power costs Average cost of power (US$/kWh) 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 Average total cost of own generated power Average price of power purchased from utility South Africa Zambia Malawi Eritrea Tanzania Kenya Uganda Cameroon Senegal Mali Burkina Faso Mauritius Cape Verde Niger Benin Weighted average cost of power used Source: Africa Infrastructure Country Diagnostic Very low access to power Source: Earthlights, 2000 6
Limited progress over time National Rural Urban 25% 7% 70% 20% 6 % 5% 60% 50% 15% 4 % 40% 10% 3 % 2 % 30% 20% 5% 1% 10% 0% 1990-95 1996-2000 2001-2005 Piped water Electricity Landline Cellphone Toilet 0 % 19 9 0-9 5 19 9 6-2 0 0 0 Piped water Land line To ilet 2 0 0 1-2 0 0 5 Electricity C ellp hone 0% 1990-95 1996-2000 2001-2005 Piped water Electricity Landline Cellphone Toilet Urbanization Source: Africa Infrastructure Country Diagnostic However, fast growing cell phone footprint Source: Africa Infrastructure Country Diagnostic 7
And rapid growth in broadband ICT different to power sector, but what can we learn in terms of competition and private sector participation? Access to energy by income quintile unequal 100% 80% 60% 40% 20% 0% Q1 Q2 Q3 Q4 Q5 Electricity for lighting Wood/Charcoal for cooking Gas/LPG for Cooking Kerosene/Paraffin for Cooking Source: Africa Infrastructure Country Diagnostic 8
Most tariffs do not recover costs 0.35 Average Effective Tariff ($/kwh) 0.30 0.25 0.20 0.15 0.10 0.05 0.00 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 Historical Average Costs ($/kwh) Source: Africa Infrastructure Country Diagnostic Source: AICD 2008 Hidden or quasi-fiscal costs 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Under-Pricing Unaccounted Losses Collection Inefficiencies Source: Africa Infrastructure Country Diagnostic 9
Extent of crisis revealed in prevalence of emergency short-term power leases Power crisis exacerbated by drought high petroleum prices damage to infrastructure through wars rapid demand growth 10
2. The response: power sector reform Standard reform model advocated since early 1990s Progress in reform, but nowhere in Africa has the standard reform model been fully implemented Instead we have hybrid power markets which present new challenges Since early 1990s standard reform model advocated 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 competition IPPs for the market or wholesale competition in the market eventually customer choice and retail competition 11
Progress in reform About 30 African counties have established independent electricity regulators Some countries have unbundled their state-owned utilities e.g. Kenya (KenGEn & KPLC) e.g. Ghana (VRA, GRIDco, ECG) e.g. Uganda (UEGCL, UETCL, UEDCL) Most countries have enacted laws permitting private sector participation, but progress is mixed Private concessions and management contracts e.g. Uganda, Cameroon, Cote d Ivoire, Mali, Gabon concessions E.g. Namibia, Lesotho, Rwanda, Tanzania, Kenya management contracts Frameworks for small RE IPPs e.g. Tanzania, REFITs, etc About 50 IPPs across Africa e.g. Kenya (more than 5 + 3 more), Uganda (first large IPP hydro + a number of smaller IPPs), Tanzania, Ghana, Cote d Ivoire, Senegal, Nigeria, Togo, etc) But nowhere is standard reform model implemented in full Initial power sector reform plans often stalled or reversed Nowhere do we have full wholesale or retail electricity competition Many countries have not unbundled e.g. Tanzania, South Africa Private sector participation is still often constrained Instead, 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 12
Hybrid power markets are challenging Performance of state-owned utilities Still responsible for electricity provision Often unable to finance new investment And poor financial and technical efficiencies New investment Responsibilities for planning, procurement and contracting fall between the cracks unclear, neglected, sub-optimal => inadequate investment Regulators have important role in responding to these challenges 3. Re-assessing regulatory performance Independent regulator model Regulatory risk Evaluating regulatory systems African electricity regulator peer review and learning network 13
Widespread model: independent regulator e.g. AFUR recommends that the following key principles form part of an initial framework for utility regulation in Africa: Minimum regulation necessary to achieve policy and sector objectives; Adherence to transparent decision-making and due process requirements; Independent or autonomous regulation where possible; Accountability towards government, investors and end-users Non-discrimination when not in conflict with policy prerogatives of government; Protection of investors against physical and regulatory expropriation; and Promotion of competition by limiting anti-competitive behaviour. A Framework for Utility Regulation in Africa 2003 Regulatory risk? Effective regulation was seen as key to infrastructure reform and attracting private investment It was hoped that regulation would insulate tariff-setting from opportunistic political interventions thus enabling cost-recovery and more predictable revenue streams Some now argue that regulators are actually exacerbating the problems they were meant to solve They argue that regulators lack true independence, are unaccountable and make non-credible, inconsistent decisions 14
Time to re-assess We now have up to 15 years of experience with infrastructure regulatory agencies in developing countries Have these regulators protected consumers and facilitated affordable and quality infrastructure services through improved efficiencies, reduced costs and effective standards? promoted financial viability of utilities and provided incentives for new investment? To what extent has regulatory independence helped achieve the above objectives? Do we need to consider new regulatory models which respond to developing country challenges and are more effective in meeting the above objectives? Regulation 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 15
Evaluating regulatory systems Regulatory governance Legal design and institutional arrangements of regulatory system and processes of regulatory decision-making Credibility, legitimacy, and transparency of regulatory decisions Regulatory substance Content of regulation licences, tariffs supply & service standards Quality & robustness of regulatory decisions Impact on sector Competitively priced, reliable infrastructure services Financial viability, new investment Adapted from Brown, Stern, Tenenbaum & Gencer, 2006 Africa Electricity Regulator Peer Review and Learning Network Ghana Uganda Kenya Zambia Tanzania Namibia 16
Typical review process 5 CEOs visit 6 th institution with support from MIR One week review Interviews with Minister Regulator Commissioners Regulator management & staff Utilities Private producers / investors Consumer groups Trade unions, media, parliamentarians Initial findings & recommendations presented to Commissioners, CEO and regulator management & staff Opportunity for subsequent institutional response & agreement on areas that could be improved Full review report published Follow-up actions from MIR (research, training, etc) Independent regulation: threats and gains Independent regulators often need informal Ministerial approval In many cases, tariff setting is still highly politicized Political difficulties when prices not revenue sufficient & need to rise Members of regulator boards are frequently replaced despite legal protections ; gap between law and practice Yet, encouraging signs of independence, transparency and accountability Push back: request Minister to issue instructions in writing Generally good legal frameworks Regulators mostly adequately resourced 17
Accountability and Transparency: encouraging progress e.g. Unique formal consultative mechanism in Tanzania Government Consultative Council Consumer Consultative Council Public hearings in some countries In Namibia & South Africa meetings are open to the public Key decisions are mostly published; websites improving Annual independent audits, reporting, parliamentary oversight Specialised courts to fast track appeals in Uganda, Kenya and Tanzania, elsewhere appeals to High Courts No history of ex-ante RIAs or ex-post reviews of regulatory performance 4. Improving performance of state-owned utilities State-owned utilities still dominant But very difficult for regulators to institute incentives for improved performance Rate of return regulation sometimes supplemented with efficiency incentives for O&M cost reductions Regulation can be supplemented with utility KPIs (cf Zambia) Ultimately regulation needs to be supported by SOE governance reforms 18
Integrated reform of SOEs 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 uitlity (cf Gomez-Ibanez) Improved transparency and information Structural reform and direct competition Mixed-capital enterprises State-owned utility governance reform Two-thirds of utilities have undergone some form of governance reform Corporatisation International accounting standards Performance contracts and monitoring Exposure to private capital markets KenGen & KPLC partially listed on Nairobi Stock Exchange Succesfull bond issues by Eskom, KenGen, Nampower, etc Empirical evidence from AICD study is that utilities that are subject to more reform measures perform better 19
5. Accelerating private investment in power Progressively more IPPs Learning the lessons of private sector performance New investment challenges Non-OECD investment is unlocking projects Independent Power Projects (IPPs) in Africa +/- 50 IPPs 17 Countries 12,000MW US$10 billion Case studies 20 projects in 8 countries 20
Contributing elements to IPP success Country level Favourable investment climate Clear policy and legal framework Coherent power sector planning Transparent and credible regulatory oversight Competitive bidding practices Contributing elements to success Project level Committed equity partners Favourable debt arrangements Secure and adequate revenue stream Credit worthiness of off-taker PPA Appropriate security & credit enhancement measures Secure, competitive fuel contracts Positive technical performance Ongoing strategic and risk management 21
New investment challenges arising from hybrid markets Who should be responsible for generation expansion planning & security of supply? How are new build opportunities allocated between the incumbent SOE and IPPs? Who should initiate bids for IPPs? How should we deal with unsolicited bids? Who should be responsible for contract negotiations with new IPPs? How do we avoid potential conflicts of interest when SOEs are the Single-Buyer? Who should approve long term PPAs? How do we ensure fair dispatch between SOE generators and IPPs? Non-OECD investment is unlocking projects Some Chinese examples Zambia: Kariba North Bank Hydro Zambia: Kafue Gorge Lower Hydro Ghana: Bui Hydro Ghana: Sun Asogli gas-fired power plant Ethiopia: Genale Dawa & other hydro etc Need for a better understanding of how these deals are structured, risk assessed, procurement undertaken and finance arranged and how they might be replicated? 22
Annual investment needs and financing flows for power sector in SSA Spending needs $ billions % GDP Capex 26 4.2 Opex 14 2.2 Total 40.6 6.4 Existing financing flows Opex Capex Public Public Non Total Total sector sector ODA OECD PPI Capex Spending 7 2.4 0.7 1.1 0.5 4.6 11.6 Improving operational efficiencies: - $3.3 bn; cost recovery - $2.2 bn Financing gap $23 billion In summary The scale of the challenge implies that ideological debates around public versus private investment are irrelevant / meaningless All sources of finance have to be mobilised Which means an integrated approach of fixing public utilities accelerating private sector participation welcoming non-oecd sources of finance and projects And building credible, transparent and accountable regulatory capacity which facilitates the above so that the power sector delivers reliable, competitively priced electricity to power economic development and improve social equity within the bounds of environmental sustainability 23
The Management Programme in Infrastructure Reform & Regulation (MIR) is an emerging centre of excellence and expertise in Africa. It is committed to enhancing knowledge and capacity to manage the reform and regulation of the electricity, gas, telecommunications, water and transport industries in support of sustainable development. Prof Anton Eberhard Research, training courses, consultancy University of Cape Town 24