BMI View: Despite the implementation of a number of reforms in countries across the region over the past two decades, the overall level of liberalisation and competition in East and Southern African power sectors remains low. While we have witnessed a slight uptick in private-sector activity, there is still inertia with regards to the implementation of reform in many countries and we believe that electricity trading in Southern Africa is behind this dynamic. Meanwhile, we highlight that the renewable energy sector is receiving an increased amount of attention from both new entrants and foreign competitors.
The overall level of competition and liberalisation in the East and Southern African power sectors remains moderately low, despite nearly every country having undertaken a variety of reforms over the past two decades. Some factors hindering the efficacy of these reforms include opaque lack of clarity with regards to policy (and policy continuity), a continued reluctance on the part of governments to relinquish control of the power sector, as well as wider political, social and economic instability.
At present, state-owned utilities continue to retain their dominant positions in many parts of the region, and in various cases remain vertically integrated, controlling generation, transmission and distribution assets (T&D). In general, privatisation has been limited mostly to generation - we have seen a growing number of independent power producers (IPPs) enter the region over the past few years - while T&D activities are still mostly dominated by state utilities.
From an intra-regional perspective, the majority of countries within East Africa (with the notable exception of Sudan and South Sudan) have made progress in terms of introducing IPPs and unbundling national utilities. Reform in Southern African power markets, however, has been more limited over the past decade, as several countries in this region have more developed infrastructure in place and electricity trading is commonplace.
|East Africa Lagging Behind|
|Electrification Rates (%) 2009|
That said, both regions continue to suffer from poor infrastructure and frequent outages, with most of the rural population having no access to the grid. On average, the Southern African power markets present a marginally higher score for electrification rates and quality of electricity than their peers in East Africa. We thus attribute the slower rate of reforms in Southern Africa to the fact relatively developed infrastructure is already in place, as well as the SAPP, which allows for electricity trading between countries and discourages domestic investment. Indeed, despite all of its problems, South Africa's Eskom is the biggest player in the Southern Africa - with the state-owned utility supplying electricity to more than 40% of Africa, according to Eskom's own data.
Indeed, in some respects, this may point about the SAPP may sound counter-intuitive - especially as some countries in Southern Africa are advancing plans to bring new capacity online so as to become net electricity exporters via the SAPP itself. Tanzania, for example, is advancing hugely ambitious plans to bring online capacity so it can reap revenues from exporting electricity to its neighbours. However, we note that such plans appear unfeasible in the near-term (with Uganda a prime example of a country where this is the case) and risk provoking the ire of local populations that would not be happy to see electricity exported at a time when they do not have access to a reliable electricity supply. Furthermore, in many cases, regardless of ambitious export targets, it will actually prove unfeasible to export electricity in the short-term - with a lack of investment in grid infrastructure and an over-reliance on oft-delayed mega hydropower projects hindering such export ambitions.
Inertia Remains A Problem In Most Countries
We believe that the power sectors for the majority of African nations are still in the early stages of reform. As highlighted by the industry risks section of BMI's power risk/rewards ratings (RRRs), the level of liberalisation in the East and Southern African markets remains quite low.
|The Slow Pace Of Reform|
|Market Risks - Scores Out Of 10|
Electricity Trading In Southern Africa: A Drag On Reform?
The Southern African Power Pool (SAPP) was founded in 1995, and full membership is reserved for national utilities only. 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.
We believe that the SAPP is one of the reasons for the inertia with regards to reform in South Africa. At present, Mozambique, Zimbabwe, and Namibia export electricity to the other participants in the SAPP, which creates less incentive for these countries to develop their own capacity and infrastructure. For instance, Mozambique exports 95% of the output from the 2,075MW Cahora Bassa hydroelectric plant at extremely low rates. There are also several more hydropower projects in the pipeline that are expected to increase Mozambique's electricity exports.
We note that electricity trading in the region is set to increase and a growing number of trans-national transmission projects are being planned. In July 2012, the details of the Zizabona power interconnector were unveiled in Namibia. The project will involve the construction of a 300MW (increasing to 600MW) transmission power line that connects Zambia, Zimbabwe, Botswana, Namibia and South Africa.
|One Step Forward, Two Steps Back?|
|Quality of Electricity Supply, Score out of 7 (the higher the better)|
Renewables: South Africa Getting The Green Light?
We believe that the growing awareness and emphasis on exploiting renewable energy resources in Africa could provide a foothold for new entrants and foreign companies into the African power sector. In particular, off-grid projects are growing increasingly popular. Namibia said in September 2012 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. Meanwhile, we have also seen an uptick in renewables activity in South Africa.
It was recently announced that renewable energy investment into South Africa during 2012 reached US5.7bn, and according to the UNEP, this was the world's highest renewable investment growth in 2012. Additionally, a number of high profile companies are all looking to capitalise. European utility firms such as EDF and Acciona; manufacturers such as Vestas Wind Systems, Nordex and Siemens, but also non-traditional alternative companies like Google, have all entered the sector.
Most pertinently, it was announced in early September that the 75MW Kalkbut PV solar power plant in the Northern Cape region is near completion; expected to be connected to the national grid in October, two months ahead of schedule. The project has been developed by Scatec Solar and would be the first IPP project in the country procured under the Renewable Energy Independent Power Producer Procurement Programme (REIPPP).
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.