Reforms Inadequate, State Utilities Remain Dominant

BMI View : The competitive landscape for the power sector in Africa remains highly dominated by state-owned utilities, with private sector participation still mainly constrained to power generation. This current market structure is primarily due to the inability or reluctance of local governments to conduct reforms in the sector.

The competitive landscape for the power sector in Africa remains highly dominated by state-owned utilities, despite reforms initiated by the majority of countries since the 1990s. State utilities such as South Africa's Eskom, Electricidade de Mocambique (EDM), Botswana Power Corporation (BPC), Zimbabwe Electricity Supply Authority (ZESA) and NAMPower continue to dominate both generation and transmission and distribution (T&D) activities in their respective markets.

Although private sector participation in the African power sector has increased over the past two decades, this has primarily been confined to electricity generation. This is because state utilities have chosen to maintain their monopoly in T&D activities, while opening up the generation sector to the private sector to compensate for a lack of capital for investment. As such, state utilities remain the sole purchasers of electricity generated by independent power producers (IPPs) in the majority of African power markets, and both state utilities and IPPs are involved in new generation investments.

East Africa Lagging Behind
Electrification Rates (%) 2009

BMI View : The competitive landscape for the power sector in Africa remains highly dominated by state-owned utilities, with private sector participation still mainly constrained to power generation. This current market structure is primarily due to the inability or reluctance of local governments to conduct reforms in the sector.

The competitive landscape for the power sector in Africa remains highly dominated by state-owned utilities, despite reforms initiated by the majority of countries since the 1990s. State utilities such as South Africa's Eskom, Electricidade de Mocambique (EDM), Botswana Power Corporation (BPC), Zimbabwe Electricity Supply Authority (ZESA) and NAMPower continue to dominate both generation and transmission and distribution (T&D) activities in their respective markets.

Although private sector participation in the African power sector has increased over the past two decades, this has primarily been confined to electricity generation. This is because state utilities have chosen to maintain their monopoly in T&D activities, while opening up the generation sector to the private sector to compensate for a lack of capital for investment. As such, state utilities remain the sole purchasers of electricity generated by independent power producers (IPPs) in the majority of African power markets, and both state utilities and IPPs are involved in new generation investments.

We note that the setting of power tariffs in most markets in Africa remains highly politicised as governments are very sensitive to public sentiment. This often means that tariffs paid by end-users are below generation costs, necessitating subsidies from the government.

This current market structure is largely the result of a collapse of the standard sector reform model advocated by the various governments in the 1990s. The reform model had advocated utility unbundling and privatisation, followed by wholesale and retail competition. Key reasons for the breakdown in the reform process include an absence of policy continuity, opaque policies, a continued reluctance on the part of governments to relinquish control of the power sector, as well as wider political, social and economic instability. Many of the power systems in the region are also too small to support meaningful competition, exacerbating the impacts of failures in market reform. As such, there are currently no full wholesale or retail electricity competition markets in the region, and many countries have yet to unbundle their state utilities.

Regional Differences

We note that there are significant differences between the competitive landscapes of power sectors in countries located in the Southern and Eastern regions. The majority of countries within East Africa (with the notable exception of Sudan and South Sudan) have made some progress in terms of introducing IPPs and unbundling national utilities.

Conversely, the pace of reform in Southern African power markets has been slower than in the eastern markets over the past decade. This is because several countries 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), which reduces pressure on governments to implement sector reforms. Electricity trading is also more commonplace in the southern part of Africa, which discourages domestic investment in new generation capacity and the execution of market reforms.

East Africa Lagging Behind
Electrification Rates (%) 2009

Electricity Trading: SAPP-ing The Will To Reform

The Southern African Power Pool (SAPP) is a common power market for South African nations, and this common market reduces the incentive for governments to implement reforms as governments are increasingly reliant on cheap imports of electricity. This is because the SAPP is aimed at the pooling of resources from different countries to exploit the region's power generating potential at the lowest cost, prompting countries with higher generation costs to increasingly rely on electricity imports from countries with lower costs. As such, some countries now prefer to rely on electricity imports via state-owned utilities rather than building up their own domestic capacity and liberalising their markets to attract private investment. Meanwhile, other countries have moved to advance huge export projects (often in the form of mega-hydropower projects) so as to bypass their local populations and reap the revenues that can be generated from exporting electricity to their neighbours.

To this end, Mozambique, Zimbabwe, and Namibia export electricity to the other participants in the SAPP. This does little to incentivise the countries that receive the electricity to investin costly new capacity. Mozambique, for instance, exports 95% of the output from the 2,075MW Cahora Bassa hydropower plant at extremely low rates.

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

Renewables Investment Gaining Momentum

In terms of the implementation of regional power sector growth plans and competitive electricity markets, we believe a growing emphasis on exploiting renewable energy resources could provide a foothold for new entrants into the African power sector. A number of countries in the region are beginning to turn to their largely untapped renewable energy potential, and many are offering subsidies for renewable projects in the form of tax incentives or, in some cases, feed-in tariffs (FiTs).

Subsidies To Attract Investors
Africa - FiT Programmes, Average Tariff By Technology

Off-grid projects in particular are growing increasingly popular. In September 2012, Namibia announced that it was conducting negotiations with renewable energy IPPs to develop projects in rural areas. While the country does not have a renewable energy policy yet, it is aiming to source 10% of electricity from renewable sources.

Furthermore, we have also seen an uptick in renewables activity in South Africa, which registered USD5.7bn in renewable investment in 2012 - recording the biggest growth rate globally. Indeed, 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.

Most pertinently, the 75MW Kalkbut PV solar power plant in the Northern Cape region was connected to the grid in September 2013 - demonstrating that renewables projects are being seen through to completion. The project - developed by Scatec Solar - is the first IPP project in the country to be procured under the Renewable Energy Independent Power Producer Procurement Programme (REIPPP). While we highlight that the broader South African power sector is in a parlous state, with Eskom declaring a power sector emergency and warning of blackout in early December 2013, the outlook for the renewables industry looks bright.

That said, we note that countries in the region appear still reluctant to fully implement the IPP model for renewable energy. It thus does not come as a surprise that in Kenya the government set up the Geothermal Development Company in 2006 in order to promote the development of geothermal energy, and it remains 100% state-owned. Notably, it is hoped that by utilising its significant geothermal power generation potential, Kenya will be able to export electricity via the East African Power Pool (EAPP).

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Related sectors of this article: Utilities - Power, Power, Regulatory - Power, Tenders - Power
Geography: Africa, Angola, Botswana, Kenya, Mozambique, Namibia, Sudan, South Sudan, Tanzania, Uganda, Zambia, Zimbabwe
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