Bringing Electricity to Sub­Saharan Africa

Colin Macri, Ryan Oros, and Ben Clark

Autumn 2015

Tables of Contents

Abstract……………………………………………………………………………….3

Background………………………………………………………………………...…4

Associated Problems………………………………………………………………….6

Evaluation of Power Sources…………………………………………………………11

­ Fossil Fuels…………………………………………………………………...12

­ Renewables (Solar, Hydro, Geothermal)..........................................................15

Minimizing Marginal Cost……………………………………………………………24

­ Centralized vs. Decentralized…………………………………………………24

­ Role of National Governments………………………………………………..25

Raising Capital………………………………………………………………………....26

Procedure: Estimating Costs…………………………………………………………...30

Demand for Electricity by Households………………………………………………...31

Applicability, Future Costs, and Conclusions………………………………………….33

2

Abstract:

Achieving at least some degree of electrical development in Sub­Saharan Africa­ where

access is currently limited to less than one third of households ­ will require a massive, highly 1

structured, well­funded plan. Given the problem’s scale and the current costs associated with

energy production (both centralized and decentralized) it is important to examine the ways in

which the necessary electrical development can be achieved such that harmful carbon emissions

are not emitted abusively.

Indeed, to address the issue in a way that is based exclusively on cost­benefit analysis

would lead one to an agenda that would focus on the electrification of highly populated urban

areas by virtue of carbon­fueled centralized power plants (which have been well­documented to

be environmentally negligent). Thus, we sought to find a cost effective alternative to centralized

grid supply that would represent a relatively reasonable expense on local governments, foreign

investors, philanthropists, and other sources of large­scale funding.

However, further investigation into the extent of the electricity­absence problem and a

historical analysis of attempts to solve it have yielded the conclusion that although stand­alone,

decentralized power generation will continue to be a fundamental part of energy expansion in

Sub­Saharan Africa, it will not be the most cost effective option for the resolution of the

problem. Our analysis is inclusive of anticipated reductions in cost for renewable energy

systems over the next 20 years.

1 Diechmann, U., C. Meisnerb, S. Murraya, and D. Wheeler (2010), The Economics of Renewable Energy Expansion in Rural Sub­Saharan Africa, Energy Policy, 39(1): 215­227

3

Hence, the inevitable requirement of centralized power plant construction in Sub­Saharan

Africa advances the need to decarbonize fuel so that the prospective new­found electricity supply

(and all of its associated economic benefits that are enumerated in this paper), will not present

itself as a severely harmful environmental externality.

4

Background:

Believe it or not, there are currently 1.3 billion people in the world who do not have

access to electricity. That’s more than 18% of the world’s population who are unable to

experience many of the daily activities which we often take for granted . In recent years, the 2

governments of underdeveloped countries have begun to realize the critical role that electricity

plays in promoting human development and as a result have explored possible solutions. In an

effort to help solve the electricity crisis, we looked to see where the problem was most severe

and the answer was clearly sub­Saharan Africa. As you can see from the table below,

sub­Saharan Africa’s electrification rate is far below that of any other region of the world and the

issue only worsens as we analyze the more rural areas of Africa.

Figure 1: Electricity Access in 2012. Source: World Energy Outlook, 2014.

2 “Providing Africans with Access to Electricty: Possible Solutions to Urgent Needs.” Akon Lighting Africa. Akon Lighting Africa, n.d. Web. 23 Nov. 2015.

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To help better understand the issue on a country­by­country basis, we can look at the

following graphic. The majority of the countries with 50% or more of the population without

electricity are concentrated in sub­Saharan Africa. As we can conclude from the previous table, it

should also be noted that even the countries shown to be dark blue are actually closer to 0%

inaccessibility to electricity rather than the 25% which is implied. With this in mind, it becomes

clear that the electricity crisis is more of a sub­Saharan issue than an international one.

Figure 2: International Electrification Rate. Source: EGG­energy, 2010.

To put things in perspective, the average African uses less electricity than the average

person in England over 100 years ago . Even today, there are more than 600 million people in 3

Africa who continue to live their day­to­day lives without accessibility to electricity. This

number has even increased since the year 2000 as the population rate has grown faster than the

3 Davidson, O., Sokona, Y., 2002. A New Sustainable Energy Path For African Development: Think Bigger Act Faster. Fingerprint, Cape Town.

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electrification rate. If this trend continues, we can predict that over 645 million people in

sub­Saharan Africa will be living without electricity by 2025 . 4

While Africa is relatively well­supplied with fossil fuels and renewable resources, they

are not evenly distributed throughout the region and consequently the energy crisis becomes

more concentrated in rural areas. For example, over 90% of Dakar, the capital of Senegal, is

electrified meanwhile just over 50 kilometers away in rural Senegal the electrification rate is

nearly zero 2. Unfortunately this is a common occurrence throughout sub­Saharan Africa as

off­grid populations are the first to suffer, something to be discussed later on.

Associated Problems:

As an alternative to electricity, the people in sub­Saharan Africa often look to sources

like kerosene or wood to help heat their homes and cook. The inhalation of these fumes are

major contributors to respiratory and cardiovascular diseases which cause deaths at a rate

comparable to that of HIV / AIDS, Tuberculosis and Malaria . Unlike some of these diseases, 5

there is a known cure for the electricity crisis the only unknown is figuring out the most

affordable solution.

Figure 3: Premature Deaths, 2010. Source: Center for Global Development, 2013.

4 “The Issues Affecting Global Poverty: Energy.” ONE. 27 June 2013. Web. 04 Dec. 2015. 5 Moss, Todd. “Who’s Blowing Smoke on Energy Poverty and the Global Disease Burden?”

Center For Global Development. 30 Apr. 2013. Web. 04 Dec. 2015. 7

As a continuation of the health risks associated with the inaccessibility to electricity, it

should be noted that up to 50% of health facilities, serving an estimated 255 million people, are

consistently without electricity 6. These clinics find themselves operating under a flashlight at

night, if at all, and often rely on kerosene for lighting or charcoal for the sterilization of medical

equipment. These factors not only lead to indoor air pollution but also increase the patient’s risk

of infection and the spread of diseases. The energy crisis even stems to clinics with electricity

because their energy source is often so unreliable that the effectiveness of life­saving vaccines in

an estimated 60% of refrigerators are compromised . The inefficiency of health clinics also has 6

indirect effects since poor health often leads to the prevention of economic opportunities which

further hampers sub­Saharan Africa’s already struggling economy.

The social impact on sub­Saharan Africa is more obvious in that night­time activities are

practically non­existent. Women are unable to carry out household tasks at night and

independent business owners are unable to work on orders which greatly reduces their economic

efficiency and consequently income. In addition, unlit neighborhoods naturally experience

increased crime rate and car accidents which can often be avoided with proper technology 2. The

following graphic illustrates the Human Development Index in 2008. The closer to 1 the index is,

the higher the quality of life, the closer to 0, the lower the quality of life. In this study, quality of

life is determined by a variety of factors including life expectancy, health and literacy indicators,

and political freedom . By comparing this graphic to the previous one, there is a high correlation 7

6 Adair­Rohani, Heather. “Global Health: Science and Practice.” Limited Electricity in Health Facilities of Sub­Saharan Africa: A Systematic Review of Data on Electricity Access, Sources, and Reliability. Web. 04 Dec. 2015.

7 Monnier, Christine. "Basic Concepts (Global Stratification)." Global Sociology /. N.p., 28 Aug. 2010. Web. 04 Dec. 2015.

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between the electrification rate of a country and their quality of life. It is natural to assume that a

country which fails to operate efficiently after sunset would have a poor quality of living. This is

an alarmingly obvious issue which makes the necessity for a solution even more immediate.

Figure 4: Human Development Index, 2008. Source: PBWorks, 2010.

From an educational perspective, children are unable to study efficiently for school or

entrance exams as they are often forced to study under the flame of a candle. The children of

sub­Saharan Africa naturally have a lower education rate not only because of their inability to

efficiently study at night, but also because they are unable to access the digital information which

has been crucial to the education of developed countries. Over 30% of primary schools in

sub­Saharan Africa operate without electricity let alone the internet, computers, etc 4. As a result,

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children are never even given the opportunity to receive an education on­par with the rest of the

world simply because of a lack of technology. The education of Africa’s youth is especially

important to its future growth when you realize that the average age in many sub­Saharan

African countries are among the lowest in the world.

Figure 5: Median Age in Africa, 2015. HTXT Africa, 2015.

The issue expands beyond the areas without electricity as even the areas with electricity

have experienced many issues which come with high costs. Accessibility is not only too

uncommon but also insufficient as the entire installed generation capacity in sub­Saharan Africa

is only 28 Gigawatts, equivalent to that of Argentina . Additionally, the source of electricity is 8

highly unreliable. African manufacturing enterprises experience power outages for an average of

8 “Fact Sheet: The World Bank and Energy in Africa.” The World Bank. Web. 04 Dec. 2015. 10

56 days per year. These outages cause firms to lose an estimated 6% of sales revenue and in

some of the less­generated areas this number can reach as high as 20% of sales revenue 8. The

source of these outages is often from load­shedding which is an intentionally engineered

electrical power shut­down for a specific region used in an effort to prevent a total blackout of

the power system. While load­shedding is often viewed as a last resort, it occurs all too often in

sub­Saharan Africa and its cost to the economy is equivalent to 2.1% of the GDP on average 8.

Even though electricity is clearly unreliable, it still comes at a high cost. The average power

tariff in sub­Saharan Africa is $0.13 per kilowatt­hour compared to developing world tariffs

which are only $0.04 ­ $0.08 8. Countries that are forced to obtain electricity from an unreliable

grid often look to pull energy from generators which often costs three to six times more than the

average. Overall, these shortcomings in the power sector greatly threaten Africa’s long­term

economic and social growth potential. The inaccessibility to reliable sources of electricity and

lack of cost effective methods in sub­Saharan Africa will continue to hamper the area’s

development if a solution is not found soon.

Evaluation of Power Sources

As a continent endowed with seemingly limitless natural resources, Africa has

tremendous potential for alternative energy generation. Solar, hydro, and geothermal power are

all viable options for reducing carbon emissions associated with traditional forms of energy.

However, fossil fuels cannot be ignored as a power source when considering Africa’s abundance

of oil and natural gas deposits. In evaluating both renewable and nonrenewable power sources, a

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close cost­benefit analysis reveals how each can effectively contribute to Africa’s long­term

energy development strategy.

Fossil Fuels:

Although not as environmentally friendly as many forms of alternative energy, fossil

fuels are essential to expanding the power grid in sub­Saharan Africa. The utilization of Africa’s

substantial oil and natural gas endowments would provide an effective and relatively low­cost

source of power capable of reaching many sub­Saharan nations. Africa’s supply of fossil fuels

has drawn attention on a global scale, as “6 of the top 10 global discoveries in the oil and gas

sector in 2013 were made in Africa” . Further data reveals that Africa’s oil reserves have grown 9

almost 120% from 1980­2012, with natural gas reserves growing around 140% over the same

time period . Africa’s fossil fuels are primarily extracted from the Northern regions of the 10

continent, including nations such as “Nigeria, Algeria, Angola, Equatorial Guinea and other Gulf

of Guinea nations, in addition to Egypt and Libya” . Following recent discoveries, many Eastern 11

nations such as Kenya and Uganda are expected to increase production, further contributing to

the supply of oil and natural gas across the continent.

Fossil fuels will undoubtedly play a critical role in Africa’s development; however,

non­renewable power sources cannot be overly relied upon for electricity generation. Currently,

80% of the electricity currently generated in Africa is from fossil fuels . In addition to the 12

detrimental effect on the global environment, the over reliance on fossil fuels leaves many

9 Vines, Alex, and The Opinions Expressed in This Commentary Are Solely Those of Alex Vines. "Africa's Oil and Gas Potential: Boom or Hype?" CNN. Cable News Network, 18 Sept. 2014. Web. 28 Nov. 2015. 10 Oil and Gas in Africa: Africa's Reserves, Potential and Prospects. Rep. Cayman Islands: KPMG Africa Limited, 2013. KPMG. Web. 28 Nov. 2015. 11 Oil and Gas in Africa: Africa's Reserves, Potential and Prospects. Rep. Cayman Islands: KPMG Africa Limited, 2013. KPMG. Web. 28 Nov. 2015. 12 World Bank, 2015

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already impoverished nations vulnerable to fluctuating commodity prices. Without diversified

sources of power generation, supply shocks that cause spikes in oil prices can be very harmful

many sub­Saharan African economies.

A majority of the oil produced in Africa is not refined domestically and contributes very

little to impoverished economies as a power source. Over the past 10 years, Africa has produced

approximately 11% of the global crude supply, while consuming only 4% over the same time

period . Data collected by British Petroleum show Africa’s production has historically been well 13

above its refining capability (illustrated in figure 6). Without the infrastructure necessary for

refinement, new oil discoveries and enhanced production capability will only reinforce Africa’s

role as a net­exporter. Unless Africa improves its refining capacity, oil will continue to flow out

of countries such as Angola and Nigeria, only to be imported after refinement at a higher cost . 14

Figure 6: Africa’s Crude Production vs. Refinement Capacity Source: KPMG sector report, 2013

13 Oil and Gas in Africa: Africa's Reserves, Potential and Prospects. Rep. Cayman Islands: KPMG Africa Limited, 2013. KPMG. Web. 28 Nov. 2015. 14 Oil and Gas in Africa: Africa's Reserves, Potential and Prospects. Rep. Cayman Islands: KPMG Africa Limited, 2013. KPMG. Web. 28 Nov. 2015.

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Natural gas is a significant export of Africa as well, with significant future potential.

Similar to crude oil, the lack of infrastructure in sub­Saharan communities makes natural gas an

impractical source of electricity. From a continent­wide perspective, Africa’s natural gas

production has risen steadily since 1970. However, similar to crude, natural gas is greatly limited

in its ability to provide a majority of African countries electricity due to a lack of refinement

capacity. According to data collected by British Petroleum (illustrated in figure 7), the steady

increase of natural gas production has greatly outpaced the lagging refinement capacity, as

measured in billion cubic meters. When examining Africa’s natural gas perspectives on a

micro­economic scale, natural gas has proven to be an effective source of electricity generation

in countries with existing pipelines and functional infrastructure, such as Algeria. As the

continent’s leading natural gas producer, Algeria has been successful in providing electricity to

its citizens, as the country currently has a 99% electrification rate . However, even in a country 15

with one of the most efficient models of electricity production, Algeria faces many of the

limitations that afflict Africa as a whole. EIA notes that production of crude and natural gas has

declined considerably in recent years, citing “slow government approval, difficulties attracting

investment partners, infrastructure gaps, and technical problems” as the major hurdles to

Algeria’s energy production . Although Algeria enjoys a significantly higher rate of 16

electrification compared to many other sub­Saharan nations, the problems that have limited

power production in recent years are analogous to those faced across the continent. In order to

take full advantage of Africa’s fossil fuel reserves and continue to expand production with a

focus on domestic consumption, national governments must place a higher emphasis on public

15 Algeria ­ International Energy Data and Analysis." US Energy Information Association. Eia, 5 Feb. 2014. Web. 16 Algeria ­ International Energy Data and Analysis." US Energy Information Association. Eia, 5 Feb. 2014. Web.

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infrastructure, and cultivating a transparent and regulated environment to attract foreign

investors.

Figure 7: Natural Gas production vs. Consumption, Breakdown of Nigeria’s natural gas by production type

Source: Data collected by British Petroleum, OPEC (recreated in KPMG sector report, 2013)

In order for Africa to utilize its fossil fuels as domestic power source, it would require a

large­scale infrastructure investment to improve its refinement capacity. In a natural gas and

crude oil sector report published by KPMG, the researchers affirm Africa’s corrupt political

economy and instability associated with fossil fuel production including recurring theft, violence,

and poor facility maintenance . We will further discuss the prospects 0of national public sector 17

reform in order to improve Africa’s ability to generate electricity using domestic fossil fuels in

the conclusion section of our paper.

Renewables (Solar, Hydro, and Geothermal):

In the chart below, it is clear that Africa’s vast range of natural resources greatly affect a

country’s potential for renewable electricity production. In this section, we will analyze different

17 Oil and Gas in Africa: Africa's Reserves, Potential and Prospects. Rep. Cayman Islands: KPMG Africa Limited, 2013. KPMG. Web. 28 Nov. 2015.

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geographic features that provide several African nations with comparative advantages in

renewable power production. We will also examine the prospect of allocating production

efficiently across the continent, as well as the difficulties with minimizing and comparing

levelized electricity costs.

Figure 8: Power Generation Potential by Country Source: McKinsey & Company, 2015

Solar

In examining alternative energy solutions that might alleviate African government’s

dependence on oil while simultaneously increasing domestic power consumption, solar is a

particularly attractive solution. Given Africa’s geographic positioning in relation to the equator,

the continent has one of the highest average annual solar radiations across the globe. These

conditions are ideal for powering photovoltaic cells, as Deichmann claims, “Most of the region

has average annual direct normal irradiance (DNI) that meets or exceeds 5kWh/m2/day, the

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critical minimum level for efficient provision of power from solar thermal facilities” The 18

plummeting costs of photovoltaic cells furthers the case for solar, as the global average cost of

solar photovoltaic electricity generation is estimated to have declined by around half between

2010 and 2014, from around USD 0.32/kWh to just USD 0.16/kWh in 2014 . The intense 19

sunlight coupled with falling costs has allowed Africa to evolve as an efficient producer of solar

electricity, as proven by its relative weighted average capacity factor, a metric that expresses

efficiency by measuring Africa’s capacity production as a ratio of its potential. According to a

report published in 2015 by the International Renewable Energy Agency, the weighted average

capacity factor for all utility scale projects in 2014was 14% in Asia (excluding China and India).

In China and India the figure is estimated to be around 17% and 21%, respectively. In Africa the

capacity factor stands at 22%, which suggests Africa’s photovoltaic energy production is already

operating at a relatively more efficient level than some of its peer developing nations . 20

However, whereas many current initiatives such as the Akon project and humanitarian

venture capital projects have aimed at providing decentralized, portable sources of solar

electricity, this does not represent the most cost effective solution for electrifying Africa in the

long­term. Even with large sources of initial funding, the high transaction and financing costs of

these projects has limited solar power’s success in sub­Saharan communities . Given the high 21

marginal costs associated with decentralized solar units, solar energy is most efficient when used

as a source of electricity in Africa’s rural communities as opposed to areas with existing

infrastructure. Grant McDermott, a researcher at the Norwegian School of Economics, makes the

18 Diechmann, U., C. Meisnerb, S. Murraya, and D. Wheeler (2010), The Economics of Renewable Energy Expansion in Rural Sub­Saharan Africa, Energy Policy, 39(1): 217. 19 Renewable Power Generation Costs in 2014. Rep. p93: IRENA, 2015. Print. 20 Renewable Power Generation Costs in 2014. Rep. p93: IRENA, 2015. Print. 21 Renewable Power Generation Costs in 2014. Rep. p32: IRENA, 2015. Print.

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distinction in efficiency between centralized and decentralized power sources, “A grid system

remains the first best option. Decentralized solutions are really a second­best option in the

absence of the former. The distinction is crucial.” . We will return to crucial tradeoff between 22

centralized and decentralized electricity and how solar fits into Africa’s long­term energy

development strategy later in the paper.

Hydropower:

In addition to high levels of irradiation, Africa is also home to the Nile and Congo River,

two of the largest sources of flowing water in the world. These rivers offer tremendous

hydroelectric power generation potential. However, once again we see Africa’s limited

infrastructure and lack of funding inhibiting the continent’s hydropower potential. As claimed by

David Appleyard, the chief editor the Hydro­Review Worldwide, “Africa holds about 12% of the

world's hydropower potential, with a technically feasible output of about 1,800 TWh/year. Yet

Africa produces only about 3% of the global hydropower and exploits less than 10% of its

technical potential, the lowest proportion of any of the world's regions” . Interestingly enough, 23

we believe Africa’s relatively untapped potential is strength in terms of its hydropower

electricity generation. According to the 2015 IRENA report, hydropower is particularly cost

efficient in developing economies, and is capable of providing electricity at very competitive

prices when there is still significant potential. Assuming projects with the lowest estimated costs

are constructed first, economies with an abundance of hydropower plants face an extraordinary

22 Jackson, Tom. "How Africa Gets Power to 620 Million More People Could Have a Huge Influence on Our World." Public Radio International. PRI, 6 July 2015. Web. 1 Dec. 2015. 23 Appleyard, David. "Africa's Hydropower Future." HydroWorld. Pennwell Corporation, 1 Jan. 2014. Web. 30 Nov. 2015.

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marginal cost. The source of hydro, unique market dynamics, and method of transmission are all

factors contributing to price variability between hydropower electricity projects. Hydropower

does not benefit from economies of scale as illustrated by the exponential marginal cost curve

(Figure 9):

Figure 9: Marginal Cost of Hydropower, 2014 Source:International Renewable Energy Agency, 2014

Given its relatively untapped potential, we see Africa operating on the efficient portion of

the marginal cost curve, with hydropower representing an attractive option to many sub­Saharan

nations. The Democratic Republic of Congo in particular has been identified as a country best

suited for a large­scale hydropower investment. As a nation historically plagued by civil war and

corruption, The DRC possesses one of the most dismal electrification rates of approximately

45% in urban areas, and 5.6% in rural communities . However, the proposed Grand Igna Dam 24

project would make the DRC one of the largest contributors to the continent’s electricity supply.

24 Matschinga, Sancy Lenoble. "Legislation on Electric Energy in the Republic of the Congo." Lexology, 28 Feb. 2015. Web. Nov. 2015.

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If completed, the Dam would generate up to 40,000MW, doubling the current electric capacity of

the world’s largest dam . The Grand Igna Dam would provide clean renewable energy to 25

millions, however there is still much doubt as to whether the current inhabitants of The DRC will

benefit directly as electricity generated by the dam will primarily serve remote urban centers.

Under current construction plans, many local Congolese would be displaced from their homes,

and their surrounding environment would be destroyed to clear paths for transmission lines.

Although the proposed dam would undoubtedly improve Africa’s electricity consumption, the

costs from both a social and economic standpoint greatly outweigh the benefits for the Congolese

people.

Geothermal:

Whereas hydropower is vulnerable to changing weather conditions, geothermal power is

one of the most reliable methods of electricity generation. Through the rapid cooling of hot water

extracted from the earth’s core, steam is generated and used to power turbines. There is

significant potential for geothermal electricity generation along the eastern coast of Africa, with

Kenya and Ethiopia containing nearly 80% of the continent’s geothermal potential . Kenya in 26

particular has begun to capitalize on the high levels of volcanic activity beneath its surface, as

the country has devoted tremendous resources to strategic extraction of the core’s natural source

of energy. With the opening of Olkaria 280 MW power plant, geothermal power now accounts

for 51% of the nation’s installed power capacity and has recently overthrown hydropower as the

25 Grand Inga Hydroelectric Project: An Overview." International Rivers. N.p., n.d. Web. 05 Dec. 2015. 26 Castellano, Antonio. Brighter Africa: The Growth Potential of the Sub­Saharan Electricity Sector. McKinsey, 2015.

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country’s leading source of electricity, according to Kenya Electricity Generating Co . 27

Geothermal energy continues to represent the least expensive method of electricity generation

and is a crucial element to Kenya’s long­term energy development strategy.

As our analysis has shown, a region’s available natural resources are crucial in

determining the lowest cost of electricity. In Africa’s northern countries with more developed

systems of infrastructure, natural gas is the most cost effective option. In regions with exploitable

natural resource potential such as the DRC and Kenya, renewable sources of power generation

such as hydro and geothermal continue to represent the most cost­efficient option. The table

below illustrating data collected by the International Renewable Energy Agency, compares the

costs of renewable energy production faced by Africa in comparison to the rest of the world.

Figure 10: Levelized costs of electricity by continent Source: IRENA, 2014

27 Grand Inga Hydroelectric Project: An Overview." International Rivers. N.p., n.d. Web. 05 Dec. 2015.

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The theory of minimizing the levelized cost of electricity production in Africa is

consistent with Severin Borenstein’s findings in The Private and Public Economics of

Renewable Electricity Generation (2012). He also discusses the difficulty associated with

minimizing the costs over the short run versus the long run, as a country’s currently installed

capacity tends to influence the potential for future production, as demonstrated by hydropower.

Additionally, comparing the levelized costs of all potential power sources on a single basis, from

fossil fuels to all forms of renewable power, is extremely difficult because of the varying degree

of externalities, local labor costs, current and future plans for infrastructure, and different

technological efficiency levels . 28

Given the high variability in levelized cost estimates, the optimization of Africa’s vast

natural resources is an extremely complex problem. However, one study published by McKinsey

& Company, attempts to project the optimal breakdown of Africa’s renewable power sources. If

each nation were to meet the rise in demand (expected to rise to nearly 1,600 terawatt hours,

driven by an estimated fivefold increase in GDP coupled with a doubling in population ) with 29

the lowest possible cost option, broken down on a regional level, the McKinsey research

estimated the following optimal distribution of renewable energy sources:

28 Borenstein, Severin. "The Private and Public Economics of Renewable Electricity Generation." (2011): n. p70. Web. 29 Castellano, Antonio. Brighter Africa: The Growth Potential of the Sub­Saharan Electricity Sector. McKinsey, 2015.

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Figure 11: Optimal breakdown of energy source, by region Source: McKinsey & Company, 2015

Interestingly enough, if each region were to produce enough electricity to meet the

expected increase in demand, renewables would only account for 26% of all electricity

production in 2040. When considering the idea that costs can be minimized based on a region’s

natural resources, we believe the McKinsey model provides an accurate depiction of what future

electricity production could potentially look like in Africa. However, given Africa’s lack of

infrastructure, specifically in the Western and Eastern regions of Africa, we believe the model

overestimates the role of natural gas in the future when considering the high costs of extending

centralized electricity to these regions. Furthermore, the question remains how each region in

Africa will fund these electricity production expenditures going forward.

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Minimizing Marginal Costs

In order to achieve the maximum rate of electricity penetration, Africa must minimize the

cost of electricity it produces. After discussing the obvious demand for electricity as well as the

role of a region’s natural resources as an obvious supply curve constraint, we examine the

government’s role in minimizing production costs, as well as the crucial distinction between

centralized and decentralized electricity.

Role of the Government

Overall, in order for Africa to achieve sustainable electricity production that keeps pace

with the continent’s rapidly expanding demand, national governments need to work in unison to

efficiently manage the continent’s natural resources and minimize production costs. As

Deichmann states, electric power systems have three basic components: “generation,

transmission, and distribution” . Although the availability of natural resources is a large 30

component of the supply curve, how governments manage the three basic components of electric

power systems will determine the long­term electrification rate. It is ultimately the job of

sub­Saharan government officials to reduce negative externalities associated with inefficient

power generation, as well as cultivate a transparent regulatory environment that encourages

foreign investment. In Smail Khennas’ publication in Energy Policy (2012), he describes the

importance of substitutive policies to maintain a healthy power supply . For example, countries 31

should promote plantation development in regions of high rainfall to keep cost of biomass

production low, and enforce substitution policies to promote cleaner electricity use in urban areas

30 Deichmann et al 219 31 Khennas, Smail. "Understanding the Political Economy and Key Drivers of Energy Access in

Addressing National Energy Priorities and Policies: African Perspective." Energy Policy 37 (2012): 21­26. Web.

24

with higher purchasing power. Tariff minimization is another key reform that all African

governments should enforce to keep electricity costs equivalent to the true cost of production As 32

we will see later on, foreign investment is essential to expanding Africa’s electricity capacity and

the high tariffs on electricity limit potential rate of returns to foreign investors. Above all,

African nation’s need to improve the current state of the political economy. Civil war and

corruption are severe inhibitors to any countries prospects for development, as they increase the

risk associated with investment.

Centralized vs. Decentralized

Deichmann’s analysis of centralized and decentralized methods of electricity distribution

reveals the complexity of cost minimization. From a government’s perspective, there are several

tradeoffs to consider when determining the most efficient source of electricity generation. As

previously discussed, the supply of natural resources has a significant influence on the cost of

delivering electricity. Beyond natural resource constraints, a government must consider

environmental impacts as well as future operational costs of any proposed electricity project.

Given the wide range of factors influencing both the supply and demand for electricity, cost

minimization strategies are ideal in theory, but often difficult to achieve in practice.

Zvoleff et al. emphasis on a region’s population density is one of the more compelling

arguments for how to provide electricity at the lowest possible cost. Whereas McKinsey’s model

primarily focused on the availability of natural resources, Zvoleff et al. bring to light the

importance of population density as a crucial cost determinant. The researchers argued the

32 Castellano, Antonio. Brighter Africa: The Growth Potential of the Sub­Saharan Electricity Sector. McKinsey, 2015.

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marginal cost is greatly increasing in distance from the grid source, which solidifies the

argument for extending the grid in areas of high population density. Although centralized energy

sources require greater upfront investment, the marginal and future operational costs are

significantly less, especially when applied to areas with higher population density. Both

Diechmann’s and Zvoleff’s models demonstrate that an optimal balance of decentralized and

centralized power sources is necessary to minimize Africa’s electricity costs and maximize

penetration. Additionally, Khennas argues that small­scale, subsidized energy projects have

contributed marginally to Africa’s electricity problem. He claims, “high transaction costs of

small­scale projects, the lack of long­term strategy and the size of the financing limited to the

basic energy needs which is insufficient to trigger a real local development” as to why

decentralized electricity projects in rural communities have not necessarily had the positive

alleviation of poverty on sub­Saharan communities.

Raising Capital

The cost of expanding the grid capacity to accommodate all 48 sub­Saharan African

nations is tremendous, with some estimates as high as $490 billion in required capital 33

expenditures. In order for a transformation of this scale to materialize, it will require strategic

investment from public and private investors abroad with a long­term vision of providing

sustainable energy.

33 Castellano, Antonio. Brighter Africa: The Growth Potential of the Sub­Saharan Electricity Sector. McKinsey, 2015.

26

Economics of Privatization:

As shown by Bacon and Besant­Jones (2002) , the privatization of the power sector can 34

have profound economic benefits on an economy. Privatization of the electricity market greatly

improves sector performance largely through the introduction of price competition. In adding

additional producers to the market, it relieves the monopolistic power previously held by the

government and increases the quality of the electricity sources supplied. Ideally, the government

recognizes the economic benefits associated with privatization, and focuses on implementing

sound regulation to preserve the health of the market. As Bacon and Besant­Jones note, many

sub­Saharan governments remain reluctant to relinquish control to private foreign investors,

which has severely impeded their development.

Private Equity Investing:

The World Bank’s Laura Gomez­Mera and Gonzalo Varela suggest a sustained

investment in infrastructure, specifically related to Africa’s transport and communication sector

would encourage foreign investment in the energy sector. In a recent article published by The

Guardian, they note, “Our analysis shows that firms that invest in Africa tend to be

trade­dependent, and that for these firms to better tap into the potential of regional and domestic

markets, they need the right transport and logistics infrastructure to reduce trade costs” . The 35

increased demand for Africa’s natural resources from foreign nations has lead to an increase in

foreign direct investment into Africa on a global scale. As African economies evolve and global

34 Bacon, R.W., and J. Besant­Jones. "Global Electric Power Reform, Privatization and Liberalization of the Electric Power Industry in Developing Countries." Energy & Mining Sector Board Discussion Paper Series 2 (2002): 1­24. Web.

35 Anyangwe, Eliza. "How to Attract Billions to Fund Africa’s Energy Sector." The Guardian, 9 Dec. 2014. Web.

27

markets recover from the financial crisis of ’07­‘08, both public and private investors have

become increasingly interested in taking a stake in the continent’s energy development. In fact,

the European Investment Bank (EIB) recently paired with several private investment fund

including Paris­based Astor Capital partners. The blend of investors plans to invest E55m in

approximately 20 businesses over the course of 5 years Although this effort will undoubtedly 36

provide relief for a projected 1 million people in East Africa, the investment in decentralized

energy sources has a miniscule impact on the state of electricity across the continent.

Figure 12: Influx of private equity transactions by region Source: The Economist

There is an obvious upward trend of capital flowing into Africa’s economy from private

investors, however a very low proportion of investment is devoted towards public infrastructure.

Many foreign investment funds target promising businesses over long­term infrastructure

36 Fox, Benjamin. "EU Unveils Private Equity Fund to Invest in African Energy." EU Unveils Private Equity Fund to Invest in African Energy. Euobserver, 24 Apr. 2015. Web. 29 Nov. 2015.

28

endeavors capable of providing sustainable energy. Not to mention, nearly half the funds flowing

into Africa are aimed at either Nigeria or South Africa, which represents a very small portion of

the African nations in need of electricity . Private equity is by no means a source of funding to 37

rely upon for all of Africa’s future capital expenditures. In fact, private equity investors are

generally hesitant to invest in Africa’s energy sector due to its high weighted average cost of

capital (WACC), of 15%­20% , which is nearly double that of comparable emerging market 38

investments. The high discount rate across the continent is largely attributed to the continued

instances of violence and corrupts governments. Furthermore, local business owners are often

reluctant to relinquish control only to have investor relinquish his or her stake at the end of the

holding period . This makes the market for private sector energy projects relatively illiquid, 39

preventing investors from entering the market, as well as finding a buyer at the end of their

holding period.

In the long run, funding for Africa’s infrastructure projects and private energy

projects will need to originate from private investors as well as an increase in public spending by

African national governments. Currently, less than 0.5% of GDP is devoted for public

investment in the African energy sector . Interestingly enough, many African governments 40

appear to have the necessary funds for infrastructure investment, yet Dipo Salimonu, an adviser

to national oil companies and chief executive of a resource logistics company Moteriba, claims

“Sub­Saharan African countries keep billions of dollars in foreign reserves and this creates a

37 Delevingne, Lawrence. "Private Investors Pile into Africa." CNBC. CNBC, 17 Mar. 2015. Web. 38 Renewable Power Generation Costs in 2014. Rep. N.p.: IRENA, 2015. Print. 39 "A Sub­Saharan Scramble." Economist 24 Jan. 2015: n. pag. The Economist, 24 Jan. 2015. Web. 40 (Youba Sokono)

29

perverse irony: that the poorest continent in the world is investing its money in the richest

regions of the world” 41

Procedure: Further Review of Cost Estimation:

We found the procedure used by Diechmann et al. (2010) to be an appropriate method of

estimating the costs of supplying power to a given underdeveloped Sub­Saharan African country.

Their procedure compared the costs of centralized grid systems and decentralized stand­alone

sources for an indicated level of supply, using an investment scheme that supplies regions

successively until 100% of households within an entire country are supplied.

For centralized power, the estimates of Diechmann et al. were based on the nature of the

current carbonized fuel mix and assumed the need to extend transmission lines to all populated

areas of the country.

The supply costs of decentralized alternatives were estimated both for full

decentralization in which electricity is generated by each household independently, and for

“minigrid” systems where hundreds of households are powered by a single source. Among the

fuel sources to be used in decentralized power generation considered by Diechmann et al. were

fossil fuels (in this case, diesel generators) and renewable sources (in particular, solar and wind).

The important economic phenomena to be considered alongside the competitive cost

estimates include (1) the optimal geographic boundary within countries where the supply source

would change (and how this boundary would move geographically with the adoption of

41 Anyangwe, Eliza. "How to Attract Billions to Fund Africa’s Energy Sector." The Guardian, 9 Dec. 2014. Web.

30

“minigrids”), and (2) how supply options may become more or less dynamic given shifts in

relative cost associated with technological advances and trending policies.

The cost estimation and economic evaluation will be done by observing case studies

performed by encyclopedic sources and authors better equipped than ourselves. Analyses of 42

Ethiopia, Ghana, and Kenya (executed primarily by Diechmann et al.) will be used to generalize

the Sub­Saharan region. The scheduled procedure will thus advance as follows:

1. An account of simplified household electricity demand to be used in cost analysis.

2. The cost estimation of centralized grid supply.

3. The cost estimation of both fully decentralized supply sources and “minigrid” sources.

4. A comparative analysis.

We will then proceed to discuss our results in the context of applicability and future

costs. We will also introduce the possibility (and associated economics) of decarbonized fuel and

submit a suggested list of political maneuvers that can be initiated to more rapidly increase

large­scale investment.

Demand for Electricity by Households:

Under the current model of electricity distribution, Africa’s rapid population growth will

greatly exacerbate the already dismal rates of electrification in many sub­Saharan nations. A

recent case study of the engineering feasibility in Kenya (KMOE, 2008) assumes, by

simplification, that electrically connected households consume an average fixed quantity of 120

42 KMOE (Kenya Ministry of Energy), 2008. Updating of the Rural Electrification Master Plan, vol. 1, prepared by DECON and Re­Engineering Africa Consortium for the Ministry of Energy of Kenya and Ministry of Foreign Affairs of Finland and Nairobi.

31

kWh/month. We consider such a figure an intense simplification, knowing that the demand for

electricity will increase with level of wealth but will also reach a maximum level, depending on

the capacity of the supply source. The analysis of Diechmann et al. (2010), to which we adhere,

is concerned with the minimum level of demand that will satisfy a household’s needs, and not in

changes in demand associated with wealth or other factors. We will therefore use the demand

figures of the feasibility study in order to maximize living standards for the average household

(inclusive of both supply sources).

We use data gathered by KMOE (2008) from spatially diverse points to represent

electricity demand over an entire region. We mimic the demand modeling techniques of

Diechmann et al.; where (1) we assume that that the entire population lives in settlements, (2)

divide the settlement population by the average household size provided by (ORNL, 2008), and

(3) multiply by the simplified average fixed quantity used by KMOE of 120 kWh/month. The

accompanying cost to the calculated demand will be that of providing electricity to 100% of

households within the given region. As Diechmann et al. acknowledge, this is not a realistic

goal of local governments or prospective investors in any measurable time frame. As illustrated

above, recent electrification goals have been far more conservative. A United Nations estimate

(UN­EN/AF, 2007) suggests that an annual investment of $4 billion into the energy sector would

supply roughly half of households with electricity in Sub­Saharan Africa by 2030.

Applicability, Future Costs, and Conclusions:

32

Our investigation into the possibility of large­scale energy supply by decentralized

sources in severely underdeveloped areas has arrived at the unequivocal solution that such a

manner of supply is economically inefficient in Sub­Saharan Africa. Indeed, we have observed

the low incremental costs of increasing the number of connected consumers within reasonable

range of large power grids. To alleviate the problem (in terms of number of individuals without

electricity) most effectively, limiting the area of focus to highly populated urban settlements has

been shown to be the most sensible resolution, in both short and medium­term perspective.

However, as Diechmann et al. rightfully suggest, the importance of decentralized power

becomes evident when attempting to approach the goal of 100% electrification, as we consider

the cost of centralized grid extension into more rural settlements in which wind and solar power

can be more effectively distributed from decentralized sources (from both independent and

“minigrid” systems). Thus, for households within these regions, decentralized power represents

the more cost­efficient means of electrification. Such a phenomenon is illustrated through our

examination of Ethiopia.

And yet, given the expected unit costs and technical advancements to be made within the

next 20 years, we revert to the conclusion that centralized grid supply is the less expensive

solution if the objective is to power the highest possible number of households. The key in this

case is growth potential, as illustrated in the table below. While the levelized costs of wind and

solar PV energy are shown by Diechmann et al. to be relatively low, the potential of each source

to reach a large number of households in the next 20 years is extremely limited. And,

additionally, current incentive programs associated with renewable energy investment and taxes

33

that at present (or will in the future) accompany carbon emissions do not, according to

Diechmann et al., represent an amount that is significant enough to favor decentralization.

Figure 6: Estimates of global energy production capacity growth. Diechmann et al., 2010.

A key element to our analysis of potential electrification agenda in this particular region

is the notion that the population of Africa will continue to increase in concentration, making 43

Diechmann et al.’s model and findings even more compelling.

It is possible that the reality of the relative advantage associated with the choice of

expanded centralized power supply systems will encourage Sub­Saharan African governments to

participate in what’s known as a “global carbon tax system,” which would preclude the use of

decarbonized fuel in power production by causing the internalization of energy investment and

consumption choices, and thus yield a decrease the net cost of renewable energy supply in the

medium and long term. While there is no “silver bullet” technology at competitive, reasonable 44

costs that is capable of decarbonizing energy from gridded plants that can be used immediately

43 World Bank, 2009. World Development Report 2009. Reshaping Economic Geography. World Bank, Washington, DC.

44 Nordhaus, William, 2007b. The Challenge of Global Warming: Economic Models and Environmental Policy. Department of Economics, Yale University July 24.

34

in Sub­Saharan Africa, we acknowledge the potential for the acceleration (and associated

decrease in cost) of the following renewable energy supply processes: 45

Figure 7: High­potential Technologies to Accelerate. World Economic Forum (2015)

Furthermore, we recommend the following measures to accelerate renewable energy

development:

1. Increased participation in the “global carbon tax system”, where the singular price of carbon

shall be set at a level that will have a measurable impact on energy investment decisions

globally.

45 Table inserted from: "Scaling Technologies to Decarbonize Energy." World Economic Forum October 2015 (2015). Web. 10 Nov. 2015.

35

2. Stimulation of investment by government sponsorship of energy innovation programs,

allowing for international collaboration in what becomes a stimulated market (as well as the

enabling of such a market through facilitation of trade).

3. Concerted effort in consumer awareness and behavioral risk.

4. Betterment of grid infrastructure to decrease power outage instance rates.

We believe that these four approaches (as articulated in WEF, 2015), if practiced

forcefully and in conjunction with ever­changing technological innovation, have the potential to

enable massive change across Sub­Saharan Africa; and even perhaps negate our conclusion that

the expansion of centralized grid supply is a more economically feasible solution than the

development and construction of “trendy” decentralized systems.

36