Africa Competitive Landscape: Slowly Unbundling Its Power Potential

BMI View: The unbundling of state-owned power companies and efforts to liberalise power markets will continue to characterise the competitive landscapes of both Southern and East Africa. While reform will be a protracted process, efforts will gain greater traction as governments look to attract private investment into power infrastructure so as to keep pace with surging demand for electricity - with the renewables segment offering opportunities for private players.

Despite most countries in East and Southern Africa having adopted strategies to reform the power sector over the last two decades, the introduction of competition and broader liberalisation efforts have thus far yielded limited success. Reform is often stifled by opaque policies, an absence of policy continuity and a reluctance to relinquish control of strategic assets in the power sector.

Meanwhile, despite the huge array of opportunities on offer and significant untapped demand for power, many private investors have been deterred by wider political, social and economic instability in Africa. Other factors that have hindered liberalisation efforts include a region-wide failure to embrace tariffs that truly reflect the cost of electricity generation and a failure to establish the regulatory principles that would sustain such tariffs.

Low Electrification Rates
Electrification Rates In Selected African Nations (%)

Africa Competitive Landscape: Slowly Unbundling Its Power Potential

BMI View: The unbundling of state-owned power companies and efforts to liberalise power markets will continue to characterise the competitive landscapes of both Southern and East Africa. While reform will be a protracted process, efforts will gain greater traction as governments look to attract private investment into power infrastructure so as to keep pace with surging demand for electricity - with the renewables segment offering opportunities for private players.

Despite most countries in East and Southern Africa having adopted strategies to reform the power sector over the last two decades, the introduction of competition and broader liberalisation efforts have thus far yielded limited success. Reform is often stifled by opaque policies, an absence of policy continuity and a reluctance to relinquish control of strategic assets in the power sector.

Meanwhile, despite the huge array of opportunities on offer and significant untapped demand for power, many private investors have been deterred by wider political, social and economic instability in Africa. Other factors that have hindered liberalisation efforts include a region-wide failure to embrace tariffs that truly reflect the cost of electricity generation and a failure to establish the regulatory principles that would sustain such tariffs.

As such, state-owned utilities retain their dominant positions in many parts of the region, and are often vertically integrated, controlling generation, transmission and distribution (T&D) assets. A quick look at some of biggest markets in our power sector matrix is instructive, with the likes of South Africa's Eskom, Electricidade de Mocambique (EDM), Botswana Power Corporation (BPC), Zimbabwe Electricity Supply Authority (ZESA) and NAMPower all dominating their respective domestic markets.

We have often highlighted that many of these companies do not have the financial capabilities to tackle the infrastructure deficits in their domestic markets, boosting calls for market liberalisation. This is of course, why many of the aforementioned countries are making tentative efforts to attract private investment in new generating capacity: to stop electricity shortages from constraining economic growth.

Regional Differences

Southern and East Africa both continue to suffer due to the poor quality of infrastructure and frequent outages, with huge swathes of the rural population in both regions having no access to the grid. Privatisation - when it has occurred - has been mostly limited to the generation segment and we have seen a growing number of independent power producers (IPPs) enter the region. T&D activities, meanwhile, continue to be dominated by state-owned companies.

The majority of countries within East Africa (with the notable exception of Sudan and South Sudan) have, however, made some progress in terms of introducing IPPs and unbundling state-owned utilities. In Ethiopia, for example, vertically integrated Ethiopia Electric Power Corporation (EEPCO) was split into two independent entities in December 2013: the new Ethiopian Electric Services (EES) will be managed by Power Grid Corporation of India, while Ethiopian Electrical Power (EEP) will be tasked with meeting the increasing electric service demand. The EES has responsibility for operations, T&D and the sale of electric power. EEP will oversee the country's power projects including large-scale plants and transmission lines.

Critically, the all-new Ethiopian Energy Agency (EEA) has been established and given responsibility for issuing permits to private-sector players who will be allowed to compete directly with the state-owned utility. Kenya is reportedly keen to adopt similar measures, with the country's Parliament having set in motion a process to liberalise electricity distribution and break Kenya Power's monopoly position. While reform will undoubtedly take time, we highlight that those companies with first-mover advantage will ultimately be well positioned to access markets that have huge pent up demand for power if full liberalisation occurs.

Low Electrification Rates
Electrification Rates In Selected African Nations (%)

Electricity Trading: SAPP-ing The Will To Reform

Meanwhile, in Southern African power markets the pace of reform has been slower than in the eastern markets. This is because several countries (primarily South Africa) in this region already have more developed infrastructure in place (on an intra-regional basis, the Southern African power markets present a marginally higher score for electrification rates and quality of electricity than their peers in East Africa) and also because electricity trading is commonplace.

Notably, we partly attribute the slower rate of reform in Southern Africa not only to the fact that relatively developed infrastructure is already in place, but also the Southern African Power Pool (SAPP), which allows for electricity trading between countries and, in some cases, discourages domestic investment.

The SAPP was founded in 1995, and full membership is reserved for national utilities. The members of SAPP have created a common power grid between their countries and a common market for electricity. More specifically, a short-term energy market was established in April 2001. From January 2004, the SAPP started the development of a competitive electricity market for the region and a new day-ahead market was officially opened in December 2009.

The problem with the SAPP is that, because the level of liberalisation in many of its constituent countries is relatively low, it has not yet evolved into an effective fully fledged, market-based electricity trading platform. While it is hoped it will ultimately evolve into such a system, the SAPP is currently aimed at the pooling of resources and enhancing power sector cooperation between different countries so as to exploit the region's power generating potential at the lowest cost - to benefit all of the member states.

This has meant that some countries have preferred to rely on importing electricity via their state-owned utilities rather than establishing domestic capacity and liberalising their markets to attract private investment. Botswana is a case in point. In June 2014, our Country Risk team downgraded the forecast for real GDP growth in Botswana due to recurring power shortages.

A lack of capacity and an absence of investment in the sector, supply-side shortages and volatile trading dynamics in the SAPP have left Botswana exposed to power shortages. Botswana has grown heavily reliant on electricity imports - primarily from South Africa, but also Mozambique and Namibia - rather than investing heavily in its own power capacity. Critically, South African utility Eskom announced in March 2014 it would could electricity exports because of its own domestic capacity constraints - starving Botswana of electricity and underscoring our concerns about SAPP.

Other countries, meanwhile, have moved to advance huge export projects (often in the form of unfeasible mega-hydropower projects) so as to bypass their local populations and reap the revenues that can be generated from exporting electricity directly to their neighbours. Mozambique, for instance, exports 95% of the output from the 2,075MW Cahora Bassa hydroelectric plant at extremely low rates.

One Step Forward, Two Steps Back
Quality of Electricity Supply, Score out of 7 (the higher the better)

Investment In Renewables Gains Traction

Countries in the Sub-Saharan Africa (SSA) region are increasingly turning to their largely untapped renewable energy potential in order to meet projected power demand and diversify their often precarious energy mixes. Projects cover the whole renewable energy spectrum; including geothermal, wind, solar and biomass.

Although we continue to highlight that there are numerous risks to renewable-based capacity expansion, some countries are emerging as the frontrunners in the African renewables market. South Africa, Kenya and Ethiopia are leading the way.

With regards to South African renewable energy investment, the country features in the top ten highest globally and posted the world's highest renewable investment growth over 2012, according to the United Nations Environment Programme (UNEP).

Perhaps the most interesting point, however, is that although the country's state-owned utility Eskom has declared numerous power emergencies since the beginning of 2014 because it has been unable to bring large-scale thermal capacity online, the country's renewables industry is booming and is very attractive relative to its conventional counterpart. European utilities such as EDF and Acciona; manufacturers such as Vestas Wind Systems, Nordex and Siemens, but also non-traditional alternative companies like Google, are all looking to capitalise.

If renewables are to have a long-lasting impact on the competitive landscapes in East and Southern Africa, governments will have to focus on four critical areas.

  • Regulatory Framework/ FiTs: In an attempt to attract investment into the sector, many countries are offering subsidies for renewable projects in the form of tax incentives or, in some cases, Feed-in-Tariffs (FiTs). Countries that have adopted FiT programmes include Kenya, Uganda and Tanzania and it seems that the regulatory frameworks are successfully attracting developers into the market.

  • New Technology And Distributed Energy Solutions (DES): The benefits of small scale power generation at - or near - the point of use (both on and off grid) in Africa are clear. Known more broadly as DES - and including technologies such as small scale wind and solar systems - this approach offers an answer to the entrenched problems associated with aging and inefficient grid infrastructure. US conglomerate General Electric (GE) launched its new unit - known as Distributed Power - in June 2014, with a view to investing USD1bn in the African DES market.

Kenyan solar system company M-KOPA focuses on providing off-grid solar systems, including lights, phone chargers and solar-powered radios, to homes across Kenya. The scheme aims to be affordable for low-income households as it works on a mobile payment plan agreement (in conjunction with Safaricom), whereby customers pay an initial deposit and then make daily instalments over the course of the following year. We also expect to see greater interaction between the renewable energy and telecommunications industry in the region, a partnership that is also likely to be supported by development banks and non-governmental organisations (NGOs).

  • Increased IFIs and Development Bank Activity: The SSA renewables industry is receiving a great deal of support from development banks and international financial institutions (IFIs), which are playing an important role in minimising financing risks for projects. We have seen funding committed by the likes of the WB, African Development Bank (AfDB), UNEP, Export-Import Bank of China and the African Carbon Asset Development Facility, particularly into the East African geothermal industry and rural renewable energy projects.

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