energy poverty 39 - ofid

39ENERGY POVERTY IN AFRICAProceedings of a Workshop held by OFID in Abuja, Nigeria

June 8 –10, 2008

O F I D P A M P H L E T S E R I E S

ENERGY POVERTY IN AFRICAProceedings of a Workshop held by OFID in Abuja, NigeriaJune 8–10, 2008

The OPEC Fund for International Development (OFID)Parkring 8, A-1010 Vienna, AustriaP.O. Box 995, A-1011 Vienna, AustriaTelephone: (+43-1) 515 64-0, Fax: (+43-1) 513-92-38Internet: www.of id.orgEmail: info@of id.org

Cover photo: Doug James/ShutterstockDesign: etage.cc, Vienna, AustriaPrinting: Druckerei Odysseus, Himberg, Austria

The “OFID Pamphlet Series” was begun in 1977, a year after the establishmentof OFID. The series is meant to promote a better understanding of the aspira-tions and problems of developing countries, including OPEC Member States.

OFID is the multilateral development finance institution established by the Member States of OPEC in 1976 to promote South-South solidarity andstrengthen cooperation between countries of the developing world.

The opinions expressed in this pamphlet are those of the authors and shouldnot be construed as necessarily representing either the view of OFID or its mem-ber countries.

ENERGY POVERTY IN AFRICA

Proceedings of a Workshop held by OFID in Abuja, Nigeria

June 8 –10, 2008

O F I D PA M P H L E T S E R I E S 3 9Vienna, AustriaOctober 2010

O F I D P A M P H L E T S E R I E S

4 OFID PAMPHLET SERIES 39

Unless otherwise stated “dollars” ($) refers to United States dollars.“Billion” means a thousand million.

Maps are for illustration purposes only and are not to be taken as accurate representations of borders.

This publication is also available in PDF format on the OFID website at www.ofid.org

OFID PAMPHLET SERIES 39 5

Contents

Foreword of the Director-General of OFID 13

I. Introduction and Overview 17Akin Iwayemi

II. Energy Poverty in Africa 39Suleiman J. Al-Herbish

III. Regional Integration of Power Systems: 49A Tool for Reducing Energy Poverty and Accelerating Economic GrowthRoger M. Gaillard

IV. Powering Industrial Growth: 57The Challenge of Energy Security for AfricaPradeep Monga

V. Energy Access in Rural Areas 105Phil U. Chineyemba

VI. Expanding Energy Access through 121Sustainable Energy Enterprises in Africa: Financing, Capacity-building and Policy AspectsLawrence Agbemabiese

VII. Africa’s Power Supply Crisis: Unraveling the Paradoxes 139Waqar Haider

VIII. Why Africa Lags Behind in the Energy Sector 169Steve Olumuyiwa

IX. Promotion of Public-Private Partnership 185to Improve Energy Access for Poverty Reduction and Growth in Sub-Saharan AfricaAdeola Adenikinju

X. Energy and Poverty in Sub-Saharan African Economies: 209Supply-side IssuesAkin Iwayemi

List of Tables, Figures and Boxes 6Acronyms and Abbreviations 238About the authors 240

II. Energy Poverty in Africa

Tables:

1 World energy production 42

2 Energy use per capita 42

3 Electricity production 46

4 Sectoral distribution of OFID's financing 47

Boxes:

1 OFID and the energy sector 41

2 Trade revenue and energy budgets 45

III. Regional Integration of Power Systems: A Tool for Reducing Energy Poverty and Accelerating Economic Growth

Figures

1 Electricity consumption / population (kWh per capita) 51

2 Activities and operations of AfDB diversified across all regions and critical sectors (in percent) 53

IV. Powering Industrial Growth: The Challenge of Energy Security for Africa

Tables:

1 World primary energy demand, 2005, 2015 and 2030 61

2 Basic energy indicators for country groups 63

3 African oil and gas reserves as of end 2005 67

4 Industrial energy intensity by country groups, 1990 and 2002 70

5 Heat shares in industrial energy use 74

6 Temperature ranges for industrial processes 75

7 African electrification rates, 2005 77

8 Electricity outages of firms in Africa 78

9 Basic patterns of energy consumption in East African Community (EAC) Countries 78

10 Energy access targets agreed by African ministers for 2015 82

List of Tables, Figures and Boxes


11 Investment requirements for increasing access to modern energy services in sub-Saharan Africa 83

12 Size of African power sector 91

13 Selected African countries’ restructuring profile 92

Figures:

1 Relationships between energy and achievement of the MDGs 59

2 Regional energy production in Africa, 2005 65

3 African energy consumption fuel shares, 1971 and 2005 66

4 Sustainable development impacts of increased energy efficiency 69

5 African electricity intensity, energy intensity and energy production intensity 70

6 Self-generation shares in African enterprises 89

Boxes:

1 Biofuels activities in Africa 76

2 Jatropha for biodiesel production in Africa 77

3 Access to thermal energy and mechanical power for productive uses in Africa 79

4 Integrating energy access into national strategies: Mali, Rwanda, Senegal 80

5 ECOWAS/UEMOA White Paper on Energy Access 81

6 CEMAC Action Plan 82

7 Hydro-power construction in Africa 96

8 India-Brazil-South Africa Declaration on Clean Energy 96

V. Energy Access in Rural Areas

Figures:

1 Energy consumption in Africa in percent in 2001 106

2 The vicious circle of energy poverty 109

3 A virtuous circle to break out of energy poverty 110

4 Implementational flow of market-based models 115

5 Concession and rental approach of market-based models 115

6 Government-led model in China – financial flow 116


VI. Expanding Energy Access through Sustainable Energy Enterprises in Africa: Financing, Capacity-building and Policy Aspects

Boxes:

1 Vent et Eau pour la Vie (VEV) in Senegal 124

2 SODIGAZ: Butane gas distribution in Mali 124

3 Biomass Energy Tanzania Limited (BETL) 124

4 AREED Investments 2000–06 125

5 Amount financed by AREED and annual repayments 126

6 AREED loans and repayments in Ghana 129

7 AREED loans and repayments in Tanzania 130

8 Terms of AREED loans in Ghana 132

VII. Africa’s Power Supply Crisis: Unraveling the Paradoxes

Tables:

2.1 Emergency power generation in SSA 145

2.2 Private participation power-sector transactions in SSA (review basic information) 153

2.3 Power-sector expenditure 157

2.4 Annualized power-sector expenditure requirements to 2015 159

Figures:

1.1 Evolution of power infrastructure in SSA relative to other regions 140

1.2 Electricity prices and consumption in Africa relative to other regions 141

2.1 Countries affected by acute power-sector crises in recent years 143

2.2 Drivers of operating costs for SSA power systems 147

2.3 Electricity costs and revenues by type of power system 149

2.4 Average power-sector revenue and various cost benchmarks 149

2.5 Electricity service coverage in SSA 150

2.6 Electricity service expenditure in SSA 151

2.7 Evaluation of power-sector reform 152

2.8 SOE governance characteristics 154

2.9 Frequency distribution of power-sector efficiency indicators 155



2.10 Hidden costs of power-sector inefficiency 156

2.11 Long-term trends in external finance for the SSA power sector 158

Boxes:

1 Introducing the Africa Infrastructure Country Diagnostic 141

2 Regional and economic effects of South Africa’s power-supply crisis 144

VIII. Why Africa Lags Behind in the Energy Sector

Tables:

1 World demographic and total energy consumption indicators: selected indicators for 2005 173

2 Selected world electrical power production statistics 174

3 Selected world energy and environment indicators 175

Figures:

1 Total primary energy supply

The world in 1973 and 2005: regional shares of total primary energy supply 170

2 1973 and 2005 regional shares of electricity generation 172

3 Location of the Inga Hydro Power Project 181

IX. Promotion of Public-Private Partnership to Improve Energy Accessfor Poverty Reduction and Growth in Sub-Saharan Africa

Tables:

1 Electrification rates by region 188

2 Electrification trend in selected countries in SSA 190

3A International initiatives to get energy to the poor 194

3B African regional initiatives to get energy to the poor 196

4 Sources of resources and allocation of risks under various PPP options 200

5 Types of government guarantees 201

6 Examples of off-grid power plant technologies 203

7 Possible IPP outcomes 204


Figures:

1 Energy access and poverty links 185

2 Electrification rate in various regions (2002) 187

3 Regional comparison of rural population access to electricity 189

4 Access to electricity for upper income households among selected countries in SSA 189

5 Income distribution of access to electricity in selected countries in SSA 190

6 Dependence on biomass fuels 191

7 Impact of reforms on the pace of electrification of the poor 192

8 Private investment in power generation in developing countries 198

X. Energy and Poverty in Sub-Saharan African Economies: Supply-side Issues

Tables:

1 Key socio-economic development indicators in Africa 214

2 Per capita energy and income for selected developed and African countries 216

3 Electric power consumption (kWh per capita) in African countries 1970–2001 219

4 Electric power transmission and distribution losses (percent of output) in African countries 1970–2001 220

5 Energy imports (percentage of commercial energy use) in African countries 1970–2001 223

6 Share of fuel in merchandise imports 2000–04 224

7 Biomass energy consumption (percent of total energy) in African countries for selected years 1970–2001 225

8 Energy resources in Africa 227

Figures:

1 Africa’s share in world oil production 1965–2005 217

2 Africa’s share in world oil consumption 1965–2005 217

3 Access to electricity in selected countries in Africa 222

4 Interlocking issues in sustainable energy supply in SSA 226




Foreword

In November 2007, in Riyadh, Kingdom of Saudi Arabia, the Heads of Stateand Government of OPEC Member Countries, meeting in a Third OPEC Sum-mit, issued a Riyadh Declaration, which, among other issues, “recognized thatenergy was essential for poverty eradication and sustainable development.”The Declaration pledged that Member Countries “would continue to alignthe programs of [their] aid institutions, including those of OFID, with theobjective of achieving sustainable development and the eradication of energypoverty in the developing countries, and study ways and means of enhancingthis endeavor, in association with the energy industry and other financialinstitutions.”

This was a charge to all aid institutions of Member Countries, includ-ing OFID, to pay greater attention to energy as a vital element in the develop-ment process. OFID was quick to take up the assignment, moving to accordrenewed attention to energy projects and programs. In early June 2008, inkeeping with the spirit of the Riyadh Declaration, OFID organized an EnergyWorkshop in Nigeria’s capital city of Abuja.

The Abuja Workshop certainly met our expectations. Almost all thecountries and institutions invited were able to attend. And the quality of thepapers presented was very high. Among the invited were such leading insti-tutions and corporations as the World Bank, the African Development Bank,the Arab Bank for Economic Development in Africa, the Chevron Corpora-tion, ExxonMobil, International Energy Forum and the United NationsIndustrial Development Organization.

Yet others included the Islamic Development Bank, the Organization ofArab Petroleum Exporting Countries, the Power Holding Company of NigeriaPlc., the Saudi Fund for Development, Schlumberger Ltd., the United NationsEnvironment Program, the West African Power Pool, the World Energy Coun-cil, the OPEC Secretariat, the UK Department for International Developmentand Japan’s International Cooperation Agency.


Energy poverty in Africa calls for priority attention from the internationalcommunity. Indeed, the region’s energy needs are huge, particularly in sub-Saharan Africa, which has the lowest rate of electrification in the world – lessthan 30 percent, according to the UNDP Human Development Report2007/2008. This rate is all the more unacceptable, when one realizes that theestimated population of sub-Saharan Africa is 16 percent of the world total.The sub-region depends largely on inefficient traditional biomass, usedmainly for cooking and water-heating in households. Traditional biomassaccounts for over 80 percent of primary energy demand. These sources ofenergy (firewood, charcoal and animal dung, for instance) burn inefficientlyand give off noxious fumes, which can cause serious respiratory disease andeven death. The surrounding environment is also degraded, through thedepletion of forest resources.

Clearly, energy poverty has diminished Africa’s productive capacity.And as a continent, Africa itself has been discussing the issue. Thus, the con-tributions of OFID’s Abuja Workshop were only additional to what Africaitself had been undertaking and what Africa’s friends – amongst whom OFIDcounts itself – need to be doing. Indeed, the primary purpose of the AbujaWorkshop was to draw government and industry and international organiza-tions together to consider ways of adding value to what Africa, as a continent,has itself been doing to address this problem. The workshop sought to unitestrengths and resources among participating agencies and corporationsbehind Africa’s own committed search for energy sufficiency.

Two years on (June 2010), the issue of energy poverty has moved rightup the international development agenda. Its eradication is now being widelyreferred to as the Ninth Millennium Development Goal. Indeed, it was also inJune 2008 – the month of the Abuja Workshop – that a global Energy for thePoor Initiative was announced at the Jeddah Energy Summit, the objectivebeing to help developing countries access modern energy services. A call wasmade by King Abdullah of Saudi Arabia on the World Bank to organize adonors’ and development institutions’ meeting to develop a framework forthe Initiative. In addition, the King called for OFID’s Ministerial Council toconsider a parallel program with an allocation of $1 billion. This Initiative hasgrown and has drawn support from many other international institutions andgovernments. OFID is participating strongly in the Initiative, which will formthe central pillar of its lending program over the period 2011–2013.

Abuja was a seminal event in the annals of OFID. We managed to gathertogether a number of leading scientists, economists and ranking state officials


to examine the energy equation. The following papers recall much of theatmosphere and discussions at the Workshop. The papers are here assembledfor historical record and education. I should, one more time, express OFID’sgratitude to the writers, the editors and all who were involved in the Work-shop. A special note of appreciation also goes to the Federal Nigerian govern-ment and, indeed, the nation of Nigeria, for years of unbroken support to thisinstitution. At Abuja, I conveyed OFID’s gratitude to Nigeria for Nigeria’s con-tinuing contributions to the institution. Nigeria was there at the very begin-ning, and has remained a Member State in good standing. We certainly lookforward to many more years of Nigeria playing a key role in OFID.

Suleiman J. Al-Herbish

Director-General


IIntroduction and Overview

Akin Iwayemi

Africa is well endowed with renewable and non-renewable energy resourcesthat far exceed its energy demand requirements for the next century. But para-doxically, most African countries are characterized by energy poverty and poorenergy access, a reflection of their low income and general state of economicunderdevelopment. Identification of the challenges of the paradox of energypoverty amidst plenty in most African countries, and their effective and effi-cient solution, have been a subject of recent debate. The dearth of analysis ofAfrica’s energy problems reflects the minimal attention given to the issue byenergy experts despite the central role of energy in economic growth, risingemployment opportunities, improved living standards, poverty alleviation, andthe overall development process.

Historically, expanded energy access, propelled by relatively inexpensiveenergy supply, played a major role in the large gains in productivity and rapideconomic growth and significant reduction in poverty witnessed in the worldeconomy in the last century. It is conventional wisdom that increased use ofmodern energy services per capita is an integral part of higher and sustainedeconomic growth and significant improvement in living standards in lowincome developing countries. Arguably, expanded access to adequate, reliable,efficient, secure, environmentally responsive and affordable energy is a key element in Africa’s quest to achieve sustained economic growth. Other vital elements are significant poverty reduction, substantial improvement in livingstandards and achievement of the Millennium Development Goals (MDGs).

The context for realizing the central goal of achieving expanded energyaccess and minimizing energy poverty, which will translate to substantiallyhigher and more efficient per capita energy consumption in the shortest timepossible, is defined by the following stylized facts:

• Africa is well endowed with energy resources, including oil andgas, yet most African countries are energy-poor and have lowenergy access;


• Significant energy demand-supply gaps exist, the most acutebeing in electric power;

• Domestic energy prices are high compared to most other devel-oping countries;

• Contrasting demand and supply paths in the region reflectdiverse initial economic and social conditions and energyresource endowment;

• Supply-demand balances reveal significant differences at sub-regional and country levels;

• Capacity utilization is low, resulting in significant dependenceon expensive imports of petroleum products and unreliable andpoor quality of electricity supply;

• Poor regional and intra-regional energy infrastructure linkageshave exacerbated the cost of domestic supplies especially inlandlocked countries;

• The problem of access is more pronounced in rural areas of Africawhere the majority of the population lives. The problem ofenergy and income poverty is also more acute in the rural areas;

• The relatively weak state of economic and social conditions inmost economies in the region, which is the world’s poorest, fol-lows almost two decades of poor economic performance anddeepening poverty.

Furthermore, global energy market developments and the countervail-ing policies of major energy importing and exporting countries have broughtthe era of inexpensive energy to an end. These external developments havemade the challenges facing expanded energy access and the elimination ofenergy poverty in Africa more overwhelming. Arguably, the sharp increase inworld energy market prices since 1999 has made Africa’s drive to achieveaffordable and expanded access to energy and sustainable development, asembodied in the MDGs more challenging. For example, higher prices havepushed access to refined petroleum products beyond the reach of hundreds ofmillions of low-income households, especially in rural areas. This and otherdevelopments associated with structural adjustment and related economicreform measures have reversed the meager improvement in living standardsand economic well-being in the post-adjustment period. With low income andhigher fuel prices, the result has been increased recourse to biomass fuels with


Itheir obvious environmental consequences. There is general agreement thatthe adverse effects of higher world energy prices on domestic energy supply,access, economic growth and sustainable development, have been more severein Africa than elsewhere. Poor access to modern energy services constitutes amajor constraint on the exploitation of economic opportunities, sustained eco-nomic growth and the achievement of higher living standards in the continent.

Against the foregoing factors, several questions demand inquiry in thesearch for a solution to the problem of achieving expanded access to affordableenergy and the elimination of energy poverty. Among the questions are: Whatdo we know and what have we learnt about the trends and characteristics ofenergy supply and demand in African countries? What are the main character-istics of energy poverty? What are the causal factors in Africa’s energy poverty?What are the conditions and requirements for achieving the much-desiredobjectives of expanded energy supply and access, as well as the elimination ofenergy poverty? How can supply capacity be increased in the context of sustain-able energy and human development future? What are the economic, political,social, legal, technical, human resource and environmental challenges to a reli-able, adequate and affordable energy supply to meet the continent’s energyneeds for economic growth and sustainable development? What are the energysecurity issues in the region and how should they be addressed? What are thecost implications of the required wide energy access and the elimination ofenergy poverty and insecurity? What are the policy and institutional require-ments for overcoming the region’s protracted energy and income poverty andfor the establishment of an efficient, reliable and sustainable energy supply?

In sum, can Africa achieve the vast expansion in supply of modern energyservices, the expanded energy access of the population in both urban andrural areas and the elimination of energy poverty that could drive its sustain-able energy future plan given the multi-dimensional challenges describedabove? At the regional level, the energy demand-supply balance situation pro-vides some room for optimism given that substantially higher energy con-sumption can be met through regional supplies with ample surplus forexport, considering the region’s total energy resource endowment. Despitethis seemingly optimistic outlook, the country and sub-regional realitiesreveal multi-dimensional issues and challenges confronting expanded energyaccess and the elimination of energy poverty. These challenges, which haveboth short and long-term dimensions, encompass economic, political, social,technological, institutional, legal and organizational facets. The consensus is that much will depend on the design and implementation of appropriatepolicy strategies. These will involve among others: the deepening of current


economic, social and political reforms; the alignment of economic and energydevelopment policies at the country and sub-regional and regional levels;intensified integration efforts to create dynamic inter and intra-regional mar-kets for goods, including energy, underpinned by openness that minimizestransaction costs in domestic, sub-regional and regional energy markets;defined roles for key actors in the region such as: the African Union (AU); theUnited Nations Development Program (UNDP); the African DevelopmentBank (AfDB) and other Development Financial Institutions (DFIs), such as thethe OPEC Fund for International Development (OFID); the World Bank; theEuropean Union (EU) and other development stakeholders. Perhaps the mostimportant factor is long-term credible regional and sub-regional political com-mitment to a sustainable energy vision anchored on the emergence of efficientenergy markets. Finally, what is required is a paradigm shift in energy sectordevelopment and management from rigid public ownership and control, to amore market responsive private enterprise-led sector guided by an appropriateinstitutional and legal framework.

The prime challenge of the first half of the 21st century for Africa is thedevelopment and efficient management of the continent’s energy wealth.This would serve as a strong anchor for achieving sustainable economic free-dom and livelihoods in an environment currently defined by energy poverty,energy-induced environmental degradation, low living standards, large-scaleunemployment and social conflicts, albeit diminishing in number and scale.However, the alternatives are few, considering the current developmentdivide that Africa has to bridge. The nature and content of the responses tothe policy challenges will largely shape the energy and economic future ofsub-Saharan Africa (SSA).

This book of proceedings, which is based on the papers presented at theworkshop organized by OFID in Abuja in June 2008, is an important contribu-tion to the much-neglected issue of energy poverty in Africa. The workshopprovided a unique forum for diverse stakeholders involved in energy sectoractivities and the development process to illuminate several of the issues andquestions raised above. The participants, who came from a broad range ofbackgrounds including policy making, academic, professional, and energy anddevelopment practitioners from domestic and international organizations,offered important perspectives on the subject. These include energy poverty,energy access and the design and implementation of policies that will ensure a sustained and wider access of the population to modern energy services. In illuminating the contours of the complex issues associated with Africa’smulti-dimensional energy crises, this book of proceedings will not only help to


Ideepen our understanding of Africa’s energy issues and challenges, but also pro-vide useful policy insights and a framework for achieving sustainable energydevelopment that will facilitate the achievement of the MDGs.

The common theme that runs through this book and the workshop isthe identification of, and solutions to, the twin problems of energy povertyand expanded access to modern energy services in Africa. The book consistsof 10 chapters that follow the structure of the workshop sessions, namely:Introduction and Overview (Chapter 1); Energy Poverty in Africa (Chapter 2);Regional Integration of Power Systems: A Tool for Reducing Energy Povertyand Accelerating Economic Growth (Chapter 3); Powering Industrial Growth:The Challenge of Energy Security for Africa (Chapter 4); Energy Access inRural Areas (Chapter 5); Expanding Energy Access through SustainableEnergy Enterprises in Africa: Financing, Capacity-building and Policy Aspects(Chapter 6); Africa’s Power Supply Crisis: Unraveling the Paradoxes (Chapter7); Why Africa Lags Behind in the Energy Sector (Chapter 8); Promotion ofPublic-Private Partnership to Improve Energy Access for Poverty Reductionand Growth in Sub-Saharan Africa (Chapter 9); Energy and Poverty in Sub-Saharan African Economies: Supply-Side Issues (Chapter 10). They reflect the variety of issues and insights that emerged from the workshop. The dis-cussions cover key issues, challenges and constraints to the elimination ofenergy poverty and expanded energy access in both urban and rural areas.Also covered are solutions based on the sustainable exploitation and utiliza-tion of the region’s abundant, though unequally distributed, renewable andnon-renewable energy resources.

The conclusions that emerge from this book can be summarized as follows: First, energy development must be integrated into sustainable devel-opment in which a sustained improvement in the general well-being of thepeople and the enlargement of their economic and social choices are key ele-ments. Second, sustainable energy and economic future in Africa must bebased on the design and implementation of appropriate and harmonizedregional and national energy and economic policies. These should be backedup by adequate financial, technical and other support from the InternationalFinancial Institutions (IFIs) and the development community. Third is thestrengthening of energy institutional infrastructure, governance and account-ability to support the development and management of a robust energy sec-tor. Fourth is the creation and sustenance of an incentive-based competitivemarket system underpinned by market-responsive energy pricing that guaran-tees an adequate risk-adjusted rate of return for investors, but that also mini-mizes deadweight loss associated with market monopoly power. Fifth is the


establishment of a well-targeted support system (of which “smart subsidies”would be an element) to help the energy poor in both urban and rural areas.Sixth, there must be due cognizance of the need for technical and capacitybuilding requirement to support the drive for expanded supply and access tocleaner energy. Finally, there is a need to foster a strategic Public-Private Part-nership (PPP) to drive a new energy paradigm that encompasses the efficientuse of both renewable and non-renewable energy sources that will minimizecarbon emissions and climate change. What emerges forcefully from the work-shop and this book is the need for a paradigm shift in the development andmanagement of Africa’s energy sector backed up by policy continuity and cred-ibility in the sector’s reform process. In conclusion, most fundamental to theeffectiveness of a solution to the energy poverty and expanded access problemsis translating the ideas in this book to practice propelled by good governanceand political accountability.

In Chapter 1, “Introduction and Overview,” Iwayemi provides a concise sum-mary of each of the chapters, with focus on the key issues, challenges, oppor-tunities and policy matters concerning the two fundamental problems ofexpanded energy access and energy poverty at the continental, sub-regionaland country level in SSA. In this overview, the author highlights the key recom-mendations of the different chapters concerning how to overcome the twinproblems of rural and urban energy access and poverty reduction.

Chapter 2, “Energy Poverty in Africa,” is authored by OFID Director-General,Suleiman J. Al-Herbish. He sets the tone of the debate by taking an overview ofAfrica’s energy dilemma. He provides evidence to support the point that Africais the most energy poor and has poor energy access compared to other regionsof the world. The effect of low energy use and access is the region’s diminishedproductive capacity and lackluster economic performance. In addition, hepoints out the overdependence of the region on inefficient traditional biomassto meet its primary energy needs, which are mainly for domestic cooking andwater heating. He argues that the great challenge facing SSA economies is howto achieve the first objective of the MDGs, namely, to reduce by half the pro-portion of people living on less than a dollar a day and also to slash by half theproportion of people who suffer from hunger.

Al-Herbish further notes that the present crises in the energy sectorhave hindered SSA countries from achieving higher economic growth and liv-ing standards. He discusses OFID’s intervention in the energy sector, whichcomes in four forms, namely, direct project funding; technical assistance insupport of international and national institutions; funding the activities of


Imultinational agencies; and research grants for specific studies and investiga-tions and the operation of an energy account.

Al-Herbish argues for a re-ordering of priorities that would give energypoverty and expanded energy access higher priority if Africa is to achieve robusteconomic growth and sustainable development. He considers the challenges offinancing energy schemes given the quantum of investment required to findlong-term solutions to energy poverty and limited energy access, against thebackground of inadequate domestic and regional investment constraints. Theauthor proposes greater reliance on private investments, micro-financing, otherinnovative financing schemes and Foreign Direct Investment (FDI), in light ofthe poor funding of public energy sector projects. He also discusses the role gov-ernments should play in supporting sustainable energy poverty solutions byproviding the enabling environment for efficient market development. Al-Herbishfurther notes that the recent experience of countries that pursued crediblereform of the energy sector shows that market incentives and business innova-tion can provide new pathways for solving the seemingly intractable energyproblems in the region. Other measures include: the need to maximize entre-preneurship, transfer skills and build human capacity as well as encourage PPPs.The challenge here is to make clear policies and other measures that wouldincrease the funding of energy sector projects. He also acknowledges the needto integrate energy policies into broader development strategies in Africancountries, while at the same time encouraging regional integration.

Al-Herbish goes on to discuss the important issue of supply and end-useefficiency. The challenges of meeting energy requirements of rural areas are alsodiscussed. He then proposes further studies and investigation that wouldaddress the great challenge of how to supply electricity to the rural areas ofAfrica, given their peculiar characteristics such as low population density,remoteness from urban centers, limited income and the low ability of themajority of rural dwellers to pay economic prices, at least in the short term. Theauthor suggests that to guarantee the sustainability of rural energy projects,these should be packaged as viable enterprises capable of attracting private-sector intervention. Al-Herbish said OFID expects the workshop to assist in theformulation of a research and investigation agenda related to the various issuesthat were identified. Finally, he suggests that energy poverty issues should beincorporated into national planning processes.

In Chapter 3, “Regional Integration of Power Systems,” Gaillard argues for a regional approach to solving Africa’s protracted electricity crisis, based on the evidence that despite the continent’s abundant energy resources, many


countries are energy poor. This is because the energy markets, due to their smallsize, would not be sufficiently profitable to support the electrification of thesecountries. He therefore emphasizes the need for the energy-poor African coun-tries to pursue a regionally-based, rather than an individual country-basedapproach. He says, individually, the countries are unable to attract adequateinvestment for the development of their energy sectors. The author notes thatelectric interconnections are well established in most of the industrializedcountries, adding that such interconnections have produced more competitive,affordable and reliable energy services to end users. He observes that Africa isthe least interconnected region in the world in terms of electricity. Therefore,he continues, such electric interconnections are a sine qua non for better balanc-ing of energy supply and demand among countries with different energyresource endowment. Gaillard posits that regional and sub-regional energyintegration would facilitate the establishment of more efficient and reliableenergy supply to meet demand. He also advocates sub-regional and regionally-based interventions to eliminate the region’s electricity crisis integrationthrough construction of power generation plants and transmission lines. Hesays this would allow for the development of a transnational electricity marketwith the aim of reducing energy poverty and facilitating the conditions for better availability, accessibility and affordability of modern energy. Against thisbackground, he notes the numerous efforts of Regional Economic Communi-ties (RECs) and IFIs to support and encourage the establishment and operationof sub-regional and regional electric power pools. Other supported areas are thejoint development of hydro-power projects as well as cross-border transmissionlines and gas pipelines. He then describes the AfDB’s interventions, which focuson exporting electricity to neighboring countries. The aim, he says, is to exploitenergy resources where they are in abundance and make the electricity gener-ated from such resources available to energy-deficient countries throughenergy trade. He argues that such an approach would ensure much-desired suf-ficiency and greater reliability of electricity supply. These, he adds, are essentialto achieving the objectives of greater country, sub-regional and regional eco-nomic competitiveness, higher economic growth and the alleviation of energyand income poverty.

Although the author’s focus is the electricity sector, he recognizes thatthe region’s energy problem goes beyond that area. Rather, it encompasses the best energy source for all needs – biomass, kerosene and other renewableenergy sources. He also discusses AfDB’s involvement in related activities suchas rural electrification, and the promotion of renewable and clean energy. Others are development of small power plants and off-grid power systems, and


Iin the energy sector at large, participation in projects in the oil and gas indus-try and in cogeneration schemes from biomass. Gaillard concludes that, with-out addressing the issue of energy poverty, sub-Saharan economies will find itdifficult to achieve the MDGs in 2015. Also, they will find it hard to improve thequality of life of the majority of their population, which is projected to doubleby 2030. He emphasizes the role of regional and IFIs in providing significantresources. This is in addition to being a catalyst in regional energy integrationprojects to change the energy map of the continent. The author points out theimportance of statistics and information in dealing with the challenges ofAfrica’s energy sector.

In Chapter 4, entitled “Powering Industrial Growth: the Challenge ofEnergy Security for Africa,” Monga examines the problems of energy povertyand lack of access to modern energy services from the perspective of industrialdevelopment and energy security. Energy poverty is viewed as a dimension ofenergy insecurity and a serious constraint to economic and human develop-ment. The author begins his analysis by looking at Africa’s energy deprivationand lack of energy access in comparative global, regional and sub-regionalterms. The evidence shows significant gaps between Africa and the rest of theworld, as well as sharp contrasts between rural and urban areas and at sub-regional levels. He argues that energy security, which has supply and demanddimensions, must be viewed from both the quantity and price perspectives.Using less energy to provide energy services and having access to energy andtechnologies that provide these energy services are two principles that under-pin energy security. He stresses that these principles should be of interest toAfrica. Monga acknowledges that energy security, which has both internal and external dimensions, is a complex topic with linkages to numerous othersustainable development objectives. He said there is a strong nexus betweenenergy production/use and human development, despite the lack of energy-specific MDGs. Therefore, energy security issues must be integrated into energypolicies alongside other development and environmental goals.

In the context of Africa, the issues of access and the affordability of energyservices assume special significance in addressing the challenges of climatechange and facilitating achievement of the MDGs. Also, aspects of African energysecurity include the diversification of energy supply and demand; the develop-ment of energy infrastructure, with attention to its resilience; and the promo-tion of clean and affordable energy sources and technologies. Other factors aredecentralization of energy production through development of local energyresources and systems; energy trade and regional integration; and energy/power


sector reform and price volatility. In addition, (carbon) financing and technol-ogy transfer also play an important role in improving African energy security.

The author observes that energy efficiency is a notable constraint toAfrican industrial development. A substantial improvement in the efficientconsumption of energy, especially electricity, by the manufacturing and serv-ice sectors, is necessary to improve the productivity and competitiveness ofAfrican industry. Therefore, any overall strategy to improve their competitive-ness must have as a primary objective, an improved economic development, forwhich a reliable and cost-effective energy supply is a prerequisite. Africa’s highenergy-intensity, even at low levels of industrialization, points to an inefficientenergy use. An important element of any energy security policy in Africa is,therefore, tapping the potential of cost-effective energy efficiency improve-ments in the continent’s industrial sector. He points out that numerous stud-ies have shown the potential for improving energy efficiency along the indus-trial conversion value chain.

The author also discusses the role that biofuels can play in the provisionof reliable and adequate energy supply in Africa. Since biofuels can, under cer-tain conditions, reduce dependence on imported fossil fuels and increaseenergy security as well as mitigate climate change, he notes that many coun-tries in the region are working towards attracting investment for large-scalebiofuel production. Biofuel production results in job creation in the ruralareas. Thus, he suggests that production and trade in biofuels can meet Africa’sobjectives of energy security, employment generation and poverty reduction.Though he recognizes the potential of second and third generation biofuels toincrease fuel availability, he also admits to their potential to adversely impactfood production or sustainability. The author cites the example of the UnitedNations Industrial Development Organization (UNIDO) in promoting indus-trial conversion technologies of biofuels, with specific focus on bio-residuesand non-edible crops like Jatropha, as evidence of viable biofuels as an energysource in Africa.

Monga also notes the emerging use of renewable energy sources, for ruralelectrification and industrial applications in energy-intensive small andmedium-scale enterprises, as an increasingly attractive option in many partsof Africa. He suggests that linking rural energy with productive uses can cre-ate employment opportunities, raise income levels and improve quality of lifein rural areas. At the same time, the linkage can contribute to the protectionof the environment and the improvement of energy security. The author notesa number of renewable energy initiatives that are taking place in Africa. These


Iare aimed at the integration of renewable energy generation into national gridservices and the creation of mini-grids. He argues that much would depend onthe ability and absorptive capacity of each country or sub-region to harnessthe true potential of renewable sources of energy. The development and trans-fer of modern energy technologies are linked to local capacity building in theareas of design, manufacture, assembly, and the operation and maintenanceof energy equipment and structures. He further notes that financing is the keyissue in overcoming barriers relating to the scaling up of renewable energy toimprove access and markets for energy-efficient technologies. In addition,regional energy cooperation is important to rationalize the geographical dis-tribution of energy resources. Regional integration of energy supply systemswill boost energy access and security. Also, power pools and energy trading willincrease the security of supply by allowing neighboring systems to providebackup facilities.

In conclusion, Monga argues that, since energy poverty is a seriousimpediment to economic development, a transition to modern fuels and effi-cient technologies can help break the vicious circle of energy deprivation andunder-development. The transition to sustainable energy economies atnational and regional level in Africa needs to be supported by conducive andeffective public policies. These should promote regionally efficient practices,energy efficiency and renewable energy-based interventions for enhancingintra/inter-regional cooperation in Africa. Strengthening common energymarkets and harmonizing policies so as to power industrial growth and meetenergy security challenges are essential to sustainable industrial developmentin Africa.

In Chapter 5, “Energy Access in Rural Areas,” Chineyemba discusses the chal-lenges of providing adequate and modern energy services to rural communities,where efforts are aimed at improving the standard of living through increasedpotential for income and employment generation. He reasons that relativelylow income level in rural areas makes the provision of modern energy servicesunaffordable to most communities. The resulting heavy reliance on traditionalenergy sources means a low level of energy efficiency; heavy deforestation anda loss of biodiversity; greater health hazards due to indoor air pollution; andreduced capacity to mitigate climate change.

The author notes the “vicious circle” of energy and income poverty,adding that the income poor are also “energy poor.” He stresses the ability andwillingness of rural people to make the transition from traditional to modernenergy sources. However, he points out, this may be contingent upon their


financial resources, as their prospects of achieving higher income levels are, inturn, often constrained by the extent to which such a transition is achieved.Furthermore, pricing for rural energy services poses a dilemma, because highprices for energy services may not be affordable for the majority of ruraldwellers. On the one hand, the energy poor may not have the means to buyimproved but higher priced energy services, even if they have access to them.On the other, pricing below cost of service may make it difficult to elicit thenecessary investment from private investors. Also, even when the improvedenergy supplies are affordable, the energy poor may not be able to afford the“conversion technology” which makes that energy useful (for example, astove, radio, light bulb or motor). Chineyemba argues that increased access tocash income becomes crucial. This is because improved energy services at thehousehold level frequently require switching to an energy technology thatinvolves higher initial fixed capital cost. Even where improvement in lightingresults in cash savings, because the new source replaces more costly but lesseffective supplies (such as batteries and candles), there is frequently a netincrease in money expenditures because people make more use of theimproved energy services. He recommends that the immediate priority in deal-ing with rural energy poverty is to provide a minimum amount of energy tomeet people’s basic needs, irrespective of their ability to bear the costs of sup-ply and delivery. He emphasizes that the cycle of energy and income povertywill be broken only by combining improved energy services with end uses thatgenerate cash incomes. This will result in a “virtuous circle” of higher energyaccess and increasing productivity, extending the range of outputs or improv-ing output quality.

The author notes that, when planning pro-poor energy interventions,it is important to consider the strategy of using the energy to secure cashincomes at an early stage of the development process. Subsequently, it wouldbe necessary to see how the impact of improved energy services can beextended to other aspects of sustainable livelihoods. He considers approachesfor increasing energy services in rural areas to include government and market-based, private sector-led. He points out the limited evidence on increasingenergy services in a sustainable fashion to rural areas using a market-basedmodel, due to the distributed service and limited profit on investment in thisarea. He then suggests the use of the concession approach. The concession toprovide the energy services as a regulated monopoly in certain areas and overa certain number of years is given to the most qualified bidder who will oper-ate in a “controlled” free-market environment. In developing countries, the


Itask of ensuring adequate energy supplies is increasingly being left to the private sector. Therefore, private investments will be crucial in sustainableenergy supply to rural inhabitants. Accordingly, the role of appropriate insti-tutional infrastructure development to support effective private sector partic-ipation cannot be overemphasized. In conclusion, Chineyemba states thatrural development, specifically rural energy, needs to be given much higherpriority by policy makers. Furthermore, rural energy development must bedecentralized to put rural dwellers themselves at the heart of planning andimplementation. Also, rural energy development must be integrated withother aspects of rural development. Meeting Africa’s energy challenges willrequire a radical scaling-up of access. However, this will be contingent on animproved enabling environment, an effective policy and regulatory frame-work, enhanced management capacity and financially healthy energy utilities.

In Chapter 6, “Expanding Energy Access through Sustainable EnergyEnterprises in Africa: Financing, Capacity-building and Policy Aspects,”Agbemabiese looks at energy poverty and access from the perspective of sus-tainable energy enterprises. The case study for his analysis is the innovativeenergy enterprise program, the African Rural Energy Enterprise Development(AREED) program. The main goal of AREED is the promotion of energy-effi-cient and renewable energy sources including solar, biomass, wind, hydro andbiofuels in peri-urban and rural communities through Small and Medium-sized Enterprises (SMEs). The author examines the achievements, constraintsand challenges of AREED as a prototype for the development of viable energySMEs in Africa. According to Agbemabiese, the achievements of AREEDinclude an ingenious plan of loan provision, capacity building in bankablebusiness plan development, analysis of market conditions and identificationof efficient energy systems for SMEs. He cites wind pumping in Senegal, Liquefied Petroleum Gas (LPG) distribution in Mali and biomass energy in Tanzania, as examples of AREED’s successful project interventions. The pro-gram is said to have yielded significant environmental benefits in terms ofannual savings of tons of carbon dioxide emissions and avoidable use of biomass. The author notes that despite these achievements and prospects,energy SMEs in Africa face several constraints and challenges including: thelack of relevant policies and an institutional framework to provide sufficientleverage for SMEs to tap into new energy business; the absence of capacitybuilding in energy system development and commercialization; a limited ruralenergy market; the inherently high initial cost of renewables and energy efficient products; and poor access to clean energy financing.


The author concludes that AREED has great potential to contribute to overallnational development priorities, by facilitating wider access to energy services for under-served communities. He identifies the critical success factors to support the development of energy SMEs geared to clean energysystems in Africa. First is for national governments to establish the relevantpolicies and institutional framework for energy SMEs and translate them intoimplementation strategies and budgetary support. In this regard, the govern-ments should also improve the policy environment of the private sector tofoster stronger links with public-sector decision-makers and make consciouspolitical commitment to widen national energy access, particularly for peri-urban and rural communities. Second is building human and institutionalcapacity in energy systems management. The author suggests that govern-ments should create a positive business environment for SMEs to function asthe engine of growth for job and wealth creation in Africa, noting that vari-ous institutions have been created for this purpose. Governments shouldrestructure SME-support institutions by recruiting appropriate experts totheir boards. Governments should also provide logistical support to enablethe institutions to build the capacities of SMEs and offer the needed techni-cal and expert support. Third is the development of functional clean energymarkets, particularly in rural areas. This can be done through explicit policyincentives and procedures to guide and stimulate clean energy equipmentdevelopment.

Agbemabiese notes that packaging energy service delivery projects withincome-generating possibilities is essential in improving the financial viabil-ity of energy SMEs. Furthermore, he points out that government agencies andorganizations mandated to manage various energy-related funds shouldexplore innovative interventions. The aim here is to reduce the costs of renew-able and energy-efficient technologies through more investment in productand market development. To address the lack of understanding of the finan-cial systems and processes by potential investors, he suggests that energy min-istries, departments and agencies should work closely with private-sectoractors to furnish potential investors with evidence-based data. These willhighlight the costs and benefits of investments in clean energy technologies,as well as raise awareness, increase acceptance and reduce the perception ofrisks in this segment of the energy sector. To reduce high capital cost andinvestor risk, national governments should also institute investment incen-tives. These can be capital grants or third-party finance arrangements, wherethe governments assume the risks or provide low-interest loans.


IIn Chapter 7, “Africa’s Power Supply Crisis: Unraveling the Paradoxes,”Haider notes that SSA faces major energy infrastructure challenges, with themost severe being the electric power sector. Presenting the preliminary findingsfrom a World Bank Africa Infrastructure Country Diagnostic Study, the authorprovides an incisive analysis of the paradoxes of the SSA electric power sector.He identifies the four paradoxes as: abundant energy but little power; highprices but even higher costs; widespread but ineffective reform; and high expen-diture, yet inadequate financing. He begins his discussion by highlighting thepoor electric energy statistics in Africa in comparative terms, as evident in thelowest global electrification rates, access and consumption per capita. Haidernotes that the grossly inadequate generating capacity, illustrated by about one-fourth of generating capacity not being in operational condition, has exacer-bated the crisis in the electricity sub-sector. Furthermore, he states that electric-ity tariffs in some SSA countries have been kept low administratively so thatprices fail to cover costs. Yet, he emphasizes, the average tariff in SSA is aboutdouble those in other parts of the developing world and almost as high as incountries of the Organization for Economic Co-operation and Development(OECD). He points out that inadequate and unreliable supply largely explainsthe comparatively high cost of supply to end users in SSA.

The author says African manufacturing enterprises report regular and significant power outages and low-quality electricity supply, adding that thisreduces revenues by 5-6 percent. He notes that in the informal sector, wherefirms rarely have the capital for backstop generation, lost revenues from poweroutages can be as high as 20 percent. Deficient power infrastructure dampenseconomic growth and weakens competitiveness by having a detrimental effecton productivity. The author refers to another study, which shows that in mostSSA countries, infrastructure accounts for 30-60 percent of the adverse impacton a firm’s productivity. This is well ahead of factors like red tape and corrup-tion. Moreover, in half the countries analyzed, power accounted for 40-80 per-cent of the infrastructure effect. He also cites yet another study which demon-strates that if the quantity and quality of power infrastructure in all SSA coun-tries were improved to that of a better performer (Mauritius), long-term percapita growth rates would be higher by as much as 2 percent. Thus, the ineffi-ciency of SSA utilities generates substantial hidden costs. He suggests that inmany SSA countries, hidden costs can be as high as 2 percent of Gross Domes-tic Product (GDP).

Haider further points out that Africa’s overstretched electricity systemshave become exceedingly vulnerable to supply shocks, resulting in widespread


outages and load-shedding. Economic growth in the past decade has raiseddemand for electricity. However, the stagnation in generation, transmissionand drought-induced reduction in power supply in hydro-dependent countries,has made prolonged blackouts commonplace. Countries whose power infra-structure has been damaged by conflict have also suffered severe shortages.Also, high petroleum prices have created enormous cost pressures in countriesthat depend on imported oil products for electricity generation.

The author identifies and discusses how the four electric power paradoxescan be eliminated. First, and most important, is the need for significantimprovement in the governance of national power utility. This is because of thewidespread nature of poor governance practices in most energy utilities inAfrican countries. Furthermore, it is evident in two-thirds of SSA utilities report-ing losses of more than double and revenue collection less than half of what isobtained in well-run utilities globally.

However, he said the policy choices that best address electric power para-doxes are not clear-cut. The traditional model that predominates in the SSApower sector – vertically-integrated, state-owned monopolist utilities – hasyielded disappointing results. Yet, reforms to increase efficiency and boost com-petition through private participation have in many cases failed to deliver theexpected results. For example, unbundling is limited, the failure of transactionsand projects is frequent, and additional investment has been minimal.

The author notes that the lesson that emerges from study is that successin tackling the challenges is not a simple function of the model adopted. Thepower sector in Africa needs to move to a “mixed economy,” characterized by arange of structures, regulations, and technologies adapted to the country con-text. Successful interventions will tackle several problems simultaneously to putthe sector on a positive trajectory of improved sector and utility management,financial viability, new investment, and better customer service. It means rec-ognizing that the power sector has quasi-monopolistic characteristics. This isparticularly so in grid-based distribution and to a lesser extent in transmission.Also, incumbent utilities will continue to be the largest players in the sector forthe foreseeable future. But interventions need to be innovative and ambitious.They have to recognize that meeting customer needs means multiple providers,financial viability and new forms of external financial assistance. There may becertain preconditions like appropriate regulatory frameworks for PPPs,reformed tariff frameworks and sufficient security of investment for investors.In that case, sector reforms can do much to facilitate the entry of strategic pri-vate partners.


IHaider concludes by proposing as a starting point, sustained and concertedaction on three strategic priorities: (i) regional scaling-up of generation capac-ity, (ii) improving the effectiveness and governance of utilities, and (iii)expanding access through sector-wide engagement. He says the three areinterdependent and must be tackled together. These actions should be com-plemented by important short-term measures, including demand-side man-agement. Examples include the introduction of energy efficient light bulbsand loss reduction programs such as enhanced bill collection and initiativesto tackle electricity theft.

In Chapter 8, “Why Africa Lags Behind in the Energy Sector,” Olumuyiwadiscusses the reasons why the continent lags behind in the energy sector andthe difficulties faced by its governments in this regard. He also identifies theadverse consequences of allowing this situation to continue and the correctiveefforts required to deal with the problem. He identifies the factors that explainwhy Africa falls behind in electrical energy production. These are: the pooreconomic status of African States, especially SSA; poor governance or unstablegovernments and wars; and regional and domestic, social and ethnic conflicts.He makes a number of proposals to improve upon the poor electricity supplyconditions in the region. These include safety and stability issues. He empha-sizes that without regional peace and stability, there can be no meaningfuldevelopment. He points out that peace and political stability are prerequisitesfor the creation of an enabling environment for infrastructural developmentin the region. He points out that physical security is of even greater importancefor integration projects, adding that power lines and pipelines are vulnerableto damage. The author cites an example where ethnic militias disrupted gasflow meant for the West Africa Gas Pipeline (WAGP). He says the success ofinterconnected power lines across the continent is totally dependent on thesafety of the transmission systems. He notes that peace is not simply theabsence of war and that signing peace treaties does not necessarily end wars.This is because years of civil re-adjustment may be required before sustainablepeace can prevail.

Olumuyiwa discusses the potentials of the Inga Dam hydroelectricscheme in the Democratic Republic of the Congo with its continent-wise elec-tricity supply. Conflict resolution initiatives should be prioritized by Africanheads of government in cooperation with the AU. Such collaboration should bestrengthened towards ending the many wars and conflicts on the African con-tinent. He observes that Africa suffers too much from abandoned projects syn-drome, where regime changes almost always result in the reversal or delay of


programs and projects of previous governments. The consequences, he argues,are unreasonable delays, with a costly escalation of project costs, or outrightabandonment. Connected to this is the institutionalized corruption that trailsgovernment projects in African countries. Therefore, the fight against corrup-tion has to be taken seriously if Africa is to experience the needed growth inenergy infrastructural development and production. Africa needs visionary andresponsible leadership to drive these needed paradigm shifts in the way we runnation states in the continent. Although many governments have embracedprivatization of the power sector in principle, the author points out that theyshow some foot-dragging and lack of the political resolve to fully embrace theprogram. The reality, however, is that most African governments cannot comeup with the required massive capital investment, both local and foreign. How-ever, private capital and involvement, foreign governmental and institutionaldonors and lending agencies need to be appropriately coordinated. This is toinsure that the eventual electrical power will be reasonably priced to make theproject profitable and power affordable for the customer.

In Chapter 9, “Promotion of Public-Private Partnership to ImproveEnergy Access for Poverty Reduction and Growth in Sub-Saharan Africa,”Adenikinju touches on various aspects of the subject. He says between nowand 2015 and beyond, substantial investment will be required to make mod-ern energy services accessible to the vast majority of people in the poorest andmost isolated communities in the rural and peri-urban areas of SSA. The sub-region receives only a small share of global private investment in infrastruc-ture due to its low credit worthiness. He defines most African countries bytheir shallow domestic financial markets, the high-risk profiles of energyinfrastructure, limited resource availability due to weak domestic economicconditions and volatile commodity markets. The author suggests greater useof PPP to bring about the inflow of investment capital essential for the elim-ination of the prevailing weak energy access and energy poverty. He consid-ers PPP as one of the most innovative options for mobilizing the domestic andforeign capital required for energy infrastructure development to supportwidespread and expanding energy access. He says expanded energy accessshould be seen holistically, beyond electricity provision to the poor. He alsomakes the point that electricity is not always the most appropriate form ofenergy, nor is it the quickest or the most cost-effective way of providingenergy services to the poor. Providing clean, modern energy services to poorcommunities will require expanding the choice of energy options, includingconventional and non-conventional sources.


IAdenikinju discusses five PPP options available to African countries, namely:technical assistance, management contracts, lease contracts, concession con-tracts and outright sale of public infrastructure assets to the private sectorwhile retaining regulatory control. He observes that the option or combina-tion of options adopted by a country would depend on local economic, social,legal and political factors. The author argues that the determination of anappropriate framework for the allocation of risk between the government andthe private sector is one of the key issues in PPP. Usually, the governmentassumes non-commercial risk, while the private sector bears the commercialrisk. He shows the different ways resources and the allocation of risk are char-acterized under the various PPP options.

Adenikinju discusses the benefits of PPP as a viable approach toaddressing the energy infrastructure shortages in African countries. Theseinclude: opportunity for the private sector to complement and even replaceavailable public energy infrastructure capital, which, by its nature is not anattractive option to the private sector, due to the large capital requirementsand long gestation periods; and better allocation of risk between the govern-ment and the private sector: efficient private provision of energy servicesthrough the discipline that the market imposes on the private sector in theprovision of such services.

The author notes that the private sector under the PPP arrangementoften requires different types of guarantee from the government. This is toenable them to commit resources to the provision of infrastructure services.In the case of the electricity sector, this is sometimes contained in the PowerPurchase Agreement (PPA). He points out that governments need to developthe capacity to evaluate proposals from the private sector and determine theappropriate guarantee to extend to particular projects. He goes on to identifybarriers to the successful implementation of PPP, including appropriate pric-ing for the services provided under the Partnership. He also recognizes thecritical success factors in PPP. These include the incentive structure underwhich the Partnership will operate; the establishment of an appropriate legaland regulatory framework; as well as a path of credible and sustained eco-nomic and political reforms. These incentives are meant to reduce “countryrisk” and other “investment risks” that constrain foreign capital inflow to theenergy sector. Generally, to successfully attract foreign investment for thedevelopment of PPP on a sustainable basis, the outcome of Partnership proj-ects must be positive for the investors and the country. Adenikinju furthercontends that investors must enjoy a reasonable return on their investment.


However, for the country, the cost that the government has to bear must notbe excessive. Experiences of PPP development in developing countries showthat not all projects result in this desirable win-win situation. In fact, he iden-tifies the possibility of cases characterized by a lose-lose situation for both thecountry and the investor. To guarantee the sustainability of the PPP model,he concludes that political leaders must exercise the necessary political willto put in place legislative and regulatory policies that would insure the suc-cess of the Partnership.

In Chapter 10, “Energy and Poverty in Sub-Saharan African Economies:Supply-side Issues,” Iwayemi observes that despite the role of energy povertyand poor energy access – as causal factors in low income and energy consump-tion per capita among other human development indicators observed in theregion – Africa’s energy problems have not been given much thought. He fur-ther states that SSA remains one of the regions whose energy problems havebeen grossly under-researched. In addressing this research gap, the author pro-vides a brief review of the energy and economic context of the problem, fol-lowed by discussion of some of the key issues, challenges and constraints toexpanded supply in the region’s quest for sustainable exploitation and utiliza-tion of its energy resources and economic development. The author then raisesthe fundamental question of whether Africa can achieve the twin objectives ofexpanded energy supply and access, as well as the elimination of energypoverty. These are key elements in the continent’s sustainable energy and devel-opment future. He answers in the affirmative and goes on to discuss the eco-nomic, financial, technical and manpower challenges to a reliable and adequateenergy supply to meet Africa’s energy needs for economic growth and develop-ment. Furthermore, he discusses the policy and institutional requirements forovercoming persistent energy and income poverty and for the establishment ofefficient and sustainable energy supply. He highlights the key supply-side issuesin the design and implementation of coherent policy reforms and programs fora viable energy industry. Iwayemi argues that situating Africa’s non-renewableand renewable energy exploitation in the context of a sustainable energy futureand the MDG goals is particularly important. This should lead to a better andmore precise appreciation of the challenges that confront policy makers, sectoroperators and other stakeholders. Finally, he discusses an action plan for achiev-ing expanded energy supply. He notes that the degree of success of the strate-gies adopted will determine the extent to which Africa will share in the gainsfrom increasing material prosperity associated with globalization, and moreimportantly, achieve the MDGs.


IThe author suggests that a dramatic scaling-up of investment in energy infra-structure capacity is required in the next three decades. The financing require-ment will be huge by regional standards. Besides, the capital requirement mustbe situated within the context of global capital market competitiveness andindustry risk. He states that while the investment scale is daunting, it is notinsurmountable, provided the appropriate institutional framework, policy con-sistency, incentive structure and security of investment exist. He notes that apublic-private sector mix has become more attractive in recent years. This maybe particularly pertinent in the development of pro-poor and environmentallyclean, renewable energy resources, such as solar, wind, wave and other cleanenergy forms. In conclusion, Iwayemi suggests that Africa can eliminate thesub-standard state of modern energy services and ensure the supply of the largeinvestment required to support sustainable energy development. Such capitalunderpins the objective for significant reduction in poverty, contingent on sev-eral conditions. These include: a strengthening of the institutions and gover-nance in the energy sector; creation and sustenance of an incentive-based com-petitive market system, strengthened by market responsive energy pricing thatguarantees an adequate risk-adjusted rate of return; establishment of a well-targeted support system to reinforce the drive for an expanded supply of cleanenergy, based on renewable energy resources; and a strategic PPP to drive a newenergy paradigm that is anchored on adequate, reliable and affordable energythat will minimize carbon emission and climate change.


Introduction

Recent macroeconomic data indicates that sub-Saharan Africa (SSA) economiesare undergoing rapid expansion, with a real Gross Domestic Product (GDP)growth rate of 6.5 percent in 2007. The improving terms of trade, as exempli-fied by the solid global demand for commodities, greater inflows of capital andthe debt relief schemes are some of the salient factors contributing to the highgrowth rates.

However, the great challenge facing SSA economies is how to reducepoverty by half, by the year 2015, in line with the first objective of the Millen-nium Development Goals (MDGs). Specifically, the targets are to reduce by halfthe proportion of people living on less than a dollar a day and also cut by one-half the percentage of people suffering from hunger.

These goals call for GDP growth rates that are even higher than the currentachievement. The implication is for higher levels of domestic investment and pro-ductivity of the economy in order to attain this goal. Thus, real GDP growth ratesshould be 7 percent or more per annum. Yet the productivity and overall perform-ance of SSA economies is being hampered by the state of the energy sector. Lackof energy services or poor access to this resource, are some of the factors militat-ing against SSA economies’ ability to realize their higher potentials.

Measures to overcome this problem have engaged and are continuallyattracting the attention of governments, the international lending agencies,non-governmental organizations and the various stakeholders. The OPEC Fundfor International Development (OFID) organized this workshop to furtherdeepen the discussions. The main purposes are to elucidate the issues and findappropriate answers that will keep SSA on a much more robust growth pathtowards achieving the key targets of the MDGs.

IIEnergy Poverty in Africa

Suleiman J. Al-Herbish


Energy resources

Africa’s landmass of 30.3 million km² is endowed with rich natural resourcesincluding fossil and renewable energy. Yet most of these resources are yet to beexploited. It has been estimated that Africa’s energy resource endowments withrespect to the world totals are in the following order of magnitude:

Oil 9.5 percent

Coal 5.6 percent

Natural Gas 8.0 percent

The sustainable development of these energy assets will ensure thatnational resources are managed to meet the needs of the present and succeed-ing generations. However, large foreign investments are required to developthese resources.

Current situation

Energy supply is given as a target indicator for achieving the seventh objectiveof the MDGs, which is to ensure environmental sustainability. Africa is energypoor, a situation that has diminished the continent’s productive capacity. SSAin particular depends largely on inefficient traditional biomass used mainly forcooking and heating water in households. Traditional biomass accounts forover 80 percent of primary energy demands. These sources of energy – for exam-ple, firewood and charcoal – burn inefficiently, thereby giving rise to energyloss. The surrounding environment is also degraded, through the depletion offorest resources. Pollutants (carbon monoxide, benzene, nitrogen oxides, etc.),which are also health-damaging substances, are emitted when these forms ofenergy sources are used indoors. Also, deaths from indoor air pollution, arisingfrom the burning of biomass fuels, are substantial.

Table 1 shows that SSA has the lowest measure of energy production,accounting for only 6.4 percent of world energy output. Total SSA productionin metric tons of oil equivalent was 715.4 million, compared to 4,450 millionfor high-income countires, 5,604 million for middle-income countries and6,767.1 million for low and middle–income countries combined. This perform-ance is all the more unacceptable, when it is realized that the estimated popu-lation of SSA is 16 percent of the world’s total.

In Africa, energy use per capita is very low, compared to other regions ofthe world. Table 2 indicates an energy usage per capita of about eight times forhigh-income countries, compared to the usage level of SSA. The figures forlow/middle-income and middle-income countries are 2 and 1¼, respectively.


II

Also, on average, per capita annual growth rate of energy use was static during 1990–2004 for SSA, compared to about 1 percent for the high incomeand 0.2 percent each for the other regions of the world. Energy supply, as atarget indicator, should be given a higher priority for Africa to achieve robusteconomic growth and produce enough goods and services, all of which arenecessary for the attainment of sustainable development. Therefore, a re-ordering of priorities addresses the energy poverty issue. There is the need forfurther investigation, to enable African countries, characterized by energypoverty, to overcome the problem of access to energy services, as a basis forcreating sustainable development.

OFID intervention in the energy sector takes four forms, namely: direct project funding;technical assistance in support of international and national institutions; funding the activi-ties of multinational agencies; and, research grants for specific studies and investigations andthe operation of an Energy Account. It is expected that these forms of assistance will con-tinue in the near to longer-term.

As at December 31, 2006, over one-fifth of all OFID-approved funding was for energysector projects. Cumulative approvals, as at December 31, 2006, for the energy sector was$1.1 billion, out of a total of $5.4 billion, for all sectors. Energy projects in Africa accountedfor 6.8 percent of the total. The bulk of OFID financing was in the Asia Region with 11.8 percent of the overall lending, while the Latin American and Caribbean countriesaccounted for the balance of 1.5 percent of the total.

Over the years, OFID has approved funds by way of technical assistance, to co-financethe activities of multilateral, bilateral and other international agencies. Notable examplesinclude the establishment of the Solar Energy Regional Centre in Mali under the auspicesof the West African Economic Community.

OFID has established the United Nations Development Program (UNDP) EnergyAccount and has also funded activities under the United Nations Financing System for Sci-ence and Technology (UNFSTD). Notable activities funded under the UNDP Account includethe Djibouti Geothermal Exploration Project, the Monitoring of Biomass Gasifier Project inAfrica and the funding of Energy Audit schemes in Ethiopia, Tanzania and Uganda. UnderUNFSTD, OFID has expended funds for the development of Solar Energy and Biogas Pro-duction in the Kingdom of Lesotho.

The OFID approved grants for research and similar activities include funds for the WorldPetroleum Congress, the Oxford Energy Seminar, the United Nations Conference on Tradeand Development and the Organization of the Petroleum Exporting Countries (OPEC) Sec-retariat. Others are the First and Second Workshop on Energy and Development, as well asthe financing of a Seminar on New and Renewable Sources of Energy. OFID has also fundedthe study on Energy Taxation and Economic Growth and the Vanishing Greenhouse Effect.

OFID and the energy sector Box 1


Challenge of investments

At present, the financing of energy schemes is inadequate and unpredictable.Current estimates put the order of magnitude required in the next 12 years to 2020, at $3 billion per annum. Also, funding in the energy sector is on a project-by-project basis as opposed to a financing strategy for the longer-termand within established national and regional programs. Long-term solutions to energy poverty are simply not achievable without adequate inflow of

World energy production Table 1

Million tons of oil equivalent (Mtoe)Average annual

percent distr. growth rate

Group of countries 1990 2004 (2004) 1990-2004

1. Low income 791.6 1,172.8 10.5 2.7

(SSA) (481.8) (715.4) (6.4) (2.7)

2. Lower middle income 2,160.0 3,257.8 29.2 2.8

3. Upper middle income 2,226.9 2,347.3 21.0 0.4

4. High income 3,657.9 4,450.0 39.8 1.3

World 8,798.3 11,171.2 - 1.6

Energy use per capita Table 2

Kilograms of oil equivalent (Kgoe)Average annual

growth rate

Group of countries 1990 2004 1990-2004

1. High income 4,842 5,511 0.9

2. Upper middle income 2,980 2,583 -0.9

3. Lower middle income 953 1,175 1.4

4. Low income 464 513 0.7

5. (Sub-Saharan Africa) 693 703 0

World average 1,685 1,793 0.4


II

investment. Experience shows that market incentives and business innovationcan provide new pathways for energy solutions. There is the need to maximizeentrepreneurship, transfer skills and capacities and encourage public-privatepartnerships.

The challenge here is to elucidate policies and other measures that wouldincrease the funding of energy sector projects. For the private sector, there is theneed to encourage better utilization of private investments, micro-financing,other innovative financing schemes and Foreign Direct Investment (FDI). Whatrole should governments play in supporting sustainable energy poverty solu-tions? If the energy poverty solution depends on finance, governments have akey role to play in providing the enabling environment, and encouraging mar-ket incentives by reviewing taxes, subsidies and regulatory frameworks. Also, forthe public sector, the challenge is how to improve the flow of resources for Pub-lic Sector Investment Programs. A contributory factor is the very low level ofOfficial Development Assistance (ODA), which is much below the UnitedNations (UN) recommended 0.7 percent of the Gross National Income of theOrganization for Economic Co-operation and Development (OECD) countries.1

This leads to poor funding of public-sector programs, including energy sectorprojects. In addition, there are the problems associated with tied-up aid andconditionality clauses.2 These issues require further studies and investigation,for the purposes of elucidating viable options.

Need for regional integration

There is an urgent need to integrate energy policies into broader developmentstrategies in African countries, while at the same time encouraging regionalintegration. The West, South, East, Central African and Nile Basin power-poolschemes are ready examples. For instance, the West African Power Pool (WAPP)is planned as a joint power-pooling mechanism – of the West African countries– to help integrate the various national power systems into a unified electricitymarket. The South African Power Pool (SAPP), on the other hand, would be aunified energy market for the members of the SAPP countries. According to the

1 In 1970, rich countries of the Organization for Economic Co-operation and Development (OECD)agreed at the United Nations (Resolution 2626) to give 0.7 percent of their GNP (now GNI) as aidto the developing countries.

2 Official Development Assistance (ODA), is attractive, as these facilities are packaged for long-termeconomic and socio-economic development. The proceeds from ODA sources are by an official creditor; with the promotion of economic development and welfare as the main objective; and atconcessional financial terms (of a loan, with a grant element of at least 25 percent).


Business Times of Nigeria, energy experts counsel that the best solution in thelong run – to energy poverty – would be for nations to cooperate on regionalpower solutions by building few large plants, which could supply power morecheaply and efficiently, than dozens of smaller ones. The East African PowerPool Project (EAPP) is expected to come on stream by 2011. When operational,the three East African states of Uganda, Kenya and Tanzania will have a powersharing pool to ease shortages. This strategy will insure the building of intercon-nection grids that would enable power flow from places of abundance to powerdeficit areas.

The Central African Power Pool (CAPP) would also help the develop-ment of the power sector in Central Africa. The CAPP vision is to exploit theenormous hydroelectric potentialities of Central Africa and to satisfy alldemands in electricity for the household, states and central African industry.The Nile Basin Power Forum (NBPF) “recognizes the significant socioeconomicand power-system benefits that can be realized from regional cooperation. Thisforum provides an important means for cooperating in the development ofelectric power resources in the Nile Basin.” Furthermore, NBPF will build onnational power master and regional plans, with linkages to existing powerforums.

We are confident that energy initiatives that are operational under theAfrican Energy Commission (AFREC)3 and the New Partnership for Africa’sDevelopment (NEPAD) will serve to set regional energy priorities. These initia-tives will also help integrate the energy policies of several African countries, torealize energy’s crucial role in the attainment of the MDGs.

Electric power sub-sector

Electricity accounts for only 4 percent of SSA’s total energy consumption. Yetthis energy source is a most vital input in production processes and the deliv-ery of the social services, namely, education and healthcare.

Electric power is a catalyst for social and economic development. In Africa,electric energy is provided mainly from fossil fuels and hydro-power. Electricityconsumption is also the lowest, on a regional basis, at about 515 kWh/perannum, compared to the world average of 2,326 kWh/per annum. Out of the

3 The African Energy Commission (AFREC) is an institutional framework, established by the AfricanUnion Energy Ministers Conference, to develop Africa’s huge energy potential. AFREC “is an institu-tional framework appropriate for enhancing energy co-operation on the African continent.” The bodywill facilitate co-operation and consulting of the African countries in the energy sector.


II

total SSA population of 743 million, over 500 million, or 67 percent, lack accessto electricity. Also, the MDGs in the education and healthcare sectors are beingcompromised by the lack of electricity, as the majority of schools and healthcarecenters cannot function properly. As is well known, inadequate lighting or illu-mination in schools is not conducive to learning. Consequently, there is unduereliance on standby generators or kerosene lamps that are not safe.

Efficient supply and use of electricity

A key challenge that is not addressed is the efficient supply and use of electricity,which takes account of technological changes and innovations, improvingoperation and maintenance standards and information disseminated by otherstakeholders. On the supply side, these factors lead to “efficiencies of supplyingenergy” and on the demand side, to “end-use efficiency.” The utilization ofthese factors could increase the supply of electricity from existing sources toserve more consumers, as SSA is particularly lacking in this resource. The roleof government is therefore to insist on the adoption of these efficiency“enabling factors,” in the licensing processes.

Challenges of the rural areas

Electricity connection rates are even lower in rural areas, and there exists anurgent need for further studies and investigation that would address the greatchallenges being faced there. However, rural areas of SSA pose specific chal-lenges. Firstly, population density is low and secondly, these areas are remote

Measures to increase the existing level of international trade of Africa could do more toincrease the overall funding of the public-sector budget than any advocacy for increased aid.Although many an African country depends on the exports of primary agricultural productsfor export earnings and subsequent funding for the recurrent revenue needs of the publicbudget, the demand for these products is on the decrease. Africa’s share of world trade hasdecreased from 7.5 percent of world exports to about 2.4 percent in 2003. Also, Africa’stotal merchandise trade increased to 3.1 percent in 2006.

The poor performance is due to unfair market access, leading to the major erosion ofAfrica’s share of world trade. The continent’s abysmal result is also influenced by the agri-cultural policies of the developed countries, especially the distortions in the market causedby their subsidies. Therefore, the challenges include identifying the measures that wouldincrease the potential export earnings for Africa that could exceed the current amount ofaid received by African countries.

Trade revenue and energy budgets Box 2


and far away from urban centers, resulting in high production, transmissionand manufacture costs. Consequently, the unit costs for construction of elec-tricity networks are high. Thirdly, consumers have limited income or resourcesto pay, implying that revenues fail to cover operating and maintenance costs.

Suggested areas for further investigation

Overall, the under-listed themes require further investigation to guide the various stakeholders:

• Identifying and implementing measures to increase the averageper capita annual growth of energy consumption, which hasbeen observed to be static.

• Changing the current emphasis of devoting more of the publicsector investments from the education and health sectors to theenergy sector, to achieve a more robust level of economicgrowth, but also to improve the performance of the educationand healthcare sectors as well as ensure environmental sustain-ability. These objectives are in line with the MDGs.

• The packaging of energy sector projects as viable enterprises forprivate-sector intervention, taking cognizance of the challengesof low energy demand base, thereby leading to high energy pro-duction to consumption ratio. The very poor manufacturingbase and overall level of industrialization is a contributing factor.

Electricity production Table 3

Billions of kilowatt hours (BkWh)Average

growth rate

Group of countries 1990 2004 1990-2004

Low income 518.1 1,026.4 7.0

(SSA) 224.4 339.0 3.6

Lower middle income 1,828.6 3,903.4 8.1

Upper middle income 2,014.3 2,355.4 1.2

High income 7,426.7 10,087.3 2.6

World 11,787.7 17,372.0 3.4


II

• Challenges arising from the lack of domestic finances for energysector projects leading to undue reliance on external financing.New resources (capital, technology and human) from thedomestic private sector, financial institutions, civil society andend-users, could be identified to complement the resources fromthe public sector and donor agencies.

• The challenge of how to encourage regional bodies, for the pur-poses of facilitating the building processes of Africa’s economy,largely with the resources that exist in the region.

Conclusion

OFID’s assistance for Africa’s energy sector through project lending, technicalassistance and research grants for specific studies and investigations, will con-tinue. These resources will be used to assist several African countries augmenttheir own funds through the co-financing process. OFID expects the Workshopto assist in the formulation of a research and investigations agenda related tothe various issues that have been identified. Energy policy options needed toalleviate poverty and achieve the MDGs could be formulated, backed by thefindings from the research efforts. To ensure that energy poverty in society isfully addressed in the national planning processes, OFID hopes that manyAfrican countries will integrate energy poverty issues raised in the nationalPoverty Reduction Strategy Papers (PRSP).

Sectoral distribution of OFID’s financing Table 4

Cumulative approvals – December 31, 2006

Energy sector percent Energy/All sectors Regions $ million distr. percent

1 Africa 369.3 34 6.8

2 Asia 636.8 59 11.8

3 Latin America and the Caribbean 81.0 7 1.5

Total 1,087.1 100 -

Total (all sectors) 5,396.2 - 20.1


Bibliography

BUSINESS TIMES OF NIGERIA (2008). February 10, 2008.

FORUM FOR ENERGY MINISTERS IN AFRICA (2005). Report on the FEMA Ministerial Meeting. Entebbe, Uganda, August 3, 2005.

IMF SURVEY (2008). vol. 37, no. 3, March 2008.

INTERNATIONAL COUNCIL OF SCIENCE (ICSU) (2007). Regional Office for Africa: Sustain-able Energy in Sub-Saharan Africa. July 2007.

IYER, VIJAY S. Africa Energy Access and Security – Some Ideas.

NJUGUNA, ANGELICA E. AND STEPHEN N. KARINJI (2007). Macroeconomic Policy Space and African Economies: An Empirical Shifting through Reality and Rhetoric. African EconomicConference, Addis Ababa, Ethiopia, November 15-17, 2007.

OPEC BULLETIN (2008). vol. XXXIX, no. 2, February 2008.

POWER ENGINEERING SOCIETY GENERAL MEETING (2005). IEEE, June 12-16, 2005, vol. 2, 1801-07.

SUBRAMANIA, ASHOK AND JACOB GRANIT (2004). The World Bank and the Nile Basin Initiative. February 2004.

TEYSSEN, JOHANNES (2007). World Energy Council Europe, Sustainability Symposium onEnergy Development in Africa. TU Delft, November 2, 2007.

UN-ENERGY/AFRICA. Energy for Sustainable Development: Policy Options for Africa.

WORLD BANK (2007). World Development Indicators 2007. Washington DC.


1. Introduction

This chapter discusses the roles of the African Development Bank (AfDB) in sup-port of the energy sector in Africa. This is in line with two of the bank’s keygrowth strategies, namely, regional integration and infrastructural develop-ment. After recalling some of the key features of the African energy sector, thepaper focuses specifically on regional interventions for achieving integrationthrough the construction of power generation plants and high voltage (HV)transmission lines that make the development of a transnational electricitymarket possible. Such projects, as well as the parallel activities in support of thedevelopment of utilities at country and regional levels, aim at reducing energypoverty in Africa by fostering conditions for the better availability, accessibilityand affordability of modern energy. Although this paper reports on the elec-tricity sector, it is worthwhile to underscore that AfDB is also active in collat-eral sectors like rural electrification, promotion of renewable and clean energy,development of small power plants and off-grid power systems. The bank is alsoinvolved in the energy sector at large, through participation in projects in theoil and gas industry and cogeneration schemes from biomass.

2. The energy sector: worldwide prospects and trends

The findings of most recent surveys indicate that energy use across the world willcontinue to grow inexorably in the future. Fossil fuels will continue to dominatethe energy mix and developing countries’ consumption will increase rapidly,approaching the level of Organization for Economic Co-operation and Develop-ment (OECD) nations, who are the largest consumers of commercial energy.

Currently, more than a quarter of the world’s population lacks access toelectricity and 40 percent still rely on traditional biomass for their basic energy

IIIRegional Integration of Power Systems: A Tool for Reducing Energy Poverty and Accelerating Economic Growth

Roger M. Gaillard


needs. Despite the increase in the absolute number of people with access topower supply, 1.4 billion people will still be without electricity in 2030, with650 million of them in Africa, compared to 509 million today.

3.The energy sector: situation in Africa

Several African nations, including oil-producing countries, are confrontedwith serious deficiencies in energy supply in all its various forms. Inefficientmanagement of utilities, corruption, protracted conflict and short-sightednesshave deprived most countries of the energy supplies needed to fuel theirgrowth process. In many cases, the investments needed to rejuvenate theenergy sector are beyond the financial capacity of the domestic economy,both public and private. Moreover, the activities of public utilities often havea huge impact on the management of the economy, especially when importedfuels are bought with foreign exchange and end-users pay in local currency atrates below full-cost recovery.

The paradox is that even though energy is desperately needed for eco-nomic growth and poverty reduction, Africa, a net exporter of commercialenergy, is very poor. Africa produces 7 percent of the world’s commercialenergy, but consumes only 3 percent. As if to compound the problem, the percapita consumption in sub-Saharan Africa (SSA) from 1990-2000 was indecline. This is not a positive signal given the correlation between GrossDomestic Product (GDP) growth and the consumption of energy.

Access to sustainable energy is a key factor for promoting social progressand economic growth, both of which are closely linked to sustainable povertyreduction. Energy plays a critical role in efforts to achieve the Millennium Devel-opment Goals (MDGs). Lack of access to adequate, affordable, reliable, safe andenvironmentally friendly energy is a severe constraint on development.

History and empirical research have shown that there is a close correla-tion between the use of energy (electricity) and the quality of life. Surveys inthe 1990s have established that developing countries’ achievement of sustain-able socio-economic growth can be measured by energy consumption. Forannual electricity consumption below 1,000 kWh per capita (where 60 per-cent of the world population falls), indicators like literacy rate and access to potable water remain respectively under 40-50 percent. However, when the per capita consumption reaches 2,000 kWh, the same indicators rise to85-90 percent. This correlation has also been established for human develop-ment indicators like infant mortality or life expectancy.


III

4. Energy resources distribution in Africa

The fact is that energy resources are not equally distributed and available overthe continent. Coal, oil, large rivers, biomass and fuelwood, solar, geothermaland wind potentials are unevenly distributed over Africa, resulting in cruelimbalances between countries and regions. Despite having a great deal ofunder-exploited energy sources, both non-renewable and renewable, Africa dis-plays the lowest per capita consumption of electricity, with an average ofapproximately 400 kWh per capita per year in the SSA region.

Electricity consumption / population (kWh per capita)

TanzaniaCongo

Gabon

Cameroon

Côte d’IvoireKenya

Zimbabwe

Eritrea

Ghana

Senegal

Benin

Botswana

DemocraticRepublic of

Congo

Mozambique

Namibia

Nigeria

South Africa

Togo

Algeria Libya Egypt

Sudan

Ethiopia

Tunisia

Morocco

Zambia

Angola

4,5002,5001,000

5000

tototototo

5,0003,0001,5001,000

500

Source: OECD / IEA 2006

Figure 1


5. The need for interconnection of energy systems

Poor people see access to energy as a priority, not for the energy in itself, but forthe “energy services” it provides, like cooking, lighting, heating, water pump-ing and transport.

There is ample evidence to suggest that improved access to sustainableenergy in the rural areas spurs economic growth, enhances social progress and reduces poverty. Energy, however, is not just about electricity; neither iselectricity always the best energy source for all needs, as biomass, kerosene andother sources are important too. Given that there is little doubt about theimportant role that sustainable access to energy plays in growth and povertyreduction, it is imperative to improve access to sustainable energy among therural and urban poor in Africa.

In spite of the abundant energy resource potential in Africa, many coun-tries have not been able to create the conducive environment to attract invest-ment in the development of the energy sector. In addition, the small size ofAfrican energy systems and markets does not allow for profitable business ven-tures in the sector. Against this background, most of the Regional EconomicCommunities (RECs) are encouraging the establishment and operation of sub-regional power pools, joint development of hydro-power projects, cross-bordertransmission lines and gas pipelines. Examples are the Inga Hydropower Proj-ect, the Organization Pour la Mise en Valeur du Fleure Senegal-Senegal RiverDevelopment Organization (OMVS) and the Gambia River Basin DevelopmentOrganization (OMVG) programs as well as the West African Gas Pipeline Proj-ect. Some RECs have also adopted a legal and regulatory framework with fiscalincentives and guarantees aimed at “dispelling the risk” for investors in theenergy sector at the regional level. A case in point is the Economic Commissionof West African States (ECOWAS) Energy Protocol. Africa is the least intercon-nected region in the world, whereas electric interconnections have long beenwell established in most of the industrialized countries. This allows for betterbalancing of supply and demand between countries with different resources orhaving resources of a different nature. It is also an important means to takeadvantage of the difference in time for the activities occurring from the easternend of the globe to the western. For example, within Europe, some countrieswith abundant hydro-resources have installed pump storage schemes or haveinvested in nuclear power plants in neighboring countries. At certain periodsof the day they can store energy at cheap cost or buy and import electricity fromcountries with excess during the night, when industrial and human activitiesare low. Then they sell back or export the electricity during peak hours, when


III

the demand, and hence the price, are high. This is only possible due to inter-connection of infrastructure, joint investments in power generation plants, andadequate systems for the trade of energy between countries, and not least, effi-cient authorities ruling and regulating the market. In short, international andregional integration allows Europe or North America to use energy more effi-ciently and to have sufficient spinning reserve to assure network stability andtherefore high-quality supply of electric energy.

6. Activities and operations of AfDB

The AfDB has retained regional integration as one of the priority areas for tar-geting in its interventions. In the energy sector and more specifically in the elec-tricity sector, significant resources are now earmarked for projects with regionaldimensions.

Flagship projects involving several countries are currently part of AfDB’sportfolio, or are well advanced for receiving financial support for their develop-ment or implementation.

Significant examples include the OMVG energy program in which thebank has long been active. The project will soon materialize with the contribu-tion of several donors amounting to more than $1 billion. Recently, the bankalso approved the financing of the overall study of the Grand Inga site in the

Activities and operations of AfDB diversified across all regions and critical sectors (in percent)

Total approvalssince inception:

$59 billion

North AfricaWest AfricaEast AfricaSouthern AfricaCentral AfricaMultiregional

32.523.415.213.111.84.0

Agriculture and rural developmentTransportMulti-sectorFinanceSocialPower Supply

16.715.413.811.69.3

Water supplyIndustryOther

17.6

7.85.22.5

Figure 2

REGION SECTOR


Democratic Republic of Congo for $16 million. The project is so massive it cansupply a large part of the continent and even inject electricity into southernEuropean grids. The bank is also considering participating in the €200 millionconstruction of the Gigel Gibe III Hydropower Project in Ethiopia. Last, but notleast, both private and public sector windows of AfDB are working on the struc-turing of the Mamabula Thermal Power Project in Bostwana, with an unprece-dented financial outlay that may amount to more than $1 billion. The commonfeature of these projects is that they are designed for exporting electricity toneighboring countries. The aim is to exploit resources that are abundant at agiven place for producing electricity in order to transfer it, under commercialterms, to less favored areas, thus enabling some poor countries to become sig-nificant players in the energy production/trade sector. The ultimate objectiveis to support the creation of regional and continental electricity markets for theeconomic growth of Africa. Such ambitious but realistic schemes will, at thesame time, satisfy the three key considerations in energy use: availability, acces-sibility and affordability. For this purpose, the interconnection of power linesis necessary. The Bank, therefore, also actively supports this sector, which is nec-essary for regional integration.

The AfDB is currently funding several ongoing projects including theinterconnection ventures between Kenya and Ethiopia, Chad and Cameroon,Mali and Côte d’Ivoire and so on. Between 2007 and 2010, the Bank will haveallocated more than 2.5 billion units of account for electricity generation andtransmission/distribution on a regional scale. With the Bank being only onefinancier among several others on these projects, the leverage effect can bebetween three to five, resulting in capital costs of the projects close to 10 billionunits of account. This is excluding strictly national projects and Bank supportto sub-sectors like rural electrification, renewable energy promotion, reformsand capacity building for authorities and utilities. The outcome of this three-year program will be several millions of additional customers and families having access to modern energy for their everyday lives. It is expected that thiswill be complemented by other donors, institutions, Non-GovernmentalOrganizations (NGOs) and private-sector investors, who all understand thatenergy poverty is one of the main insidious components of poverty.

There is an obvious trickle-down effect of regional integration of energysystems as it impacts all layers of human and socio-economic activities. Energyis a non-negligible component of the production costs of goods and services.Therefore, a better quality and reliability of supply will increase the competi-tiveness of African products, thereby fostering exchanges and trade. This wouldin turn contribute to revenue growth and the alleviation of poverty.


III

7. Conclusions and recommendations

Without addressing the issue of energy poverty specifically in the SSA region,African economies would have difficulties taking off at a sufficient pace; first,to achieve the MDGs by 2015; and second, to provide a reasonable quality of lifeto a population that is projected to double by 2030.

To face this challenge, AfDB will continue to direct its relatively limitedresources into energy projects that have the highest impact in terms of the pop-ulation served. It will continue to support governments, authorities, regionalorganizations and private entrepreneurs. The Bank will do so by acting as a wise adviser, financier, facilitator and an honest broker in assuring that theavailability, accessibility and affordability aspects of the energy supply chain areequitably balanced and respectful of the environment in the proper utilizationof resources. With the creative arrangements made under the recently replen-ished AfDB’s 11th Resource Replenishment (ADF XI) for allocating significantresources to regional projects, the Bank will be the key player in partnershipwith other institutions. It will also collaborate with initiatives like the New Part-nership for Africa’s Development (NEPAD) and the Infrastructure Consortiumfor Africa, so as to change the energy map of the continent.

The numerous authorities created at national and regional levels such asthe RECs and various other initiatives deployed by sister institutions and NGOs,will receive due attention from the Bank, which will always consider their inter-ventions alongside its own operations.

The AfDB will also encourage and participate maximally in the develop-ment of initiatives and actions by the various power pools created in Africa. TheBank will also partner with continental or international actors like the AfricanEnergy Commission (AFREC), which launched the African Energy InformationSystem (AIES). By building databases of statistics and information on theAfrican energy sector, the AIES is performing a crucial role. Sound knowledgeof the energy sector is now very important for decision makers. This is becauseit helps them to adopt and implement appropriate policies and strategies in aglobalized world, where energy access has become the most important chal-lenge for preserving peace and stability as well as providing support for thesocio-economic growth of the less developed regions.


1. Energy security in the African context

Worldwide demand for energy is likely to increase significantly over the comingdecades, particularly in developing countries. Three-quarters of the projectedincrease in carbon dioxide emissions will come from fossil fuel consumption in non-Organization for Economic Co-operation and Development (OECD)countries. Commercial energy supply is increasingly concentrated on a smallnumber of countries. These current patterns of global energy production andconsumption are set to face multiple challenges: global warming and otherenvironmental concerns, geopolitical conflicts, significant rises in fuel priceand depletion of fossil fuel reserves. Consequently, the social dimensions (fightagainst poverty), the economic dimensions (competitively priced energy, secu-rity of supply) and the environmental dimensions of these energy demand andsupply patterns, constitute a huge challenge to the achievement of sustainabledevelopment objectives.

High and highly volatile energy prices have moved global energy securityto the top of the political agenda. Energy security was, for example, one of thesubjects of the Summit of the Group of Eight (G8) leaders in July 2006. Not hav-ing access to energy services is an obvious case of energy insecurity. Comparedwith other parts of the world, energy deprivation or the lack of access to energyis by far the most prevalent in Africa. Over the last four decades, the gapbetween energy supply and demand in Africa has been (and is expected to con-tinue) growing (UN-Energy, 2007). Since access to affordable energy services isa key determinant of economic growth and poverty reduction efforts, Africacontinues to face critical challenges related to its energy sector. These chal-lenges include the use of renewable energy; improving energy efficiency; thediversification of energy supply; the development of energy infrastructure; andthe promotion of new (energy) technologies by exploiting innovative modelsof technology transfer. Others are energy trade and regional integration; reform

IVPowering Industrial Growth: The Challenge of Energy Security for Africa

Pradeep Monga


of the continent’s electricity industries; and the economic vulnerability ofAfrican countries to oil price fluctuations. Within Africa, the situation differsdramatically between rural and urban regions as well as between Northern, sub-Saharan and Southern Africa. North Africa is heavily reliant on hydrocarbons,Southern Africa depends to a very high degree on coal, and in sub-SaharanAfrica (SSA) (except South Africa), traditional biomass is by far the dominantfuel. This high degree of intra-African variability requires differentiatedapproaches to tackle the issues related to the continent’s energy security.

Energy security may be defined as “a country’s ability to expand and opti-mize its energy resource portfolio and achieve a level of services that will sus-tain economic growth and poverty reduction” (RIVM, 2004). The InternationalEnergy Agency (IEA) defines energy supply to be “secure” if it is adequate,affordable and reliable (IEA, 2007a).1 From the different definitions of energysecurity, two broad dimensions may be distinguished: a physical/quantitydimension – risks related to physical supply shortfalls occurring between produc-tion and consumption due to infrastructural failure; and an economic/pricedimension – the risks of price distortions caused by fluctuations in the price ofenergy products on the world markets. Essentially, energy security rests on twoprinciples: using less energy to provide energy services (i.e., improving energyefficiency), and having access to technologies (and fuels) that provide theseenergy services in a sustainable manner. Therefore, energy security encom-passes supply-side and demand-side options. Both principles are typically notwell met in Africa.

From an African perspective, energy security requires a broader definitionthan just the availability of a regular supply of energy at an affordable price.Energy security is a complex topic with linkages to numerous other sustainabledevelopment objectives. Because of this strong nexus between energy produc-tion/use and human development (UNDP, 2000, 2007b, 2007c, 2007e; FEMA,

1 A list of energy security definitions can be found in UNIDO (2006). Another aspect of energy securitythat is of importance to energy producers is “demand security,” the predictable demand pattern (vonHirschhausen, 2005).

2 FEMA was established to provide political leadership, policy direction and advocacy to increase accessto, and better utilization and management of, energy resources for the continent’s sustainable devel-opment. FEMA’s website can be accessed at http://www.fema-africa.net.

3 In the declaration, ministers identified the need to: increase access to modern energy services, andaddress the significant negative health and environmental implications of heavy reliance on tradi-tional biomass energy; utilize Africa’s rich energy resources, which are currently underexploited orexported without benefiting the majority of Africa’s citizens; increase financial flows to match Africa’senergy investment needs; and promote a better mix of energy supply options, ranging from existingconventional options to renewable energy sources, to strengthen Africa’s energy security.


IV

2006) (and also because there are no energy-specific Millennium DevelopmentGoals (MDGs)), energy security must, therefore, be integrated into energy poli-cies alongside other policy objectives, such as developmental and environmen-tal goals. In the context of Africa, the issues of access to energy services andaffordability assume special significance in facilitating the achievement of theMDGs. An efficient and effective energy infrastructure is a precondition for eco-nomic development in general, and for industrial development (as measured inincreases in productivity and competitiveness) and diversification in particular.Yet most forms of energy infrastructure are very capital-intensive and oftenrequire large-scale investment, which many African country governments findalmost impossible to finance (UNCTAD, 2007c). Figure 1 shows the linksbetween energy use and the MDGs.

There are a number of initiatives to address these issues in Africa. Toachieve its objectives and the MDGs, the Forum of Energy Ministers of Africa(FEMA)2 proposed to fulfill the following energy-related targets by 2015: theconsumption of modern energy services should be doubled; 50 percent ofinhabitants in rural areas should use modern fuels for cooking; 75 percent of thepoor in urban and peri-urban areas should have access to modern energy serv-ices; 75 percent of schools, clinics and community centers should have accessto electricity as this would enhance their competitiveness. Also, mechanicalpower should be available to rural areas. African ministers convening underFEMA met in Maputo in March 2007, where they adopted the “Maputo Decla-ration on Energy Security and Sustainability in Africa.”3 Table 10 provides anoverview of energy targets agreed by the African ministers.

Source: UNECA (2006b)

Relationships between energy and achievement of the MDGs

Access to affordable, reliable and sustainable energy services

Figure 1

Incomes Agricultural productionIncreased consumption

Education Health

MDG 1 MDG 2 MDG 3 MDG 4 MDG 5


In the New Partnership for Africa’s Development (NEPAD)4 Framework Docu-ment, governments adopted several energy-related targets, including those to:increase African people’s access to reliable and affordable commercial energyfrom 10 percent to 35 percent or more within 20 years; improve the reliabilityand lower the cost of energy supplies to productive activities, in order to enablea 6 percent annual economic growth; rationalize the territorial distribution ofexisting but unevenly allocated energy resources; and reverse environmentaldegradation associated with the use of traditional fuels in rural areas. Other tar-gets aim to exploit and develop the hydro-power potential for the river basinsof Africa; integrate power grids and gas pipelines to facilitate cross-borderenergy flows; and, reform petroleum regulation and legislation. These targetscan be considered a quantification of African energy security and reliabilityobjectives, whereas almost all of these targets immediately relate to the issue ofaccess to energy services.

This paper raises aspects related to energy security in an African contextby focusing on the industrial sector. Strategic priorities to address the issueinclude: renewable energy, including agro/bio/fuels, for enhancing access toenergy services and industrial applications, and energy efficiency for industrialproductivity and competitiveness. Industrial productivity is one of the centraldeterminants of a country’s prosperity. Other aspects in the context of Africanenergy security include the diversification of energy supply and demand; devel-opment of energy infrastructure, with attention to its resilience; promotion ofclean and affordable energy sources and technologies; as well as decentraliza-tion of energy production through development of local energy resources andsystems. Others are the role of energy trade and regional integration;energy/power sector reform (of which energy pricing is an essential compo-nent) as well as the economic vulnerability of many African countries to oil(and commodity) price fluctuations.

2. Global and African demand and supply patterns

Global trends

Worldwide demand for energy is likely to increase significantly over the nextdecades, particularly in developing countries. This increase is projected to takeplace in all world regions and for all fuels:

• The Intergovernmental Panel on Climate Change (IPCC) proj-ects that the energy demand in developing countries and tran-sition economies could increase by a factor of three to five by


IV

2050. During this period, all IPCC scenarios suggest that themain sources of primary energy will remain a combination ofcoal, oil and gas, providing between 60 percent and 80 percentof the energy mix in 2050.

• The Energy Information Administration (EIA) of the USDepartment of Energy projects an increase of (commercial)world energy demand by 57 percent from 2004 to 2030 (EIA,2007). Three-fourths of the projected increase in carbon diox-ide emissions results from fossil fuel consumption in non-OECD countries.

• The IEA (2007e) expects an increase of global energy demandof 55 percent by the year 2030; while energy demand in thedeveloping world is likely to more than double over the pro-jected period. Table 1 shows projected global energy demandon a fuel basis.

World primary energy demand, 2005, 2015 and 2030 Table 1

Million tons of oil 2005 2015 2030 2005-2030equivalent (Mtoe) percent p.a.

Coal 2,892 3,988 4,994 2.2

Oil 4,000 4,720 5,585 1.3

Gas 2,354 3,044 3,948 2.1

Nuclear 721 804 854 0.7

Hydro 251 327 416 2.0

Biomass and waste 1,149 1,334 1,615 1.4

Other renewables 61 145 308 6.7

Total 11,429 14,361 17,721 1.8

4 The objective of NEPAD is to stimulate Africa’s development by bridging existing gaps in priority sectors, including agriculture, health, education, infrastructure, information and communicationstechnology, environment, tourism, and science and technology. NEPAD’s website can be accessed athttp://www.nepad.org/.

Source: IEA (2007e)


This massive increase in projected energy demand raises important energy secu-rity concerns for energy importing nations. With respect to the physical dimen-sion of energy security, on the global scale, there is an increasingly poor geo-graphical correlation between commercial energy supply and demand. Interna-tionally traded energy accounts for a growing share in total energy use. In thecase of oil, for example, a small number of suppliers account for an increasingshare in total supply. Concerning the economic dimension of energy security,on the global scale, there is enough capital available to finance energy supplyprojects (including their transport infrastructure). However, in poor regionssuch as Africa, it is by no means guaranteed that the necessary capital flows willbe forthcoming.

Two-thirds of the world’s oil and one-third of global gas reserves are in theMiddle East, mostly in the Gulf region. Although these countries currentlyaccount for some 27 percent of global crude oil supplies, they are expected todouble their share by 2010. Africa accounts for 114 billion of the world’s 1,317billion barrels of proven oil reserves and 484 trillion of the 6,183 trillion cubicfeet of proven natural gas reserves (EIA, 2007).

Currently, renewable energy technologies supply 13.1 percent of theworld’s primary energy mix, but 25 percent of the developing countries’ energysupply, mainly in three forms: traditional biomass for heating and cooking inrural areas, modern biomass combustion, and hydro-power (IEA, 2007c). The IEA(2007e), in its reference scenario, projects that the global share of renewables inelectricity generation will increase from 18 percent currently to 21 percent by 2030.

Industry (excluding non-energy use) accounts for about one-third ofglobal final energy consumption.5 On a regional basis, this share ranges from18 percent in Africa to more than 40 percent in China, reflecting the relativeimportance of the industrial sector in energy use and also its contribution to aregion’s GDP.

African trends

On the African continent, much more energy is produced than consumed. In2005 the production of coal was 39 percent higher than consumption. The cor-responding numbers for crude oil and natural gas are 236 percent and 119 per-cent, respectively. However, this does not imply that there are no energy secu-rity issues. There is a high degree of intra-African diversity in energy demand

5 Industry is defined as sector D (Manufacturing) under the International Standard Industrial Classifi-cation (ISIC). Industry is not only an important consumer of final energy but also an energy producer.


IV

and supply that largely reflects the diverging regional resource endowments.Africa’s energy sector is best understood as three distinct clusters: North Africa,Southern Africa and sub-Saharan Africa. North Africa is heavily reliant onhydrocarbons, Southern Africa depends to a very high degree on coal, and insub-Saharan Africa (excluding South Africa) traditional biomass is by far thedominant fuel.

The strong growth in total energy production was a result of robustgrowth in North and West African crude oil production. The share of bio-mass in total primary energy supply (TPES) decreased from 62 percent in1971 to 47 percent in 2005. However, Africa’s use of combustible renewables(mainly fuelwood) still remains significantly higher than the world average.Combustible renewables provide most of sub-Saharan Africa’s householdenergy needs. The presence of large forests, agro-industry, agriculture, a largerural population, and a low GDP per capita has resulted in a massive use ofbiomass in cooking. This helps explain the extremely high share of biomassin the African energy mix compared to the world average of 10 percent (IEA,2007b).

Global per capita energy consumption is very unevenly distributed whenviewed in terms of electricity consumption. Whereas average annual electricityconsumption in the OECD is around 9,000 kWh per capita, it is only 1,157 kWhin developing countries on average, and in several sub-Saharan African coun-tries, it is around 100 kWh. In ECOWAS countries, for example, the average per capita electricity consumption is only 88 kWh annually. Africa’s energy

Basic energy indicators for country groups Table 2

Traditional fuel consumption (percent of total

energy requirements), 2003

Electricity consumption per

capita (kWh), 2004

GDP per unit of energy use (2000PPP $ per kg of oil

equivalent)

Per capita CO2 emissions (metric tons),

2003

All dev. countries 26.3 1,221 4.6 2.2

Sub-Saharan Africa 81.2 478 – 0.8

OECD 4.6 8,795 5.3 11.2

World 21.7 2,701 4.8 3.7

Sources: UNDP (2006) and UNDP (2007e)


intensity is higher than the world average despite low electrification rates andless developed industry and transport sectors. This clearly points to a low over-all energy efficiency. In addition, energy intensity has not improved since 1971(Figure 5). Table 2 presents basic energy indicators for individual African coun-tries. Thirty-four of the 50 Least Developed Countries (LDCs) are in Africa.

In 2005, Africa produced 12 percent of world crude oil and exported 79 percent of its production. With the exception of Egypt, the major oil produc-ers in Africa all registered strong growth in 2005. Nigeria, Algeria, Libya, Angola and Egypt accounted for 83 percent of African production. In 2005,Africa’s production of crude oil averaged 8.856 million barrels per day. Algeria,Angola, Libya, and Nigeria are the main oil producers. Other oil producers areCameroon, Chad, Congo, Côte d’Ivoire, Egypt, Equatorial Guinea, Gabon,Mauritania, the Sudan and Tunisia.

Natural gas experienced the fastest increase in primary energy productionbetween 1971 and 2005, with natural gas TPES increasing from 1 percent to 12 percent. Almost all African gas production comes from Algeria, Egypt andNigeria, at 52 percent, 25 percent and 11 percent respectively. More than halfof African natural gas production is exported, both by pipeline and LNG.Africa’s production of natural gas in 2005 averaged 171,735 million standardcubic meters, which represented an increase of 13.1 percent from 2004. Thisraised Africa’s share in world gas production from 5.5 percent in 2004 to 6.1 per-cent in 2005. Algeria accounted for 50 percent of Africa’s total production ofgas, followed by Egypt, Libya, and Nigeria, together accounting for about 44 percent in 2005. The increase in African production of natural gas is explained bytwo main factors. The first is related to the acceleration of substitution of crudeoil by natural gas in the generation of electricity around the world. The secondreason is the high level of international prices for both oil and gas, whichincreased the level of extraction of gas on the continent (UNECA, 2007).

In 2005, South Africa accounted for 97 percent of Africa’s total coal pro-duction and 90 percent of consumption. Also, South Africa remains the world’sfifth-largest producer of coal. A third of the coal is exported, 38 percent is usedin electricity generation and 16 percent is converted in coal liquefaction andgasification plants.6

6 In the industrial sector, increasing use of coal in Africa is expected for several purposes, including theproduction of steam and process heat for industrial applications, production of coke for the steelindustry, and production of coal-based synthetic liquids. Currently, two commercial-sized coal-to-liq-uids plants (Sasol II and Sasol III) in South Africa supply about 28 percent of the country’s total liq-uid fuel requirements. The two plants together are capable of producing 150,000 barrels of syntheticliquids per day (EIA, 2006).


IV

Electricity production and consumption largely reflects the disparity in fossilfuel resources between regions of Africa. North African countries and SouthAfrica generate 79 percent of the continent’s total electricity.

Figure 2 highlights the continent’s diversity concerning energy produc-tion by fuel type.

Between 1971 and 2005, total African energy consumption increased atan average annual rate of 3.3 percent to 605 Mtoe. Figure 3 shows the conti-nent’s fuel shares in 1971 and 2005. However, as stated above, this averagemasks important regional differences in energy consumption. For example, thebiomass share in TPES for the whole continent stands at 47 percent, while forSouth Africa it amounts to 15.4 percent, in Libya 1.4 percent, in Egypt 2.3 per-cent, and in Ethiopia > 90 percent. Conversely, and not surprisingly, the shareof hydrocarbons is the highest in North and West Africa.

While average per capita commercial energy consumption in Africa isestimated at 313 kilograms of oil equivalent, the average figure for African LDCsis only 30.4 kilograms of oil equivalent. Many LDCs are characterized by verylow commercial energy consumption such as 5 kg of oil equivalent in Chad, 13kg in Mali, 19 kg in Burundi, 20 kg in Uganda and 21 kg in Mozambique(OSCAL, 2001).

Source: IEA (2007b)

Regional energy production in Africa, 2005 Figure 2

0

50

100

150

250

200

300

350

North Africa East Africa Southern Africa Central Africa West Africa

MtoeOtherCombinedrenewablesGasOilCoal


Five countries dominate the demand for refined oil products: Algeria, Egypt,Nigeria, Libya, and Tunisia, accounting for almost 65 per cent of the totalAfrican consumption of refined products in 2005.

At the end of 2005, African proven reserves of crude oil represented 10.2percent of the world’s total, while reserves of natural gas in Africa accounted for7.9 percent of the world’s total. Algeria, Libya, and Nigeria lead in terms ofproven reserves with a share of 76 percent of total African reserves, followed byAngola, Egypt, Gabon and the Sudan with a combined share of 18.4 percent.Africa continues to be a net exporter of crude and refined oil products. In 2005,exports of crude oil reached 6.477 million barrels per day, which represented anincrease of 1.8 percent from 2004. Sixty-eight percent of the gas reserves are injust two countries, Algeria and Nigeria. Table 3 shows African oil and gasreserves as of end of 2005 (UNECA, 2007).

3. Energy efficiency for industrial productivity and competitiveness

One of the principal aims of the United Nations MDGs is to halve extremepoverty by 2015. To achieve this goal, developing countries are in need of avibrant private sector with entrepreneurs making investments and creatingjobs. Enhancing productive capacities7 also directly contributes to UNIDO’stwin objectives of promoting sustainable industrial development and environ-mental protection. While some industrial sectors have reduced the problem of energy access by using decentralized on-site power generation, energy

Source: IEA (2007b)

African energy consumption fuel shares, 1971 and 2005

Combined renewables

Oil

Coal

Gas

Other

Figure 3

62% 18%

18%

12%

1%

1%

1% 1%

22% 47%

Hydro

17%1971

198 Mtoe

2005605 Mtoe


IV

African oil and gas reserves as of end 2005 Table 3

Algeria 12.2 2.015 16.6 4.58 87.8 52.2

Egypt 3.7 0.696 14.6 1.89 34.7 54.4

Libya 39.1 1.702 63.0 1.49 11.7 n/a

Tunisia 0.7 0.074 25.2 - - -

Nigeria 35.9 2.58 38.1 5.23 21.8 n/a

Angola 5.4 1.242 19.9 0.31 0.93 n/a

Equatorial Guinea 1.765 0.355 13.6 0.04 1.4 n/a

Sudan 0.6 0.379 46.3 0.09 0 -

Gabon 2.5 0.234 25.8 0.034 0 -

Congo-Brazzaville 1.5 0.253 19.3 0.091 0 -

Cameroon 0.4 0.06 n.a 0.11 0 -

Chad 0.9 0.173 14.3 0 0 -

South Africa 0.157 0.2308 n/a 0.037 3.11 n/a

Côte d’1voire 0.1 0.0538 n/a 0.03 1.43 n/a

Other Africa 0.4 0.07 12.0 0.46 0.13 n/a

Total 114.3 9.835 31.8 14.39 163.3 88.3

Country Oil reserves (billion barrels)

Oil production (mb/d)

Gas reserves (tcu.m)

Gas production (bcu.m)

R/P(years)

R/P(years)

7 “The productive resources, entrepreneurial capabilities and production linkages which together deter-mine the capacity of a country to produce goods and services and enable it to grow and develop”(UNCTAD, 2006).

Source: 2007 BP Statistics, African Business, Jan. 2007

n/a = not available


efficiency problems are very often a considerable impediment to African indus-trial development. A broad consensus has emerged that one of the major chal-lenges facing Africa is, for the continent as a whole, and more so for sub-Saha-ran Africa, converting comparative advantages, the cornerstone of trade theory,into industrial competitiveness (UNIDO, 2007a).

Energy industries have an impact on many policies, including transport,environment, industrial competitiveness and economic development. There-fore, a competitive, energy-efficient industrial sector improves a country’s over-all economic competitiveness. The productivity of most African industry iscompromised by the lack of a coordinated approach to energy efficiency tech-nologies and measures.8 A substantial improvement in efficient consumption ofenergy, especially electricity, by the manufacturing and service sectors is nec-essary to improve the productivity and competitiveness of African industry.

Competitiveness can be viewed at several levels – national, industrial, orfirm – as well as domestically and internationally. As both national and evenindustry comparisons are based on aggregate measures, the clearest analyticalapproach to look at competitiveness is at the firm level. Here, competitivenessis defined as the firm’s ability to maintain or increase market-share based onits cost structure, quality, or other perceived attributes. Ultimately, nationalcompetitiveness depends on the competitiveness of individual companies.Industrial competitiveness is generally viewed as an industry’s ability to exportits goods, with industry being defined as a group of firms that produces simi-lar goods.

Depending on the firm’s cost structure and adaptation, competitivenessis affected both domestically and internationally. Domestically, these impactsinclude changes in the market shares and profit margins of firms within thedomestic industry. Also, the factors include increased competition fromimported goods as well as changes in the return on investment, and thus apotential shift of production between different firms or industries (or sectors).Internationally, the most direct measure is reflected in the firm’s ability to

8 Productivity is a measure of how efficiently the economies’ resources are transformed into the pro-duction of goods and services. It measures how much output is produced relative to the inputs of labor,capital (plant and equipment), and (energy consuming) technology. An increase in productivityimplies that more output can be produced with the same inputs. Productivity increases allow compa-nies to defend their competitive position. Investment in more energy-efficient equipment increasesthe productivity of the input energy. Similarly, at the national level, productivity is the single mostimportant determinant of sustained improvements in the standard of living of its citizens. Productiv-ity increases and wealth creation would facilitate increased spending on social programs, health care,higher education, cleaner environment, etc.


IV

maintain its export markets. The OECD (2006c) finds that sub-Saharan Africais the region with the lowest industrial productivity.

The issue of energy and competitiveness covers three levels. These are:measures related to the energy sector that affect the competitiveness of individ-ual fuels within a country’s energy system; the competitiveness of the wholeenergy sector, for example, as measured by the trade in energy products; and,how the productivity of a country’s energy sector affects the competitiveness ofthe whole economy, for example, as a result of lower energy prices.

The fact that demand for fuels is a derived demand allows, in many cases,a high degree of substitution between factors of production in order to producethe consumer-relevant energy services. The concept of energy services alsonicely bridges the supply side with the demand side. Improving efficiency oneither side, therefore, also contributes directly to sustainable consumption. Figure 4 outlines the linkages between energy efficiency at each stage of energyconversion and the corresponding sustainable development impact, as meas-ured by quality of life (social dimension), competitiveness (economic dimen-sion) and environmental implications.

Numerous studies show the potentials for improving energy efficiencyalong the conversion chain. Examples include high-efficiency motors and light-ing, district heating and heat/electricity cogeneration systems, heat pumps andbuilding insulation. Given the projected growth in global energy demand,energy efficiency plays a crucial role in the attainment of all dimensions of sus-tainable (industrial) development. At the global level, only some 37 percent ofprimary energy is converted to useful energy (UNIDO, 2001). Policy mechanisms

Sustainable development impacts of increased energy efficiency Figure 4

Energy securityQuality of lifeCompetitivenessEnvironment

ENERGYSERVICES

Primary energySupply side efficiency

Final energyDemand side efficiency

Useful energyDemand side efficiency

Decoupling by improving energy efficiency


to promote energy efficiency have been justified on the rationale of market failure, which prevents price signals alone from being sufficient to induce con-sumers to implement the socially optimal level.

The G8 Summit Declaration of June 2007 states: “Improving energy effi-ciency worldwide is the fastest, the most sustainable and the cheapest way toreduce greenhouse gas emissions and enhance energy security.” Africa’s highenergy intensity, coupled with the low levels of industrialization, points to an inefficient energy use. Figure 5 shows African electricity intensity, energy

Source: IEA (2007b)

African electricity intensity, energy intensity and energy production intensity

Figure 5

0

50

100

150

200

250

0.0

0.5

1.0

1.5

2.0

2.5Production/TPES

1971=100

1971 74 77 80 83 86 89 92 95 98 2001 05

Electricity/GDP

TPES/GDP

Production/GDP

Industrial energy intensity by country groups, 1990 and 2002 Table 4

Industrialized countries (25/25) 200 190 -0.4

Transition economies (7/22) 1,380 580 -7.0

Developing countries (53/100) 780 590 -2.3

Least developed countries (8/45) 700 640 -0.7

Country groups (Number of countries/total number in the group)

1990(toe/$106 of manufac-

turing value added)

2002(toe/$106 of manufac-

turing value added)

1990-2002 (Average annual

percentage change)

Source: Luken and Hesp (2006)


IV

intensity and energy-production intensity. As can be seen, overall energy inten-sity has not improved since 1971, and electricity intensity has even doubled overthat period. This trend is in stark contrast to OECD countries, where energyintensity improved (i.e., declined) significantly and electricity intensity stayedabout constant from 1971 to 2006. Luken and Castellanos-Silveria (2007) pres-ent a detailed analysis of decoupling of industrial energy consumption from thesector’s manufacturing value added for different country groups.

Table 4 presents industrial energy intensities, as measured in toe per mil-lion US dollars of manufacturing value added, for different country groupings.Industrialized countries’ industries require least energy for every dollar valueadded while industries in LDCs operate most inefficiently.9 The numbers indi-cate the significant potential for energy efficiency improvements.10

According to UNIDO (2007a), in terms of the degree of industrial devel-opment, measured by the share of manufacturing value-added (MVA) in GrossDomestic Product (GDP), African countries can be grouped into five categoriesa) Relatively advanced industrial stage – MVA/GDP ratio above 20 percent; b) Upperindustrial stage – MVA/GDP ratio of 15-20 percent; c) Intermediate industrial stage– MVA/GDP ratio of 10-15 percent; d) Low industrial stage – MVA/GDP ratio of 5-10 percent; and e) Very low-industrial stage – MVA/GDP ratio of less than 5 percent. While the degree of industrial development differs across Africancountries, only in a few countries is the share of manufacturing value-added inGDP above 20 percent. For a large number of countries in Africa, the manufac-turing sector’s contribution to GDP is less than 15 percent.11

An important element of energy security policy in Africa is tapping thepotential of cost-effective energy efficiency improvements in its industrial sector. The IEA (2007d) presents efficiency potentials for several industrial sub-sectors. If all developing countries met the developed country average manu-facturing energy intensity as of 2004, energy consumption could potentially bereduced by 70 percent. Also, increased energy efficiency in key sectors wouldcontribute to industrial and economic stability.

9 However, Africa is the most efficient region in aluminum production due to new production facilities(IEA, 2007d).

10 In the case of Ghana, for example, Van Buskirk et al. (2007) estimate an average energy savings poten-tial of 550 kWh/refrigerator/year, and a monetary savings of more than $35/refrigerator/year.

11 From 1980 to 2000, MVA in the developing world as a whole grew by 5.7 percent annually, as com-pared to 2.3 percent in the industrialized countries. MVA grew by 4.8 percent in the Middle East andNorth Africa and 1.7 percent in sub-Saharan Africa (Shapiro, 2007).


4. Renewable energy for productive uses and industrial applications

The key driving factors for an increasing renewable energy implementation inOECD countries are policies to mitigate climate change. In contrast, in devel-oping countries, which are generally characterized by a high share of non-com-mercial (renewable) energy, particularly in Africa, rising fossil fuel prices andenergy security concerns offer additional opportunities for renewable energy.The environmental characteristics of renewable energy systems and the energysecurity brought about by increased use of indigenous energy sources are themost common reasons cited for renewable energy promotion. However, energyflexibility and diversity issues, economic concerns such as regional develop-ment and the export potential of renewable energy technology in emergingmarkets are also important.

Africa has huge potential for renewable energy to meet its growing ruralenergy needs on a decentralized basis. Sub-Saharan countries are within thetropics and, therefore, offer the best potential for solar energy and biomass.North Africa is another promising region for renewable energy. Egypt, Moroccoand Tunisia account for 85 percent of the installed wind capacity in Africa andthe Middle East. North Africa is also becoming a focal point for solar thermalprojects.

This section focuses on productive uses and industrial applications ofrenewables. In the African context, renewable energy is also well recognized asa vehicle to improve energy access (dealt with in Chapter 5).

In developing countries, industry accounts for more than a third of totalfinal energy consumption,12 and 70 percent to 80 percent of this sector’s energydemand is for heat production (process heat for low or high temperature appli-cations). Given the topical concerns of global warming, environmental pollu-tion, energy security and international industrial competitiveness, there is anincreasing need for industry to make use of modern sources of energy. Solar andbiomass-based technologies have very considerable potential to meet, in a sus-tainable way, the growing energy needs of many industrial enterprises, espe-cially for small and medium-scale enterprises. Renewable energy technologieshave recently also proved economically competitive for meeting the growing

12 For Africa as a whole, due to a low degree of industrialization, this share is only 18 percent. In SouthAfrica industry accounts for 35 percent of total final energy consumption.

13 UNIDO (2007c) defines biofuels “as energy carriers derived from the conversion of biomass to providesustainable inputs for heat, power, and transport applications.” Biofuels can be liquid, solid or gaseous.The principle sources of biomass are agriculture and forestry.


IV

energy needs of SMEs. This, for example, is highlighted by enhanced use of solar(thermal) technologies for low heat/drying applications. However, currentlyonly a tiny fraction of solar energy is being used for industrial processes. Bio-mass-based fuels (“biofuels”)13 have recently attracted a lot of attention due totheir potential to displace conventional transport fuels. However, in the indus-trial sector, modern biomass technologies such as biomass gasification can con-tribute to the achievement of the above-mentioned concerns.

In this context, renewable energy sources and technologies for industrialapplications in energy-intensive small and medium-sized manufacturing enter-prises (SMEs) have been emerging as an increasingly attractive option to meetthe energy requirements for motive power and process heat for low-temperatureapplications. In addition to strengthening co-generation efforts, biomass gasi-fication and solar technologies have immense potential to meet the growingenergy needs of SMEs in developing countries. UNIDO is heavily involved inactivities to promote industrial applications of renewable energy (UNIDO,2004, 2007c, 2007d).

Key industrial applications of renewables include: power/process heatfrom biomass gasification, combustion and co-generation; biogas/power fromindustrial effluents/residues; power generation from industrial solid wastes; liquid biofuels for the transport/power sector; and solar thermal and photo-voltaic applications. Two sources of renewable energy are most relevant forapplication in SMEs: bio-energy and solar energy.

Solar heat for industrial processes (SHIP)

Electricity accounts for around 17 percent of global final energy demand, low-temperature heat accounts for 44 percent (of which traditional biomass used forheating and cooking in developing countries has a significant share), high-temperature industrial process heat accounts for 10 percent, and transport fuelsaccount for 29 percent. Salem (2007) estimates “that the energy demand thatcould be met by solar heat for industrial processes in the most suitable indus-trial sub-sectors in non-OECD countries is 2,250,000 TJ, which is equal to 6 per-cent of all energy used in the industrial sector.”

The use of solar energy has a long history in the residential sector, wheresolar collectors are used for domestic hot-water preparation, swimming-poolheating and space heating. Virtually 100 percent of all solar collectors world-wide are used for these applications. As of 2004, there was an installed solar-thermal capacity of 86 GW, covering 123 million square meters.


The industrial sector is well suited to solar (thermal) technology because of itshigh share and volume of energy required for process heat. Table 5 shows theheat and electricity shares in industrial final energy use for different worldregions. In non-OECD countries, for example, some 80 percent of total indus-trial energy use is required for heat processes such as drying, washing, hot-waterpreparation, pasteurization and sterilization. A significant potential for usingsolar heat is in the food and beverage industries, in the textile and chemicalindustries and for simple cleaning processes (such as car washes). In developingcountries, with their generally sunny climate and limited availability of com-mercial energy supply, solar thermal energy can be used to promote develop-ment while at the same time reducing emissions.

In addition to the high heat share, the temperature level for almost allapplications is below 250 °C – a temperature profile that could be well suppliedby solar thermal technologies (Table 6). The lower range of that temperaturelevel “can already be provided today with commercially available solar thermalcollectors” (ESTIF, 2006).

Biofuels applications

Biomass is far too precious to burn. Biofuels are one way of extending thefunctionality of biomass. Industry, and particularly SMEs, occupy key func-tions in: producing food, feed and fiber (food industry pulp and paper indus-try, etc.); pre-processing wastes and residues (for example, polarization); man-ufacturing equipment with various technologies (assembly/maintenance,logistics); and, converting feed stocks into biofuels (combustion, fermenta-tion, gasification, etc.).

Heat shares in industrial energy use Table 5

Region Heat share Electricity share(percent) (percent)

OECD 70.9 29.1

Non-OECD 80.4 19.6

Africa 78.0 22.0

Latin America 79.2 20.8

Asia (excl. China) 81.8 18.2

Source: Salem (2007)


IV

As highlighted in UNIDO (2007a), there is an urgent need to harness the vastpotential of renewable energy resources to promote growth and reduce povertyin Africa, and a growing realization that over-dependence on imported fuel andinefficient traditional energy impedes economic development. Biofuels canreduce dependence on imported fossil fuels and increase energy security as wellas mitigate climate change. Their production can also enhance rural economicdevelopment (UNCTAD, 2006b and 2006e). These benefits are difficult to quan-tify as they are externalities and not reflected in the market price of biofuels. Onthe other hand, there are potential trade-offs between the production of food,fuel and feed. The recent dramatic increase in agricultural commodity prices(“agflation”) is of particular concern for net food-importing developing coun-tries as well as the poor in urban populations (OECD-FAO, 2007). In poorcountries the issue of food security is closely linked to energy security. “A higher share of biofuels will link the price movement of that crop to the

Temperature ranges for industrial processes Table 6

Dairy Pressurization 60-80 Chemical Soaps 200-260

Sterilization 100-120 Synthetic rubber 150-200

Drying 120-180 Processing heat 120-180

Concentrates 60-80 Pre-heating water 60-90

Boiler feed water 60-90

Meat Washing 60-90

Tinned food Sterilization 110-120 Sterilization 60-90

Pasteurization 60-80 Cooking 90-100

Cooking 60-90

Bleaching 60-90 Bricks and blocks Curing 60-140

Textile Bleaching, dyeing 60-90 Plastics Preparation 120-140

Drying, degreasing 100-130 Distillation 140-150

Dyeing 70-90 Separation 200-220

Fixing 160-180 Extension 140-160

Pressing 80-100 Drying 180-200

Blending 120-140

Paper Cooking, drying 60-80

Boiler feed water 60-90

Bleaching 130-150

Industry Process / Temperature (°C) Industry Process / Temperature (°C)

Source: Kalogirou (2003)


world petroleum market” (Doornbosch and Steenblik, 2007). For this reason,Kojima et al. (2007) conclude that “biofuels are unlikely to become the solutionto rising crude-oil prices” (Doornbosch and Steenblik, 2007).

The potential contribution of biofuels to the world’s energy mix is highlydebated (Smeets et al., 2007). Under optimistic assumptions bio-energy couldprovide a multiple of today’s energy demand (without competing for food pro-duction). However, there are also critical voices arguing that bio-energy’s sus-tainable contribution is even less than it provides today. A detailed overview ofthe status, challenges and opportunities for biofuels in Africa can be found inKarekezi et al. (2007), and Box 1 highlights some African biofuels activities.

The African continent has several comparative advantages for producing biofuels. Somecountries have large surfaces of suitable rain-fed lands that have not yet been cultivated, andgenerally agriculture can be largely improved. At the same time, many countries, even somewith good agricultural potential, are struggling to provide sufficient food for their rapidlygrowing populations.

Due to its geographical and social situation, Mozambique may become an important bio-fuel producer: suitable climatic conditions for sugarcane and oil-tree crops, abundant arableland and a largely rural population. The Mozambican Government is preparing an ambitiousbiofuel program aimed at decentralized production of electricity, gradual blending of gaso-line and biofuel-gel as a substitute for kerosene and firewood in lighting and cooking.

The Nigerian National Petroleum Corporation (NNPC) recently signed an agreementwith the Brazilian state-owned oil company Petrobras to build an ethanol plant on the shoreof the Niger River, aimed at supplying the local market and helping Nigeria achieve a 10 per-cent ethanol blend in its gasoline supply. Brazil intends to strengthen South-South cooper-ation and uses its biofuel know-how for this purpose.

A survey on Tanzania’s biofuels potential and implications was carried out by the DeutscheGesellschaft für Technische Zusammenarbeit (GTZ, 2005). As in many other LDCs, importsof petroleum products absorb large amounts of foreign reserves. At the same time, Tanzaniahas a large potential for expansion of rain-fed crop production. The study concludes that stepsneed to be taken rapidly to promote the production of biofuels and that, with current oilprices, Tanzania’s ethanol is likely to rapidly become competitive in commercial terms.

Zimbabwe pioneered the production of ethanol in Africa. It started a program in 1980and has since been blending gasoline with 12-15 percent ethanol. As sugar-producing coun-tries, South Africa and Swaziland are well positioned to become exporters of bioethanol.Madagascar is also in the process of developing its ethanol industry on the basis of sugar-cane. Zambia is reported to have a large amount of high-potential available land and couldbecome an important ethanol producer. It has also set fuel-blending targets and is promot-ing the planting of Jatropha.

Biofuels activities in Africa Box 1

Sources: SDC (2007)


IV

5. Energy/electricity access and energy poverty

The World Bank reports that less than one in five Africans has access to elec-tricity. With such low levels of access, electricity can hardly be an effective primemover for economic development. “Lack of access to affordable electricity andheavy reliance on the inefficient and unsustainable use of traditional biomassfuels … are both manifestations and causes of poverty” (OECD, 2007b). In addi-tion, the distribution of services is also skewed, with 80 percent directed tourban centers, while rural areas, with 70 percent of the population, get only 20 percent. These figures are particularly unsatisfactory, given the importanceof industrial/commercial energy use for development. For sub-Saharan Africa,

Over the longer term, Africa contains a number of countries with considerable potentialfor benefiting from biodiesel production and trade based on Jatropha, a large, fast-growing, drought-resistant perennial shrub, the seeds of which yield up to 2,700 kilogramsof raw oil per hectare. Projects to demonstrate the possibilities of producing bio-diesel from Jatropha have been started, or are being planned, in several African countries (Burkina Faso, Ghana, Lesotho, Madagascar, Malawi, South Africa, Swaziland and Zambia).Thisplant is particularly suitable for growing on land too poor and arid to support food crops,and is also nitrogen-fixing. As with any other crop, the problem is not the palm itself butthe industrial model in which it is being implemented. There are numerous examples inAfrica to show that this palm can be grown and harvested in an environmentally-friendlymanner and that it can serve to fulfill the needs of the local populations in a sustainableand equitable manner.

Jatropha for biodiesel production in Africa Box 2

African electrification rates, 2005 Table 7

Africa Sub-Saharan North Africa

Population without electricity (millions) 554 547 7

Population with electricity (millions) 337 191 146

Electrification rate (percent) 37.8 25.9 95.5

Urban electrification rate (percent) 67.9 58.3 98.7

Rural electrification rate (percent) 19.0 8.0 91.8

Source: Steenblik (2006)

Source: IEA (2006b)


the IEA projects that by 2030, half the population of that region will still bewithout electricity (IEA, 2004). Table 7 shows African electrification rates.

Electrification is normally simply measured by the percentage of house-holds with access to electricity. In some cases, however, too much attention hasbeen paid just to increasing the number of connections and “not enough to therole of electricity in the household and local economy where the poorest peo-ple live” (Victor, 2005). In several countries, per capita electricity consumptionhas declined even with improved electrification rates. An explanation for thisphenomenon is that poverty is the limiting factor for electricity consumptionand poor households (have to) continue using traditional fuels.

Beside the extent of electrification (a quantitative dimension), it alsohas a quality dimension. Often the population that has access to electricity

Electricity outages of firms in Africa Table 8

Average number of days of supply interruptions per year, 2000-2005

Eritrea 93.9

Kenya 83.6

Madagascar 78.0

Mali 10.5

Senegal 26.1

South Africa 5.5

Tanzania 60.6

Uganda 70.8

Zambia 30.0

Basic patterns of energy consumption in East African Table 9

Community (EAC) Countries

Total Urban Rural Biomass Modern Urban Rural

Kenya 31.9 10.5 21.4 70 30 46 4

Rwanda 8.1 0.5 7.6 90 10 48 1

Tanzania 36.5 12.0 24.5 90 10 38 2

Uganda 24.4 3.0 21.4 93 7 8 1

Total EAC 100.9 26.0 74.9 92 8 40 5

Population(million)

Energy consumption(percent)

Electrification(percent)

Source: Mangwengwende and Wamukonya (2007)

Source: UNDP-GTZ (2005)


IV

suffers from poor supply quality with frequent power brownouts and black-outs, as can be seen from Table 8. In the industrial/commercial sector, the lowsupply security often results in a significant self-generation of electricity inenterprises (Figure 6).

The access issue is not confined to electricity. Access definitions can beapplied to traditional fuels (biomass), to modern fuels, to thermal energy serv-ices and mechanical power for productive uses. Table 9, for example, shows pat-terns of energy consumption in EAC countries, and Box 3 highlights accessissues for thermal energy services and mechanical power for productive uses.

The principal challenge in Africa is that 90 percent of the continent iswithout access to modern energy services. The number of people relying on tra-ditional biomass in sub-Saharan Africa is likely to increase from 575 million in2004 to 720 million in 2030. Even in North Africa this number is expected toincrease. The Poverty Reduction Strategy Papers (PRSPs) of many African coun-tries do not include targets or timelines to meet the energy priorities articulatedby the country. A recent review (UNDP, 2007a) found that only 48 percent ofthe PRSPs included concrete references to energy. In fact, few of the PRSPs focus

Data on access to thermal energy for productive uses, like baking, crop drying, metalwork-ing and vegetable oil processing, is not available. This may be partly because the formal sec-tor industries usually rely on oil and sometimes electricity or LPG, while the informal indus-tries/commercial enterprises, particularly those in rural areas, rely mostly on wood fuel.Mechanical motive power for productive uses has gained more currency in the last five to10 years so that ECOWAS, for example, reports that about 10 percent of the population inrural areas of West Africa have access to energy services for food processing and othermotive power needs. Greater challenges lie ahead for increasing access to modern energysystems for cooking, given the very ambitious 2015 targets set by some of the RECs. Unlikethe African ministers who put cooking at the top of their energy access “agenda,” the WorldBank’s APEA puts this at the bottom of its implementation tracks. Cooking is also whereincome levels are universally recognized as constituting a major determinant of progressionto modern energy systems. Any chances of achieving the targets for cooking with modernenergy systems will therefore be closely linked to success at providing energy for incomegeneration, including thermal energy for productive uses and mechanical power in ruralareas. “By far the most pervasive form of renewable energy used in the developing world is fuel wood and agriculture residue used for heating and cooking. It accounts for about 10 percent of total primary energy used, or 77 percent of total renewable energy used globally” (IMF/World Bank, 2006).

Access to thermal energy and mechanical power Box 3

for productive uses in Africa

Source: Brew-Hammond (2007)


on access, affordability and choice of energy services. This clearly indicates theneed to better integrate energy policies within overall developmental policies.

There are several programs to improve access to energy in Africa. Exam-ples include: The ECOWAS/UEMOA White Paper on Energy Access (Box 5); theCEMAC Action Plan for Promotion of Access to Energy 2006 (Box 6); and theEAC Regional Energy Access Strategy developed in 2006.14 Table 10 summarizesthe specific energy access targets agreed by African ministers for 2015. Animportant feature of these targets is that they are not confined to electricity andthat they cover all energy consuming sectors. Of particular relevance toUNIDO’s activities are initiatives to increase the use of (mechanical) power forproductive uses and industrial applications.

Mali. High-level political commitment from the President of Mali greatly facilitated actionto allocate public resources to meeting energy service needs. Previous experience gainedthrough a Multi-functional Platform program had raised awareness of the benefits to thepoor of energy for agricultural processing, water pumping, etc. As a result, $4 million of HIPCfunding was allocated to village-level energy access programs.

Rwanda. The Economic Development and Poverty Reduction Strategy (Rwanda’s secondPRSP) is currently being developed to guide the implementation of VISION 2020, thenational framework for development. UNDP and UNEP supported Rwanda in carrying outa costing exercise to estimate the investment in energy infrastructure necessary to achievea level of energy access in Rwanda corresponding to the EAC regional targets.

Senegal. By integrating MDG benchmarks in its PRSP, Senegal created the opportunity toreassess the contribution of energy to MDGs. Ongoing discussion to develop a regional pol-icy (ECOWAS) further motivated Senegal to align its national efforts to the forthcomingregional policy for energy access. A broad multi-sectoral process – part of the PRSP revi-sion dialogue – led to a common perspective on the level of energy access needed to achievethe MDGs.

Lessons: The integration of energy into national development plans can be facilitated bythe existence of a regional policy on access to energy. Developing MDG-based PRSs atnational and regional level creates the impetus and political space for re-introducing energyaccess for poverty reduction and for examining how energy access consideration can helpachieve the MDGs.

Integrating energy access into national strategies: Box 4

Mali, Rwanda, Senegal

14 The EAC Energy Access Strategy “will engage EAC Partner States in ambitious initiative to scale upaccess to modern energy services to meet the MDGs and to ensure that at least half of the EAC popu-lation has access to modern energy services by 2015” (EAC, 2007).

Source: UNDP (2007d)


IV

The ECOWAS/UEMOA White Paper on Energy Access stands today as a major landmark in the socio-economic development process for the countries of West Africa. The WhitePaper puts forward a regional policy geared towards increasing access to energy servicesfor rural and peri-urban populations to achieve the MDGs. The White Paper commitsECOWAS/UEMOA Member States to providing access to modern energy services by 2015to at least half the populations in rural and peri-urban communities, aiming at what manyregard as probably the most ambitious set of energy access targets agreed to date in anydeveloping region of the world. The decision adopting the White Paper was made at the 29th

Summit of the Authority of Regional Heads of State and Government meeting in Niamey,Niger, on January 12, 2006, giving it the highest level of political approval within a regionalcooperation framework.

The ECOWAS/UEMOA White Paper’s energy access targets, all to be realized by 2015,may be summarized as follows:

• 100 percent access to improved energy services for domestic cooking;

• At least 60 percent of rural population with access to motive power; and

• Over 60 percent access to electricity covering:

- 100 percent of households in urban & peri-urban areas,

- about 40 percent of households in rural areas, and

- 60 percent of social service centers in rural areas.

The magnitude of the challenge posed by these targets is reflected in the very low accessrates for modern energy services in West Africa at present. Less than 5 percent of theregion’s population has access to modern fuels for cooking, and only four out of the 15ECOWAS/UEMOA countries have overall electricity access rates above 20 percent. Thereis no doubt therefore that translating these low rates into the ambitious targets put for-ward in the White Paper, over a period of less than 10 years, will require some very inno-vative approaches, the concerted effort of all parties involved and substantial amounts offinancial and other resources.

As part of the process in the run-up towards agreement of the White Paper, NationalMulti-sector Committees (NMCs) were established in the majority of ECOWAS/ UEMOAMember States with the mandate to coordinate national stakeholder efforts in developingEnergy for Poverty Reduction Action Plans and National Investment Programs. A RegionalMulti-sectoral Committee (RMC) was then established to harmonize the work of the NMCsand oversee the White Paper’s development. The White Paper itself eventually proposes theestablishment of a Regional Agency for Energy Access (RAEA) to mobilize the necessaryresources for tackling the enormous challenge to provide modern energy services to morethan half the region’s population by 2015.

ECOWAS/UEMOA White Paper on Energy Access Box 5

Sources: ECOWAS (2005)


Energy access targets agreed by African ministers for 2015 Table 10

(percent)

FEMA ECOWAS EAC CEMAC

Modern energy for cooking 50 100 50 80

Modern energy services/electricity for basic needs in urban and 75 100 100 50peri-urban areas

Electricity for rural households - 36 - 35

Electricity for schools, clinics and community centers 75 60 100 56

Mechanical power for productive uses in rural areas 100 60 100 -

The orientations of the Monetary and Economic Union of Central Africa (CEMAC) ActionPlan to be implemented from 2007-11 include:

• Capacity building for energy planning oriented towards the needs of ruraland peri-urban populations;

• Coordinated hydro-power development in the sub-region;

• Implementation of policies to promote electricity generation from agro andforest industrial residues;

• Creation of exemplary promotional areas with improved access to modernenergy services in rural areas of each member state;

• Low-cost grid intensification in peri-urban areas;

• Integrated regional promotion of solar energy;

• Promotion of improved stoves and modern cooking fuels such as LPG;

• Work towards a concerted development of the petroleum sector Elabora-tion of a CEMAC Energy Charter;

• Creation of an Energy Access Observatory for the sub-region;

• Facilitate transfer of technologies among member countries.

CEMAC Action Plan Box 6

Source: http://ec.europa.eu



IV

The World Bank has indicated for Africa the levels of investment required toachieve 100 percent electrification and 48 percent by 2030. These levels arepresented in Table 11 together with the respective investment costs of the threeregional organizations, CEMAC, EAC and ECOWAS, which have developedcomprehensive energy access strategies/programs. To reach electricity targetsof 100 percent and 48 percent by 2030, the World Bank estimates that this will require $11 billion and $4 billion per annum, respectively, in sub-SaharanAfrica (with a current population of 725 million people). CEMAC also esti-mates electricity investments of about $0.2 billion for 35 million people (Brew-Hammond, 2007). The IEA (2007e) calculates a cumulative investment require-ment for African power-sector infrastructure of 484 billion dollars to 2030.15

Most African countries have largely failed to attract investment.

Investment requirements for increasing access Table 11

to modern energy services in sub-Saharan Africa

$ billions p.a. Remarks

World Bank (A) 11.0 Electricity only, 725 million people – 100 percent by 2030

World Bank (B) 4.0 Electricity only, 725 million people – 48 percent by 2030

ECOWAS 5.2 Energy costs for cooking account for about half,

250 million people – 50 percent by 2015

EAC 0.3 Using High-Impact Low Costs and Scalable (HILCS)

Technologies, 110 million people – 50 percent by 2015

CEMAC 0.2 Electricity only, 35 million people – 50 percent by 2015

15 Total African energy sector requirement to 2030 amounts to 1,461 billion dollars.



6. Price fluctuations in fossil fuels

The fact that Africa is a net oil exporter does not imply that there are noenergy/oil security issues. The higher oil prices have had a severe impact onthe oil-importing African countries. A steep increase in the price of oil has aserious impact on their balances of payments. This development highlightsthe economic dimension of energy security. The recent oil price increases ledto a reduction in oil import volumes by more than two-thirds in LDCs, mostof which are in Africa (UNCTAD, 2007a). Developing countries, and LDCs inparticular, are highly sensitive to the volatility of the international energymarkets. A survey of African importers by the African Development Bankshows that 28 countries spend more than 10 percent of their total import billon oil. For some countries like Burundi, Ethiopia and Rwanda, these importssometimes represent more than 30-40 percent of their export earnings. Eritreaspent about $140 million on oil imports in 2004, accounting for about onequarter of its GDP (Habtetsion and Tsighe, 2007). In Tanzania, payments haverisen by 152 percent between 2002 and 2006. Mali’s payments quadrupled in2005 from $100 million spent on oil imports in 1998. The rise in import costsis not unique for Africa. According to the World Bank, the oil price impact onHeavily Indebted Poor (HIP) Countries from December 2002 to April 2006 was4.7 percent of their GDP (UNCTAD, 2006d).

Developing countries are generally more dependent on imported oiland use twice as much oil per unit of economic output as the OECD countries(IEA, 2004; ESMAP 2005d). In addition, energy price fluctuations have ahigher impact on their economies due to their fragile financial situation.Analysis of data for a large number of countries shows that a sustained $10 abarrel price increase would deliver a shock equivalent to a loss of GDP of 1.47 percent for the poorest countries (those with GDP per capita of less than$300). Even the highest income group (over $9000 per capita GDP) would suffer a loss of GDP of 0.44 percent.16 Some of the lowest income countries suffer a shock of up to 4 percent of GDP (UNDP/ESMAP, 2005).17

In terms of vulnerability to oil price increases,18 sub-Saharan African(omitting South Africa) and East Asian (excluding China) countries are mostexposed. Vulnerability to oil price increases in Africa increased between 1990and 2003 by more than the oil price rise. This high level of oil vulnerability inAfrica was coupled with the highest external debt to GDP ratio, and the low-est per capita income, which shows that for Africa the oil shock is large andthat it has the least resources to cope with the shock (ESMAP, 2005d).


IV

In countries where petroleum products are subsidized, which is the case in mostLDCs, the impact of higher oil prices will not be directly felt by households, butthe worsening of the government’s fiscal position will result in less governmentspending than would otherwise have been possible (UNDP/ESMAP, 2005).“There is a risk that progress in reducing dependence on traditional, dirty bio-mass fuels may be slowed or reversed as the poor face higher prices for LPG andkerosene” (UN, 2006). Energy is often subsidized on social grounds. However,in LDCs only 20 percent of energy used is produced commercially. Therefore,subsidies benefit primarily middle and higher-income groups. A challenge forpolicy makers is to target subsidies specifically for those consumers that aremost in need of this kind of support (“smart subsidies”). An example of suchsmart subsidies would be so-called lifeline electricity tariffs where a certain basicamount of electricity is free for the (needy) consumer; consumption above athreshold, however, subject to full-cost pricing. Such an incentive scheme, ifimplemented properly, can reconcile social and economic efficiency objectives,but it is difficult to design in such a way that it does not benefit the rich evenmore than the poor (ESMAP, 2000). In the electricity industry, higher tariffshave the potential to create revenues that utilities can use to develop andexpand electricity networks that, in turn, would benefit the poor.19 Page (2006)finds that out of 44 sub-Saharan countries, 24 have fully or extensively passedthrough higher prices, in 15 sub-Saharan countries there has been a partialadjustment in prices, and no price adjustment could be observed in five sub-Saharan countries.

There is evidence that biomass energy prices are linked in many urbanareas to the price of petroleum fuels. This linkage means that even those poorhouseholds using wood for cooking in the urban areas of many developingcountries are not exempt from problems of rising petroleum fuel prices (ESMAP,2005b).

16 The IEA (2004) estimates that, for the OECD as a whole, a sustained $10 a barrel price increase wouldresult in a loss of GDP of 0.5 percent during 2004 and 2005.

17 Over a two-year period certain countries experienced extremely large shocks, including Guinea-Bissau (7.4 percent), Liberia (5.5 percent) and Sierra Leone (5.9 percent). However, the shock was quitesmall in some other countries, such as Uganda (1.1 percent) and Botswana (1.1 percent) (ESMAP,2005d). Calculations also show that within a country low-income deciles are more severely affectedthan higher-income groups.

18 Vulnerability of an oil-importing country is generally measured by the ratio of the value of net oilimports to GDP.

19 Higher tariffs result in higher utilities revenues only if demand for electricity is price inelastic.


Sustained higher oil prices will slow growth and progress towards the MDGs inlow-income, oil-importing African countries. For most African countries, realGDP growth rates have remained low relative to their development goals. Withonly five countries recording an average real GDP growth rate of 7 percent or more during 1998-2006, few African countries are positioned to fullyachieve the MDGs. Oil-importing African countries are characterized by highoil-intensity of primary energy sources as well as inelastic oil demand. Higheroil prices raise production costs, leading to lower output as well as tighter finan-cial constraints. Governments are forced to decrease expenditure on infrastruc-ture and social services in order to finance the higher oil bill. Moreover, higheroil prices fuel domestic inflation, increase fiscal deficits, and worsen the balance-of-payments position as well as the terms of trade (UNECA, 2007).

Although oil-importing African countries have recorded positive overallGDP growth in the past few years, they are experiencing mounting internal andexternal imbalances. Strong commodity demand, good macroeconomic man-agement, better agricultural performance, improved political governance inmany countries and increased aid flows and debt relief are the key factors thathelped them to maintain overall growth momentum.20 However, as a result ofthe recent hike in oil prices, the share of fuel imports in the merchandiseimports of oil-importing African countries rose significantly, leading to notableincreases in the current account deficits. Moreover, oil-importing countriesfaced sustained, large terms-of-trade losses (UNECA, 2007).

Higher oil prices have generated increased trade surpluses in oil exportingcountries. The IMF estimates that Africa’s trade surplus increased to $27.7 billionin 2005. Seven of the 10 countries that had budget surpluses in 2006 were oilexporters (Algeria, Cameroon, Republic of Congo, Equatorial Guinea, Gabon,Libya and Sudan). Therefore, oil continues to be the key factor behind the posi-tive fiscal position for Africa as a whole, which raises concern over the sustainabil-ity of fiscal balance over the medium term. For oil producers, fiscal sustainabilitywill require effective strategies for prudent management of oil revenues and strate-gies to utilize these revenues for enhancing economic diversification (UNECA,2007). Strategies are needed to make sure that the excess liquidity as a result ofhigh oil revenues does not result in the “Dutch Disease” and its adverse effects(real exchange rate appreciation and loss of competitiveness) on the industrialsector. Economic development requires diversification, not specialization.

Heavy dependence on primary commodities remains a common featureof production, exports and growth in all the African sub regions.21 This exposesthe continent to external shocks and makes economic diversification a top pri-


IV

ority for growth policies on the continent. The impact of higher oil prices ontrade balances has been offset for some countries by price increases for othercommodities, such as metals and agricultural products, but most countries inAfrica have suffered worsening terms of trade (UNCTAD, 2006d).

During the last years, improved economic management and increases innon-oil commodity prices have more than offset the negative impact of high oilprices on the real GDP of African oil importers. This is mainly due to debt reliefand increased aid flows as well as improved agricultural production and high agri-cultural commodity prices. The growth rate in non-oil, mineral-rich Africancountries was unchanged in 2006 relative to 2005, as gains from the higher pricesof minerals were dampened by the effects of rising oil prices (UNECA, 2007). How-ever, in most African countries that benefit from the current “commodity boom”there has been little progress in reducing poverty, inequality and raising employ-ment. Also industrial development remains subdued (UNCTAD, 2006c).

A challenge for commodity-dependent countries is to ensure that thepositive outlook for commodities can be turned into a broad-based develop-ment. African countries need to implement commodity strategies to fosterdynamic commodity-sector development, economic diversification and com-petitiveness.

An important policy response is to improve diversification of fuel use ordiversification towards energy-efficient technologies. One way in which thiscan be improved is by increasing the self-sufficiency of the economy withrespect to oil production.22 Another promising route for reducing vulnerabilityto oil shocks would be to reduce aggregate energy intensity.

A critical challenge for oil-importing African countries is to reduce theirdependence on oil by promoting alternative sources of energy. It is particularlycritical for these governments to strengthen growth policies, including indus-trial strategies that promote diversification of production and exports. Theinternational donor community and international financial institutionsshould provide special support to oil-importing African countries to mitigatethe impact of higher oil prices.

20 “Taking a longer-term perspective, SSA is clearly enjoying its best period of sustained growth sinceindependence” (IMF, 2007b).

21 In 2004 primary exports of sub-Saharan Africa accounted for 70 percent of all merchandise exports.With the exception of Arab States (75 percent) this share is much higher than in all other worldregions. In OECD countries this share is only 15 percent; for all developing countries 22 percent(UNDP, 2006).

22 Oil self-sufficiency is defined as the ratio of oil consumption less production to oil consumption.


7. Energy sector reform and policy issues

The worldwide move toward increased reliance on market mechanisms has pro-gressed during the last years. In the field of energy, governments have played adirect and dominant role. Energy has always been seen as a strategic sector, cru-cial to international competitiveness, economic and social development andnational security, and one in which the most important decisions were takenby the government. State utilities for electricity, gas, and sometimes also coaland oil were instruments for implementing energy policy in many Westerncountries (European Commission/UNDP, 1999). In many cases, public utilitiesbecame huge organizations that were almost out of government control. Also,the introduction of new technologies may be too slow in the case of public own-ership of the energy industry. Often consumers did not receive the service theyexpected. This concept was gradually abandoned in many countries, as it wasexpected that market mechanisms could perform the same tasks with greaterefficiency.

The main objective for liberalizing energy markets is to promote increasedeconomic efficiency. From a public policy point of view, it is important thatresources are used efficiently, that consumers have as much choice as possiblein terms of the different fuels and sources of supply, and that consumer pricesare stable and fair. From the perspective of a supplier of energy it is importantthat energy prices are sufficient to attract investment for the continued devel-opment of new supplies, and that the market penetration rates of the differentfuels and supply sources are not hampered by artificial hindrances and obsta-cles, for example, barriers to entry.

The key driving forces for institutional change in the power sectorinclude: a general re-evaluation of regulated industries and a rethinking of howthe introduction of competition might improve efficiencies; the wide disparityof electricity rates across states; and technological improvements that have ledto a dramatic decline in the average size of generating units. Projected elec-tricity demand growth, environmental considerations and power supply reliability are also factors that underlie the drive towards more competitive elec-tricity markets. Williams and Ghanadan (2006) provide an overview of the driving forces of power-sector reform, and they also nicely contrast the contextof power-sector reform in OECD and non-OECD countries.

The prices of oil products have been deregulated in most industrializedcountries, the exploration and exploitation of oil and gas deposits are open tocompetition, and the process of liberalization in this field has progressed.


IV

Regulatory reform is also used to promote technological innovation, productiv-ity, structural adjustment and market contestability. Several aspects dominatethe debate over regulatory reform and the objectives of regulation:

• the move from command-and-control to incentive-based regu-latory approaches based on the removal of entry barriers in com-petitive markets;

• the design of efficient and competitively-neutral charges foraccessing the fixed networks of incumbents;

• the pros and cons of structural measures such as privatization,and vertical and horizontal separation of formerly integratedmonopolies;

• the ways to ensure achievement of important non-economicobjectives (such as environmental protection and access toenergy for the poor) in a more competitive environment at aminimum cost for society; and

• the design of regulatory mechanisms and institutions.

A key objective of electricity reforms in developing countries has been toattract private-sector investments in order to improve the quality and reliabil-ity of electricity supply. In countries where quality and reliability of electricitysupply is poor, self-generation capacity tends to be high. Figure 6 shows the

Source: Estache (2005)

Self-generation shares in African enterprises Figure 6

0

20

40

60

80

100

Eritrea Ethiopia Nigeria Kenya Mozambique Tanzania Uganda Zambia Senegal

percent MicroSMELarge / very large


shares of African micro, SMEs, and large enterprises that maintain self-generation capacities. Even if self-generation is more costly than utility powerit can make sense for industrial producers to self-generate electricity because ofhigh losses associated with power outages. The burden of price subsidies, lowservice quality, low collection rates, high network losses and poor service coverage have meant that many governments are no longer willing or able tosupport the existing arrangements. In addition, international developmentagencies have engaged in the promotion and implementation of electricity sector reforms (Jamasb, 2006).

It is critical to recognize that the fundamental interest of most develop-ing countries in power-sector reform stems not from any desire to change own-ership and/or to introduce competition for its own sake, but from the fact thatthey have no choice but to attract foreign private investors if their power sys-tems are to grow fast enough to keep pace with demand. Often, governmentshave come under strong pressure from international financial institutions toprivatize and liberalize the energy (and other network/infrastructure) indus-tries. Most countries initiated reform plans, but few have enacted majorchanges. Others are at different stages of the reform process, but they show lit-tle enthusiasm and determination in this endeavor (Gabriele, 2004). In manycases the (imposed) restructuring of these industries can be considered a failurebecause the “textbook approaches” adopted from industrialized countries didnot work in a developing country setting, for example, due to a lack of institu-tional capacity or simply a lack of political will to implement reforms.

The African power sector is heavily dominated by North and SouthernAfrica, which together account for more than 80 percent of the continent’s gen-eration capacity and 90 percent of power production (Table 12). The continent’sgeneration mix is largely thermal-based: coal accounts for 44 percent of elec-tricity generation; natural gas’ share is 26.4 percent. In Southern Africa 94 per-cent of all electricity is produced in coal-fired plants. At present, SouthernAfrica’s two nuclear reactors are the only ones operating on the continent,accounting for about 3 percent of Africa’s total electricity generation.

With the implementation of Structural Adjustment Programs (SAPs) insub-Saharan (SSA) countries, the restructuring of the power sector has been partof a wider debate on the changing role of government and its eventual substi-tution by the private sector in the production of goods and services. A look atcountries in the SSA region reforming their power sectors shows different indus-try and ownership/management structures. Table 13 shows the reform profileof selected countries in the region. From this table one can deduce that


IV

countries in SSA are opening up the generation segment of the industry to private-sector generators, and have the power generated sold to publicly-owned utility companies through Power Purchase Agreements (PPA) (Turkson andWohlgemuth, 2001). There are, however, no indications whether the sort ofreform being put in place is a transition towards a more competitive industrystructure or is the envisaged industry structure for their reforms. Regardingownership/management structure, most countries have maintained their exist-ing structure, while only a few have ventured into corporatization, commercial-ization or management contract for the power-sector companies. A crucial ele-ment of these processes has been the improvement in the technical efficiencyof the sector.23 This has involved rehabilitation of equipment (power plants,transmission and distribution networks) and the introduction of a new pricingsystem that reflects the cost of supply. In order to give the right price signals forsupply and demand decisions, in the long run prices have to include all costs(“full cost pricing”).24 A more detailed overview of the African power sector andits reform can be found in UN-ENERGY (2007).

Size of African power sector Table 12

23 System losses are generally very high, for example 37 percent in Uganda, 33 percent in Nigeria, and27 percent in Tanzania. The South African electricity system, in contrast, appears to be quite efficient,with a system loss of about 7 percent (Bhagavan, 1999).

24 In a perfect market, with externalities fully reflected in energy prices, marginal cost pricing would bethe socially optimal way to allocate resources. However, (energy) markets are not perfect. Governmentintervention in energy pricing is, therefore, sometimes justified to ensure competition or to achievethe goals of energy accessibility, availability and acceptability.

MW percent GWh percent

West Africa 9,498 10.01 21,190 6.26

Southern Africa 50,007 52.70 197,481 58.34

North Africa 28,905 30.46 101,688 30.04

East Africa 2,875 3.64 7,696 2.27

Central Africa 3,454 3.64 7,696 2.27

Totals 94,898 100 338,485 100

Source: Mkhwanazi (2003)


Available data on the structure of power sectors in the region and the policiesof different governments suggest that the pattern of vertically integratedmonopoly enterprises with little or no autonomy from government to operatein a commercial manner is typical of SSA and indeed the whole of Africa(Wamukonya, 2002 and 2003). For example, the utility SONEL in Cameroon isabout 93 percent state-owned, with the board of directors appointed by the gov-ernment; Uganda Electricity Regulatory Authority handles generation, trans-mission and distribution and regulates itself; and the Power Holding Companyof Nigeria (NHCN) is a state monopoly, with government controlling all pro-curements and foreign exchange transactions. Almost all countries in theregion have opted for an electric utility industry that is an arm of governmentand generally vertically integrated. This structure of the sector is, however,changing.

Selected African countries’ restructuring profile Table 13

Country Type of structural Type of ownership/ Regulatory bodychange management change

Ghana De integration towards Public and private Public Utilities Regulatory wholesale competition independent power Commission (PURC)

producers (IPPs) and joint ventures

Kenya De integration towards Public and private IPPs Electricity Regulatory Board competition at and management generation level contract

Côte d’Ivoire Vertically integrated (VI) Management contract Authorité Nationale de monopoly and IPPs Régulation du Secteur

de l’Electricité

Mali VI monopoly Management contract Commission de Régulation de l’Eau et de l’Electricité

Uganda Partial de integration Public and private IPPs Electricity Regulatory with competition at Authority (ERA)generation level

Zambia VI monopoly Performance contract Energy Regulation Board (ERB) Zimbabwe Electricity

Zimbabwe VI monopoly Performance contract Regulatory Commission (ZERC)

Sources: Gutierrez (1996), Girod and Percebois (1998), SAD-ELEC (2004 and 2005), ESMAP (2005c)


IV

Private participation is now present in the form of IPPs (Ghana, South Africa, Tanzania), concessions (Mali, Uganda), and management contracts(Mali, Tanzania and, briefly, northern Namibia) (ESMAP, 2005b). Mebratu andWamukonya (2007) note that “In some cases [price] rises of more than 100 per-cent have occurred within a year, and tariff increases have been a cause of pub-lic outcry in many African countries.” For the case of Nigeria, Amobi (2007) con-cludes that, “consistent with some of the other countries in sub-Saharan Africa,implementing a hastily convened competition policy will be a huge transactioncost, and one that will yield the country very little (if any) economic benefit.”

Africa’s power sector is in need of reforms for commercial viability.25

Some countries have begun the process in different ways. These include thecommercialization and privatization of state-owned utilities, unbundlingenergy production from distribution, opening markets to private investors andrevising pricing policies. Strategies should address the issues of sustainablefinancing and regulatory risk – the regulatory framework (including social andenvironmental standards) should be clearly defined and predictable.

In theory, the market should be sensitive to security risks and reactaccordingly. However, recent experience (Bertel, 2005) shows that the capabil-ities of liberalized markets to address energy security concerns can be doubted.The final verdict on the energy security effects of increased competition is stillout, as impacts can go both ways. There is still an important role for the publicsector to play in this important network industry.

8. Energy trade and regional cooperation

While energy commodities such as gas and oil are traded internationally, energyinfrastructure is largely confined within national borders. Regional cooperationmakes sense because:

• The geography of energy resources does not correspond to polit-ical boundaries.

• National markets may be too small to justify investment in particular energy supply opportunities. Combining nationalmarkets can provide economies of scale to overcome this.

• The integration of small neighboring markets can provide thescale needed for effective competition, as markets mature.

25 South Africa may be an exception.


• Cross-border energy supply can enhance the diversification ofenergy sources – a key element of energy security.

• Joint energy project development can help build close tiesbetween countries – less tangible, but important to internationalrelations.

An important factor that could affect energy security is the extension ofworld trade liberalization to energy products and services. Interregional energytrade is dominated by exports of crude oil and petroleum products. Accordingto the OECD (Steenblik, 2006), the value of trade in renewable energy goods isstill relatively low, in the range of $4-5 billion. International trade in biofuels is mostly confined to ethanol, which is by far the most widely used of the bio-fuels (93.5 percent of total biofuels produced). However, vegetable oils have thelargest potential for growth (UNCTAD, 2005b). Industrialized countries domi-nate the high-technology segment of exports. However, on the low-tech sideand in biofuels, developing countries are major exporters. Here, one issue is theextent to which African countries can learn from the Brazilian experience withbiofuels to position themselves as major exporters. Generally, an importantdevelopmental issue for African countries is how best to reap the potential ben-efits of globalization and new (energy) sources and technologies.

International trade is seen to offer opportunities, either with other devel-oping countries or with developed ones. However, there are considerable barri-ers to international trade: agricultural production subsidies, high tariffs, entrybarriers (UNCTAD, 2005b).26

At a summit in Lusaka, in July 2000, African Heads of State took animportant step by adopting two major policy documents: the Convention ofthe African Energy Commission, and NEPAD. While NEPAD aims to exploitand develop the hydro-power potential of African river basins and integratetransmission grids and gas pipelines to facilitate cross-border energy flows27

the Convention of the African Energy Commission aims to map out energydevelopment policies, strategies and plans based on sub-regional and regionaldevelopment priorities. The lesson from Africa’s nascent experience is thatlarge regional supply systems can produce energy for member countriescheaply and reliably by exploiting economies of scale.

Regional integration and cooperation can help address the continent’sinsufficient supply of electricity. The importance of a well-developed regionalenergy infrastructure for industrial development has been increasingly recog-nized. Regional cooperation in the area of energy also has the potential to


IV

leverage the necessary external support for financing the huge public invest-ment needed to develop the energy infrastructure.28

In Northern Africa, the linking of oil, gas and electricity infrastructure iswell advanced.

ECOWAS initiated regional cooperation in power supply in 2000 with thelaunching of the West African Power Pool (WAPP) project. The project, to beimplemented over a period of 20 years, aims at increasing and stabilizingregional energy supply and at improving the connections between nationalelectricity grids. (UNCTAD, 2007c). Project activities under this initiative areestimated to cost about $15 billion.

The Southern African Power Pool (SAPP) has also improved energy gen-eration and distribution in the region. The benefits for SAPP members includereduced fuel costs and better use of low-cost hydro-power resources, as well asmutual support in the event of electricity shortages.

The SAPP and the WAPP under development both allow optimal use ofcomplementary power generation facilities, using cheap hydro-power when itis available and sharing thermal generation when necessary.29 Furthermore,regional power pools increase the reliability of service, allowing neighboringsystems to provide backup facilities in case of outage of one power plant (UNDP,2007d).

Mali, Mauritania and Senegal are cooperating, through the Organizationfor the Development of the Senegal River, in the construction of a dam for theproduction of electricity and the creation of a related network for power trans-mission to the capitals of the three countries. Another example of such coop-eration in Africa is between the Gambia, Guinea, Guinea Bissau and Senegal

26 “In many countries, a policy for energy security is equated with self-sufficiency. This in turn conveniently leads to protection of domestic agriculture in industrial countries, since many viewdevelopment of biofuels as a substitute for agricultural reforms required under international tradenegotiations. But energy security objectives might be met by trading with a broad range” (Kojimaet al., 2007).

27 The NEPAD Short Term Action Plan for infrastructure notes that the “Challenge is to develop fully theenergy resources of the continent in order to provide affordable energy services. Africa’s rich energyresources will be developed through co-operation.”

28 There are several international initiatives aimed at promoting successful financing models, such aspublic-private partnerships (PPPs) and partnerships with civil society. These include the African RuralEnergy Enterprise Development (AREED) initiative, the Global Village Energy Partnership (GVEP), theRenewable Energy and Energy Efficiency Partnership (REEEP), the Public-Private Advisory Infrastruc-ture Facility (PPIAF) and the Emerging Africa Infrastructure Fund (EAIF).

29 Bowen et al. (1999) estimate the benefits from a centralized and competitive dispatch to be about $100million per year in the SAPP.


through the Organization for the Development of the River Gambia. A com-mon hydro-electric project is being prepared in combination with the regionalintegration of electric power grids in the four countries, which aims at endingthe frequent power shortages and heavy dependence on imported petroleumproducts for the generation of electricity (UNCTAD, 2007c).

Despite these examples of progress, African countries are yet to reap thefull benefits from increased regional cooperation in energy. With the possibil-ity of sustained high global oil and gas prices in the future, such cooperationwill assume greater importance.

Bilateral trade in energy among member countries is also growing. Côted’Ivoire, for example, became a net exporter of energy to neighboring countriesin 1995 (UNECA, 2006a).

In 2006, the Export-Import Bank of China signed a memorandum of understanding with thegovernment of Mozambique to provide a $2.3 billion loan package that would include con-struction of the 1,300-megawatt Mphanda Nkuwa hydro-electric dam on the Zambezi River.In addition, there are plans to expand the existing hydro-electric facility at Cahora Bassa andto construct a new North Bank Cahora Bassa dam. The African Development Fund has esti-mated that the additions could increase Mozambique’s installed generating capacity by 2,000megawatts and raise its national electrification rate from 6 percent in 2006 to 20 percentin 2020.In Angola, there are plans to refurbish existing hydro-power facilities at Capanda andCambambe and increase their capacity to 520 megawatts and 700 megawatts, respectively,in the near term. Nigeria has plans to expand its renewable generating capacity by 3,500megawatts in the mid-term, mostly in the form of small hydro-electric projects, in an attemptto diversify the country’s energy mix away from oil and natural gas.

Hydro-power construction in Africa Box 7

The second India-Brazil-South Africa (IBSA) summit was held in October 2007. At this sum-mit, the three countries reached agreement to work together in the promotion of nuclearenergy, clean energy technologies and other renewable energies and in the endorsement ofclimate change mitigation. In a presidential declaration, the countries noted agreement topool resources to ensure a secure supply of safe, sustainable and non-polluting energy tomeet global demand, particularly in developing countries. The declaration indicated thatcooperation would include clean coal technologies and renewable energies such as biomassand innovative ways to transfer, develop and commercialize clean energy.

India-Brazil-South Africa Declaration on Clean Energy Box 8

Source: EIA (2007)

Source: http://www.iea.org


IV

The West African Gas Pipeline is designed to transport natural gas from refiner-ies in Nigeria through Benin and Togo to Ghana, substantially reducing the costof generating energy in these countries and improving their energy security(UNECA, 2006a). Based on its success and economic benefits, it may beextended to other parts of the region.

Cooperation among African countries in the field of power generationand distribution is increasing. Several African countries are planning to rein-force the interconnections between their grids/networks in order to optimizethe use of their capacities, eliminate emergency purchasing of thermal units,make the most out of their regional resources, and increase energy efficiency –thereby making trade an “engine of growth.” The South and West African PowerPools are examples for regional energy integration that allow optimal use ofcomplementary power generation facilities. In addition, these pools increasethe security of supply by allowing neighboring systems to provide backup facil-ities. Although energy trading is increasing, more organized arrangements areneeded. Activities within the existing sub-regional bodies, including the Com-mon Market for Eastern and Southern Africa (COMESA), the East African Com-munity (EAC), the Southern African Development Community (SADC), theEconomic Community of West African States (ECOWAS), the UnionEconomique et Monétaire Ouest Africaine (UEMOA), the Union du MaghrebArabe (UMA), the Economic Community of Central African States (ECCAS),and the Communauté Economique et Monétaire de l’Afrique Centrale(CEMAC) should be fully utilized and harmonized.


Bibliography

AMOBI, M.C. (2007). “Deregulating the Electricity Industry in Nigeria: Lessons from theBritish Reform.” Socio-Economic Planning Sciences 41(4), 291-304.

BERTEL, E. (2005). “Nuclear Energy and the Security of Supply.” NEA News 23(2): 4-7.

BHAGAVAN, M.R. (ed.) (1999). Reforming the Power Sector in Africa. African Energy PolicyResearch Network (AFREPREN), Zed Books Ltd., London.

BOWEN, B.H., SPARROW, F.T. AND Z. YU (1999). “Modeling Electricity Trade Policy for theTwelve Nations of the Southern African Power Pool (SAPP).” Utilities Policy 8: 183-97.

BP (2007). BP Statistical Review of World Energy 2007.

BREW-HAMMOND, A. (2007). Challenges to Increasing Access to Modern Energy Services inAfrica. Commissioned Paper for the Forum for Energy Ministers Conference on Energy Sustainability and Security, Maputo, Mozambique, March 28 -30, 2007.

DAVIDSON, O. (2007). The Oil and Gas Sector: Energy Security and Sustainability in Africa. Com-missioned Paper for the Forum for Energy Ministers Conference on Energy Sustainability andSecurity, Maputo, Mozambique, March 28-30, 2007.

DOORNBOSCH, R. AND R. STEENBLIK (2007). Biofuels: Is the Cure Worse than the Disease?OECD Round Table on Sustainable Development, SG(SD/RT (2007)3.

EAC (2007). Strategy on Scaling Up Access to Modern Energy Services in Order to Achieve the Millen-nium Development Goals East African Community (EAC).

ECOWAS (2005). White Paper for a Regional Policy Geared towards increasing access to energyservices for rural and peri-urban populations in order to achieve the Millennium Develop-ment Goals. Economic Community of West African States, Abuja.

EIA (1999). Energy in Africa. Energy Information Administration, Washington DC.

EIA (2006). International Energy Outlook 2006. Energy Information Administration, Washing-ton DC.

EIA (2007). International Energy Outlook 2007. Energy Information Administration, Washing-ton DC.

ESMAP (2005a). Advancing Bioenergy for Sustainable Development: Guideline for Policymakers andInvestors Volumes I, II, and III. Energy Sector Management Assistance Program, Report 300/05.

ESMAP (2005b). Annual Report 2004. Energy Sector Management Assistance Program, Report300/05.

ESMAP (2005c). Power Sector Reform in Africa: Assessing Impact on Poor People. Report 306/05,Washington DC.


IV

ESMAP (2005d). The Vulnerability of African Countries to Oil Price Shocks: Major Factors and Policy Options. The Case of Oil Importing Countries. Report 308/05, Washington DC.

ESTACHE, A. (2005). What do we Know about Sub-Saharan Africa’s Infrastructure and the Impactof its 1990s Reforms? Draft working paper, version 4.

ESTIF (2006). Solar Industrial Process Heat – State of the Art. European Solar Thermal IndustryFederation.

EUROPEAN COMMISSION AND UNITED NATIONS DEVELOPMENT PROGRAM (1999).Energy as a Tool for Sustainable Development for African, Caribbean and Pacific Countries. Brussels and New York.

FEMA (2006). Energy and the Millennium Development Goals in Africa. The Forum of EnergyMinisters of Africa.

FEMA (2007). Energy Security and Sustainability in Africa. The Forum of Energy Ministers ofAfrica, Trade Autoprint Ltd, Nairobi, Kenya.

GABRIELE, A. (2004). Policy Alternatives in Reforming Power Utilities in Developing Countries: A Critical Survey. United Nations Conference on Trade and Development, Geneva.

GIROD, J. AND J. PERCEBOIS (1998). “Reforms in Sub-Saharan Africa’s Power Industries.”Energy Policy 26(1): 21-32.

GTZ (2005). Liquid Biofuels for Transportation in Tanzania. Potential and Implications for Sustain-able Agriculture and Energy in the 21st Century.

GUTIERREZ, L. (1996). “How do Sub-Saharan African utilities Compare?” Proceedings on Sym-posium on Power Sector Reform and Efficiency Improvements in Sub-Saharan Africa. World Bank,ESMAP Report no. 182/96.

HABTETSION, S. AND Z. TSIGHE (2007). “Energy Sector Reform Initiatives and Implicationsin Eritrea.” Journal of Cleaner Production 15(2): 178-89.

HIRSCHHAUSEN, C. VON (2005). Strategies for Energy Security – A Transatlantic Comparison.

IEA (2004). Analysis of the Impact of High Oil Prices on the Global Economy. International EnergyAgency, Paris.

IEA (2006a). Energy Technology Perspectives: Scenarios & Strategies to 2050. International EnergyAgency, Paris.

IEA (2006b). World Energy Outlook 2006. International Energy Agency, Paris.

IEA (2007a). Contribution of Renewables to Energy Security. IEA Information Paper, InternationalEnergy Agency, Paris.

IEA (2007b). Energy Balances of Non-OECD Countries 2007 Edition. International EnergyAgency, Paris.

IEA (2007c). Renewables in Global Energy Supply: An IEA Fact Sheet. International EnergyAgency, Paris.

IEA (2007d). Tracking Industrial Energy Efficiency and CO2 Emissions. International EnergyAgency, Paris.


IEA (2007e). World Energy Outlook 2007: China and India Insights. International Energy Agency,Paris.

IMF (2007a). Regional Economic Outlook: Sub-Saharan Africa. World Economic and FinancialSurveys, International Monetary Fund, Washington DC, October.

IMF (2007b). World Economic Outlook 2007. World Economic and Financial Surveys, Interna-tional Monetary Fund, Washington DC, October.

IMF/WORLD BANK (2006). Clean Energy and Development: Towards an Investment Framework.

IZAGUIRRE, A.K. (2005). Private Infrastructure: Emerging Market Sponsors Dominate PrivateFlows. Public Policy for the Private Sector, Washington DC.

JAMASB, T. (2006). “Between the State and Market: Energy Sector Reform in DevelopingCountries.” Utilities Policy 14(1): 14-30.

KALOGIROU, S. (2003). “The Potential of Solar Industrial Process Heat Applications.” AppliedEnergy 76: 337-61.

KAREKEZI, S., KITHYOMA, W. AND S. LEYIAN (2007). The Promise of Biofuels in Africa-States,Challenges and Opportunities. AFREPREN/FWD, paper presented at the First AU/Brazil/UNIDOseminar on biofuels at Addis Ababa, July 30-August 1, 2007.

KOJIMA, M., MITCHELL, D. AND W. WARD (2007). Considering Trade Policies for Liquid Biofuels. Energy Sector Management Assistance Program.

KRISHNASWAMY, V. AND G. STUGGINS (2007). Closing the Electricity Supply-Demand Gap.Energy and Mining Sector Board Discussion Paper no. 20. The World Bank Group.

LUKEN, R. AND P. HESP (2006). Review of Selected Industrial Environmental Initiatives of theUnited Nations System and Regional Banks. Issue paper for the United Nations EnvironmentalManagement Group.

LUKEN, R. AND F. CASTELLANOS-SILVERIA (2007). Energy Use by, and CO2 Emissions fromthe Manufacturing Sector in Selected Countries: Background Paper. United Nations IndustrialDevelopment Organization, Vienna.

MANGWENGWENDE, S. AND N. WAMUKONYA (2007). Challenges and Way Forward for thePower Sector in Africa. Paper presented at Forum of Energy Ministers of Africa (FEMA) Ministe-rial Conference on Energy Security and Sustainability, Mozambique, Maputo, March 28-30,2007.

MEBRATU, D. AND N. WAMUKONYA (2007). “Electricity Sector Reform in Africa: Key Lessons and Emerging Trends.” Journal of Cleaner Production 15(2): 163-65.

MKHWANAZI, X. (2003). Power Sector Development in Africa, prepared for the Workshop forAfrican Energy Experts on Operationalizing the NEPAD Energy Initiative, Dakar, Senegal,June 2-4, 2003.

NHETE, T.D. (2007). “Electricity Sector Reform in Mozambique: A Projection into the Povertyand Social Impacts.” Journal of Cleaner Production 15(2): 190-202.


IV

OECD (2006a). Agricultural Market Impacts of Future Growth in the Production of Biofuels. Work-ing Party on Agricultural Policies and Markets, Organization for Economic Co-operation andDevelopment, Paris.

OECD (2006b). Aid for Trade: Making it Effective. Organization for Economic Co-operation andDevelopment, Development Centre Studies, Paris.

OECD (2006c). The Ladder of Competitiveness: How to Climb It. Organization for Economic Co-operation and Development, Development Centre Studies, Paris.

OECD (2007a). African Economic Outlook 2006/2007. Organization for Economic Co-operationand Development, Paris.

OECD (2007b). OECD Contribution to the United Nations Commission on Sustainable Development15. Energy for Sustainable Development. Organization for Economic Co-operation and Develop-ment, Paris.

OECD-FAO (2007). OECD-FAO Agricultural Outlook 2007-2016. Organization for Economic Co-operation and Development, Paris, and Food and Agriculture Organization, Rome.

OSCAL (2001). Energy for Sustainable Development of the Least Developed Countries in Africa. An Overview. Office of the Special Coordinator For Africa and the Least Developed Countries(OSCAL), United Nations, New York.

PAINULY, J.P. AND N. WOHLGEMUTH (2006). “Renewable Energy Financing – What Canwe Learn from Experience in Developing Countries?” Energy Studies Review 14(2): 154-70.

PRAETORIUS, B. AND J.W. BLEYL (2006). “Improving the Institutional Structures for Disseminating Energy Efficiency in Emerging Nations: A Case Study for Energy Agencies inSouth Africa.” Energy Policy 34(13): 1520-31.

RIVM (2004). Conference Paper: Energy For Development.

SAD-ELEC (2004). Reform and Restructuring of the Electricity Supply Industry (ESI) in Southern andEast Africa. Status Report as at November 2004, SAD-ELEC Ltd, Rivonia, South Africa.

SAD-ELEC (2005). Legal and Regulatory Framework of the Electricity Supply Industry (ESI) in South-ern and East Africa. Status Report as at February 2005, SAD-ELEC Ltd, Rivonia, South Africa.

SALEM, J. (2007). Solar Heat for Industrial Processes. United Nations Industrial DevelopmentOrganization, Vienna, 2007.

SDC (2007). Biofuels, Opportunity or Threat to the Poor? Issue Paper Swiss Agency for Develop-ment and Cooperation.

SHAPIRO, H. (2007). Industrial Policy and Growth. DESA Working Paper no. 53, ST/ESA/2007/DWP/53.

SMEETS, E.M.W., FAAIJ, A.P.C., LEWANDOWSKI. I.M. AND W.C. TURKENBURG (2007). “A Bottom-up Assessment and Review of Global Bio-energy Potentials to 2050.” Progress inEnergy and Combustion Science 33: 56-106.

STEENBLIK, R. (2006). Liberalization of Trade in Renewable-Energy and Associated Technologies:Biodiesel, Solar Thermal and Geothermal Energy. OECD Trade and Environment Working Paperno. 2006-01, Paris.


TURKSON, J. AND N. WOHLGEMUTH (2001). “Power Sector Reform and Distributed Gener-ation in sub-Saharan Africa.” Energy Policy 29(2): 135-45.

UN (2006). Energy for Sustainable Development, Industrial Development, Air Pollution/Atmosphereand Climate Change: Progress in Meeting the Goals, Targets, and Commitments of Agenda 21, the Program for the Further Implementation of Agenda 21, and the Johannesburg Plan of Implementation.United Nations Economic and Social Council, E/CN.17/2006/3, February 17.

UNCTAD (2005a). Biofuels – Advantages and Trade Barriers. United Nations Conference on Tradeand Development. Geneva, UNCTAD/DITC/TED/2005/1.

UNCTAD (2005b). Report of the Export Meeting on Strengthening Participation of Developing Countries in Dynamic and New Sectors of World Trade: Trends, Issues and Policies. Geneva, TD/B/COM.1/EM.26/3.

UNCTAD (2006a). Boosting Africa’s Growth through Re-Injecting “Surplus” Oil Revenue: An Alter-native to the Traditional Advice to Save and Stabilize. United Nations Conference on Trade andDevelopment. Geneva, UNCTAD/DITC/COM/2006/10.

UNCTAD (2006b). Challenges and Opportunities for Developing Countries in Producing Biofuels.United Nations Conference on Trade and Development. Geneva, UNCTAD/DITC/COM/2006/15.

UNCTAD (2006c). Economic Development in Africa. Doubling Aid: Making the “Big Push” Work.United Nations Conference on Trade and Development, Geneva.

UNCTAD (2006d). Meeting Trade and Development Challenges in an Era of High and Volatile EnergyPrices: Oil and Gas in LDCs and African Countries. United Nations Conference on Trade andDevelopment, Geneva, UNCTAD/DITC/COM/2006/12.

UNCTAD (2006e). The Emerging Biofuels Market: Regulatory, Trade and Development Implications.United Nations Conference on Trade and Development, Geneva.

UNCTAD (2006f). The Least Developed Countries Report 2006: Developing Productive Capacities.United Nations Conference on Trade and Development.

UNCTAD (2007a). Commodities and Development. United Nations Conference on Trade andDevelopment, Geneva, D/B/COM.1/82.

UNCTAD (2007b). The Least Developed Countries Report 2007: Knowledge, Technological Learningand Innovation for Development. United Nations Conference on Trade and Development,Geneva.

UNCTAD (2007c). Trade and Development Report 2007. United Nations Conference on Trade andDevelopment, Geneva. UNCTAD/TDR/2007.

UN-DESA (2007). Industrial Development for the 21st Century: Sustainable Development PerspectivesUnited Nations Department of Economic and Social Affairs.

UNDP (2000). World Energy Assessment; Overview – Energy and the Challenge of Sustainability.United Nations Development Program, UNDP, UNDESA, World Energy Council, New York.


IV

UNDP (2006). Human Development Report 2006. Beyond Scarcity: Power, Poverty and the GlobalWater Crisis. United Nations Development Program.

UNDP (2007a). A Review of Energy in National MDG Reports. United Nations Development Programme, New York.

UNDP (2007b). Energizing Poverty Reduction: A Review of Energy-Poverty Nexus in Poverty Reduc-tion Strategy Papers. United Nations Development Program, New York.

UNDP (2007c). Energizing the Least Developed Countries to Achieve the Millennium DevelopmentGoals: The Challenges and Opportunities of Globalization. United Nations Ministerial Confer-ence of the Least Developed Countries, Istanbul, July 9-11, 2007.

UNDP (2007d). Mainstreaming Access to Energy Services: Experiences from Three African RegionalEconomic Communities. United Nations Development Program contribution to CSD-15 forinformational and discussion purposes.

UNDP (2007e). Human Development Report 2007/2008. Fighting Climate Change: Human Soli-darity in a Divided World. United Nations Development Program.

UNDP/ESMAP (2005). The Impact of Higher Oil Prices on Low Income Countries and on the Poor.World Bank, ESMAP report, Washington DC.

UNDP-GTZ (2005). Scaling Up Modern Energy Services in East Africa: A Strategy to Alleviate Povertyand Meet the Millennium Development Goals.

UNECA (2006a). Assessing Regional Integration in Africa: Rationalizing Regional Economic Com-munities. United Nations Economic Commission for Africa, Addis Ababa, Ethiopia.

UNECA (2006b). Sustainable Energy: A Framework for New and Renewable Energy in SouthernAfrica. United Nations Economic Commission for Africa, ECA/SA/TPUB/2005/6.

UNECA (2007). Economic Report on Africa 2007: Accelerating Africa’s Development through Diver-sification. United Nations Economic Commission for Africa.

UN-ENERGY (2007). Energy for Sustainable Development: Policy Options for Africa. UN-ENERGY/Africa publication to CSD15.

UNEP (2007). Global Trends in Sustainable Energy Investment 2007: Analysis of Trends and Issuesin the Financing of Renewable Energy and Energy Efficiency in OECD and Developing Countries.United Nations Environment Program.

UNIDO (2001). Building Productive Capacity for Poverty Alleviation in Least Developed Countries(LDC’s): The Role of Industry. United Nations Industrial Development Organization, Vienna.

UNIDO (2004). Industrial Development Report 2004: Industrialization, Environment and the Mil-lennium Development Goals in Sub-Saharan Africa. The New Frontier in the Fight against Poverty.United Nations Industrial Development Organization, Vienna.

UNIDO (2006a). Energy Security in Least Developed Countries. CSD 14 Background Paper.

UNIDO (2006b). Industrial Development, Trade and Poverty Reduction through South-South Cooperation. United Nations Industrial Development Organization, Vienna.


UNIDO (2007a). Industrial Diversification and Growth for Sustainable Development in Africa,prepared for discussion at the preparatory meeting for CAMI, United Nations IndustrialDevelopment Organization, Vienna.

UNIDO (2007b). Industry Matters for Sustainable Development. Background Paper for the UNIDOSide Event on Sustainable Industrial Development on May 8, 2007 at the Commission for Sustainable Development, United Nations Industrial Development Organization, Vienna.

UNIDO (2007c). UNIDO’s Biofuels Strategy: Sustainable Industrial Conversion and Productive Usesof Biofuels. United Nations Industrial Development Organization, Vienna.

UNIDO (2007d). UNIDO’s Energy and Climate Strategy: United Nations Industrial DevelopmentOrganization, Vienna, 2007.

UNIDO AND REEP (2007). Sustainable Energy Regulation and Policy-Making for Africa. UNIDO/REEEP Joint Publication, United Nations Industrial Development Organization, Vienna.

VAN BUSKIRK, R., HAGAN, E.B., AHENKORAH, A.O. AND M.A. MCNEIL (2007). “Refrig-erator Efficiency in Ghana: Tailoring an Appliance Market Transformation Program Design forAfrica.” Energy Policy 35(4): 2401-11.

VICTOR, D.G. (2005). The Effects of Power Sector Reform on Energy Services on the Poor. UnitedNations Department of Economic and Social Affairs, Division for Sustainable Development,New York.

WAMUKONYA, N. (2002). Power Sector Reform in Developing Countries: Mismatched Agendas.UNEP Collaborating Centre on Energy and Environment, Risø National Laboratory, Roskilde,Denmark.

WAMUKONYA, N. (2003). “African Power Sector Reforms: Some Emerging Lessons.” Energyfor Sustainable Development 7(1): 7-15.

WEC (2005). WEC Statement 2005: Delivering Sustainability: Challenges and Opportunities for theEnergy Industry. World Energy Council, London.

WILLIAMS, J.H. AND R. GHANADAN (2006). “Electricity Reform in Developing and Transi-tion Countries: A Reappraisal.” Energy 31: 815-44.

WORLD BANK (2004). Emerging Infrastructure Policy Issues in Developing Countries – A Surveyof the Recent Economic Literature. Washington DC.


1. Introduction

1.1 Status of Africa’s energy sector

Africa has a landmass of over 30.3 million km², an area equivalent to theUnited States of America, Europe, Australia, Brazil and Japan combined. As of2004, Africa housed 885 million people (World Bank, 2005) in 53 countriesof various sizes, socio-cultural entities, and resource endowments, includingfossil and renewable energy resources. Most of these energy resources are yetto be exploited, and that is a reason why the continent is the lowest consumerof energy.

Africa is faced with the challenge of providing adequate and modernenergy services to its rural communities in an effort to improve their standardof living through increased potential for income and employment generation.The relatively low income levels in rural areas make the provision of modernenergy services unaffordable to most communities.

Sub-Saharan Africa (SSA) has 16 percent of the world’s population, and isresponsible for 2.5 percent of world economic activity. It comprises 47 coun-tries, most of which have a high percentage of low income and largely ruralagrarian communities. The use of modern energy services is closely linked toeconomic development, poverty reduction and the provision of vital services.However, consumption of modern energy sources in SSA is extremely low(WEC, 2005) owing to the region’s reliance on traditional biomass.

The region consumes 2.7 percent of world commercial primary energy.It has 2 percent of world proven oil reserves, 3 percent of world proven gasreserves and 6 percent of world proven coal reserves. There is a large hydro-power potential in excess of 1,383 GWh/a. Other energy resources include ura-nium deposits and a consistently high level of solar insolation. Despite these

VEnergy Access in Rural Areas

Phil U. Chineyemba


extensive primary energy resources, commercial energy use is the lowest in theworld and the average per capita final commercial energy consumption is lessthan 700 kg of petrol equivalent per inhabitant, compared with 7,844 kg inNorth America and the world average of 1,674 kg (IEA, 2006).

The main forces driving the demand for energy are population growth andeconomic development. The exposure to and vulnerability of the SSA economiescontributed to the severe economic downturn during the high oil prices in the1970s and early 1980s. The distribution of primary energy resources across theregion is uneven. Nigeria and Angola have 32 percent of Africa’s proven oilreserves, while virtually the rest, 65 percent, is in North Africa. Nigeria has 33 per-cent of Africa’s proven gas reserves, while North Africa has 56 percent. SouthAfrica has 88 percent of Africa’s proven coal reserves. Of the 308 GW of hydro-power potential, 64 percent is located in East and Central Africa and 34 percentin West Africa. Regional trade in both fuels and electricity is relatively low (WEC).

1.2 Main characteristics of African energy use

The most striking feature of the African energy situation is over-consumption of low-grade traditional energy sources (fuelwood, charcoal and non-woody biomass), on the one hand, and under-consumption of high-quality modern

Source: International Energy Agency, 2003 and Karekezi, et al. (2004).

Energy consumption in Africa in percent in 2001 Figure 1

Biomass

Petroleum

Electricity

Gas

Coal

4.1

61.5

15.1

18.0

1.3

North AfricaType Sub-Saharan Africa Southern Africa

81.2

14.5

2.9

1.0

0.5

16.5

29.3

25.9

1.6

26.8

Petroleum 25%

Electricity 8%

Gas 4%

Coal 4%

Biomass59%


V

fuels (coal, Liquefied Petroleum Gas (LPG), natural gas, NRSE) on the other. Largedisparities exist among countries in SSA, with only five accounting for 70 percent of total modern energy consumption for the region. National percapita modern energy consumption varies by a factor of more than 10 betweenthe highest user and the lowest (IEA, 2006). Enormous disparities also existbetween urban poor and rural users and the higher income groups throughoutthe region.

Africa accounts for 3 percent of world energy consumption – the lowestper capita modern energy consumption in the world (50 percent of worldaverage).On the other hand, Africa has the highest share of biomass in totalenergy consumption in the world (59 percent of total energy consumed).

Africa is a diverse continent. There is considerable variation in energyconsumption among the different regions and countries. For example, theshare of biomass energy in total energy exceeds 81 percent in Africa comparedto only 4.1 percent in North Africa and 16.5 percent in Southern Africa.

Figure 1 illustrates that Southern Africa and North Africa have high levels of modern energy consumption, while SSA countries continue to relyheavily on biomass and traditional energy. This heavy reliance on traditionalenergy sources means a low level of energy efficiency; heavy deforestation andbiodiversity loss; greater health hazards due to indoor air pollution; andreduced capacity to mitigate climate changes.

2. Status and prospect of energy access

2.1 The situation of access to energy services

When approaching “energy” for rural areas many people think of this interms of provision of electricity or “bringing in the power grid.” But energycovers a number of different forms, for example, direct light, heating, cooling,shaft power as well as electricity. Others are a huge number of different tasks(cooking, lighting, water pumping, refrigeration and communications) andend-users (domestic, businesses, basic social services, transportation etc.).Because energy is just the “ability to work,” demand for energy is a “deriveddemand”; people do not want energy in itself but the “energy services” pro-vided. This wide range of services is made possible by different fuels and tech-nologies and can have a major impact in facilitating livelihoods, improvinghealth and education in rural areas of developing countries and helping toreduce poverty.


2.2 Basic needs of energy in rural areas

The benefits deriving from energy services are often diverse and complex. Theyrange from:

• The direct benefits of contributing to increased production andreducing “sweat energy”;

• The contribution that energy can make to health and humancapital, for example, in terms of pumping water or providinglighting and other services to health facilities and schools;

• More intangible benefits of “security” (via street lighting, back-up energy supplies, or pumped water reducing risks fromdrought);

• A sense of “inclusion” in the modern economy (via the commu-nications media).

2.3 The problems of increasing the ability to pay for improved energy services in rural areas

Large numbers of people suffer from a “vicious circle” of energy poverty. Theyare “energy poor” because they do not have the means to buy improved energyservices, even if they have access to them (in the sense of being in close prox-imity to a supply source). Furthermore, even people who can afford improvedenergy supplies still may not be able to afford the “conversion technology” thatmakes that energy useful (for example, a stove, radio, light bulb or motor). Thisis illustrated vividly in Figure 2 below.

Increased access to cash becomes crucial, because improved energy serv-ices at the household level frequently necessitate switching to an energy tech-nology that costs money from one that does not. Even where improvement inlighting results in cash savings, because the new source replaces more costly butless effective supplies (such as batteries and candles), there is frequently a netincrease in money expenditures because people make more use of the improvedenergy services.

This means that attempts to reduce energy poverty (particularly by usingelectricity supply technologies) face a particularly difficult challenge in termsof the stated preferences of intended beneficiaries. When rural people expresstheir needs for improved energy services they often give high priority to light-ing, a perfectly understandable position for those forced to live much of theirlives in the semi-darkness provided by candles or kerosene. But the most finan-cially sustainable, decentralized electricity supply options are likely to be those


V

that provide power to productive enterprises that can sell their products/services profitably.

Generally, village wealth will not increase unless goods and services canbe sold outside the village; this implies that roads and transport are likely to benecessary “complementary inputs.”

An important conclusion follows from this: the cycle of energy povertywill often be broken only by combining improved energy services with end usesthat generate cash incomes. These are likely to be the productive energy end-uses that enhance production activities, either by increasing productivity,extending the range of outputs or improving output quality. This might belabeled a “virtuous circle,” and is illustrated in Figure 3.

Clearly, the vicious cycle of energy poverty (as with other forms ofpoverty) can be broken through the redistribution of wealth by means of grantsand subsidies. But the level of funds available from government, aid donors andnon-governmental organizations (NGOs) is likely to be far less than thoserequired to provide all people with adequate energy services.

There is something further to take into account when planning pro-poorenergy interventions. It is important to consider the means of using the energyto secure cash incomes at an early stage of the development process, and only subsequently to see how the impact of improved energy services can be

Source: ESMAP World Bank, 1999

The vicious circle of energy poverty Figure 2

2

1

3

No energy to run machines results in low productivity, poor quality andrange of output. The issue is deepened by “time poverty,” meaning

women's labor time cannot be released for economic activity.

No money to buy improvedenergy supplies or energy

conversion equipment.

Low productivity, low surplus, little cash.


extended to the other aspects of sustainable livelihoods. It has proven extremelydifficult to produce financially sustainable results with energy projects if theyare started with the mindset of “social development” (akin to feeder roads, clin-ics and schools) that are free at the point of service. Such projects often failwhen the governments, aid agencies and NGOs who finance them initially can-not sustain their support for recurrent expenditures.

3. Overcoming the barrier to energy access

3.1 The role of intermediation

There are clearly many ways in which overall energy supply and use might beconceptualized. The most effective method of increasing energy services inrural areas is to use the policy instrument. This approach extends the idea offinancial intermediation, technical intermediation, social intermediation andorganizational intermediation.

Financial intermediation: This involves putting in place all the elements of afinancial package to build and operate decentralized rural energy supply com-panies (RESCOs). The process is sometimes referred to as “financial engineer-ing” and covers:

• The transaction costs of assembling the equity and securingloans;

Source: ESMAP World Bank, 1999

A virtuous circle to break out of energy poverty Figure 3

Increased access to improved

energy services.

Money to buy improvedenergy supplies, serviceor energy equipment.

Increased productivity.Women gain time for

economic activity.

Increased income. Increased sales,surplus and profit.

25

1

4 3


V

• Obtaining subsidies;

• The Assessment and assurance of the financial viability ofschemes;

• Assessment and assurance of the financial credibility of the bor-rower;

• Management of guarantees;

• Establishment of collateral (“financial conditioning”); and

• Management of loan repayment and dividends to equity holders.

Technical intermediation: This involves both improving the technicaloptions by undertaking research and development activities and importingthe technology and know-how “down” through the development of capaci-ties to supply the necessary goods and services. These goods and servicesinclude:

• Site selection;

• Systems design;

• Technology selection and acquisition;

• Construction and installation of civil, mechanical and electricalcomponents;

• Operation & maintenance;

• Trouble-shooting, overhaul and refurbishment.

Organizational intermediation: This involves not only the initiation andimplementation of programs, but also lobbying for the policy change requiredto construct an “environment” of regulation and support in which the energytechnology and the various players can thrive. This means putting in place thenecessary infrastructure and getting the incentives correct in order to encour-age owners, contractors and financiers. Organizational intermediation mustinclude the development of regulatory support and incentive structures, whichcan specifically address the energy needs of the poor in rural areas.

Furthermore, organizational intermediation is usefully distinguishedfrom social intermediation, which involves identification of the owners andbeneficiaries of projects and the “community development” necessary toenable a group of people to acquire the capabilities to take on and run each indi-vidual investment project, obtaining for them a voice in project identification,design and management of programs.


3.2 The Role of subsidies

In addition to overall poverty in rural areas, the number and range of “interme-diation tasks,” low density of demand and remoteness of location raises thecosts and reduces profitability of energy supplies to rural areas. Furthermore, acertain amount of “social overhead investment” almost always has to be put inplace to support such schemes (training, technical assistance and capacitybuilding within communities). The burden of these overheads will be particu-larly high for innovative schemes, though they may eventually be spread acrossa large number of enterprises.

A report from The World Bank confirms the view of many peopleinvolved in the practical implementation of rural energy schemes when it says:

“It is illusory to expect that increasing access to electricity for a signif-icant part of the population traditionally excluded from grid-basedelectricity can be financed only by the private sector.” (ESMAP WorldBank, 1999)

If the cost of energy is too expensive for poor people who need it, thenthe issue of subsidies and/or grants cannot be avoided. The political acceptabil-ity of subsidies has undergone wild fluctuations in recent years. All govern-ments provide subsidies, and it is clear that some have done more harm thangood (destroying markets and benefiting people who are already better off).However, the essential question that has emerged from the ideological postur-ing of recent years is less about the rights and wrongs of subsidies in principle,but rather as to whether a particular form of subsidy is actually likely to achieveits intended purpose.

The arguments for using money that is supplied at less than full commer-cial rates of interest are overwhelming if large numbers of people are to be givenaccess to improved energy services. This “soft money” will be required to enablepeople with insufficient purchasing power to gain access to electricity, and toother more convenient forms of energy.

If the case can be made for subsidies, experience suggests that the use ofsoft money can both help the expansion of decentralized energy supply optionsand harm them. As always, the “devil is in the detail” and in the specifics ofeach context. Hence the phrase “smart subsidies” (ESMAP World Bank, 1999)has been coined to put some distance between current forms of subsidy and theearlier forms, for example, subsidies on grid-based electricity, kerosene anddiesel, that have been shown to stultify innovation, destroy markets and sup-port the already more well-off.


V

3.3 Pricing

Perhaps, one of the most critical issues in rural energy development is the non-monetized nature of many aspects of the rural economy, in particular, the bulkof energy supplies in the form of fuelwood and other biomass fuels. The limitedcash that rural people do have needs to be spent on a variety of goods; becauseenergy has traditionally been considered a free resource, it may not enjoy thehighest priority. At the same time, the introduction into rural societies of mod-ern energy sources carries a cash price.

While the ability and the willingness of rural people to make the transi-tion from traditional to modern energy sources may be contingent upon theirfinancial resources, their prospects of achieving higher income levels are, inturn, often constrained by the extent to which such a transition is achieved.Energy and rural development may thus find themselves in a state of mutualdependence, and represent one aspect of the poverty cycle that pervades manyrural areas. Breaking this deadlock is one of the major challenges faced by devel-oping countries in developing their rural areas.

Pricing rural energy services is an issue to ponder. High prices for the serv-ices will be beyond the affordability of rural people and low pricing will resultin it being difficult to induce the necessary investment from commercial banksand private investors. In most cases, the immediate priority of dealing withrural energy poverty is to provide a minimum amount of energy to meet peo-ple’s basic needs, irrespective of their ability to bear the costs of supply anddelivery.

So, subsidies on prices are one measure used to lower the cost of energyservice in the rural area. For example, in the Chinese village solar power pro-gram implementation, the government proposed a price subsidy that enablesthe rural people to pay only the operating cost, while the government pays theinvestment cost.

3.4 The enabling environment

The local government clearly plays a crucial role in the provision of subsidies,even where it has been “rolled back” from direct involvement in providingenergy services to the poor. However, subsidies should not be considered in iso-lation from other aspects of government intervention. Although the climate isbecoming more favorable to decentralized energy supply options, in most coun-tries the existing regulatory framework is often the major barrier to such devel-opment. It can be hostile, contradictory or uncertain. Taxes and subsidies often


still undermine markets, rather than encourage them. The supporting infra-structure of training institutions or finance may be non-existent or inaccessi-ble. Competitors may be able to gain privileged access to subsidies that enablethem to sell their products below cost. Without changes to this policy environ-ment, the flow of private-sector finance and innovation will be restricted. Theseare the areas currently under the focus of much analysis, innovation andreform.

3.5 The role of the energy regulator

The overall role for an energy sector regulator in a liberalizing power market isto ensure a level playing field and to overlook the proper functioning of thepower market.

4. Models for increasing energy services in rural areas

Although some developing countries have long recognized the importance ofenergy in rural development, it was only after the so-called energy crisis in theearly 1970s that rural development policy makers began to show greater con-cern for the energy constraints facing them.

The world suddenly entered an era of rising energy prices and unstablepetroleum-based fuel supplies. These factors threatened to accelerate the per-ceived gradual environmental depletion associated with rural people’s heavyreliance on fuelwood and agricultural residues to meet their basic energy needs.As supplies of petroleum-based fuels became more costly and unreliable, it wasbelieved that people would have to switch back to traditional or natural energysources. Therefore, the option in most developing countries became to increaseenergy services by using different business models.

4.1 Market-based models

There are very limited successful stories for increasing energy services in a sus-tainable fashion to rural areas using a market-based model. This is due to thedistributed service and limited profit on investment in this area. However, inter-national aid agencies have developed several market-based business models toincrease energy access to rural areas. The general implementation flow of mostmarket-based models is shown in Figure 4.

Other market-based models could be the “concession approach” and“rental approach” as shown in Figure 5.


V

A concession approach has been demonstrated in Argentina (TPAEPRA ,1995-2000 and PERMER 2000-2005), where an award would be given to the mostqualified RESCO bidder to provide the energy services as a regulated monopolyin certain areas and over a certain number of years, thereby operating in a “con-trolled” free-market environment. The tariffs should be real, reflecting theactual costs of service, but subsidies for electricity used could be extended to thepoorest (based on household spending for lighting in the absence of electricityor on household willingness to pay) and then reduced over time during the con-cession period.

Implementational flow of market-based models Figure 4

Fund from international aid agencies

Business servicecompanies

Local energyservice companies

International or local commercial banks or investors

Rural users

Concession and rental approach of market-based models Figure 5

Subsidy for poorest

Energy servicebased on real tariffs

Rentalfor SHS or small village PV system

Concession (area and no. years)

RESCO bidder

Governmentcontrol

Village PowerSupplier / End-user

Village PowerSupplier / End-user


4.2 Government-led model

A government-led model can take on several forms. For example, for the MexicoPRONOSOL program, the government maintained control of the program and theprivate sector only participated as a vendor of goods and services and never as theowner-operator. A “bottom-up” approach was taken allowing awareness buildingon RE and participation of communities, and this effort has increased the ruralelectrification level with over 40,000 solar home systems (SHS) disseminated.

In this model, the government is the financial agency and the installation com-pany, while the local service company plays a crucial role for supply energy serv-ice in the rural areas. However, the sustainability of this model depends verymuch on continuing government support.

4.3 Private company participation

In the developing countries, the task of ensuring adequate energy supplies isincreasingly being left to the private sector. This is primarily the result of struc-tural adjustment programs, central to which is the privatization of publicly-owned utilities and the elimination of costly subsidies. In the absence of care-fully defined contractual relationships between the new private utilities and thestate, reliance on the private sector to provide energy services to the rural poormay result in their continued neglect. This is because potential returns oninvestment in rural areas may be lower than in other areas, or non-existent insome extreme cases. Despite this, there are examples of private commercial REsuccesses in the provision of energy services in rural areas: SELCO (Solar EnergyLight Company), active in India, Sri Lanka, Vietnam, and SOLUZ are good mod-els, using fee-for-service and customer financing and leasing approaches(www.selco-intl.com).

Government-led model in China – financial flow Figure 6

Selecting theinstallation companies

by bidding

Local rural energyservice companies

(RESCOs)

Governmentbudget

Install systemfor rural users


V

4.5 Subsidies

Finally, subsidies, which are provided by the central and local governments, areone of the most popular economic incentives for increasing energy to ruralareas in developing countries. The typical subsidies are:

Management and administration: Governments would finance agencies thatmanage the energy planning, regulation and price as well as other services for increasing energy to rural areas, such as IREDA and the Ministry of Non-conventional Energy Sources (MNES) of India.

Direct cost for R&D: There are some subsidies for rural energy research anddevelopment in many developing countries.

Project subsidies: In some cases, special financial agencies have been set up forrural energy project financing, such as IREDA in India, which offers soft termloans varying at present from 2.5–14 percent. In 1987, IREDA secured interna-tional funding for the solar photovoltaic and thermal, small hydro and windsectors through the World Bank and the Asian Development Bank.

5. Conclusion

Financing is a key form of intervention in the bid to increase the access ofrural people to energy services. Many renewable technologies best suited toproviding energy services to remote rural areas use non-monetized fuel, buthave a prohibitive initial capital cost. At the same time, many developingcountry governments are actively promoting the replacement of fuelwood bysubsidizing other energy sources. However, the success of such fuel substitu-tion and energy access programs basically depends on two factors largelybeyond government control. These are economic growth and the correspon-ding increase in personal incomes that would permit consumers to switchfuels. The substitution process in many countries is hampered by high importcosts resulting from the inefficient procurement of small quantities of renew-able energy technologies.

Subsidies are a conventional means of overcoming the financial obsta-cles, but this approach presents various difficulties. The welfare objectiveembodied in subsidies for rural electricity, or commonly used fuels such askerosene, LPG and diesel, can often fail in its purpose. This may be because ofthe diversion of these energy sources to unintended uses, or their dispropor-tionate use by the more affluent, who could anyway afford the real costs ofenergy supply.


A reduction or removal of pricing subsidies to overcome this problem is, how-ever, not straightforward because of the potentially adverse impact on the poor.The partial withdrawal of kerosene price subsidies in Sri Lanka and Myanmar,for example, forced people in some rural areas to return to the use of fuelwood.Both these countries suffer from deforestation and this could have serious envi-ronmental implications for them in the long run.

Private sector participation is always the most important option forenergy access by rural people, and in most of the developing countries, pri-vate investments become the crucial measure to ensure energy supply to ruralpeople.

There is a clear need for planning integration between rural electrifica-tion authorities, ministries and transmission and distribution system operators.An independent or semi-independent energy regulator, being an essential part-ner for the national government in implementing the energy policies, shouldbe given the mandate and resources to coordinate the consultation process.

In summary, rural development in general and rural energy specificallyneed to be given much higher priority by policy makers and regulatory agen-cies. Also, rural energy development must be decentralized to put the rural peo-ple themselves at the heart of planning and implementation; and rural energydevelopment must be integrated with other aspects of rural development. Meet-ing Africa’s energy challenges requires a radical scaling-up of access. This callsfor an improved enabling environment, effective policy and regulatory frame-works, improved management capacity and financially healthy utilities.


V

Bibliography

ARVIDSON, A., NORDSTROM, M., FORSLUND H., SYNGELLAKIS K. AND G.WOODS-WORTH ET AL. (2006). Scaling-up of Energy Services Access in East Africa to Achieve the Millen-nium Development Goals. ENABLE & SIDA0, June 2006.

CURES (2004). The Future is Renewable. Declaration for the International Conference forRenewable Energies (Renewables 2004).

DFID (2002). Energy for the Poor, Underpinning the Millennium Goals. August 2002.

ENPOGEN REPORT (2003). Energy, Poverty and Gender: A Review of the Evidence and Case Studies in Rural China.

GARDNER, G. (2002). State of the World 2002 (Worldwatch). Chapter 1: “The Challenge forJohannesburg: Creating a More Secure World.” February 2002.

GREENPEACE AND THE BODY SHOP (2001). Power to Tackle Poverty. June 2001.

INTERNATIONAL ENERGY AGENCY STATISTICS DIVISION (IEA) (2006). Energy Balancesof OECD Countries (2006 edition) and Energy Balances of Non-OECD Countries. Paris.

LI JUNFENG & SIMON. Policy Options for Increasing Access to Energy Services in Rural Areas.

TAYLOR, D.B., Chinese Renewable Energy Industries Association, Beijing, China.

WORLD BANK (2005). World Development Indicators 2005. Washington DC.

WORLD ENERGY COUNCIL AND FOOD AND AGRICULTURE ORGANIZATION OF THEUNITED NATIONS (1999). The Challenge of Rural Energy Poverty in Developing Countries.

WORLD ENERGY COUNCIL (2001). The Challenge of Rural Energy Poverty in Developing Countries. Worldwatch Institute – State of the World, January 2001.

WORLD ENERGY COUNCIL (2002). World Energy Assessment, 2002. United Nations Devel-opment Programme, United Nations Department of Economic and Social Affairs.

WORLD ENERGY COUNCIL (2004). World Energy Assessment: Overview 2004, Update. UnitedNations Development Programme, United Nations Department of Economic and SocialAffairs.


Internet Resources

The ENABLE project: building capacity in energy in the health, water and education sectorsfor poverty reduction in sub-Saharan Africa: www.enable.nu

Global Village Energy Partnership: www.gvep.org

Greenpeace International: www.greenpeace.org/international

The UK Government’s Department for International Development (DFID): www.dfid.gov.uk

United Nations Statistics division: unstats.un.org/unsd/default.htm

United Nations Human Settlement Programme: www.unchs.org

Worldwatch Institute, independent research for an environmentally sustainable and sociallyjust society: www.worldwatch.org

Renewable Energy and Energy Efficiency Partnership: www.reeep.org

The EU Energy Initiative: www.euei.org

Agenda 21: www.un.org/esa/sustdev/documents/agenda21/index.htm

The World Bank Group: www.worldbank.org

The Millennium Development Goals: www.un.org/millenniumgoals

IEA: www.iea.org


1. Introduction

The African Rural Energy Enterprise Development (AREED) program waslaunched in 2001 by the United Nations Environment Programme (UNEP).Though not initially envisaged, AREED is now in its second phase. This paperis based on the initial phase, which was completed in mid 2007. During thatperiod, AREED was implemented in five partner countries, namely, Ghana,Mali, Senegal, Tanzania and Zambia.

AREED was created to promote energy-efficient and renewable energytechnologies to widen access to clean energy services by rural and peri-urbancommunities. The main instrument of AREED is the small-and medium-sized enterprise (SME) and the key actors for achieving the objectives ofAREED are the AREED implementing institutions in the partner countries,non-governmental organizations (NGOs), development organizations, nationalgovernments, financial institutions and SMEs.

The AREED program has achieved good results since its inception. How-ever, it has also faced severe challenges due to inadequate national policies tosupport effective energy SME development as well as weakness in the programimplementation framework by AREED partner institutions, namely, CEEEZ inZambia, Enda TM in Senegal, Mali Folkecenter in Mali, KITE in Ghana, andTaTEDO in Tanzania.

The purpose of this policy-makers’ paper is to make appropriate recom-mendations to enable policy makers to address the constraints facing the devel-opment of energy SMEs in the partner countries and Africa in general. Theserecommendations are drawn from the experience and challenges encounteredin the implementation of the AREED program. The policy-makers’ paper

VIExpanding Energy Access through Sustainable Energy Enterprises in Africa: Financing, Capacity-building and Policy Aspects

Lawrence Agbemabiese


includes background information on the AREED program as well as a succinctsummary of achievements and challenges facing the AREED program, partic-ularly in creating an enabling environment for the development and growthof viable energy SMEs that will serve the rural and peri-urban markets. Theconclusions and recommendations focus on the roles of key policy actors andthe respective instruments that could be adopted to achieve the identifiedgoals.

1.1 Background on AREED

The provision of electricity and clean fuels for both urban and rural populationsis a major policy priority for all governments in Africa. However, in most SSAcountries, access to electricity and modern fuels (Liquefied Petroleum Gas (LPG),improved biomass, biofuels, etc.) is skewed towards the urban population. Theconsequence is that the majority of the rural and peri-urban populations dependon traditional fuels, mainly firewood, charcoal and agricultural waste for cook-ing and heating; and kerosene and dry cell batteries for lighting and radio listen-ing, respectively.

African governments have initiated programs to promote clean energyservices based on energy-efficient technologies, modern fuels and renewableenergy sources for electricity generation and cooking as well as domestic andindustrial heating. These programs, however, face major challenges, includinginadequate funding as well as weak institutional frameworks, implementationand management. Energy sector restructuring has been initiated as a recommen-dation to address these challenges. As part of measures to create an enabling envi-ronment for private-sector companies to participate effectively in the provisionof rural energy services, and introduce new technologies and decentralizedrenewable energy sources, governments have established new institutions andagencies. The Agence Malienne pour le Développement de l’Energie Domestiqueet de l’Electrification Rurale (AMADER) has been established in Mali, AgenceSenegalaise d’Electrification Rurale (ASER) in Senegal, Rural Energy Agency (REA)in Tanzania, Rural Electrification Authority in Zambia, and a new Rural Electrifi-cation Agency is to be established in Ghana under the current World Bank-fundedGhana Energy Development and Access Project (GEDAP).

In support of the efforts of various national governments at ensuringaccess to clean energy services for all populations and recognizing the potentialof energy as a cross-cutting input for sustainable socio-economic development,the United Nations Environment Programme (UNEP) in 2001 launched theAREED program. The overarching aim of AREED is to promote the development


VI

of energy-efficient technologies and renewable energy sources (solar energy,biomass, wind, hydro, biofuels etc.) for the provision of clean energy servicesin peri-urban and rural communities, through the development and capacityenhancement of SMEs. The specific objectives of AREED are to: establish andstrengthen enterprises (private sector, public-private partnerships) that offerclean energy services in mostly rural and peri-urban areas; increase the capac-ity of local NGOs and development organizations offering enterprise develop-ment services that are critical to small and medium-size energy enterprises dur-ing their start-up phase; and engage local and regional financial institutionsinvesting in the clean energy sector so as to leverage the efforts of local, regionaland national governments that provide support for business-like solutions tothe delivery of sustainable energy services to SMEs.

The AREED program was launched under the joint auspices of UNEP, theUnited Nations Foundation (UNF), E+Co, and UNEP Risoe Centre. Being theprogram initiator, UNEP facilitates and mobilizes funding for the AREED pro-gram; E+Co pioneered the enterprise development model and manages theRural Energy Enterprise Development (REED) seed fund; while the UN Founda-tion and other agencies (SIDA, BMZ and the Dutch government) have donatedfunds to AREED.

In the partner countries, where the AREED program is being imple-mented, there has been an acknowledgement of the potential contributionsthat SMEs can make to overall national development. In Senegal, the govern-ment has gone one step further down the institutional line to draw an SMEcharter. In Zambia, the government has indicated its intention to reduce thecurrent barriers to the growth and expansion of SME development. The govern-ment of Ghana has created a special private sector ministry and singled out pri-vate sector development as one of the President’s Special Initiatives (PSIs),aimed at contributing to economic development and poverty reduction. Maliand Tanzania have outlined a number of incentives in SME policy documentsintended to boost entrepreneurial culture and lay the foundation for a strongand effective industrial base.

In spite of the strong political will to make SMEs an engine of growth,little attention has been focused on energy SMEs as an instrument for wideningaccess to clean energy services. Existing policies and regulations have providedfew resources to stimulate growth in energy SMEs and this, to a certain extent,has constrained implementation of the AREED program. Notably, the AREEDpartner institutions have made little inroads in engaging NGOs and develop-ment organizations, as well as local, regional and national governments.

This enterprise supplies potable water to rural populations through a wind-pumping sys-tem. The enterprise is currently the main actor in the maintenance and installation of windpumps in the rural areas of Thies, Louga, Diourbel and other surrounding villages. The enter-prise also takes part in the sensitization of the population on the management of the pumpsand access to potable water. According to the annual activity report, VEV repaired manywind systems and installed new wind pumps. Difficulties faced by the enterprise include theinability of some rural communities to find a good management system. Some wind pumpsare not functioning because of lack of funds to pay the repair expenses.

Vent et Eau pour la Vie (VEV) in Senegal Box 1

Since 2003, SODIGAZ has been repaying, on schedule, the loans contracted from AREED.The financial state of the enterprise is good in spite of the arrival of two competitors in thedistribution of butane gas. During the first quarter of 2005, the enterprise realized 380 mil-lion FCFA as turnover by selling 10,500 bottles of butane gas, subsidized by AMADER. In2005, SODIGAZ obtained from E+Co a second loan dispensed in two tranches to purchase25,000 bottles of butane gas to supply rural populations.

SODIGAZ: Butane gas distribution in Mali Box 2

Making cement is an energy intensive business, where energy is often supplied by fossil fuels.In Tanzania, however, the Tanga Cement Company Limited (TCCL) wanted to source someof their energy from biomass and turned to Peter Gathercole, a mechanical engineer with24 years experience, who is also the founder and Managing Director of Biomass Energy Tan-zania Limited (BETL). BETL is an energy service company based in Dar es Salaam. BETL beganoperations on receipt of a $50,000 AREED investment in June 2003. The AREED partner-ship provided BETL with business planning support and assisted in filling in certain gaps inthe operational structure of the business. The company was established primarily to developthe business of turning waste products with no value into marketable products. The com-pany aims at producing thermal energy from solid biomass that is environmentally friendly.It developed a concept of providing industrial clients with alternative fuel source from thebiomass. Since then, the company has been sourcing and supplying a range of agriculturaland other biomass wastes for use as fuel.

Mr. Gathercole believed he could profit from a Tanzanian law that demands that produc-tion industries remove biomass waste, which is not only expensive but also a potential envi-ronmental hazard. TCCL on the other hand, chose to follow international trends by usingbiomass waste for their thermal needs in the cement production process. Such a policy ledthem to commission the engineering department to design and build a suitable facility at theplant so that large volumes of biomass could be utilized. The policy also resulted in cost sav-ings to TCCL and reduced greenhouse gas emissions, while giving a 40 percent gross profitmargin to BETL. Similar opportunities exist in Tanzania, and the business model and knowl-edge can be replicated in other AREED countries, such as Ghana, where large-scale depositsof biomass (from sawmills) are currently unused. BETL has signed a new two-year contract,increasing volumes from 500 tons per month (original contract) to 1,200 tons per month.BETL has also begun a small pilot project with a group of women in the Kigamboni suburbin Dar es Salaam to begin carbonizing coconut husks. BETL will buy the carbon from themas a source of raw material for briquettes.

Biomass Energy Tanzania Limited (BETL) Box 3


VI

AREED investments 2000–06 Box 4

50,000 100,000 150,000 200,000Size ($)

Sodigaz (LPG)

Eco‘Home (ELighting)

AB Mgt (EEfficiency)

Gladym (ELighting)

Motagrisol (SPV)

Lambark (LPG)

LMDB (LPG)

Seeco (SPV)

KBPS (Biomass)

Chavuma (EEfficiency)

Anasset (LPG)

RESCO (LPG)

M38 (LPG)

Mona (SPV)

Aprocer (Cookstoves)

Bansim (LPG)

Kalola Farms (Wind Pump)

AME (SThermal)

Energie R (SPV)

Fee Hi (LPG)

Fadeco (SThermal)

BETL (Biomass)

Prosoleil (SThermal)

VEV (Wind Pumps)

Foyers Amel. (LPG-Stove)

Translegacy (LPG-Stove)

Rasma (Cookstoves)

USISS (Crop Drying)

Ubwato (Cookstoves)

Bagani (Biofuel)

TSADC (SThermal)

RCI (Biofuel)

Enterprises

ConceptCommercializationExpansion

Between 2000 and 2006, AREED granted loans to a number of clean energy enterprises tofinance their business concepts, commercialization or expansion in the partner countries. Thebar chart below demonstrates the energy enterprises and amounts (in dollars) financed.


1.2 Achievements and challenges of AREED

The AREED program has achieved good results since its inception. It has suc-ceeded in developing an ingenious plan of loan provision, building capacity inbankable business plan development, analyzing market conditions and identi-fying efficient energy systems for SMEs. By May 2006, AREED had approvedabout $2 million for 33 enterprises with a potential market base of about224,000 people in over 40,000 households in the five partner countries –Ghana, Mali, Senegal, Tanzania and Zambia. By June 2007, about 39 enterpriseswith market potential of 331,000 people in various areas, including wind pumpsin Senegal (Box 1), LPG distribution in Mali (Box 2) and biomass energy in Tanzania (Box 3), had benefited from AREED financing. AREED’s investmentsduring 2000-06 are also presented in Box 4.

Amount financed by AREED and annual repayments Box 5

Annual finance Annual repayment

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2000-01 2002 2003 2004 2005 2006 2007

$

The graph shows the total amount financed annually by AREED for the 39 companies inGhana, Mali, Senegal, Tanzania and Zambia during the first phase up to June 2007. The annualpayments received are impressive, as the initial loan repayments started in 2003. ThusAREED is a commercially sustainable program, as shown again by the Ghana and Tanzaniacase studies.


VI

Experts estimate that AREED’s support to energy SMEs providing clean energyservices (energy efficient and renewables) has yielded some environmentalbenefits, including annual savings of about 422,000 tons of carbon dioxideemissions and 263,000 tons of charcoal and firewood. Box 5 shows a summaryof the total amount financed annually by AREED and repayments by the 39enterprises during the first phase up to June 2007. The annual repayments areimpressive, as the initial loans were largely repaid during 2003-04 and addi-tional loans were granted. Thus AREED is potentially a commercially sustain-able program.

In spite of the stated achievements, there are several challenges and bar-riers facing energy sector businesses in the AREED partner countries. Theyinclude a lack of relevant policies and institutional frameworks to provide suf-ficient leverage for entrepreneurs to consolidate or tap into new energy businessventures; lack of capacity building in energy system development and commer-cialization; limited rural energy market; inherently high initial cost of renew-ables and energy-efficient products. Others are poor access to clean energy sec-tor financing; the long and arduous administrative processes involved in energyenterprise creation; lack of effective communication between relevant govern-ment institutions and energy SMEs; and perception of the provision of energyservices as the purview of government.

2. Policies for enhancing enterprise development and market access

AREED has the potential to contribute to overall national development priori-ties and, in particular, the goal of widening access to clean and sustainableenergy services for under-served communities through effective SMEs. This willrequire dynamic policy initiatives and mobilizing of the capital and humanresources needed to develop and enhance energy SMEs. Decision makers in gov-ernment, the private sector, civil society and AREED institutions should makethe effort to address these barriers facing SME development in general and, inparticular, energy SMEs. Given this context, the following policy recommenda-tions are made to address the challenges that need priority attention.

2.1 Establish relevant policies and institutional frameworks for energy SME development

National governments and parliaments are responsible for the formulation ofpolicies, institutional frameworks and legislative measures to support enter-prise development and expansion. The objectives, principles and resourcesrequired to establish and strengthen energy sector enterprises present a number


of challenges. These challenges differ from country to country depending onlocal conditions and concerns. However, the following areas are recommendedfor attention in the development and enhancement of energy SMEs:

• Translating policies into actions (having clear-cut paths forbudgetary support and implementation strategies).

• Integrating private sector (SMEs) into policy-making processes.

• Making consistent political commitment to widen nationalenergy access particularly for peri-urban and rural communities.

While the policy and institutional settings seem to be in place in the variouscountries, there are still considerable difficulties in translating policies intoactions. Moreover, the policies lack clear-cut paths for budgetary support andimplementation strategies. Also, actions contained in existing institutionalframeworks are not properly streamlined to address the peculiar needs of energySMEs. This could be partly addressed through establishing financing frame-works within Rural Energy Agencies/Authorities that clearly include support forSME participation.

There is growing recognition that improving the policy environment ofthe private sector can foster strong links with public-sector decision-makers,and this can unlock resources that have the potential to boost the performanceof energy SMEs. However, this needs to be complemented with clear implemen-tation strategies, where the responsibilities of both private and public-sectorstakeholders are well defined.

Research evidence suggests that the lack of consistent political commit-ment to widen national energy access is likely to constrain energy sector busi-nesses due to low investor confidence. This needs to be underpinned in themaster plans and development budgets thereof to mitigate the short-termeffects caused by a change of government or cabinet reshuffles. In addition,it is important to support professional watchdog groups as these serve asmonitoring bodies.

2.2 Build human and institutional capacity in energy system management

It appears that there is the political will to create a positive business environ-ment for the private sector to function as the engine of growth for job andwealth creation. However, more needs to be done. In this regard, it is recom-mended that national governments in collaboration with development agen-cies should implement relevant capacity building programs by way of trainingand international exposure in energy systems application and management.


VI

In most of the AREED partner countries, the institutions that are agents ofchange, for example, the National Board for Small-Scale Industries (NBSSI) inGhana and the Small Enterprise Development Board (SEDB) in Zambia, arefaced with several constraints. These include inadequate resources, poor coor-dination and limited capacity. Notably, these institutions are often located inenvironments that are not accessible to SMEs and have inadequate experiencedealing with energy SMEs. There is need for governments to restructure SMEsupport institutions (such as NBSSI, SEDB) by recruiting appropriate experts totheir boards and providing logistical support to enable them build the capac-ities of SMEs and offer the needed technical support.

AREED loans and repayments in Ghana Box 6

Amount financed by AREEDTotal payments received

0

50,000

100,000

150,000

200,000

250,000

300,000 $

01A 02B 07B2 02C 04D 04E2 03E1 04F 04G 06H 06I

Year loan granted and company identification

The graph shows the loans granted by AREED to clean energy entrepreneurs in Ghana during the period 2001 to June 2007, and the repayments, including principal and interest.Eleven companies identified as A, B, C, etc., were granted loans and the years loans weregranted are indicated as 01, 02, 07, etc.

Companies awarded a second loan after successfully paying off the first are also identi-fied. Thus, company B got its first loan in 2002, completed payment with interest and wasawarded a new loan in 2007. Similarly, company E has successfully paid off two loans identi-fied as 03E1 and 04E2. Two new companies were awarded loans in 2006, which they havestarted paying off.


2.3 Develop functional market systems

To develop functional energy markets, particularly in the rural areas, explicitnational policies and procedures to guide and stimulate energy equipmentdevelopment are needed. In addition, the small size of the rural market and thescarcity of energy equipment result in high prices of goods and services. It isproposed that relevant government ministries, departments and agenciesshould dialogue with private-sector associations and trade unions to put inplace financial and fiscal incentives. These should include micro credits, hirepurchase schemes, soft loans and tax exemptions to stimulate public-privatesales outlets and support services in rural communities.

The nature of the cash economy in rural Africa is such that uptake ofenergy efficient and renewable energy technologies will remain slow due to theuneven, uncertain and seasonal nature of incomes. One of the available policyoptions is that costs are brought down by targeting main initial investmentstowards energizing public facilities and community welfare initiatives. In addition, packaging energy services with income generating possibility is cost-effective. This is demonstrated by the graphs showing the loan repayments

AREED loans and repayments in Tanzania Box 7

Amount financed by AREEDTotal payments received

A02 B05 C03 D040

10,000

20,000

30,000

40,000

50,000

60,000 $

The graph below shows AREED loans and repayments in Tanzania up to June 2007. Again, therecovery rate is excellent. The interest rates are similar to the case of Ghana, varying from5 to 12 percent.


VI

made by 11 energy enterprises in Ghana (Box 6) and four energy enterprises inTanzania (Box 7). There is growing evidence that quality and uninterruptedsolar PV lighting is likely to enhance working hours and create income genera-tion opportunities for rural enterprises located in off-grid communities.

In Tanzania and Ghana, the governments have applied a tax waiver on solarenergy equipment. Also, import duty has been removed as a measure to reducecost and promote widespread use of solar PV systems. In Mali, high poverty inci-dence has resulted in the provision of energy services with a subsidy rationale.In Senegal, unclear taxation rules influence energy entrepreneurs to factor inother costs in their overall pricing. This undoubtedly limits energy access by therural poor, especially when they purchase the equipment upfront. Therefore,lobbying for policy change is useful.

2.4 Address long administrative procedures to enhance energy enterprise creation

Emerging evidence from Ghana, Mali, Senegal, Tanzania and Zambia indicatesthat enterprise creation is often a long and arduous process [2]. For energyentrepreneurs who sell LPG, the procedures are relatively long and daunting.They necessitate obtaining several permits and approvals, including land andbuilding permits, site inspection approval and fire service reports. Clearly, therunning of LPG business is associated with risks and requires careful safeguardsand strict adherence to safety standards. It is nevertheless recommended thatlocal licensing authorities, in consultation with government agencies, shouldendeavor to reduce the duration of obtaining permits, licensing and approvalsbefore starting an LPG business.

Putting together the different legal papers and licenses (company regis-tration, license for VAT, trading license, energy regulatory board certificate,authorization from fire service, approvals for telephone and water supply) isperceived as time-consuming and costly. To ensure that proper safeguards areput in place, entrepreneurs who apply for loan facilities are required to provideadditional documentation, namely a business plan (five years for first-timeapplicants and three years for renewal), audited financial statements, certifica-tion of authority, proof of funds and a list of shareholders and directors. Theseprocedures call for administrative intervention by stakeholders comprisingtown and country planners, licensing authorities and relevant local govern-ment agencies. The aim is to reduce regulations and simplify bureaucraticprocesses, as well as develop zoning and site plans that would serve as a guide-line and direction to encourage potential energy investors.


3. Fiscal incentives for energy SMEs

Energy SMEs tend to require a great deal of investment to operate. However, mostentrepreneurs are constrained by the difficulty in mobilizing start-up financialcapital. The difficulty in mobilizing funds necessitates making the investmenton a hire-purchase basis and this requires information and guidance from finan-cial experts. In an effort to obtain bank loans or credits, transaction costs mayovershadow potential gains from high-interest loans. To reduce high capital costand investor risk, national governments should institute investment incentiveslike capital grants or third-party finance arrangements where the governmentsassume risks or provide low interest loans (see Box 8 – Terms of AREED loans inGhana). Favorable lending schemes, in which banks guarantee the cash flow ofa project, thus reducing investor risk, are equally effective.

Financing energy projects would require long-term, low-interest loans.However, taking on such long-term commitments is difficult for small entre-preneurs, who are more concerned with day-to-day survival. In addition to

Terms of AREED loans in Ghana Box 8

Interest rate

0

2

4

6

8

10

12

Percent

5.5 4 5 4.5 4 2 3.5 4 4 4 4

Loan payment years

The interest rates and payment duration in years are shown in the graph below. The inter-est rates vary from 5 percent for four-year terms to a maximum of 12 percent for five-yearterms. These terms are low compared with market rates in the AREED partner countries.


VI

supporting energy SMEs, investment incentives can also be used to reduce thecapital cost of clean energy technologies to consumers. For example, for distrib-uted, modular technologies such as solar water heaters and PV, incentives suchas a grant from government can be directed toward the consumer to bring downthe initial cost. Furthermore, low capital cost is crucial for overcoming the con-straint of high initial capital and can reduce the burden of high up-front costsof energy service delivery equipment.

4. Other essential policies

4.1 Create facilities to foster information and knowledge exchange

Knowledge deficit is a key factor that is preventing potential entrepreneurs fromparticipating effectively in the clean energy service market. Owing to the lim-ited knowledge of potential entrepreneurs on energy market opportunities,mainly because of low awareness of energy resources among SMEs and poten-tial consumers, national governments remain the key players. In Zambia,research evidence suggests that open bids for energy projects are usually notvery competitive, because energy sector companies as well as other potentialbidders have little knowledge of operating an energy business. This is primarilybecause the energy sector is a relatively “opaque” territory to SMEs and non-state actors. As such, there is the need for national governments and intergov-ernmental organizations to support the capacity development of local actors,particularly NGOs and CBOs, to disseminate information on energy resourceavailability, level of technology development, manpower expertise in mainte-nance, and potential application areas of clean energy services.

Recent experience suggests that lack of knowledge on clean energytechnology options is all-pervasive, ranging from the financial sector to gov-ernment ministries. Officials in the various government energy ministrieshave different career profiles with several of them becoming experts throughtraining. In this regard, there is the need for national governments to createincentives and encourage public officials to participate in seminars, work-shops and international meetings to update their knowledge on sustainableenergy technologies, business, policies and targets linked to national devel-opment goals.

There is a lack of understanding of the financial systems and processesthat are relevant to the development of the energy sector market. When finan-cial mechanisms are created they are often subject to diverse interpretation. Itis recommended that energy ministries, departments and agencies should work


closely with private-sector actors to furnish local banks, particularly the com-mercial banks, with evidence-based data on the costs and benefits of invest-ments in clean energy technologies for cooking, heating or industrial processes.In-depth knowledge and information to local banks will help to raise awareness,increase acceptance and reduce the perception of energy-sector businesses as ahigh risk territory. Existing educative media programs on poverty reduction andsustainable development efforts (income generation, social empowerment ofwomen and environment protection) should be targeted and piggy-backed todeepen knowledge and understanding of energy-related issues.

Given the knowledge deficit that is pervasive in the energy sector, thereis the need to devote time to the preparation of fact sheets, leaflets and trainingmanuals that would specifically target a wide range of stakeholders to commu-nicate the benefits of clean energy services, particularly renewables to the pub-lic. This would increase knowledge on the link between energy and develop-ment. Efforts should also be made to diversify training materials to includeshort video clips that would give potential entrepreneurs, local and interna-tional organizations, civil society groups (scientific organizations, profession-als) an idea of the range of energy resources, their application and potentialbusiness opportunities.

4.2 Increase public confidence in the energy sector

Public confidence in energy business should be increased as emerging evidencesuggests a low self-assurance in operating energy-sector companies. This callsfor public policies and laws that would provide fiscal and monetary incentives(tax exemption, soft loans, hire-purchase schemes, etc.) and less bureaucraticsupport services that can be accessed by potential entrepreneurs. Given that thepolicy environment is generally not sufficiently conducive for private-sectoroperatives seeking to provide clean energy services to under-served communi-ties, this tends to affect public confidence and ability to be fully involved inenergy businesses. In the case of renewable energy technologies, particularlythe sale of solar PV systems, small rural markets and limited profits tend toheighten the vulnerability of entrepreneurs. This is in spite of a new attitudetowards energy services as essential input for achieving the Millennium Devel-opment Goals (MDGs).


VI

5. Conclusion and policy recommendations

Emerging evidence from the AREED program in the five partner countriessuggests that national policies and regulatory framework for the developmentof energy SMEs, energy sector market and fiscal incentives depend on greaterawareness by policy-makers. Nonetheless, experience also suggests that ruralenergy market development requires a long time and that growing domesticenergy-sector companies are required to work out effective technical andoperational challenges of energy SMEs. This requires the support of nationalgovernments, financial institutions, NGOs and development organizations.Such backing would help to ensure that sustainable regulatory mechanisms,policies, financing, adequate skills and knowledge are continuously devel-oped and strengthened.

The difficulties of developing commercially oriented energy enterprisesthat focus on rural and peri-urban communities and the provision of cleanenergy products that have high initial costs, even for the urban middle class,pose severe challenges to the promotion of sustainable energy. This paper hasidentified both the challenges and successes achieved by the AREEDapproach. To further enhance energy SME development in Africa and widenaccess to clean and renewable energy services, particularly for under-servedcommunities, policy makers are encouraged to adopt and improve the AREEDapproach by working towards achieving the following key recommendations:

• National governments should establish relevant policies andinstitutional frameworks and translate them into implementa-tion strategies and budgetary support. They should also improvethe policy environment of the private sector to foster strongerlinks with public-sector decision-makers and make a consciouspolitical commitment to widen national energy access, particu-larly for peri-urban and rural communities.

• National governments should implement relevant capacity-building programs (training and international exposure inenergy systems application and management) for SME supportinstitutions. Governments should restructure SME support insti-tutions (such as NBSSI in Ghana, SEDB in Zambia, etc.) byrecruiting appropriate experts to their boards and providinglogistical support to enable them to build the capacities of SMEsand offer the required technical and expert support.


• There is the need to develop functional energy markets, particu-larly in the rural areas, through explicit national policy incen-tives and procedures to guide and stimulate energy equipmentdevelopment. In addition, energy services should be packagedwith income-generating possibilities as this improves financialviability. This is demonstrated by the graphs showing the loanrepayments made by 11 and four energy enterprises in Ghanaand Tanzania, respectively.

• Government agencies, authorities, commissions and organiza-tions mandated to manage various electrification funds andother energy-related funds should explore innovative interven-tions to reduce the costs of renewables and energy-efficient tech-nologies through increasing investments in product and marketdevelopment.

• To address the lack of understanding of the financial systemsand processes, energy ministries, departments and agenciesshould work closely with private-sector actors to furnish localbanks, particularly the commercial banks, with evidence-baseddata on the costs and benefits of investments in clean energytechnologies to raise awareness, increase acceptance and reducethe perception of risks in the energy business.

• To reduce high capital cost and investor risk, national govern-ments should institute investment incentives: capital grants orthird party finance arrangements whereby the governmentsassume risks or provide low-interest loans.


VI

Acknowledgements

This paper has benefited immensely from a report by F. Denton, titled: “Analysis of Policiesand Institutions and Linkages with Energy SME Development in Ghana, Mali, Senegal, Tan-zania and Zambia.” In addition to a review of reports on AREED, the author of this report vis-ited institutions in the various countries and interacted with stakeholders, including officialsin ministries, departments and relevant agencies. Also, useful information was gathered fromvarious AREED partner institutions in Ghana, Senegal as well as the E+Co representative inGhana and Dr. Lawrence Agbemabiese through the Seminar Series on AREED, organized fromSeptember to November 2007 by the Energy Centre at the Kwame Nkrumah University of Science and Technology, Kumasi, Ghana. The author acknowledges the invaluable contribu-tions by Dr. Njeri Wamukonya, UNEP; and Prof. Abeeku Brew Hammond, Kwame NkrumahUniversity of Science and Technology, Kumasi, for their critical reviews of the various draftsof the paper. Finally, information was also collected from the AREED website.

Bibliography

AGBEMABIESE, L. (2007). Rural/Renewable Energy Enterprise Development. REED SeminarSeries, Kumasi, College of Engineering, KNUST, October 2007.

DENTON, F. (2006). Analysis of Policies and Institutions and Linkages with Energy SME Develop-ment: Ghana, Mali, Senegal, Tanzania and Zambia. AREED Policy Review, Denmark, RisoeNational Laboratory, February 2006.


Africa’s power sector in international perspective

Sub-Saharan Africa (SSA) faces major infrastructure challenges, the most severe ofwhich are arguably those in the power sector. Not only is SSA’s energy infrastruc-ture meager compared with other regions’ but electricity service is costly andunreliable. Indeed, in recent years, more than 30 of the 48 countries in the SSAregion have suffered acute energy crises. This paper presents preliminary findingsfrom the Africa Infrastructure Country Diagnostic (AICD) (see Box 1 for furtherdetails) that aims to unravel the paradoxes of SSA’s troubled power sector.

The entire generation capacity of the 48 countries of SSA, at 63 gig watts(GW), is comparable to that of Spain. If South Africa is excluded, SSA’s genera-tion capacity falls to 28 GW, which is about the same as Argentina’s. Normaliz-ing for population, and subtracting South Africa, the installed capacity of SSAis only one third of South Asia’s, and about a tenth of that of other developingregions (Figure 1.1a). Moreover, SSA’s generating capacity has been stagnant formany years; its growth rates are barely half of those in other developing regions(Yepes, Pierce and Foster, 2008). To make matters worse, as much as one-fourthof SSA’s plant is currently not in operating condition.

* This paper was prepared by the World Bank’s Africa Region Sustainable Development Department.The team consisted of Vivien Foster, Tjaarda Storm van Leeuwen, Cecilia Briceno-Garmendia, DanielCamos, John Gabriel Goddard, Robert Mills, and Karlis Smits. The research draws on the Africa Infra-structure Country Diagnostic (AICD), a multi-stakeholder knowledge program supported by theInfrastructure Consortium for Africa. The AICD will include a much more extensive power-sectorreview to be published later in 2008. This work represents the views of the authors. David Dunn contributed from the IMF.

VIIAfrica’s Power Supply Crisis:Unraveling the Paradoxes*

Waqar Haider


Rates of electrification are correspondingly low. Some 24 percent of SSA’s population has access to electricity versus 40 percent in other Low-IncomeCountries (LICs), and electrification is proceeding more slowly (Figure 1.1b).Electricity consumption in SSA is a fraction of consumption in other regions(Figure 1.2) and, excluding South Africa, is only about 124 kilowatt-hours (kWh)a year, less than a tenth of China’s. Although electricity tariffs in some SSAcountries have been kept low, the cross-country average tariff is rather high at$0.13 per kWh – about double those in other parts of the developing world andalmost as high as in OECD countries. Nevertheless, the prices fail to cover costs.

Evolution of power infrastructure in SSA relative to other regions Figure 1.1

0

200

400

600

800

1,000

1,200 MW per million inhabitants

A) GENERATION CAPACITY

1980 1985 1990 1995 2000 2006

ECAMENAEAPLAC

SASSSASSA-SA

ECAMENA

EAPLAC

SASSSA

0

20

40

60

80

100

Percent households

B) ELECTRICITY COVERAGE

1990 - 1995 1996 - 2000 2001 - 2005

Source: Yepes Pierce and Foster 2008


VII

Comparatively little is known about Africa’s infrastructure sectors, with sparse coverage ofinformation in most standard international databases. The Africa Infrastructure CountryDiagnostic (AICD) aims to reverse this situation, by creating a comprehensive infrastruc-ture database for the continent and associated body of analytical work. AICD is a two yearmulti-stakeholder knowledge program – currently nearing completion – that is sponsoredby the Infrastructure Consortium for Africa as well as the African Union, NEPAD, andRegional Economic Communities. The project covers all major economic infrastructures –energy, information and communication technologies, irrigation, transportation, water andsanitation – in 24 countries that together account for 85 percent of the Gross DomesticProduct (GDP), population, and infrastructure aid flows of SSA. The scope of data collectionand analysis for each sector and country includes public expenditure, investment needs andsector performance. The underlying data and associated studies will be made available tothe public through an interactive website. It is expected that AICD will provide a baselineagainst which future improvements in infrastructure services can be measured, as well as amore solid empirical foundation for prioritizing investments and designing policy reforms inthe infrastructure sectors in Africa. Phase II of the AICD project will extend the coverageto additional African countries.

Introducing the Africa Infrastructure Country Diagnostic Box 1

Source: Eberhard and others (2008)

Africa Asia LAC China ECAMNA OECDSAS EAP ECA LAC SSA OECD

Electricity prices and consumption in Africa relative to other regions Figure 1.2

0.00

0.04

0.02

0.06

0.10

0.14

0.08

0.12

0.16 $/kWh 8,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

kWh/capita/year

B) AVERAGE ELECTRICITY CONSUMPTION A) AVERAGE RESIDENTIAL PRICE

Acronyms from Figures 1.1. and 1.2.ECA Europe and Central Asia, MENA Middle East and North Africa, EAP East Asia and Pacific, LAC Latin America and theCaribbean, SAS South Asia, SSA Sub-Saharan Africa, SSA–SA Sub-Saharan Africa – Southern Africa


As a result of such low power consumption, the contribution of SSA’s power sec-tor to global CO2 emissions is no more than 520 million tons per year, withSouth Africa being by far the major contributor. In all other SSA countries, thebulk of greenhouse gas emissions come from land use and deforestation. Whilepower consumption in SSA will need to grow substantially to meet unsatisfieddemands, a significant share of the increment could be met from hydro-power,thereby mitigating the climate change impact. For example, in Southern Africaalone, it has been estimated that greater regional trade could reduce incremen-tal carbon emissions by 40 million tons per year.

Also, unreliable supply adds to the cost. African manufacturing enter-prises report power outages on an average of 56 days a year, costing firms 5-6 percent of revenues. That is why many firms operate their own diesel gen-erators, at a cost of about $0.40/kWh. In the informal sector, where firms rarelyhave the capital for backstop generation, lost revenues from power outages canbe as high as 20 percent.

Deficient power infrastructure dampens economic growth and weakenscompetitiveness by, for example, the detrimental effect on productivity.Escribano, Gausch and Pena (2008) estimate the impact of infrastructure onfirm productivity relative to other variables and also decompose the contribu-tion of various components of infrastructure. They find that in most SSA coun-tries, infrastructure accounts for 30-60 percent of the adverse impact on firmproductivity, well ahead of factors like red tape and corruption. Moreover, inhalf the countries analyzed, power accounted for 40-80 percent of the infra-structure effect. In another study (Calderon 2008), simulations based on paneldata show that if the quantity and quality of power infrastructure in all SSAcountries were improved to that of a better performer (Mauritius), long-term percapita growth rates would be higher by as much as 2 percentage points.

The scarcity of power in SSA also affects delivery of social services and thequality of life. Without electricity, clinics cannot safely deliver babies at nightor refrigerate essential vaccines. Lack of illumination restricts the ability of chil-dren to study at night and fosters crime in peri-urban areas.

Africa’s acute power problems

Africa’s overstretched electricity systems have become exceedingly vulnera-ble to supply shocks, resulting in widespread outages and load shedding (Figure 2.1). With economic growth in the past decade raising demand for elec-tricity, the lackluster expansion of generation and transmission facilities has


VII

stripped away any cushion from excess capacity that may have existed. In recentyears, when droughts reduced power in the hydro-dependent countries of EastAfrica, prolonged blackouts became commonplace. In countries like SouthAfrica, plant outages for maintenance have had serious consequences (Box 2).Countries whose power infrastructure has been damaged by conflict have alsosuffered severe shortages. And high petroleum prices have created enormouscost pressure in countries like those of West Africa that depend on imported oilproducts for electricity generation.

Source: Briceno-Garmendia (2006); Eberhard and others (2008)

Countries affected by acute power-sector crises in recent years Figure 2.1

B) FREQUENCY DISTRIBUTION for load shedding as percentage demand

<1 1-3 3-5 5-10 >100

10

5

15

25

20

30 Percentage of countries

Percentage

Natural causes (droughts)Oil price shockSystem disrupted by conflictHigh growth, low investment/structural issues

Main cause or trigger A) COUNTRIES AFFECTED by power-sector crises by cause

BurundiCongo

Côte d’Ivoire

Guinea Bissau

Liberia

Rwanda

KenyaUgandaSierra Leone

Somalia

Burkina Faso

Zimbabwe

Eritrea

Ghana

Madagascar

Senegal

Benin

Botswana

Central AfricanRepublic

DemocraticRepublic of

Congo

Guinea

Lesotho

Malawi

Mauritania

Namibia

Nigeria

South Africa

Swaziland

Togo

Western Sahara

Zambia


South Africa has long been a sizeable producer of low-cost electricity, reflecting its abun-dant coal reserves. It is by far the region’s biggest producer and consumer of electricity,accounting for over half of electricity production in SSA. Electricity prices for both house-holds and industry are exceptionally low, which has been an important factor in the devel-opment of South Africa’s energy-intensive mining and mineral processing sectors.

However, South Africa’s electricity supply has remained stagnant in recent years whiledemand has continued to increase, resulting in power shortages. Attempts to encouragegreater investment in generation by the private sector proved to be unsuccessful (partlybecause South Africa’s low electricity tariffs were unattractive to independent power pro-ducers) and at the same time resulted in delays in investment by the state-owned electric-ity provider, Eskom. As a result, the spare capacity (or “reserve margin”) in the system tocope with peaks in demand has declined, leaving the country prone to periodic rounds ofrolling power cuts, sometimes with very little warning.

This has resulted in gridlock on the roads as traffic lights fail, millions of Rands lost asbusinesses cannot operate, and houses regularly without power for up to 12 hours. Elec-tricity supply to large industrial users was also reduced in January 2009, resulting in a tem-porary shutdown of production in the mining sector, causing global prices for gold andplatinum to spike. South Africa exports about 5 percent of its electricity production toneighboring countries – such as Botswana, Namibia, and Swaziland – that import at leasthalf of their electricity needs from South Africa. These countries have been affected by asimilar regime of rolling blackouts; moreover, some South African opposition and uniongroups have called for a complete halt on power exports.

The government’s response to the crisis involves a series of measures to manage demandin the short and medium term until new capacity comes on stream. This will involve powerrationing, modeled on Brazil’s response to its energy crisis in 2001, with a view to reducingdemand for electricity by 12.5 percent. Large mines have already been rationed to 90 per-cent of their normal electricity supply. Eskom also plans to increase its generating capacityby some 50 percent over the next 9–10 years. Electricity prices are likely to increase sub-stantially over the next several years to help finance investment (and reduce demand). Nev-ertheless, the supply-demand balance is likely to remain tight for the next few years.

Regional and economic effects of Box 2

South Africa’s power-supply crisis

Source: IMF Staff, 2008


VII

An increasingly common response to the crisis has been short-term leases foremergency power generation to a handful of global operators (Table 2.1).Though this capacity can be put in place within a few weeks, it is expensive. Thecosts of small-scale diesel units, for example, are very high, typically about$0.35/kWh. The equipment is typically leased for up to two years, after whichit reverts to the private provider. An estimated 700 MW of emergency genera-tion are currently operating in SSA; this represents more than 20 percent ofinstalled capacity. The total price tag ranges from 0.5 percent of GDP in Gabonto 4.3 percent in Sierra Leone.

The recent energy crises are symptoms of a deeper malaise, the causes ofwhich need to be understood and addressed. Four paradoxes shed light on thevery complex challenges that need to be faced: abundant energy but littlepower; high prices but even higher costs; widespread but ineffective reform; andhigh expenditure yet inadequate financing.

Emergency power generation in SSA Table 2.1

Contract Emergency Total installed Estimated annualCountry Date duration capacity capacity (%) cost (% GDP)

Angola 2006 2 years 150 18.1 1.04

Gabon 14 3.4 0.45

Ghana 2007 1 year 80 5.4 1.90

Kenya 2006 1 year 100 8.3 1.45

Madagascar 2004 Several years 50 35.7 2.79

Rwanda 2005 2 years 15 48.4 1.84

Senegal 2005 2 years 40 16.5 1.37

Sierra Leone 2007 1 year 20 133.3 4.25

Tanzania 2006 2 years 180 20.4 0.96

Uganda 2006 2 years 100 41.7 3.29



Paradox 1: abundant energy but little power

Ironically, SSA is richly endowed with both renewable and exhaustible energyresources. At present, for instance, it exploits only 8 percent of its gross hydro-power potential of 3.3 million gigawatt-hours (GWh) annually. The countrieson the Gulf of Guinea hold 4.9 percent of the world’s proven oil reserves (some60 billion barrels) and 7.8 percent of proven natural gas reserves (some 14 tril-lion cubic feet); if converted to electricity, the natural gas currently flared dur-ing oil production could itself meet a substantial share of Africa’s power needs.Southern Africa is rich in coal. Botswana, South Africa and Zimbabwe togetherhold 5.6 percent of the world’s proven reserves (more than 50 billion tons).There is also significant geothermal potential in the Rift Valley.

However, the continent’s energy resources tend to be concentrated in ahandful of countries whose physical and political barriers to trade make it dif-ficult for them to access centers of power demand. And their economies are toosmall for them to develop their own resources. For example, the DemocraticRepublic of Congo (DRC) alone accounts for about 40 percent of SSA’s hydro-electric potential, and Ethiopia accounts for another 20 percent. But both arefar from the economic centers in Southern, Western, and Northern Africa, andthe multi-billion dollar investments needed to exploit hydro-potential are toobig for their economies.

Moreover, in most SSA countries, energy markets are too small to takeadvantage of efficiencies from large-scale electricity production. With today’stechnology, full economies of scale in thermal power generation begin at about400 MW; national power systems meet this threshold in only 14 countries inSSA. In another 14, power systems have only 100 MW of capacity. With rela-tively little cross-border trade, many SSA countries use technically inefficientforms of generation (Figure 2.2). In Eastern and Western Africa, about a thirdof installed capacity is diesel-based generators. These countries have fewdomestic energy resources of their own, even though there are sufficient hydroand gas resources in neighboring countries to support much lower-cost formsof generation.

The consequences of this technically inefficient pattern of power gener-ation become evident when average operating costs of different types of powersystems are compared (Figure 2.2b). The average for predominantly diesel-basedpower systems is as much as $0.20/kWh more expensive than the cost of hydro-based systems. Similarly, the operating cost penalty for countries with nationalpower systems of less than 200 MW installed capacity can run up to $0.30/kWh,


VII

relative to countries with power systems above 500 MW. An additional costpenalty for landlocked and island states relative to coastal nations is the muchhigher cost of importing fossil fuels.

That is why regional power pools have been formed in Central (CAPP),Eastern (EAPP), Southern (SAPP) and Western (WAPP) Africa. The pools are atvery different stages of development, both technically and institutionally. Thepolitical process is most advanced in the WAPP, supported by political agree-ments at the Heads of State level through the Economic Commission of WestAfrican States (ECOWAS). The pools, particularly the WAPP and SAPP, havefacilitated significant cross-border exchanges of power. A number of countries,such as Botswana and Niger, rely on imported power; others, such as Nigeriaand Mozambique, are major exporters of power. However, none of the pools isyet at the point where the arrangements are fully competitive.


Drivers of operating costs for SSA power systems Figure 2.2

CAPP WAPP EAPP SAPP Overall Predominantlydiesel

Predominantlyhydro

Overall0.00

Small Medium Large Overall Islands Landlocked Coastal Overall

0.20

0.10

0.30

0.40

0.50 $/kWh

0.00

0.20

0.10

0.30

0.40

0.50 $/kWh

0.00

0.20

0.10

0.30

0.40

0.50 $/kWh

0.00

0.20

0.10

0.30

0.40

0.50 $/kWh

A) BY REGIONAL POWER POOL B) BY TECHNOLOGY

C) BY SCALE OF POWER SYSTEM D) BY GEOGRAPHICAL CHARACTERISTICS


Paradox 2: high prices but even higher costs

The variation in electricity charges across SSA countries is huge. It spans someof the cheapest power in the world (at less than $0.05/kWh in hydro-based systems and in South Africa based on cheap coal) to some of the most expen-sive power in the world (at over $0.30/kWh in countries with diesel-based systems and landlocked or island geography such as Chad and Madagascar).Nevertheless, looking across countries, the average charges today look high byinternational standards and are a result of recent increases reflecting higher oilprices and tightening supply conditions worldwide. The overall average revenuehas risen from $0.07/kWh in 2001 to $0.13/kWh in 2005. In countries relianton diesel-based power generation systems, average revenues have risen from$0.08 to $0.17/kWh.

Yet the average revenue in SSA countries still falls significantly short ofcovering the average operating costs of $0.27/kWh (Figure 2.3). This is eventhough average revenue in hydro-based countries has risen dramatically, from$0.02 to $0.07/kWh.

Despite such comparatively high average revenues, the vast majority ofSSA countries are doing little more than covering average operating costs (Figure 2.4). The correlation between average revenue and average operating costis as high as 90 percent, indicating that operating cost recovery is usually thedriving principle behind power pricing. Nevertheless, once average operatingcosts exceed $0.20/kWh, there is a tendency to price below the 45 degree line asshown in Figure 2.4A. The implication is that past capital costs of power-sectordevelopment have historically been almost entirely subsidized by the state.

Nonetheless, a comparison of current average revenues and average oper-ating costs misrepresents the long-term cost recovery situation for two criticalreasons. First, because of major inefficiencies in revenue collection, the averagerevenue collected per unit of electricity sold is substantially lower than the aver-age effective tariff that is being charged. Second, owing to major inefficienciesin generation technology and the growing trend towards regional trade, theaverage incremental cost of power in SSA for many countries is somewhat lowerthan the average historic cost of power production (including both historic oper-ating and capital costs). Thus, a truer picture of the long-term cost recovery sit-uation is gained by comparing the average effective tariff with the average incre-mental cost as shown in Figure 2.4B. The result shows that in the case of many(but certainly not all) countries, even the current tariff would be adequate forcost recovery purposes, if only revenues could be fully collected, and the powersystem could transition towards a more efficient structure of production.


VII

The presence of large historical capital subsidies to the sector raises questionsabout their distributional incidence. In a recent study, Wodon and others(2008) use evidence from household surveys to establish the distribution ofsuch subsidies in 18 SSA countries. In all the countries, power-sector subsidieswere found to be highly regressive. Across the bottom half of the income distri-bution, barely 10 percent of households have access to electricity. Because thepoor are almost entirely excluded from service, they cannot possibly benefitdirectly from subsidies (Figure 2.5).

Source: Banerjee and others (2008)

Electricity costs and revenues by type of power system Figure 2.3

0.00

0.15

0.05

0.10

0.20

0.25

0.30 $/kWh

2001 2002 2003 2004 2005 2001 2002 2003 2004 2005

A) AVERAGE OPERATING COST B) AVERAGE REVENUE FROM TARIFFS

Predominantly dieselPredominantly hydroOverall


Average power-sector revenue and various cost benchmarks Figure 2.4

0

50

10203040

607080

0 10 20 30 40 50 60 70 80

A) AGAINST AVERAGE OPERATING COST ($/kWh)

Average incremental costAverage operating cost

Ave

rage

effe

ctiv

e ta

riff

Ave

rage

ope

ratin

g re

venu

e

B) AGAINST AVERAGE INCREMENTAL COST ($/kWh)

0 10 20 30 40 50 60 70 80


In the urban areas of the low income countries (LICs), around a third of house-holds lack access to electricity. At least half of these unserved urban populationareas live physically proximate to an electricity grid. This suggests that demand-side barriers – such as connection charges or household tenure – are contribut-ing to restrict access (Banerjee and others 2008).

In the rural areas of LICs, only 12 percent of the population has access toelectricity, and for at least 17 countries, the figure is under 5 percent. The dis-persed nature of the rural population means that grid extension does not alwaysprove economical, although a handful of countries – most notably Ghana andSouth Africa – have had successful large-scale grid-based electrification pro-grams, anchored on technically and financially strong utilities and careful poli-cies that address affordability.

The concentration of power services in upper-income echelons mightsuggest that full-cost recovery pricing is feasible. However, the reality is morecomplex. In low-income SSA countries, even households in the highest incomebracket have monthly budgets of only $260 to support families typically com-prising five people.

Banerjee and others (2008) estimated the affordability problems of SSAhouseholds in different pricing scenarios, assuming modest consumption of 50 kWh/month. Bills are considered affordable if they do not absorb more than5 percent of household budgets. With cost recovery prices of about $0.25, as iscurrently the case in high-cost countries, a subsistence monthly bill would be$12. Except in a relatively small group of middle-income and better-off LICs(Cameroon, Cape Verde, Côte d’Ivoire, Republic of Congo, Senegal, and South


Electricity service coverage in SSA Figure 2.5

0

60

20

40

80

100 Percent households

Rural National Urban First Second Third Fourth Fifth

A) BY GEOGRAPHIC AREA B) BY HOUSEHOLD BUDGET QUINTILE

Low incomeMiddle incomeOverall


VII

Africa), a substantial share of the population would be unable to afford costrecovery tariffs. Today, household spending on electricity service is significantlybelow this level (Figure 2.6). However, if costs could be reduced to $0.12/kW –in line with SSA’s average incremental cost of power – the monthly bill of $6would be affordable to most of the population, except in LICs like Burundi,Democratic Republic of Congo, Ethiopia, Malawi and Uganda.

Although residences account for 95 percent of power utility customers in Africa,they contribute only about 50 percent of revenue. Thus, the pricing of power tocommercial and industrial consumers is just as important to cost recovery. Theaverage revenue raised from low- and medium-voltage customers seems to besimilar, but high-voltage customers tend to pay only about half as much. Glob-ally, this relative price differential is not unusual. It reflects the fact that high-voltage customers do not use as much of the distribution network and hence donot create such high costs for the utility. Nevertheless, it suggests that in absoluteterms, neither residential nor commercial and industrial customers are close topaying full-cost recovery prices. Moreover, a number of SSA countries have his-torically sold power at highly discounted rates to large-scale industrial and min-ing customers like the aluminum smelting industry in Cameroon and Ghanaand the mining industry in Zambia. These arrangements were initially justifiedas ways of locking-in base load demand to support large-scale power projects thatwent beyond the immediate demands of the country, but they are increasinglyquestionable as local demands have grown to absorb capacity. Given the prob-lems of SSA power systems, cost recovery needs to be discussed along with meas-ures to reduce costs, improve revenue collection and increase reliability.


Electricity service expenditure in SSA Figure 2.6

0

8

4

12

16 $ per month

Rural National Urban First Second Third Fourth Fifth

A) BY GEOGRAPHIC AREA B) BY HOUSEHOLD BUDGET QUINTILE

Middle incomeOverallLow income


Paradox 3: widespread but ineffective reform

Although they are somewhat behind the reform programs in other regions ofthe world, SSA countries also embarked upon the path power-sector reformorthodoxy. This included reform legislation and sector restructuring to pave theway for competition in generation and private sector participation across theelectricity supply chain. As of 2006, more than 80 percent of SSA countries hadenacted a power-sector reform law, 75 percent had experienced private partici-pation in power, about 66 percent had corporatized their state-owned utilities,more than half had established a regulator, and over a third had independentpower producers (Figure 2.7a). Yet a few countries have adopted the full rangeof reform measures (Figures 2.7b).

The lack of results has forced a rethinking of whether certain reform principlesand programs apply in SSA. One reform that has not been widely adopted in SSAis unbundling of generation, transmission, and distribution functions to createcompetition in generation and supply. Besant-Jones (2006) in his global reviewconcluded that restructuring the power sector to advance competition onlymade sense in countries large enough to support several generators above min-imum efficient scale. The power systems in most SSA countries are so small thatthis prescription is largely irrelevant for them. Nevertheless, even in the largestcountries, where unbundling could work, there has not been much progress.

There have been nearly 60 medium- to longer-term power-sector transac-tions with the private sector in SSA, not counting emergency power generationleases (Table 2.2).


Evaluation of power-sector reform Figure 2.7

0

60

40

20

80


Other PSP Regulatoryoversight

Verticalunbundling

Six Five Four Three Two One No

A) Prevalence of power-sector reform components B) Frequency distribution for reform index

Components


VII

Almost half of these have been independent projects, with the utility signingPower Purchase Agreements with the private sector to build green-field gener-ation plants. With more than $2 billion of private investment these have pro-vided nearly 3,000 MW of new capacity, which is a substantial contribution toavailable capacity. An independent assessment concluded that these projectscan be relatively costly due to technology choices, procurement problems, andcurrency devaluation, and are often subject to renegotiation (Gratwick andEberhard, 2006). A poorly documented issue is the extent to which Power Pur-chase Agreements are creating contingent liabilities for the state.

The rest of the transactions have been concession, lease, or managementcontracts typically for operation of the entire national power system. Thesehave had a relatively high failure rate; because about one-third of the contracts

Private participation power-sector transactions in SSA Table 2.2(review basic information)

Type of private participation Number of Problem Total valueCountries affected transactions transactions ($m)

Management or lease contract 17 4 5

Chad, Gambia, Gabon, Ghana, Guinea-Bissau, Kenya, Lesotho, Madagascar, Malawi, Mali, Namibia, Rwanda, São Tomé, Tanzania, Togo

Concession contract 12 5 1,598

Cameroon, Comoros, Côte d’Ivoire, Gabon, Guinea, Mali, Mozambique, Nigeria, São Tomé, Senegal, South Africa, Togo, Uganda

Independent power project 24 2 2,293

Angola, Burkina Faso, Congo, Côte d’Ivoire, Ethiopia, Ghana, Kenya, Mauritius, Nigeria, Senegal, Tanzania

Divestiture 4 - 938

Cape Verde, South Africa, Zambia, Zimbabwe

Overall 57 11 4,834

Note: Problem transactions are defined as projects that are now distressed or were prematurely canceled.Source: World Bank Private Participation in Infrastructure Database, 2007.


are currently in distress or already canceled. However, in the more successfultransactions performance has improved noticeably.

The usual reasons for failure are the lack of financial viability or credit-worthiness of the utilities – governments have been unwilling or unable toadjust tariffs to enable cost recovery or pay subsidies to make up the difference– and the lack of access to funding for priority investments to improve efficiencyor expand services. Thus, the fundamental factors for making private participa-tion work were absent.

Perhaps the single most relevant institutional consideration is the gover-nance of the national power utility. It is possible to rate SSA power utilities bythe extent to which they are managed on sound commercial principles (IMF,2004a). The rating is based on whether utilities have managerial autonomywith respect to (i) labor policy and (ii) market decisions relating to production andsales; whether utilities are financially viable, measured in terms of the (iii)absence of subsidies and (iv) tax breaks and the requirement to be (v) profitableand pay (vi) market rates for debt; and whether utilities are accountable, produc-ing (vii) published audited accounts, and being (viii) publicly listed on the stockexchange to protect the rights of (ix) minority shareholders.

These good governance practices are not widespread in SSA utilities (Fig-ure 2.8), though the majority do report freedom with respect to labor policies,and a sizeable minority can make their own market decisions. While most util-


SOE governance characteristics Figure 2.8

A) Prevalence of good governance characteristics B) Frequency distribution for IMF governance index

6040200 80 100

Nine criteria

Eight criteria

Seven criteria

Six criteria

Five criteria

Four criteria

Three criteria

Two criteria

One criterion

6040200 80 100

Labor policy

Market rate debt

Profitability requirement

Public audited accounts

Market decisions

No tax breaks

Publicly listed

Minority shareholders

No subsidies

Percentageof countries

Percentageof countries


VII

ities report that they are required to be profitable and pay market rates for debt,in practice, the vast majority benefit from sizable subsidies and tax breaks andare not in a position to borrow at all. Only 60 percent publish audited accounts,while stock exchange listing is unheard of. The typical utility in the samplemeets only about half the criteria (Figure 2.8b).

Poor governance is reflected in deficient performance. In well-performingutilities around the world, system losses can be as low as 10 percent. However,two-thirds of SSA utilities report losses of more than 20 percent. Similarly, well-run utilities collect close to 100 percent of what is owed them; whereas 40 per-cent of SSA utilities collect less than 90 percent (Figure 2.9)

The inefficiency of SSA utilities generates substantial hidden costs. Thesehidden costs can be quantified (Ebinger, 2006) by comparing the revenues autility raises against those raised by an ideal utility that prices at full economiccost and keeps distribution and collection losses to best practice levels. In manySSA countries, hidden costs can be as high as 2 percent of GDP (Figure 2.10a).About 50 percent of the costs stem from collection losses and another 30 per-cent from distribution losses (Figure 2.10b). The dividend from improving util-ity performance is often very high. The contribution of under-pricing to thesehidden losses is relatively small, although it depends on the country.

Given the large scale, long lead times, and extensive preparation requiredto build power infrastructure, careful planning is crucial. However, many SSAcountries lack ministerial capability for long-term power-sector planning. SSA’scurrent power shortages were to a large extent foreseeable, but action was not


<60% 80-90% 90-100%10-20% 20-25% 25-30% <30%

Frequency distribution of power-sector efficiency indicators Figure 2.9

0

40

20

10

30

50


60-80%

A) SYSTEM LOSSES B) COLLECTION EFFICIENCY


taken far enough ahead to avert them. Even today – notwithstanding the strongcase for power-sector development – there is a shortage of bankable electricitygeneration projects because of bottlenecks in project preparation. To someextent, power-sector planning has been a casualty of the 1990s reform modelthat emphasized market-led infrastructure development and allocation ofhuman resources to regulatory, rather than planning functions.

Effective power-sector planning recognizes critical upstream linkageswith fuel supply industries. Security of supply is subject to interrelated infra-structure and incentive problems. For countries with access to natural gas, lackof pipeline capacity and vandalism have been a growing concern. In Nigeria, forexample, these problems have reduced the gas available for domestic electric-ity generation by independent power producers and limited gas trade in theWAPP. Inadequate incentives in gas pricing have also deterred private invest-ment in infrastructure to gather natural gas and in pipelines. For countries thatrely on imported diesel fuel, deficient port facilities and transport links addgreatly to their costs. The lack of competition and transparency in fuel procure-ment also exacerbates costs. The OECD Competition Committee has flaggedcollusive tendering of oil and price fixing as major issues in a number of Africancountries.


1-2%<1% of GDP2-4% >4%

Hidden costs of power-sector inefficiency Figure 2.10

0

30

10

20

40

50

Percentage of countries

A) FREQUENCY DISTRIBUTION BY OVERALL SIZE B) DECOMPOSITION BY SOURCE

Under-pricing

Distributionlosses

Collectionlosses

52%

18%

30%


VII

Paradox 4: high expenditure but inadequate finance

SSA countries on average spend 2.7 percent of their GDP on power; and a sig-nificant number spend more than 4 percent (Table 2.3). Typically, more than90 percent of this spending is channeled through the national state-owned util-ity; while less than 10 percent appears on the central government budget. Oper-ating costs absorb 75 percent of total spending. As a result, public investmentin the sector is very low; on average only 0.7 percent of GDP.

The contribution of Official Development Assistance (ODA) to publicinvestment in power has been modest, averaging only $700 million a year forthe last decade. Also, support has been highly volatile, amounting to only a fewhundred million dollars a year in the late 1990s, but rising toward $1 billionannually, in recent years. Despite the substantial number of private transac-tions, their value has averaged only about $300 million a year for the lastdecade, and once again the flows have been highly volatile because these invest-ments are lumpy. Thus, total external capital flows to the power sector in SSAamount to no more than 0.1 percent of the region’s GDP (Figure 2.11).

In recent years, the China Export-Import Bank has emerged as a majornew financier of power infrastructure in SSA. Between 2001 and 2006, Chinesecommitments averaged $1.7 billion a year, more than ODA and PPI combined,and equivalent to about 0.2 percent of the region’s GDP. Most of the Chinesefinancing has gone to six large hydro-power projects with a combined generat-ing capacity of over 7,000 MWs. Once completed, these projects will increaseSSA’s installed hydro-power capacity by 40 percent. China is also financing2,500 MW of thermal power, and the India Export-Import Bank has financedsignificant thermal generation projects in Nigeria and Sudan.

Power-sector expenditure Table 2.3

Central State-owned Public OperatingPercent GDP Total government enterprise investment costs

Average 2.72 0.21 2.51 0.67 2.05

Lower quartile 1.90 0.04 1.83 0.20 1.70

Upper quartile 3.45 0.36 3.29 0.79 2.65

Source: Briceno-Garmendia and Smits (2008)


Numerous econometric analyses show that the elasticity of power-sectordemand with respect to economic growth is close to unity. With GDP growthrates in SSA averaging above 5 percent a year in recent years, power generationcapacity should be growing at a similar rate to keep pace with demand. How-ever, since 1980, annual growth in power-generating capacity in SSA has aver-aged only 2.9 percent.

A recent study constructs a series of optimization models for each ofAfrica’s major regional power pools to simulate the expenditures required (EconAnalysis, 2008). The model is flexible enough to consider different assumptionsabout the extent of regional power trade, the pace of economic growth, theextent of political ambitions for universal access, and the price of inputs like oiland gas.

Table 2.4 reports baseline results for a scenario where full advantage istaken of regional power trade and all countries aim for an access rate of 35 per-cent by 2015. Each year, SSA would thus need to add about 3,000 MW of newgeneration capacity and connect about three million new households. This sce-nario costs 6-7 percent of SSA’s GDP, equivalent to $47 billion annually. Theamount is split almost evenly between investment and operations and withabout two-thirds of the cost coming from power generation needs. Currentspending on power averages less than 3 percent of the region’s GDP. Investmentaccounts for more than half that, equivalent to at least 2 percent of GDP, com-pared with current power-sector investment amounting to less than 1 percentof GDP on average. However, despite significant expansion in access, the bulkof the expenditure is associated with generation.

Source: OECD, 2006, Infrastructure Consortium for Africa, 2007 and World Bank Private Participation in Infrastructure Database, 2007

Long-term trends in external finance for the SSA power sector Figure 2.11

20061973 1980 1985 1990 1995 2000

1,500 $m

0

500

1,000

ODA commitments 1973-2006PPI commitments 1995-2006


VII

The regional averages conceal huge variations between countries. As powertrade grows, the burden of investment falls disproportionately on countrieswith abundant resources. In a handful of cases, the annualized expenditurerequirement exceeds 10 percent of GDP, mostly for investment in generation forexport. The most prominent examples are Ethiopia and the Democratic Repub-lic of Congo, which would each become major exporters of hydro-power intheir pools. The financing would not necessarily need to be raised from domes-tic resources but could be underwritten to some degree by importing countries.

Thus, there is major potential for expansion of cross-border power trade.For example, in the Southern Africa Power Pool alone, the volume traded inter-nationally could rise from the current 45 TWh to 141 TWh per year if trade wereexploited to its full economic potential.

Trade necessitates investments in cross-border transmission links but alsoallows for significant savings from accessing lower-cost power sources. It istherefore possible to calculate the gains from trade as the rate of return on cross-border investments. These have been estimated at 20 percent in Eastern Africato 167 percent in Southern Africa. Both cases exceed typical hurdle rates for pub-lic investment (Econ Analysis, 2008). While such trade would still only repre-sent about 8 percent of total power demand, under such trading scenarios somesmaller countries would depend on power imports to meet more than 50 per-cent of their domestic demand.

The savings in the annualized cost of the power sector from trade is rela-tively small at less than 10 percent, but the gains for individual countries interms of cheaper power can be substantial. Most countries would reduce the

Annualized power-sector expenditure requirements to 2015 Table 2.4

Percent GDPOperating Transmission and

Total Investment expenditure Generation distribution

CAPP n/a n/a n/a n/a n/a

EAPP 4.9 2.5 2.4 3.7 1.2

SAPP 3.8 2.0 1.8 2.3 1.5

WAPP n/a n/a n/a n/a n/a

Overall * 6.7 3.4 3.3 4.5 2.2

Source: Africa Infrastructure Country Diagnostic, 2008

n/a = not available* Preliminary estimate for the whole of SSA based on results currently available for EAPP and SAPP


average cost of power by a few cents/kWh – resulting in a 20-60 percent saving.For a handful of countries, power costs would be reduced by more than 60 per-cent or $0.10/kWh.

The main effect of trade in power is to support development of morelarge-scale hydro-power schemes that would not be viable for a single nation.As a result, the composition of the generation portfolio shifts toward hydro-power by 10-15 percentage points relative to the case without expanded trade.The additional hydro-power would displace natural gas generation in EasternAfrica and coal generation in Southern Africa. It would also increase the shareof power production coming from exporting countries like Ethiopia and theDemocratic Republic of Congo. Irrespective of trade development, however, themajor power consumers – Egypt, Nigeria, and South Africa – continue to be byfar the main producing countries in their regional power pools.

The way forward

The power sector in Africa is characterized by a set of paradoxes. There areabundant sources of power, significant levels of government funding, andnotable efforts at reform. Yet, electricity access rates are very low compared toother developing regions, prices are high, and the power supply insufficientand unreliable.

The policy choices that best address these paradoxes are not clear-cut. The traditional model that predominates in the SSA power sector – vertically-integrated, state-owned monopolist utilities – has yielded disappointing results.Yet reform to increase efficiency and boost competition through private partic-ipation has in many cases failed to deliver the expected results. For example,unbundling is limited, failures of transactions and projects frequent, and therehas been minimal additional investment.

The lesson that emerges is that success in tackling the challenge is not asimple function of the model adopted. The power sector in Africa needs tomove to a “mixed economy,” characterized by a range of structures, regulation,and technologies adapted to each country’s context. Successful interventionswill tackle several problems simultaneously to put the sector on a positive tra-jectory of improved sector and utility management, financial viability, newinvestment, and better customer service. This means recognizing that thepower sector has quasi-monopolistic characteristics – particularly in grid-baseddistribution and to a lesser extent in transmission. Furthermore, incumbentutilities will continue to be the largest players in the sector for the foreseeable


VII

future. But interventions also need to be innovative and ambitious, recogniz-ing that meeting customer needs means multiple providers, financial viability,and new forms of external financial assistance. Where certain preconditionsare in place – including appropriate regulatory frameworks for public-privatepartnerships, reformed tariff frameworks and sufficient security of investmentfor investors-sector reforms can do much to facilitate the entry of strategic pri-vate partners.

Consequently, the starting point is sustained and concerted action onthree strategic priorities: (i) regional scaling-up of generation capacity, (ii)improving the effectiveness and governance of utilities, and (iii) expandingaccess through sector-wide engagement. The three priorities are interdepend-ent and must be tackled together. Efforts to boost generation and regionalpower trade will stumble if the utilities, which will continue to be central actorsin the sector, remain inefficient and insolvent. Expanding electricity distribu-tion systems without taking measures to tackle the shortages in generation andto improve transmission capacity would clearly be futile. And focusing exclu-sively on utility reform would be fruitless unless a start is made on substantial,long-gestation investments in both generation and access to improve quality ofservice and render the utilities viable. In short, these strategic priorities mustprogress together. At the same time, the period required to yield results fromthese actions is such that they need to be complemented by important short-term measures. These include demand-side management, for example, theintroduction of energy-efficient bulbs and loss-reduction programs such asenhanced bill collection and initiatives to tackle electricity theft.

Regional scaling-up of generation capacity

The first strategic priority is to tackle the generation capacity deficit head-on.Africa’s considerable hydro, gas and coal resources remain under-exploited. Thebest way to scale-up power generation at the lowest unit cost is to develop a newbreed of large-scale projects. An initial wave of projects could include candi-dates like Inga III in the Democratic Republic of Congo, which is expected toadd about 3,800 MW of capacity; the Temane Gas-powered Plant in Mozam-bique, 750 MW; Gilbe Gibe III Hydropower in Ethiopia, 1,800 MW and furtherdevelopment of generation capacity based on natural gas from Nigeria. How-ever, individual countries do not have the necessary investment capital, or eventhe electricity demand, to move forward with these large projects. A projectfinance approach, predicated on regional power off-take in which private sec-tor participation and donor funding are blended, is needed.


Expanded generation capacity is redundant unless the power can be trans-mitted to users. This is where regional power pools play a critical enablingrole. Challenges common to all the pools are rehabilitation and expansionof the cross-border transmission infrastructure to increase the potential fortrade, and harmonization of regulations and system operating agreements.Equally important is the formulation of market trading mechanisms so thatthe additional energy generated from large projects can be priced and henceallocated in an efficient and fair way (for example, via competitive poolarrangements). While the economics of regional large-scale generation proj-ects are convincing, they may give rise to significant political challenges. Thegains from trade are much larger for some countries than for others, and con-siderations of self-sufficiency sometimes have more political weight thanaccess to low-cost power. These factors need to be addressed early in the proj-ect development cycle.

Large-scale regional energy schemes have deep financing require-ments. Capital expenditure for Inga III, for example, is estimated at $4-5 bil-lion. This is beyond the capacity of public-sector concessional financiers,even after significant increases in aid. Private participation will be pivotal.Yet successful private investments in energy projects have been rare in Africa,and increased private investment will not materialize simply because of largeinfrastructure financing gaps. The lessons learnt from past failures need to beaddressed, as private investment will only flow where rewards demonstrablyoutweigh risks. Large-scale regional generation projects would have severalattractions in this respect:

• Large investments benefit from economies of scale. For example,for a given amount of generation capacity, the total costs (design,engineering, capital items, civil works, safeguards and others) forone large plant are lower than for several smaller plants with thesame aggregate capacity. All else being equal, investments inlarger projects are therefore likely to be more profitable.

• The investments would primarily be in stand-alone generationprojects that present fewer risks compared to investments in ver-tically integrated utilities whose operational and regulatory risks(organizational inefficiency, lack of financial transparency, geo-graphical distribution of personnel and assets, governance risks,political interference, and contingent risks like an uncertainlegal framework) are far harder to price.


VII

• There is increasing realization that investment in new genera-tion capacity cannot be undertaken in isolation from otherefforts in the sector. Capital is more likely to be forthcoming inan environment where other factors – such as the tariff structure,power-purchase agreements, and reliable transmission intercon-nections – have been addressed. Utilities that are better run willeventually be able to move beyond covering operating expensesto invest in system expansion, making the whole sector moreviable. Public-sector financiers like the World Bank are alsobecoming more nimble in their deployment of tools to helpcrowd-in the private sector, such as risk-mitigation instruments.

There are early but encouraging signs that scaling-up generation capac-ity through large private-sector-led projects is starting to gather speed. A promi-nent example is the privately owned 250 MW Bujagali Hydro Power Plant inUganda, supported by World Bank Group guarantees and funded by a privateconsortium. At the same time, ambitious regional projects undoubtedly pres-ent technical, financing and political risks, and will continue to be comple-mented by investments at the national level.

Improving the effectiveness and governance of utilities

Shortcomings in how the power sector operates lead directly to many of the sub-optimal outcomes detailed in this chapter. Tackling these shortcomings willrequire improvements in the regulatory and tariff framework at the sector level,as well as better management in utilities.

The lack of strategic policy and planning for the electricity sector at cen-tral government level is a critical weakness. Interventions have been piecemealrather than integrated. For example, many countries have focused on genera-tion without investing in efficient transmission and delivery of power. A well-articulated plan for the sector will allow governments to move beyond the “fire-fighting” that has reduced their ability to plan for exogenous shocks, such asdrought or high oil prices.

Financial viability of incumbent utilities – and hence creditworthinessand access to domestic and international private capital – is important for theoverall development of the sector. It demands that utility revenues allow atleast the recovery of operating costs and ideally some contribution to capitalcosts. It means that in many cases, tariffs need to be gradually adjusted to lev-


els that will allow these goals to be met, while remaining sensitive to theneeds and capacity to pay of poorer households. The corollary of tariff adjust-ments is the need to significantly reduce operating costs to lessen the finan-cial burden on consumers and of efforts to recover costs. Operational effi-ciency programs are needed to reduce the high rates of technical, non-tech-nical (electricity theft) and collection losses. These can include capacitybuilding and technical assistance to improve management, business practicesand planning. Priority areas are improved load management (to better matchsupply with priority customer needs), theft-reduction initiatives andincreased revenue collection through enhanced metering and better-run cus-tomer service units. Capital expenditure can also be driven down by usinglow-cost technology, as undertaken in Mali and Guinea. Innovations haveincluded adjusting technical design standards to meet the reduced require-ments of low-load systems, maximizing the use of material provided by localcommunities (such as locally sourced wooden poles), as well as the use of localemployees and supervisors recruited from the community.

Past efforts at improving utility management focused too heavily ontechnical issues to the exclusion of governance and accountability. Good gov-ernance practices in SSA utilities are often observed in the breach. Trans-parency and accountability depend on solid financial management, procure-ment, and management information systems. Examples are, requiring theauditing and publication of financial accounts and the use of comprehensivecost-based accounting systems that allow functional unbundling of costs anda clearer sense of cost centers. Oversight and transparency also need to beenhanced by better corporate governance, for example, by reforming howsenior managers are appointed, insisting on conflict of interest disclosures,and making staffing practices more transparent and effective. Many of SSA’snewly established energy regulators can play an important role in this area,even in the absence of private participation in the sector. Reforms to ensurefinancial and managerial autonomy from state interference in commercialdecisions are also needed in some countries.

In practical terms, even with appropriate tariffs, reduced operating costsand better governance, the combination of expensive, maintenance-intensiveequipment and the inability of even moderately wealthy households to pay forthe full capital cost of domestic grid extension means that full cost recovery inAfrica is not yet possible. Often, capital subsidies will still be needed, whetherfrom governments or donors. Therefore, governments must be able to articu-late, in their strategic policy framework, the economic benefits of subsidies to


VII

the sector, as well as the path to eventual full-cost recovery. Governments mustalso recognize that some households connected to the grid cannot afford eventhe variable costs of their service. Accordingly, carefully targeted and calibratedlifeline subsidies may be a vital part of power-sector strategy.

Expanding access to electricity through sector-wide engagement

The fact that power is often unavailable to lower-income groups means thatthose who do not have access are not benefiting from government or externalfinancing. From a social, poverty-reduction and political perspective, it is there-fore imperative to expand access. Yet financing expansion to lower-incomehouseholds will further strain the financial viability of the power sector.

Tackling this dilemma will require both significantly higher concessionalfinancing from development partners for access programs, in addition to tariffincreases and operating cost reductions. Given the scale of investments needed,a systematic approach to planning and financing new investments is critical.The current project-by-project, ad hoc approach in development partnerfinancing has led to fragmented planning, volatile and uncertain financialflows, as well as duplication of efforts. Engagement across the sector in multi-year programs of access roll-out supported by multiple development partnersas part of a coherent national strategy will channel resources in a more sus-tained and cost-effective way to the distribution subsector. Coordinated actionby development partners will also reduce the unit costs of increasing access.Such action will also create new sources of demand that will further make thecase for large generation projects at the supranational level.

Since universal household electrification is still decades away in manycountries, it is equally important that sector-wide programmatic approachesensure that the benefits of electrification touch the poorest households, partic-ularly deep in rural areas. While grid extension is often not economical for dis-persed populations, off-grid models based on innovative renewable technolo-gies can be cost-effective. For example, low-cost portable solar lanterns are oneconsumer product that could be accessible and affordable to the rural public,and the “Lighting Africa” initiative is supporting the development of the mar-ket. Solar-powered electrification of clinics and schools that provide essentialpublic services to low-income communities is another way of directly bringingthem the benefits of investment in electrification.

Finally, it is important to recognize that most of the measures describedabove are medium term in nature, and cannot be implemented overnight. As


strong economic performance continues to escalate power demand, many SSAcountries will continue to face a very tight demand-supply balance in the com-ing years. It is therefore critical that longer-term efforts should redress theunderlying structural causes of SSA’s current power supply crisis. These endeav-ors should be complemented by shorter-term measures to soften the economicand social impact of power scarcity. Recent experiences from countries such asBrazil show that well-designed demand-side management measures can go aconsiderable way towards trimming peak demand, thereby substantially reduc-ing the extent of power rationing at relatively low economic and social cost. Agood example of such measures is a quota system with price signals, combinedwith a public energy-efficiency campaign.


VII

Bibliography

ADENIKINJU, A. (2005). Analysis of the Cost of Infrastructure Failures in a Developing Economy: TheCase of the Electricity Sector in Nigeria. AERC Research Paper 148, African Economic Research Con-sortium, Nairobi.

BANERJEE, S., WODON, Q., DIALLO, A., PUSHAK, T., UDDIN, H., TSIMPO, C. AND V. FOSTER,(2008). Access, Affordability and Alternatives: Modern Infrastructure Services in Sub-Saharan Africa. AfricaInfrastructure Country Diagnostic.

BESANT-JONES, J. E. (2006). Reforming Power Markets in Developing Countries: What Have WeLearned? Energy and Mining Sector Board Discussion Paper 19, World Bank, Washington, DC.

BOSTON INSTITUTE FOR DEVELOPMENT ECONOMICS (2006). Impact of Privatization inAfrica: Synthesis of Eight Case Studies. Public Private Infrastructure Advisory Facility

BRICENO-GARMENDIA, C. AND K. SMITS (2008). Fiscal Costs of Infrastructure in Sub-SaharanAfrica. Africa Infrastructure Country Diagnostic.

CALDERON, C. (2008). Infrastructure and Growth in Africa. Working Paper, Africa InfrastructureCountry Diagnostic.

EBERHARD, A. (2005). [Paper From Cape Town Conference And Others]

EBERHARD ET AL. (2008). Review of the State of the Power Sector in Sub-Saharan Africa. Africa Infra-structure Country Diagnostic.

EBINGER, J. (2006). Measuring Financial Performance in Infrastructure: An Application to Europe andCentral Asia. Policy Research Working Paper No. 3992, World Bank, Washington DC.

ECON ANALYSIS (2008). Costing Power Infrastructure Investment Needs in Sub-Saharan Africa. AfricaInfrastructure Country Diagnostic.

ESCRIBANO, A., GUASCH, J.L. AND J. PENA (2008). A Robust Assessment of the Impact of Infra-structure on African Firm’s Productivity. African Infrastructure Country Diagnostic.

FOSTER, V. AND J. STEINBUKS (2008). Paying the Price for Unreliable Power Supplies: In-House Gen-eration of Electricity by Firms in Africa. Africa Infrastructure Country Diagnostic.

GRATWICK, K.N. AND A. EBERHARD (2006). An Analysis of Independent Power Projects in Africa:Understanding Development and Investment Outcomes. Working Paper, Graduate School of Business,University of Cape Town.

IMF (2004). Public Investment and Fiscal Policy. Board Paper, Fiscal Affairs Department, InternationalMonetary Fund, Washington DC.

KAREKEZI, S., AND D. MUTISO (1999). “Information and Statistics on the Power Sector and theReform Process in Sub-Saharan Africa.” In M. Bhagavan, ed., Reforming the Power Sector in Africa(331–352). London: Zed Books Ltd., in association with African Energy Policy Research Network.

WODON ET AL. (2008). Electricity Tariffs and the Poor: Case Studies for Sub-Saharan Africa. AfricaInfrastructure Country Diagnostic.

YEPES, T., PIERCE, J. AND V. FOSTER (2008). Making Sense of Sub-Saharan Africa’s InfrastructureEndowment: A Benchmarking Approach. Africa Infrastructure Country Diagnostic.


Introduction

Africa is the world’s second largest and second most populous continent. It ishome to over 900 million people of diverse racial stock – the largest, of course,being the black race, who are the aboriginal owners of the continent. Fromthe Arab states in the north to the multiracial nation of South Africa in thesouth, Africa has 53 countries of diverse economic capabilities. These includeoff-the-mainland island countries such as Madagascar, Seychelles, theComoros Islands and Cape Verde.

Africa is endowed with vast and diverse primary energy resources –more than enough to meet all her energy needs. Oil and gas, estimated at 60billion barrels and 11.4 trillion cubic meters respectively, are concentratedmainly in the north and west regions of the continent. The southern regionsof the continent host the bulk of her coal reserves estimated at over 55,000million tons, while the eastern regions of Africa display tremendous geother-mal potentials especially along the great Rift Valley. In Kenya, for example,there is a park strangely called “Hell’s Gate National Park,” where the heatfrom the over 3450C hot plasma deep below the Rift Valley, manifests instrange rock formations amidst spouts of hissing steam and nearby lakes thatbubble as if on the boil.

Africa’s uranium deposits, estimated at over 600 kilo tons, are amongthe largest in the world. South Africa, Namibia and Niger Republic are cur-rently ranked among the 10 leading global producers of uranium, which is themain fuel for nuclear energy production.

VIIIWhy Africa Lags Behind in the Energy Sector

Steve Olumuyiwa


Africa also hosts in its Western, Central and Eastern regions some of thelargest river courses of our world. These are the Nile, Congo, Niger, Volta andZambezi river systems. This makes Africa’s hydroelectric potentials mostattractive, especially as a renewable energy source. The hydroelectric poten-tials of the Democratic Republic of Congo (DRC) alone, is estimated to be suf-ficient for over 300 percent of current Africa energy consumption. Indeed,some parts of Europe are already thinking of subscribing to cheap hydroelec-tric power imports from the DRC.

Africa also has tremendous solar energy potentials, because of the prox-imity of a greater bulk of its land mass to the equator. At this privileged centerof the earth’s location, Africa has most of its land mass exposed to nothing lessthan 325 days of strong sunlight.

In spite of all this impressive primary resource content, Africa is embar-rassingly behind in electrical energy production and consumption. Speaking atthe 8th Pan African Power Congress in 2006, Ghana’s Volta River Authority(VRA) CEO, Mr. Joshua Ofedie, stated that “Despite its abundant energyresources, Africa generates only 3.1 percent of the world’s electricity, less thanany other region of the world.” In October of the same year, Mr. AzanawAbreha,Vice Chair of the UNECA Commission on Sustainable Development(CSD) at the 14th session of CSD, stated that almost one-third of the estimated1.6 billion people living without access to electricity reside in Africa. Mr.Abraha, earlier in his opening statement at the opening session of Africa’sregional implementation meeting of that year, had said, “If concerted efforts are

Total primary energy supplyThe world in 1973 and 2005: regional shares of total primary energy supply

Figure 1

61.37.15.6

14.23.53.71.11.91.6

OECDChinaAsiaFormer USSRAfricaLatin AmericaMiddle EastWorld Marine BunkersNon-OECD Europe

48.515.211.28.65.34.44.41.50.9

1973

6,128 Mtoe

1973

Region / Percent 2005

11,435 Mtoe

2005

Source: International Energy Agency, Key World Energy Statistics 2007


VIII

not made to improve access, 650 million people in sub-Saharan Africa would bewithout electricity by 2030.”

A BBC report in April 2005 quoted the Kenyan National Power Company(KENGEN) as saying that 85 percent of Kenyans do not have access to electric-ity. However, this situation is not unique to Kenya. Currently, aside from SouthAfrica, Egypt, and perhaps Nigeria, not more than 20 percent (and in somecountries as few as 5 percent) of Africans have direct access to electricity. Therural areas fare even worse as only an average of 2 percent of rural dwellers hasaccess to electricity. Even in those cities and rural communities where Africangovernments have engaged in rural electrification, appropriate pricing of theproduct makes it unaffordable for many. The continent’s New Partnership forAfrican Development (NEPAD) in its development blueprint, emphasizes that,to achieve the desired socio-economic prosperity, African countries must boostaccess to cheaper and more reliable electricity for its citizens and industries.

In summary, Africa, while being home to 13 percent of the world’s popu-lation and producing 7 percent of its commercial primary energy, accounts foronly 2 percent of the world’s Gross Domestic Product (GDP) and 3 percent ofglobal commercial energy consumption. Most of the commercial primaryenergy Africa produces is exported to other continents, sometimes with minimalbenefit to local populations. South Africa accounts for nearly half (46 percent)of all the electricity consumed on the whole continent and Egypt, Libya andAlgeria between them account for a further 30 percent. Most of Africa isextremely poorly served with electricity. The production of electricity for manyAfrican countries is equivalent to that of a small town in Europe or the USA. Also,Africa’s per capita consumption of electricity is minuscule. It is as small as 24kilowatt-hours (kWh) per capita per annum in some countries. The major energyresource in Africa is wood fuel, used with low efficiency through traditional tech-nology and with associated environmental, health and development burdens.

Africa’s current electrical power production status

Total installed capacities in all of Africa’s power stations as at 2005, stood at106,543 MW. This shows a growth of roughly 140 percent over the last 25 yearswhen compared to electricity installed capacities of 44,468 MW in 1980. How-ever, compared to one country in Asia – Japan – this is an abysmally low levelof power-generating capacity. Japan in 1980 had a total installed capacity of129,751 MW. This by 2005 had grown to 247,946 MW. India, whose totalinstalled capacity in 1980 was below all of Africa at 33,316 MW had overtaken


Africa by 2005 with a total installed capacity of 137,578 MW – a stupendous 313percent growth in just one country in Asia. Individual national installed capa-bilities in Africa south of the Sahara are not very impressive. Aside from ESKOMof South Africa, whose total installed capacity grew from 18,383 MW in 1980 to44,683 MW in 2001 only to drop off to 40,481 MW in 2005, the rest of Africasouth of the Sahara generally sports below 5,000 MW installed capacities,except for Nigeria, whose installed capacity grew from 2,240 MW in 1983 to apeak of 5,959 MW in 1992, only to drop off to 5,898 MW in 2005. Even at thesenominal installed capacities, most of Africa’s real generating output is poor dueto low availability of figures, which in most cases is in the range of 30-40 per-cent of the installed capacities. The consequences of low generating capacitiestend to manifest in frequent power cuts, load shedding and at times, outrightgrid collapses.

Total energy generated in all of Africa in 2005 was 503 TWh. This is just 3 percent of world energy generation figures of 16,695 TWh that year. In thatsame year, South America, whose population is about half that of Africa, gener-ated a total of 761 TWh. Total Africa per capita electricity production averaged 563kWh/capita. This is about 22 percent of world average per capita energy produc-tion in that year. Now, when compared to North America, Canada, for example,with a total population of 32.27 million, generated a total of 558.5 TWh that yearresulting in an impressive per capita electricity production of 17,307 kWh, about667 percent of the world average (see Table 2). The United States of America in2005 generated a total of 4,046.6 TWh, a whopping 24 percent of total world production – making it the largest electrical energy producing nation in 2005,

1973 and 2005 regional shares of electricity generation Figure 2

72.92.82.6

15.02.60.61.81.7

OECDChinaAsiaFormer USSRLatin AmericaMiddle EastAfricaNon-OECD Europe

56.913.98.87.75.03.53.11.1

1973

6,116 TWh

1973

Region / Percent 2005

18,325 TWh

2005

Source: International Energy Agency. Key World Energy Statistics 2007


VIII

with an impressive per capita electricity generation of 13,640 kWh. In Europe,Germany produced 586 TWh thereby averaging 7,111 kWh per capita. In Asia,India’s production for 2005 was 525.93 TWh averaging 480 kWh per capita,while industrial giant Japan produced 1,214.19 TWh to achieve a high per capitaaverage of 8,233 kWh. On the other hand, one city state, Singapore, produced36.29 TWh to average a high 8,358kWh per capita.

Compared to these world figures, as low as Africa’s total averages are, theyare even far worse at the country-by-country level. The total Africa figure of 563 kWh per capita was made up largely by two nations. One is Egypt in theNorth with a total 2005 production of 90.73 TWh 18 percent of all Africa aver-aging at 1,226 kWh per capita. The other and Africa’s highest producer is SouthAfrica whose production in 2005 was 227.3 TWh to average at 4,848 kWh percapita – about 860 percent of all Africa per capita generation (Table 2).

In West Africa, Nigeria, the most populous nation on the continent (140 million), ranked sixth in Africa’s gross electricity generation in 2005 at atotal production of 17.90 TWh averaging a poor 136 kWh per capita – one of the

World demographic and total energy Table 1consumption indicators: selected indicators for 2005

Region / GDP Energy Net Elec.Country Population GDP PPP prod. imports TPES cons. CO2

million billion billion Mtoe Mtoe Mtoe TWh Mt of CO2$2,000 $2,000

World 6,432 36,281 54,618 11,468 -11,434 16,695 27,136

OECD 1,172 28,394 30,321 3,834 1,813 5,548 9,800 12,910

Middle East 187 786 1,362 1,496 -979 503 558 1,238

Former USSR 285 525 2,099 1,551 -565 980 1,199 2,303

Non-OECD Europe 54 152 428 63 43 105 167 263

China 1,311 2,098 8,057 1,641 124 1,735 2,363 5,101

Asia 2,080 1,974 7,089 1,114 199 1,286 1,343 2,591

Latin America 449 1,620 3,193 680 -168 500 761 938

Africa 894 731 2,069 1,088 -475 605 503 835

PPP = Purchasing power parity

Source: International Energy Agency


Selected world electrical power production statistics Table 2

Country/Region Population Total energy production Energy productionMillion TWh kWh/capita

Total World 6,432.00 16,695.00 2,596

Total Africa 894.00 503.00 563

Latin America 449.00 761.00 1,695

India 1,094.58 525.93 480

China 1,304.50 2,322.72 1,781

Malaysia 25.35 83.67 3,301

Japan 127.76 1,214.19 8,233

Singapore 4.34 36.29 8,358

Israel 6.92 46.80 6,759

United Kingdom 60.22 376.63 6,254

Italy 58.53 332.23 5,676

France 62.70 483.23 7,707

Finland 5.25 84.57 16,123

Germany 82.46 586.41 7,111

Canada 32.27 558.50 17,307

United States 296.68 4,046.60 13,640

South Africa 46.89 227.30 4,848

Egypt 74.03 90.73 1,226

Algeria 32.85 29.52 899

Libya 5.85 19.53 3,336

Morocco 30.17 19.40 643

Nigeria 131.53 17.90 136

Zimbabwe 13.01 12.50 961

Zambia 11.67 8.28 709

Ghana 22.11 5.99 271

D.R. Congo 57.55 5.35 144

Kenya 34.26 4.93 144

Cameroon 16.32 3.49 214

Tanzania 38.33 2.36 61

Source: International Energy Agency (IEA)


VIII

lowest in the West Africa region that year. Nigeria has, over the years, embarkedon one of the most ambitious rural electrification programs on the continent,with many rural communities either connected to the grid or with stand-alonecommunity power schemes. The problem, however, is that the poor availabil-ity of generating capacity results in poor reliability of supply and frequentblackouts. For the most part, the Africans who live in the nations south of theSahara do not have access to electricity.

Why Africa lags behind in electrical energy production

The foregoing state of electrical energy production and use in Africa is causedby a number of factors, many of which are interrelated. The most prominent ofthese factors are:

1. Poor economic status of African states especially south of theSahara.

2. Poor governance or unstable governments.

3. Wars, regional and domestic social and ethnic conflicts.

Selected world energy and environment indicators Table 3

Region / TPES/ Elec. CO2/Country Pop. GDP GDP (PPP) Cons. Pop. TPES Pop. GDP GDP (PPP)

toe/ toe/000 toe/000 KWh/ tCO2/toe CO2/ kg CO2/ kg CO2/capital $2,000 $2,000 capital capital $2,000 $2,000

World 1.78 0.32 0.21 2,596 2.37 4.22 0.75 0.50

OECD 4.74 0.20 0.18 8,365 2.33 11.02 0.45 0.43

Middle East 2.69 0.64 0.37 2,980 2.46 6.62 1.58 0.91

Former USSR 3.44 1.87 0.47 4,209 2.35 8.08 4.39 1.10

Non-OECD Europe 1.94 0.69 0.25 3,086 2.50 4.87 1.73 0.61

China 1.32 0.83 0.22 1,802 2.94 3.89 2.43 0.63

Asia 0.62 0.65 0.18 646 2.01 1.25 1.31 0.37

Latin America 1.11 0.31 0.16 1,695 1.88 2.09 0.58 0.29

Africa 0.68 0.83 0.29 563 1.38 0.93 1.14 0.40

Whichever way the nations of the world are rated, African countries south ofthe Sahara stand at the bottom, most of the time. Although it has abundant nat-ural resources, Africa remains the world’s poorest and most underdevelopedcontinent, due largely to the effects of tropical diseases, the slave trade, corruptgovernments, failed central planning, the international trade regime andgeopolitics. Other factors that have retarded Africa’s development are wide-spread human rights violations, the negative effects of colonialism, despotism,illiteracy, superstition, tribal savagery and military conflicts (ranging from wars,civil wars, guerilla warfare and genocide). According to the United NationsHuman Development Report 2003, the bottom 25 ranked countries (151st to175th) were from Africa.

Widespread poverty, illiteracy, malnutrition and inadequate water supplyand sanitation, as well as poor health, affect the majority of the people whoreside in Africa, where 36.2 percent of the population is living on or under $1per day. Africa is by far the world’s poorest inhabited continent, and on aver-age, in 2003, it was poorer than it was in 1973.

Some areas, notably Botswana and South Africa, have experienced eco-nomic success. The latter has a wealth of natural resources, being the world’sleading producer of both gold and diamonds, and having a well-establishedlegal system. South Africa also has access to financial capital, numerous mar-kets, skilled labor and advanced infrastructure in much of the country. Also,South Africa is home to one of the major stock exchanges in the continent – theJohannesburg Stock Exchange.

Over a quarter of Botswana’s budget (also a major diamond producer)goes toward improving the infrastructure of Gaborone, the nation’s capital, andlargest city, as well as one of the world’s fastest growing cities. Other Africancountries are making comparable progress. Nigeria has one of the largest provenoil reserves in the world and has the highest population among nations inAfrica, with one of the fastest-growing economies in the world. From 1995 to2005, economic growth picked up, averaging 5 percent in 2005. However, somecountries experienced much higher growth (10 percent) in particular, Angola,Sudan and, Equatorial Guinea. All three have recently begun extracting theirpetroleum reserves or have expanded their oil extraction capacity.

Nevertheless, the economic situation is grim in some countries. Zim-babwe is an example, with 80 percent of its citizens unemployed. The economiccrisis has forced about two million Zimbabweans to migrate to Botswana andSouth Africa. Since 1998, Zimbabwe’s per capita GDP has slid from about $700to less than $200.



VIII

In consequence of the foregoing, many in Africa cannot afford appropriatelypriced electricity. Many power utilities in Africa are wholly government owned,financed and operated. Until very recently, electricity in most of Africa was pro-duced as a social amenity, heavily subsidized by government. The result hasbeen that the heavy cost of infrastructural expansion to meet growth, thoughfrequently executed with loans from world bodies such as the World Bank etc,could not be sustained because the utilities were producing power and sellingat inappropriate prices. This, coupled with the corruption content of publicservices in Africa became a crippling combination for electrical power develop-ment. In those countries where electricity was appropriately priced, mostAfricans whose economic ratings were such that they had to live on less than$1/day, could not afford it. These economic factors are the reasons why mostelectrical systems in many African countries are quite obsolete, as they datefrom the colonial era. The bulk of power-plant transmission and even distribu-tion facilities was built in the 1950s and 1960s. Low-level investment and poormaintenance has left the infrastructure in a very sorry state across most ofAfrica south of the Sahara.

The many ethnic and regional conflicts in Africa have also taken their tollon energy production. Wars have left equipment damaged and transmissionlines cut. For example, a large portion of Liberia’s generation and distributioninfrastructure was damaged or destroyed during its long civil war. Liberia’snational electricity company estimates it will cost more than $107 million andtake over five years to fully restore the system. Sierra Leone’s Bumbuna Hydro-electric Project was nearly complete when civil war disrupted construction. InNigeria, ethnic militancy in the Niger Delta Region, where most of the coun-try’s oil and gas exploitation takes place, has resulted in blowing-up of gas andoil pipelines, thereby disrupting supplies to thermal-fired power stations. Theinstability occasioned by these conflicts has also been largely the reason whyAfrica has not attracted the necessary foreign and institutional investmentsrequired for electrical power development.

Current power management options in Africa

Nigeria, Ghana and Côte d’Ivoire are the largest generators of electricity in WestAfrica. Nigeria’s major sources of energy are petroleum, natural gas and hydro-electricity. Although the country exports electricity to neighboring Niger, pooravailability results in frequent national blackouts. Ghana primarily relies onhydro-power from its Akosombo Dam on the Volta River about 80 kilometersupstream from the coast. Ghana supplies Benin and Togo with the majority of


their electricity. In Côte d’Ivoire, thermal generating facilities powered prima-rily by oil and gas, provide most of the electricity. Countries connected to theIvorian grid include Mali, Burkina Faso, Benin and Togo.

The three landlocked and sparsely populated countries of Mali, BurkinaFaso and Niger are not particularly well served with energy, mainly because theyare relatively poor and are at least partially situated in the Sahara Desert. Energydevelopment is also very limited in the small coastal countries of Liberia, SierraLeone, Guinea and Guinea-Bissau because of the small economies, politicalstrife and conflicts.

In East Africa, regional cooperation on electricity supply has helped sus-tain current levels of energy use in the countries of the region. The greater partof this was derived from the Nalubaale (formerly Owen Falls) hydro scheme inUganda. More recently, the East African Community, consisting of Kenya,Uganda and Tanzania, has initiated the preparation of an East African PowerMaster Plan with the assistance of the World Bank and the Swedish Interna-tional Development Agency. Recently, Uganda and Kenya agreed to an increasedsupply of electricity to Kenya, once the planned Bujagali scheme is commis-sioned, hopefully in 2011 by latest estimates. Kenya also hosts the Ol Karia PowerStation, which is the continent’s biggest geothermal power-generating plant. OlKaria currently has an installed capacity of 125 MW. In Southern Africa, theSouth African Power Pool (SAPP) established since 1995, has helped to networka large number of nations in the region. These include South Africa, Namibia,Botswana, Lesotho, Swaziland, Mozambique, Zambia, Zimbabwe and Malawi.

Recommendations and solution options for improving African energy production

Safety and stability issues

Without regional peace and stability within Africa, there can be no meaning-ful development. This is a vital first precondition that will create the environ-ment for infrastructural development of any kind on the continent. Physicalsecurity is of even greater importance for integration projects. South Africaexperienced this directly when Renamo rebels destroyed 1,200 power pylonsin Mozambique during the 1970s and 1980s. The action put the Caborra BassaHydro scheme effectively out of commission for a considerable period of time.Power lines and pipelines are vulnerable to damage. A lot of willful damage isbeing inflicted by ethnic militias in Nigeria’s Niger Delta with dire conse-quences for the West African Power Pool (WAPP) plans. The success of inter-


VIII

connected power lines across the continent, whether built in West Africa byWAPP, or in Southern Africa by SAPP or any other systems of interconnections,is totally dependent on the safety of the transmission systems. The southerntransmission axes are still sensitive. Peace is not simply the absence of war, andsigning peace treaties does not necessarily end wars. Years of civil readjustmentmay be required before sustainable peace can prevail.

The Hydro potentials of the DRC and the Inga Dam scheme is to sendmany lines across the continent. Northwards, the line to Egypt needs to crosscountries that have long histories of political unrest. The transmission lines willneed protection, a difficult challenge across the distances envisaged. Evenestablished lines are not safe as seen in various countries of Africa, though itshould be borne in mind that not all damage to installations is malicious. Poormaintenance is as much a cause of damage in Africa as terrorists and vandals.

Conflict resolution initiatives should be prioritized by African Heads ofGovernment. Also, the African Union (AU) should be strengthened towardsending the many senseless wars and conflicts on the continent. The drivetowards attaining genuine democratic dispensations will help stability. Africasuffers too much from the abandoned projects syndrome where regime changesalmost always mean that developmental efforts of outgoing governments willeither suffer unreasonable delays with consequential escalation of project costs,or outright abandonment. Connected to this is the terrible level of institution-alized corruption that trails government projects within Africa. The fightagainst corruption has to be taken seriously if Africa is to experience the neededgrowth in energy production infrastructural development. In addition, Africaneeds visionary and responsible leadership to drive these needed paradigmshifts in governance.

Appropriate commercial pricing of energy and privatization of national power utilities

Electrical power production and distribution to end users is a very capital-intensive venture anywhere in the world. Power production infrastructureinclude the following:

1. Power stations. This is the point where we consider the primaryor secondary energy to deploy and is the most intensive point ofenvironmental and climate consideration.

2. Power transmission lines that carry grid power across vast dis-tances at variously graded extra high voltages.


3. Transformer substations and switching stations where the powerlines connect with other lines from other parts of the grid toform the power pool.

4. Distribution networks that consist of lines and transformers atlower voltages for connection to the various consumer loadpoints.

The scale of funding required for any of these stages, or all of them together,can be quite daunting for the small economies of Africa. For example, the Eco-nomic Commission of West African States’ (ECOWAS) estimate in 2005 for theproposed WAPP was put at $11.8 billion. This figure, which by now will bemuch higher, is required to build the power stations, substations and powerlines that will stretch for some 5,600 km. Ghana’s plan for expanding itshydroelectric generating facilities along the Volta River with a 400 MW plantat Bui is estimated to cost $700 milion. This is why governments in Africaneed to divest from the power sector so as to enable a more businesslikeapproach to power development on the continent. Although many govern-ments have embraced privatization of the power sector in principle, there isa lot of foot-dragging and lack of resolve to conclude this and to do it prop-erly. Privatization itself is a topic on its own; therefore, I will not attempt todiscuss it here. The reality on the ground, however, is that most African gov-ernments cannot come up with the required massive local and foreign capi-tal investment. Certainly, private capital is needed. Thus, private involve-ment, foreign governmental and institutional donors and lending agenciesneed to be appropriately coordinated. This will guarantee that the eventualelectrical power will be reasonably priced to ensure project profitability andpower that is affordable for the customer.

Power through integration

Traditionally in many countries, energy planning has been undertaken on apurely national basis. This is reinforced in Africa’s case by the desire for self-sufficiency in the immediate post-independence phase. The fact is that even intraditional energy planning, it is always cheaper to generate power at the loca-tions where the primary energy supply is cheap. The electricity is then trans-ported along power lines to load centers that are usually distant. Anotherapproach is in the case of oil and gas-fired generating stations. These could besited close to load centers, while the oil or gas is piped long distances from thesource. But the cheapest energy source for a country might lie just across its bor-der in another nation. This is the case for cross-border energy networks, where


VIII

countries with surplus cheap power could run their stations at optimum out-put without risking oversupply. Conversely, countries with limited generationcapacities could access affordable power without building costly facilities.Power pooling also diversifies energy alternatives, ensuring optimum economicpower production and end user pricing.

Currently, Africa has a number of regionally integrated power poolseither existing or already at various stages of planning. North Africa’s energyinfrastructure is already reasonably well integrated, particularly regarding theelectricity and gas sectors. Energy cooperation between North African countrieswas first initiated in the 1950s when Algeria and Tunisia linked their electricitynetworks to exchange power in emergencies. Similar cooperation progressedsteadily over the years in the whole of North Africa. Though integration in WestAfrica is not as far advanced as in North Africa, two major projects are set to laya strong foundation for West African energy integration in the near future. Theyare the West African Gas Pipeline (WAGP) and the envisaged WAPP. There arealso a number of other regionally integrated power pools operating in Eastern,Central and Southern Africa.

The Inga Hydro Power Project

The Inga Hydro Power Project has been discussed for a long time. First studieswere done in the 1960s. These site development studies recommended the construction of four hydroelectric power stations in two phases. The first phaseconcerned the building of three power stations in the Nkokolo Valley, namely

Location of the Inga Hydro Power Project Figure 3

Matadi

225 km

Moanda

Tshela

Boma

KINSHASA

Mbanza-NgunguINGA

150 km


Inga I (351 MW, commissioned in 1972); Inga II (1,424 MW, commissioned in1982) and Inga III (about 3,500 MW, currently in the project design phase).High voltage lines transmit the generated power to Zambia, Zimbabwe, theRepublic of South Africa and the Republic of Congo (Brazzaville).

The potential of the Grand Inga Project

Apart from the two existing sites and the one currently under development, thetotal potential of the Grand Inga Project amounts to about 39,000 MW. This canprovide sufficient electricity to the African continent. Furthermore, it couldhelp Africa export energy through possible interconnection links to SouthernEurope. Three major African interconnection projects were identified in the feasibility studies.

1. Northern Highway (between Inga site and Egypt)

2. Southern Highway (between Inga site and South Africa)

3. Western Highway (between Inga site and Nigeria)

A project like this satisfies all the climate concerns of the world today.Africa contributes very minimally to climate issues. The AU initiatives such asNEPAD are structured to help Africa integrate their individual national plans forthe corporate benefit of all, as in this case of Inga.

Financing the project and incentives

The development of a project like the Grand Inga needs huge investments. Theestimated costs of the entire project could be between $30 billion and $70 bil-lion, depending on the scope. Nevertheless, for example, the price per kWhgenerated at the Inga site and transmitted to the Italian border would be lowerthan the market price in Italy today. Already a number of finance institutionssuch as the Africa Development Bank (AfDB) have begun to invest in the proj-ect. The conflict in the Congo and the Great Lakes region of Africa is also grad-ually coming under control. Attracting adequate funding from global financeinstitutions and nations in Europe that are already eyeing this project shouldbe easier to arrange now. This project alone holds a lot in terms of potential forAfrican unity and prosperity.

If Africa were to concentrate on its rich renewables, such as the manyhydro schemes, and the Rift Valley geothermal potentials, the continent wouldsoon find itself a net exporter of affordable electrical power even to Europe.Abundant energy in Africa can only lead to a more prosperous Africa. The wayforward is integration through regional and continental collaboration that


VIII

concentrates on maximizing our renewable energy sources. Doing so wouldensure that Africa remains the least contributor to climate problems, more espe-cially in the face of rising global oil and gas prices. Africa for the foreseeablefuture should stick to relatively easier-to-manage technology. Nuclear powergeneration will remain contentious in the region.

Conclusions

Africa is rich, not poor, in many primary sources of fossil fuels as well as renew-able energy sources such as geothermal, wind, hydro-power, etc. Regional andinter-ethnic conflicts all over the continent have combined with and exacer-bated the economic poverty of most of SSA. This has given rise to the currentdismal levels of electrical power generation in the continent.

Corruption and unstable governments have also made many Africannations unable to execute power projects in good time. The result has been esca-lating project costs. The low level of private-sector involvement in the powersector, run at ridiculously low pricing, has meant that many of the power infra-structures acquired from the colonial and immediate post-colonial era, haveneither been upgraded nor adequately maintained. Consequently, this has ledto diminishing availability of electricity from the installed capacities featuredin many African nations.

The regional and continental integration initiatives that exist in the con-tinent such as the AU with its many organs, ECOWAS, SADC, etc, are the bestway forward. These have the potential of fostering conflict resolution towardscontinental political harmony as well as fast-tracking the development of themany eco-friendly, renewable energy sources in the continent. While nationsin Africa should ensure that their internal power development plans are com-mercially viable at completion, it is evident that power through integration isthe best way forward for Africa to attain economic prosperity.

The involvement of the private sector through properly negotiated andregulated financial participation has now assumed added urgency. Such partic-ipation will go a long way to provide funding for executing the many projectssuch as the Inga Dam project. Furthermore, private-sector involvement willensure that power is run as a business that is both profitable for the operatorsas well as affordable for the people.


1. Introduction

It is now widely accepted that energy and development are intertwined. Accessto adequate and affordable energy services is positively correlated to economicdevelopment and poverty reduction. The history of development shows con-vincingly that no country has substantially reduced poverty without massivelyincreasing the use of energy. The United Nations (2005) shows how energyinteracts with sustainable development in its various phases – economic, socialand environmental. Energy facilitates economic development at the local levelby improving productivity and enabling local income generation throughimproved agriculture development and through non-farm employment,including micro-enterprise development. At the national level, energy pro-motes stable economic development, attracts Foreign Direct Investment (FDI)and allows access to global markets. Also, energy has an impact on the nationaland global environment. However, lack of energy access also leads to a viciouscircle of poverty as seen below in Figure 1.

Energy access and poverty links Figure 1

Poverty

• Very low income• Poor living standard

No money to buy

• Energy services, or• Energy conversion equipment

Lack of energy

• To run machines for income generation activities• For improved living standard

IXPromotion of Public-Private Partnership to Improve Energy Access for Poverty Reduction and Growth in Sub-Saharan Africa

Adeola Adenikinju


The central role of energy in the achievement of the Millennium DevelopmentGoals (MDGs) is well acknowledged and documented. Energy is directly or indi-rectly linked to all the MDGs. According to the UN Commission on SustainableDevelopment (UN-CSD), “to implement the goal accepted by the internationalcommunity to halve the proportion of people living on less that $1 per day by2015, access to affordable energy services is a prerequisite.”

Hence, to achieve the MDG targets of halving global poverty level by2015, there is the need for an urgent focus on increasing poor people’s access toappropriate, affordable and efficient energy services. Achieving the MDGs,therefore, means reaching the poorest and most isolated communities that aremostly in the rural and peri-urban areas in developing countries. Improvingenergy access substantially in sub-Saharan Africa (SSA) between now and 2015and beyond will require considerable investment, often beyond the reach ofmost of the countries.

Unfortunately, SSA receives only a small share of private investment forinfrastructure. This is due to the low credit worthiness of most African coun-tries, the shallow local financial markets and risk profiles of energy infrastruc-ture. The limited resources available in SSA imply that all resources must bemobilized to be able to make significant impact on the prevailing energy accesssituation. The Public-Private Partnership (PPP) remains one of the most inno-vative options that can be used to mobilize more resources – local and foreign– for energy infrastructure development. This paper discusses the role of PPP inexpanding energy access in SSA.

The rest of the paper is organized into five sections. Section 2 providessome statistics on the state of energy access in SSA. This is followed in Section 3by a discussion on the constraints limiting energy access in the region. Section4 discusses the various initiatives and opportunities at the global and regionallevels to address energy access in developing countries. The fifth section providessome discussions on PPP, its benefits and challenges, and areas where it can assistthe energy goals of the subcontinent. The last section concludes the paper.

2. State of energy access in SSA

The statistics on energy access and development in SSA are frightening. The SSAregion ranks very poorly in relation to other continents of the world in mattersof energy access and economic development. The subcontinent is home tosome of the poorest people of the world. Correspondingly, the energy accessbase is also among the lowest in the world. For instance, 80 percent of people


IX

in SSA have no electricity. Lack of access to modern energy has imposed signif-icant productivity constraints on the rural poor of SSA. Also, poor people spendup to a third of their income on energy, mostly to cook. In rural SSA, manywomen carry twenty kilograms of fuel wood an average of 5 kilometers everyday (cited in ITDG). The opportunity cost of this time can be measured by thetime that could have been spent on income generation, childcare or education.

The problem here is both of overall energy access as well as the qualityand reliability of available energy supply. At the broad macro level, these havetranslated into significant constraints on the economic performance and com-petitiveness of domestic firms. In most parts of SSA, poor electricity supply isperhaps the greatest infrastructure problem confronting the business sector. Forinstance, the typical Nigerian firm experiences power failure or voltage fluctu-ations about seven times per week, each lasting for about two hours, withoutthe benefit of prior warning. This imposes a huge cost on the firm from idleworkers, materials spoilage, lost output, damage to equipment and restart costs.The overall impact of this is increased business uncertainty and lower returnson investment. For the aggregate economy, it reduces the attractiveness of theeconomy to foreign investment (Adenikinju, 2003). Lee and Anas (1992) reportthat manufacturing establishments in Nigeria spend on average 9 percent oftheir variable costs on infrastructure, with electric power accounting for half ofthis share. Usually, small firms bear a relatively higher cost of infrastructure failures. A 1991 survey of small enterprises in Ghana cited power outages, transportation costs, and other infrastructure problems among the top four

Electrification rate in various regions (2002) Figure 2

Develo

ping

coun

tries

Africa

Develo

ping A

sia

Latin

Amer

ica

Middle

East

Tran

sition

econ

omies

OEC

DW

orld

100 Percent

0

20

80

40

60


problems of operations (behind taxes), with this response strongest among“micro” and small firms. Electricity outage was ranked by very small firmsamong their top four constraints to expansion (Steel and Webster, 1991).

No doubt, the low access to modern energy in SSA has played a major rolein the high incidence of poverty in the region. If we take electricity as a proxyfor modern energy services, only 40 percent of the total population currentlyhas access to power. The access figure is less than 10 percent when we consideronly the rural areas. Figures 2 and 3 show the comparative figures on electrifi-cation rates among various regions of the world and the percentage of ruralpopulation with access to electricity. Figure 3 shows that Africa has the leastelectrification access. Its electricity access rate is half of the figure for LatinAmerica and also below the developing countries and world averages.

Figure 3 shows that the same trend holds when we compare electricityaccess for the rural population alone. The regional differences are even morepronounced here. While China has over 90 percent of her rural population con-nected to electricity, in SSA, the figure is less than 10 percent. Latin America andSouth Asia respectively have about 30 percent and 20 percent of their rural pop-ulation with electricity access.

Another feature of electricity access in SSA is the sharp inequality in its access, both across geographical spheres (rural and urban divide), as we

Electrification rates by region Table 1

1970 1990 2000 2015 2030

North Africa 34 61 90 98 99

Sub-Sahara 9 16 23 33 49

Africa 14 25 34 43 56

South Asia 17 32 41 53 66

Latin America 45 70 87 94 96

East Asia/China 30 56 87 94 96

Middle East 36 64 91 97 99

Developing countries 25 46 64 72 78

World 49 60 73 78 83

Source: IEA (2002)


IX

mentioned earlier. Perhaps more important is the inequality in access based onincome divide. This is amply demonstrated in Figures 4 and 5, which shows that100 percent of the richest 20 percent of the population have access to electric-ity in Côte d’Ivoire, Namibia, and South Africa.1 In Ghana, Cameroon, Nigeriaand Zimbabwe, 99 percent of the richest 20 percent of the population haveaccess to electricity. Comparatively, Figure 5 shows that the bottom 40 percent

1 Electricity access is defined generally to cover the number of households that have electricity in their homes. It includes commercially sold electricity – both grid and off-grid as well as self-generatedelectricity.

Regional comparison of rural population access to electricity Figure 3

100 Percent

South Asia China Sub-Saharan Africa Rest of Africa Latin America0

20

80

40

60

Access to electricity for upper income households among selected countries in SSA

Figure 4

Camer

oon

Côte d

’Ivoir

e

Ethio

pia

Ghana

Kenya

Namibi

a

Nigeria

Sene

gal

Sout

h Afri

ca

Tanz

ania

Ugand

a

Zambia

Zimba

bwe

100

Percent

0

20

80

40

60


of the population has no access to electricity in SSA (Karekezi and Majoro,2002). In many countries, rural access to electricity is less than 2 percent as canbe seen in Figure 3.

Figures relating to electricity access do not even reveal the quality of sup-plies, which is often very poor in many areas of the continent. According to theITDG estimate, it will take more than 40 years to electrify South Asia and almost80 years for SSA, going by the current trend. However, if the international com-munity is to intervene and support current reform efforts as well as energyaccess initiatives, electricity could be provided to the entire SSA at a faster pace.

In Africa, more than 80 percent of the population relies primarily on bio-mass – wood, dung, crop waste – for their domestic needs (see Figure 6). Biomass

Income distribution of access to electricity in selected countries in SSA Figure 5

100

0

20

80

40

60

Population: Poorest 2nd poorest RichestPercent

Camer

oon

Côte d

’Ivoir

e

Ethio

pia

Ghana

Kenya

Namibi

a

Nigeria

Sene

gal

Sout

h Afri

ca

Tanz

ania

Ugand

a

Zambia

Zimba

bwe

Electrification trend in selected countries in SSA Table 2

Country Population (millions) Coverage (%) Years to 100%

Tanzania 34.0 8 Infinity

Uganda 24.4 4 1,275

Malawi 11.8 5 183

Kenya 31.3 15 42

Source: ITDG


IX

for cooking is often used inefficiently and emits a large amount of smoke. Whenthis is done in poorly ventilated surroundings, as is often the case, it can be asignificant source of indoor pollution, with dangerous amounts of toxic sub-stances like carbon monoxide, sulphur and nitrogen oxides (Davidson andSokona, 2002).

3. Constraints to improving energy access

The central question we will examine in this section is: what are the factors thatare responsible for the low energy access rate in the subcontinent? There are sev-eral reasons that can be adduced for this. First, energy access should be seenholistically rather than just in terms of electricity provision. There has been anextensive focus on the provision of electricity to the poor people. However, elec-tricity is not always the most appropriate form of energy, nor is it the quickestor the most cost-effective way of providing energy services to the poor (UN,2005). Providing clean, modern energy services to poor communities willrequire the expansion of choice of energy options, including conventional andnon-conventional sources.

A corollary to the above is that the approach adopted for expansion of theelectricity system is not appropriate. The conventional approach to electrifica-tion, through centralized power plants and power-line distribution, oftenbypasses rural communities because they are located too far away from the grid

Dependence on biomass fuels Figure 6

China

Indon

esia

Rest o

f Afri

caInd

ia

Sub-

Saha

ran A

frica

Rest o

f Sou

th A

sia

Latin

Amer

ica

North

Afri

ca

Middle

East

Develo

ping

coun

tries

3,000 Millions Percent

0

500

2,500

2,000

1,000

1,500

100

0

25

75

50

Population using biomass (millions)Percentage share in total population


(ITDG, 2004). About 70 percent of people in SSA live in rural areas. Rural pop-ulation densities are generally low, levels of demand are limited and the cost ofproviding energy supply is high compared with densely populated areas. Thus,electricity companies – public or private – have little or no incentive to provideservices to these areas.

Third, while current reforms in the energy sector and the economy aremaking fairly good progress in several parts of the continent, there is inade-quate attention given to meeting the energy needs of the poor. The issue ofexpanding energy access to the poor has been relegated to the background inthe wave of World Bank and International Monetary Fund (IMF) inspired eco-nomic reforms that swept through the continent in the 1980s and 1990s. Theexamples of Kenya and Senegal presented in Figure 7 are illustrative of this expe-rience. The pace of providing electricity to the poor has assumed little or noimportance. Hence, there is an urgent need to sequence the reform process sothat consideration for expanding energy access to the poor progresses in tan-dem with other components of the reforms.

Furthermore, in the past, energy access was perceived as simply a techni-cal problem. This has limited the success rate of past initiatives in expandingenergy access. Energy access must not be addressed simply as technical and eco-nomic issues only. It is important to take a people-centered approach, by look-ing at how energy affects peoples’ lives directly. Hence, there is need for a par-ticipatory approach where the sensitivities of the people to cultural, social andeconomic factors are taken into consideration in the choice of technologies forenergy delivery.

Impact of reforms on the pace of electrification of the poor Figure 7

20 Percent

Pre-reforms Post-reforms0

15

5

10

KenyaSenegal


IX

Fourth, there is also the role of financial constraint. Most of the countries in theregion are very poor. Per capita income in the region is among the lowest in theworld. Worse still, many of the countries are quite small: therefore their capac-ity to provide electricity for their people beyond the capital city and a few othercities is very limited. This implies that regional coordination of energy policiesand programs to cover for financial, skills and technical gaps is imperative.

Fifth, the perceived high investment risk in Africa has limited the conti-nent’s ability to be a destination for private investment in the power sector. Thesecountries are seen as lacking strong contract enforcement legislation, have anundeveloped regulatory environment and have significant potential economic orpolitical weaknesses. The dispersed population in rural areas, with low spendingpower, does not present an interesting opportunity for international privateinvestors, but can represent a market for local investors and small local companieswhich understand the market and can provide cost-effective services (ITDG).

In addition, past energy access initiatives have also failed because of lackof proper coordination among the various ministries, government departmentsand agencies (MDAs). Energy access was seen as a singular preserve of the lineministry in charge of energy. Hence, there was little coordination between sec-tors. Inter-sectoral coordination of investment is of paramount importance ifthere is to be any real impact on poverty reduction and development. A signif-icant amount of past investment for energy infrastructures failed to deliverexpected results, because they were dissociated from investments for social, pro-ductive or domestic use; besides that, the potential services could not find mar-kets and therefore energy infrastructure viability was compromised.

Finally, the extant renewable energy resources available in the continenthave not been actively developed towards meeting the energy needs of the peo-ple. There are various barriers to the development of local and renewable energysources. These barriers include financial, shortage of local expertise, no localproduction of equipment and components. Others are institutional and regu-latory barriers including non-incentive fiscal framework.


4. Existing initiatives and opportunities

There are several initiatives currently at both global and continental levels toaddress the energy poverty problem of the subcontinent. Some of these initia-tives are highlighted in this section.

International initiatives to get energy to the poor Table 3A

UN Commission for Sustainable Development 9th Session

Acknowledged that access to sustainable energy services is an essential element of sustain-able development stating that: “To implement the goal accepted by the international com-munity to halve the proportion of people living on less than $1 per day by 2015, access toaffordable energy services is a prerequisite.”

G8 Renewable Energy Task Force

Commissioned by the G8 in 2000 to report on how the barriers to the expansion of renew-able energy can be overcome particularly in the south and how the G8 should support thedissemination of renewable energy for the world’s poor. It made significant policy recom-mendations on how to achieve access to renewable energy supplies for 800 million peoplein developing countries. Unfortunately the recommendations were not fully supported byall G8 members, but they do represent the views of a large group of recognized interna-tional experts in the field from governments, industry and NGOs.

UNDP and the World Energy Council

Have published the World Energy Assessment with recommendations about how the pro-vision of energy to poor people could be accelerated. In addition, a series of UNDP publi-cations, “Energy for Sustainable Development: A Policy Action Agenda” discusses criticalenergy policies, illustrated with concrete examples, necessary to address development objec-tives, including economic growth, equity and environmental protection.

The European Union Initiative on Energy for Sustainable Development

Aims to contribute to providing the access to energy necessary for the achievement of theMDGs. The EU proposes to work with developing countries towards creating the necessaryeconomic, social and institutional conditions in the energy sector to achieve their nationaldevelopment goals, in particular by providing and improving energy services for the “energypoor.”

The Department for International Development in the UK

Published its “Energy and the Poor” paper at The World Summit on Sustainable Develop-ment (WSSD). This emphasizes the important role of energy as an enabling factor forachieving the MDGs.


IX

Other bilateral agencies such as DANIDA (Denmark), USAID, DGIS (Netherlands), BMZ (Germany) and SIDA (Sweden)

These bilateral agencies are also actively involved in small-scale renewable energy activitiesfor poverty reduction as well as other energy-access programs.

National Governments

Developing countries are preparing Poverty Reduction Strategy Papers (PRSPs) as part ofconditions from International Development Agencies. These define countries’ commitmentto reducing poverty and make proposals for the actions needed to provide improved serv-ices in a number of sectors to achieve the MDGs. The first completed PRSPs show that whileonly 50 percent of the papers make a specific priority of the need for energy investment,energy will be an essential enabling factor in the achievement of the strategy for all othersectors and all MDGs .

The UN Conference on Finance for Development at Monterey, March 2002

Declared a financial commitment to fund the achievement of the MDGs, each of whichrequires investment in improved energy services, although the conditions attached to divest-ment of financial resources, particularly those from the US, raise questions about its value.Furthermore, the vast majority of industrialized countries fall far short of meeting the UNgoal of 0.7 percent of GNP for development aid contribution. Official development aid toAfrica has fallen by some 6 per cent each year since 1995.

Organization of Economic Co-operation and Development (OECD)

Issued a statement of intent to participate in a global effort to provide energy services tothose currently without access and to encourage the involvement of private finance. How-ever, the International Energy Agency observes that with current policies there will be littleimprovement in the availability of modern energy to those who currently lack access, par-ticularly in SSA and South Asia, where growth prospects are limited by affordability.

The World Bank’s new energy strategy

Proposes direct help to the poor by providing financial and technical assistance for: facili-tating access to modern fuels and electricity; supporting energy needed for social services(education, communications, health); improving the macro and fiscal balances by replacinginefficient application of public funds by more directed subsidies for the poor; encouragingprivate investment; improving regulation of the energy industry; and removing market barriersto renewables. For the areas of the world with the most acute problems of access to energyservices (Africa and South Asia), the World Bank will focus on demand-driven infrastruc-ture investments through such mechanisms as “Community-Driven Development” (COD)(currently $2 billion per year in all sectors), Social Investment Funds (SIF), reform and pri-vatization of transmission and distribution, and investment in rural energy and renewables.

Sources: ITDG, ECOWAS White Paper


African regional initiatives to get energy to the poor Table 3B

NEPAD

To meet the challenges facing African countries, NEPAD sets the objectives of increasing theAfrican population’s rate of access to energy from 10 percent to 35 percent over the next20 years. i.e. bring the number of people served from 60 million to 300 million (NEPAD,2001).

African energy ministers

At a meeting in New York, the African energy ministers committed to working together tofulfill the following aims over the next 10 years in order to enable Africa to achieve the MDGs:

• 50 percent of Africans living in rural (and peri-urban) areas and using traditional biomass to fuel their cooking will have access to improved stoves and kerosene or efficient cookers in order to cut internal pollution.

• 50 percent of the urban and peri-urban population must have access to a reliable modern energy service that enables them to meet basic needs such as lighting, communication, community and productive activities.

• 50 percent of schools, clinics and community centers in rural areas must have accessto a modern energy service to fuel lighting, refrigeration, information and communi-cation amenities, etc. The centers must also be equipped with productive energycapacities services (Africa and South Asia).

Common Energy Policy (CEP)

The CEP, which was adopted in 2001 is in conformity with UEMOA mandate before imple-mentation of the national sector reforms, which changed the relationships between energyactors and public authorities. The CEP plans to: implement an integrated energy planning system, promote renewable energies, speed up the interconnection of electricity grids in collaboration with and under the wing of ECOWAS.

The West African Power Pool (WAPP) system

In accordance with the May 1992 decision on the Community energy policy, whose aims areto harmonize Member States’ energy policies and increase collective energy autonomy,ECOWAS adopted, in December 1999, the principle of setting up a West African Power PoolSystem (WAPP). This stand led to the formulation of a master plan allowing for the develop-ment of energy production means and interconnecting electricity grids with a view to boost-ing Member States’ interconnection with the capacity and multiply it by four between 2005and 2020. The WAPP is to interconnect national grids across 5,600 km in most West Africancountries (Nigeria, Benin, Togo, Ghana, Côte d’Ivoire, Niger, Burkina Faso and Mali). Totalrequired investment in all infrastructures will amount to $11.8 billion over 19 years. The result-ant facility will equip the ECOWAS region with an installed capacity of some 17,000 MW,enough to satisfy estimated demand until 2023 (ECOWAS, 2005).

The West African Gas Pipeline (WAGP) project

No doubt this work takes advantage of the 18 billion m3 of natural gas that Nigeria currentlyflares. It stands as a complement to the WAPP regional strategy for the development of WAPPhydro-electricity. The 687 km pipeline, whose cost is estimated at $617 million, will serve tosupply thermal power stations in Benin, Ghana and Togo, and yield a capacity of 3,000 MW in


IX

20 years’ time. It will be built, run and be the property of the West African Gas Pipeline Com-pany (WAPCO), a public-private partnership with the following shareholders: Chevron TexacoWest African Gas Pipeline Limited (38.2 percent), Nigerian National Petroleum Corporation(26 percent), Shell Overseas Holding Limited (18.8 percent), Takoradi Power Company (17 per-cent); SOBEGAZ (Benin) and SOTOGAZ (Togo) are also to take shares in the consortium.

ECOWAS/UEMOA Energy Partnership Agreement

ECOWAS and UEMOA signed in August 2005 a collaboration agreement that covers wideareas including poor people’s access to energy. Activities provided for in the agreement relateto: WAPP; access to energy services in rural and peri-urban zones; cross-border oil and gaspipelines in West Africa; promotion of renewable energy sources; regional energy informationsystems; improvement of hydrocarbons supply; energy control; human and institutional capac-ity building; raising development partners’ awareness, and fundraising for energy projects.

The Regional Solar Program (RSP)

The objective here is to use modern energy services to provide the population with drinkingwater. It was launched in the late 1990s by the lnterstate Committee for Drought Control inthe Sahel (CILSS) and was backed by the European Union. The program aims at promoting theuse of photovoltaic (PV) solar power, particularly for water pumping, in order to meet theneeds of the main urban centers of the Sahel.

The Regional Program for the Promotion of Household and Alternative Energies in the Sahel (PRADES)

This program is implemented by CILSS and Sahelian Governments, with the support of theEuropean Union and the German Co operation Authority. Prades’ objective is to help Mem-ber States design, adopt and implement their Domestic Energy Strategy.

The Multi-Functional Platforms project (MFP)

Aims at bringing motive power to rural areas. The project was initiated in Mali in 1996 withthe backing of UNDP and UNIDO, and has since been extended to Senegal, Burkina Faso,Ghana, Nigeria and Guinea. Its goal is poverty reduction as a whole but specifically among ruralwomen, by allowing them to engage in income-generating opportunities through supply ofenergy services.

The Regional Biomass Energy Program (RBEP)

This is a program whose objectives are poverty reduction and environment protection. It isimplemented by UEMOA with the support of Dutch cooperation. The RBEP aims at helpingMember States conceive and implement projects and programs on modern uses of biomass.

Regional Center on Small Hydro Power for the African Region

A UNIDO initiative to promote the study and application of small hydro for electricity gen-eration in the sub-region.

Debt forgiveness initiatives

A number of heavily indebted poor countries in the subcontinent have benefited from debtforgiveness initiatives provided by the rich countries and international financial organizations.These hopefully provide a pool of resources that these countries can commit to povertyreduction and providing modern and efficient energy to the poor in these countries.

Sources: ITDG, ECOWAS White Paper


5. Expanding energy access: What role for public-private partnership (PPP)?

The initiatives listed in the previous section present some opportunities fordelivering modern energy to the poor. We also note the increasing interest ofthe private sector in energy investment in the developing countries. The totalannual global private investment in PPPs in developing countries between 1990and 2003 was about $97.7 billion (see Figure 8). This translates to an annualmean of $6.98 billion. However, due to a number of developments in the inter-national scene, most especially the Asian financial crisis, private investmentflow for power generation in developing countries declined from the height of $16 billion in 1996 to an average of $4 billion in 2003. This investment is con-centrated in generation and divestiture (privatization) in Latin America andEast Asia. Only a quarter of FDI in energy goes to South Asia and Africa, andeven then, the larger chunk of this goes to the oil and gas sub-sector.

Thus, for SSA to efficiently integrate into another wave of global privatefinance in the power sector of developing countries, it needs to make the con-tinent attractive to investors and reduce perceived high-investment risks in thecontinent. Fortunately, the reform programs in various countries in the sub-continent have started to address concerns of investors in this regard. The leg-islative and institutional environment in the continent has changed signifi-cantly in recent years.

Private investment in power generation in developing countries Figure 8

16,000 $ million

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20030

12,000

4,000

8,000


IX

5.1 Public-Private Partnerships – a definition

“A Public Private Partnership is an arrangement between a government entity(central or sub-national) and a private entity established for the purpose ofproviding an essential service facility to the public. The goal of this arrange-ment is to provide the service or facility more efficiently and at a lower cost tothe end user than either entity could provide the service on its own. Thearrangement will try to allocate the risks of the venture fairly between the pri-vate and government entities, based on each entity’s ability to manage theserisks and to provide rewards to each party based on the risks they haveassumed.” (Spicer, 2005)

There are different options open to SSA in adopting a framework for PPP.These options vary in terms of the level of government involvement in the pro-vision of the service. The particular option to be adopted will depend on a num-ber of factors that will influence the success of the PPP option.

• Technical assistance: In this case, the private sector provides lim-ited advice to the government on how to offer more efficientoperations. However, the relevant government agency continuesto provide the services.

• Management contract: Here, the private sector takes a moreactive role in the management of the agency providing the serv-ices. However, this type of PPP does not impose any new invest-ment on the private sector.

• Lease contract: Under lease contract, the private sector pays foruse of the system. However, the public sector pays the operationsfees.

• Concession contract: This is one of the most intensive PPP oper-ations. Usually, the private sector commits significant invest-ment into the project. The private sector then exercises a periodof ownership control. Ultimately the assets revert to the publicsector.

• Sale of assets: Public sector sells system ownership to private sector and retains regulatory authority.

One of the key issues in PPP is determining an appropriate framework forthe allocation of risks between the government and the private sector. Usually,the government assumes non-commercial risk, while the private sector takescare of the commercial risks. Table 4 shows the sources of resources and alloca-tion of risks under the various PPP options discussed above.


There are several benefits of PPP, which make it one of the important optionsto addressing the infrastructure shortages in developing countries. Multilateralagencies are also in support of the PPP and are willing to shore up its applica-tion in several infrastructure projects in developing countries. The justificationsand benefits of PPP are several. First, due to budgetary constraints and severalalternative calls on their limited resources, it is very clear that African countriesare unable by themselves to address the energy challenges that they face. Thisis even complicated by declining Official Development Assistance (ODA) inrecent years. Therefore, PPP provides an opportunity for the private sector tocomplement available public capital.

Second, PPP offers an incentive for the private sector to engage in infra-structure provision. Infrastructure by its nature is not an attractive option to theprivate sector due to the large capital requirements, long gestation periods andhow to recover the costs of their provision. Some of these problems are resolvedunder the PPP through fair allocation of risks between the government and theprivate sector. The government can assist also to address issues of resettlement,community disruptions and distrust, as well as land conflicts, among others.Off-take agreements also assure the private providers of sales of output.

Third, it is generally accepted that the private sector is more efficient inthe provision of services. The discipline of the market imposes production andtechnical efficiency on the private sector in the provision of goods and services.Hence, PPP provides an opportunity to harness the efficiency of the private

Sources of resources and allocation of risks Table 4under various PPP options

PPP Option Labor Capital Contract Output Investmentinvestment/ duration risk * risk **Financing

Service contract Private NA 1-2 years Public Public

Management contract Private Public 3-5 years Public Public

Operating lease to private sector Private Public 5-15 years Public Public

Concession (DBFO) Private Private 15-25 years Public Private

Concession (BOOT) Private Private 15-25 years Private Private

* Output risk: quality, minimum unit costs and secure availability ** Investment risk: competitive return on equity capital

Source: Feig and Finlayson, 2008


IX

sector. The issue of access by the poor to modern energy services can also beaddressed through tariff support for the poor. The government can pay the dif-ference between the cost recovery price and the price affordable to the poor sothat the private sector can continue to provide the service. A good example ofthis is the Pamir Energy case in Tajikistan. Here, aware that due to the extantpoverty of the people, it was going to be difficult for 80 percent of the popula-tion to afford tariff payment for electricity consumed, the government, with thesupport of the World Bank and the government of Switzerland, pays the private company, Pamir Energy, a lifeline tariff from a tariff fund if it deliverselectricity and it is paid by users. This is an example of output-based aid (OBA).

Types of government guarantees Table 5

Exclusivity

The government may agree to preclude competition within the concession for an agreedperiod of time that may extend to the full life of the concession given.

Construction cost guarantee

Government protects a private entity from potential cost overruns in the construction phaseof a project.

Revenue guarantee

Government sets a minimum variable income for the private operator, typically the incomederived from user fee payments by end-use customers.

Cash subsidy

Government agrees to provide the private concessionaire a total lump sum or fixed amountper new connection, and payments can be either in installments or paid all at once up front.

Payment guarantee

Government agrees to fulfill the obligations of a purchaser (typically an SOE) with respectto the private concessionaire in the case of non-performance by the purchaser, e.g. an off-take agreement.

Debt guarantee

Government agrees to secure the debt of the private concessionaire by guaranteeing repayments to creditors in the cases of a default.

Exchange rate guarantee

Government protects the private concessionaire from fluctuations in the value of the localcurrency.

Source: Operations Evaluation Dept of ADB and World Bank


Direct subsidy is not the only option open to government in managing PPP. Theprivate sector under the PPP arrangement often requires different types of guar-antees from the government to enable it to commit resources to the provisionof infrastructure services. Usually the nature of the guarantees is spelt out in theagreements between the government and the private sector. In the case of theelectricity sector, this is sometimes contained in the Power Purchase Agreement(PPA). Table 5 shows different types of government guarantees.

However, the government needs to develop the capacity to evaluate pro-posals from the private sector and determine the appropriate guarantee toextend to particular projects in the interests of the country.

5.2 Barriers to PPP in expanding energy access in the rural sector

However, it is important to realize that there are certain barriers that have doggedthe successful implementation of PPP in the rural electricity sector. These barri-ers include the continuous existence in some of these countries’ statute booksof old laws, policies and regulations that inhibit competition and an enablingenvironment for the market to flourish. In some cases, the private sector isbanned from taking part in some economic activities or at times the cost andtime of complying with the regulations become prohibitive. Second, govern-ment sometimes lacks the capacity to be able to fully engage the private sectorin the design and implementation of the PPP arrangement.

Another barrier has to do with appropriate pricing for the services pro-vided under the PPP. By the nature of some of these services (sometimes seenas public or merit goods), the government will want to encourage maximumaccess to them. However, given the level of poverty in most parts of SSA, it willbe difficult for full cost-recovery through pricing for these services. Hence, thegovernment may have to support the provision of the services through subsi-dies or budgetary allocation. A corollary of the above is the low effectivedemand for modern energy services in rural areas. This is complicated by yearsof habit to traditional methods that are perceived as “cheap and inexpensive,”thereby making transition to modern energy more difficult.

In addition, private-sector operators are usually unwilling to take someuninsured risks. Operating in Africa and in rural areas in particular poses challenges. Hence, investors are not generally disposed to taking those risks.Furthermore, the limited capacity and low depth of the domestic financial mar-ket also places a major constraint on the operation of private investment. Infra-structure in general is highly capital intensive, and is traditionally funded froma mix of equity and debt. However, banks are generally reluctant to provide


IX

lending for long-term, high-risk activities such as infrastructure provision. Thecapital market is either non-existent or too shallow to provide an alternativesource of funding for local entrepreneurs. Finally, there is limited experience oflocal entrepreneurs in the areas of decentralized off-grid solutions.

5.3 PPP intervention – critical success factors

The history of PPP intervention in SSA is still very recent. There are a numberof ongoing experimental projects in different parts of the subcontinent, withvarying levels of success. What then are the critical factors for successful PPPin the continent? In this section, we identify some of these factors. These

Examples of off-grid power plant technologies Table 6

Source: IEA (2002)

Technology Applications Pros Cons

Diesel engines - Water pumps - Mills - Refrigeration - Lighting and

communication

- Easy maintenance - Continuous energy

services (24 hours a day)

- Allows for income- generating activities

- High fuel costs - Noxious and CO2

emissions

Small biomass plants - Water pumps - Mills - Refrigeration - Lighting and

communication

- Allows for income-generating activities

- Base load operation, continuous operationpossible

- Noxious emissions

Mini-hydro - Mills - Lighting,

communication and other

- Long life, highreliability

- Allows forincome-generating activities

- Site-specific - Intermittent

water availability

Wind - Lighting and communication

- Mills - Pumps

- No fuel cost - Expensive batteries - Intermittent energy

services

PV/Solar - Basic lighting and electronic equipment

- No fuel cost - High capital costs - High cost of battery

replacement - Needs further R&D


include formulation of an appropriate regulatory framework that will protectprivate property and ease the bottlenecks for the private sector to operate. Thereis also the need for a government agency that is well equipped and has the capac-ity to coordinate electrification activities in the rural areas. For example, in Nige-ria, there is the Rural Electrification Agency (REA). The REA will then serve as thegovernment’s focal point to negotiate contractual agreements with the privatesector in all manners relating to rural electrification. The agency must be well-equipped and staffed to be able to effectively perform this function.

Solutions to electricity access in the rural and peri-urban areas will requirea combination of both grid and off-grid approaches. Grid extension to areasthat are far away from existing grid structure may take too long in coming or be

Possible IPP outcomes Table 7

COUNTRY OUTCOME: POSITIVE COUNTRY OUTCOME: NEGATIVE

Country attracts competitive Country IPP obligations excessive, and sustainable investments unnecessary or expensive

Contracts payments are made Contract payments are made as originally agreed as originally agreed

Examples: Examples:Thailand, Egypt, Brazil (Hydro IPPs) Turkey, Malaysia

Country wins, investors win Country loses, investors win

Country attracts investment Country IPP obligations are excessive,that produces electricity unnecessary or expensive

Private investors do not make Mismanagement deters a reasonable return on investment future investmentand quit the country

Private investors do not make a reasonable return on investment or project canceled

Examples: Examples:China India (Dahbol Power), Poland, Kenya

Country wins, investors lose Country loses, investors lose

Source: Adapted from Adegbulugbe, 2005

INV

EST

MEN

T O

UT

CO

ME

– PO

SIT

IVE

INV

EST

MEN

T O

UT

CO

ME

– N

EGAT

IVE


IX

very costly. Hence, options using various non-grid methods can be exploredbased on relative costs, technology and resource availability (see Table 6 for dif-ferent technology options for off-grid electricity).

Generally, to successfully attract foreign investment for the developmentof PPP on a sustainable basis, the outcome of partnership projects must be pos-itive for the investors and the country. On the investors’ side, they must enjoya reasonable return on their investment. For the country, the cost that the gov-ernment has to bear must not be excessive. Experiences of PPP development indeveloping countries show that not all projects result in this desirable win-winsituation. As shown in Table 7, the outcome of projects in the upper left-handcorner is successful for both the country and the investor (win-win situation).At the other extreme, the projects in the lower right corner resulted in a lose-lose situation for both the country and the investor.

Energy access is not an end in itself but a means to an end for economicdevelopment and poverty reduction. Therefore, an effective energy access pro-gram must be seen and implemented within a broader perspective in a coordi-nated manner. This calls for an integrated and bundled approach that includes:

• complementary infrastructure such as roads, communicationfacilities, and water supply;

• availability of income generation activities especially throughsmall-scale enterprises;

• access to market and credit; and

• promotion of private sector/community initiatives for energysupply.

Other essential factors include: development of local capital market andestablishment of specialized or guaranty funds for infrastructure develop-ment that can be easily accessed by private investors; design of appropriateincentive structures for private investors; continuation and deepening ofmacroeconomic reforms; increased funding of research and development andlocal production of electricity equipments and materials; and, training ofengineers and technicians in local communities that can repair and maintainrenewable energy infrastructure. African countries must continue on the pathof credible and sustained economic and political reforms in order to reduce“country risk” and other “investment risks” that constrain foreign capitalflow into the energy sector. DFID claims that “there is no lack of capital toinvest; the challenge is how to make it attractive for private investors to investin energy in developing countries.”


5.4 PPP: areas of intervention

There are a number of key areas where PPP can start to make an impact. Oneimportant area is in terms of a program to develop technology to improve bio-mass-based fuel in the subcontinent. Biomass will continue to play an impor-tant role in household energy use in SSA. The key, however, is to improve on thesustainable use of biomass in a way that cannot constitute a health hazard tousers. For example, distribution of improved stoves through PPP has been work-ing in some parts of Uganda and Kenya.

In most of SSA, energy prices are much higher in the rural areas or, attimes, modern energy products and services are not even available because ofpoor distribution systems. The distribution network of energy products discrim-inates against the people in the rural areas. Also, PPP efforts should be concen-trated in developing capacity for local production of electricity components.This is one of the key successes of the rural electrification program in China.

PPP can also focus on the area of developing pilot projects to test innova-tive institutional and financing options. Furthermore, SSA can benefit fromknowledge transfer from experiences available around the globe. Likewise, gov-ernments should invest in developing micro-credit systems that will empowerbeneficiaries of PPP projects in the rural areas to be able to afford them and thussustain the virtuous cycle of prosperity.

6. Conclusion

Clearly, PPP remains a critical option for addressing energy access problems inSSA. It provides an opportunity for the subcontinent to harness the comple-mentarity between the public and private sectors. Energy access is central to theachievements of the MDGs. In this paper, we have identified key elements thatare central to accelerating energy access for the vast number of poor people liv-ing in the rural and peri-urban areas of SSA.

The PPP remains one of the most innovative options that can be deployedto mobilize more resources for energy infrastructure development. Also, PPP hasseveral other benefits. It provides a means of mobilizing funds to develop thevast backlog of investment required in the energy sector, which governmentalone cannot finance due to fiscal constraints. It allows the private sector tooffer outputs in competitive markets and to introduce efficiency into the pro-vision and delivery of energy services. In addition, PPP contracts provide amechanism to ensure that risks are efficiently allocated between the public and


IX

private sectors. Also, there is a reasonable degree of certainty on the tariff mech-anisms and private sector return on investment.

Opportunities for PPP adoption in SSA energy sector exists. These includedeployment of Renewable Energy Technology (RET) such as solar, wind andmini-hydro. Others are local production of electricity components, develop-ment of an efficient modern distribution system, efficient billing and collect-ing systems, and development of more efficient biomass technology.

However, there are a number of critical success factors for PPP. These crit-ical factors are necessary in order to maximize the potentials of PPP in the sub-region. These factors include: a good regulatory framework that will minimize“regulatory risk” in the sub-region; promotion of capacity building in Researchand Development (R&D) and in the operation and maintenance of electricityequipment; enlightenment and education on the importance of renewableenergy; improved profitability of projects to attract private investment; a creditsupport system such as a low-interest fund; and, micro credit. In addition, com-munity participation very early in the project is critical.

Increasingly, many countries in the sub-region are realizing the potentialthat PPP arrangements hold to utilize the huge natural endowments extant inSSA to boost access of their citizens to modern energy. Political leaders mustexercise necessary political will to put in place legislative and regulatory poli-cies to ensure the success of PPP. There must also be a departure from the pre-vious strategy of simply seeing electricity provision as a social service. Rather,the focus should be a “bundled approach” where emphasis is on the provisionof electricity to generate income and boost the productivity of recipients. This,in the long run will guarantee the sustainability of the PPP model in SSA.


Bibliography

ADEGBULUGBE, A.O. (2005). Work Programs, mimeo.

ADENIKINJU, A.F. (2003). “Electric Infrastructure Failures in Nigeria: A Survey-based Analysisof the Costs and Adjustment Responses.” Energy Policy, vol. 31: 1519-30.

DAVIDSON O AND Y. SOKONA (2002). A Sustainable Energy Path for African Development –Think Bigger, Act Faster. EARc/ENDA Tiers, University of Cape Town, Cape Town.

FEIG, H AND B. FINLAYSON (2008). The Special Evaluation Study of ADB Assistance to PublicPrivate Partnerships in Infrastructural Development. Asian Development Bank, mimeo.

INTERNATIONAL ENERGY AGENCY (IEA) (2002). World Energy Outlook: Energy and Poverty.Paris: OECD.

KARAKEZI, S. AND L. MAJORO (2002). “Improving Modern Energy Services for Africa’sUrban Poor.” Energy Policy 30: 1015-28

LEE, K.S AND A. ANAS (1992). Impacts of Infrastructure Deficiencies on Nigerian Manufactur-ing: Private Alternatives and Policy Options. Infrastructure and Urban Development Depart-ment Report no. 98. World Bank, Infrastructure and Urban Development Department,Washington DC.

SPICER, M. (2005). “Public Private Partnerships: IFC Global Experience.” Paper presented inMoscow, February.

STEEL, W.F AND L.M. WEBSTER (1991). Small Enterprises Under Adjustment in Ghana. WorldBank Technical Paper no. 138, Washington DC.

UNITED STATES AGENCY FOR INTERNATIONAL DEVELOPMENT (USAID) (1988). Power Shortages in Developing Countries: Magnitude, Impacts, Solutions, and the Role of the PrivateSector. USAID Report to Congress. March.

WORLD BANK (2005) cited in WOODHOUSE, E.J. (2005). A Political Economy of InternationalInfrastructure Contracting: Lessons from the IPP Experience. Working Paper.


1. Introduction

Sub-Saharan African (SSA) economies, with the exception of South Africa,Botswana and Mauritius, are characterized by low income and energy consump-tion per capita among other human development indicators.1 This unsatisfac-tory condition despite the region’s substantial human and natural resources hasgenerated extensive discussions.2 A key question and the subject of muchresearch is why most SSA countries are poor, partly captured by low compara-tive income and energy indicators, when they should be rich? Paradoxically,low income and energy-poor Africa currently finds itself entangled in anothermajor global economic and energy development largely defined by higherenergy and food price trends.3 The coincidence of higher world energy and foodprices has significantly eroded the hard-earned economic and social gains ofrecent economic and social reforms in the region, and exacerbated its fragileeconomic and energy conditions. Eliminating the income and related energypoverty conditions has arguably posed enduring economic and political chal-lenges for SSA countries.

There is substantial evidence that expanded energy access, propelled byrelatively inexpensive energy supply, played a significant role in the large gainsin productivity and rapid economic growth and poverty reduction witnessed inthe world economy in the last century.3 However, the era of inexpensive energy

1 See UNDP (2006) World Bank (2006).

2 See Collier and Gunning (1999) and Easterly and Levine (1997) for more discussion on this issue.

3 For further discussion see Jorgensen (1984) and Toman and Jemelkova (2003).

XEnergy and Poverty in Sub-Saharan African Economies: Supply-side Issues

Akin Iwayemi


is gone, caused by oil market developments of the post-1970 period. In spite ofthis development, increased supply and use of energy services are still regardedas an integral part of the development process. In addition, a strong correlationbetween energy consumption per capita on the one hand and economic growthand living standards on the other used to be conventional wisdom.4 Thoughcorrelation does not imply causality, it is widely recognized that significantexpansion in supply and access to adequate and reliable energy services is fun-damental to the quest of SSA economies to achieve rapid and sustained eco-nomic growth, significant poverty (income) reduction, noticeable improve-ment in living standards and sustainable development, as embodied in the Mil-lennium Development Goals (MDGs). Successful and widespread adoption ofappropriate mechanized technologies that should underpin the significantincrease in productivity growth that small-scale industries and the informal sec-tor need to generate large output growth to minimize income and energypoverty, is contingent on expanded access to adequate and reliable energy sup-ply. Notably, small-scale industries and the informal sector activities providelivelihoods for the bulk of the population, and dynamic output and incomechanges in these sectors will positively impact poverty in the region.

The relatively fragile state of economic and social conditions in SSA, theworld’s poorest region that is just recovering from almost two decades of pooreconomic performance and deepening poverty, provides an important perspec-tive on the energy and poverty problem, the subject matter of this paper.Against this background, the marked and sustained rise in world market pricesof energy and food products and the need to fast-track sustainable humandevelopment in the region in the context of the MDGs, the debate on Africa’senergy and poverty situation is bound to intensify. The dramatic increases inworld energy market prices since 1999 have made Africa’s drive to achieveaffordable and expanded access to energy and sustainable development asembodied in the MDGs, more difficult. For example, higher energy prices havepushed refined petroleum products beyond the reach of hundreds of millionsof low-income households in the region. Consequently, this has constituted animportant obstacle to significant improvement in living standards and eco-nomic well-being of the people. In no other region of the world are the adverseeffects of higher world energy prices on domestic energy supply, access, eco-nomic growth and sustainable development, more severe. Given the lowhuman development indicators that characterize the SSA region, the adverseimpact of higher energy prices on economic growth, improved living standardsand economic well-being, is self-evident. Poor access to modern energy servicesconstitutes a major constraint to the exploitation of economic opportunities,


X

and consequently, sustained economic growth and achievement of higher liv-ing standards, in most African countries.

The weak, though steadily improving economic conditions in most SSAcountries in recent years, implies that the region has limited degrees of freedomin taking offsetting actions to mitigate the impact of higher energy prices. Inaddition, there are the additional challenges posed by the requirements of eco-nomic globalization for the poor in the region. Furthermore, SSA energy sup-ply-demand outlook and socio-economic overall development prospects pres-ent significant policy challenges, given the current low level of regional energyconsumption by global development standards. For most African countries,whose population is largely impoverished with limited access to adequate quan-tity and quality of modern energy services, the issue of increased supply andexpanded access assumes great urgency in the context of the MDGs.5 Againstthis background, the response of Africa’s development partners to the chal-lenges posed by the region’s low development and energy indicators is impor-tant in achieving a marked reduction in poverty and a noticeable increase in thewell-being of the poor who constitute the majority of the population. Clearly,the New Partnership for Africa’s Development’s (NEPAD’s) key objectives ofrapid and sustainable growth and development and the elimination of extremepoverty in Africa, will remain a mirage until the problem of energy access issolved. The nature and content of the responses to these policy challenges willlargely shape the energy and economic future of Africa.

Accordingly, the current poor energy and income conditions in SSA raiseseveral questions regarding Africa’s quest for achieving expanded access toaffordable energy. Among these are: What do we know and what have we learntabout the patterns, trends and characteristics of energy supply and demand inSSA? Can Africa achieve the objective of expanded energy supply and accesselimination of duality in the energy economy, which should drive its sustain-able energy and development future? How can supply capacity be increased inthe context of sustainable energy and human development future? What arethe technical, financial and manpower challenges to a reliable and adequateenergy supply to meet Africa’s energy needs for economic growth and develop-ment? What are the policy and institutional requirements for overcoming thepersistent energy and income poverty and the establishment of efficient andsustainable energy supply?

4 However, after a threshold e.g. advanced level of economic development the correlation weakens asenergy use per unit of output declines over time.

5 The importance of energy in achieving MDG is UNDP (2005).


This paper seeks to illuminate some of the issues embodied in these questionsalbeit in a generalized manner given its limited scope. Primarily the paper willhighlight the key supply-side issues in the design and implementation of coher-ent policy reforms and programs for a viable energy industry. The SSA remainsone of the regions whose energy problems have been grossly under-researched.In addressing this research gap, this paper proceeds as follows. First, is a briefreview of the energy, economic and social context of the problem with focus onappraising the energy and economic growth and poverty trends, patterns andcharacteristics in Africa. This is followed by a brief discussion of some of the keyissues, challenges and constraints to expanded supply in the region’s quest forsustainable exploitation and utilization of SSA’s energy resources for economicdevelopment. Situating Africa’s non-renewable and renewable energy exploita-tion in the context of sustainable energy future and the MDGs, is particularlyimportant for a better and more precise appreciation of the challenges that con-front policy makers, sector operators and other stakeholders. Finally, the paperdiscusses an action plan for achieving expanded energy supply. The degree ofsuccess of the strategies adopted will determine the extent to which Africa willshare in the gains from increasing material prosperity associated with global-ization, and more importantly, achieve the MDGs.

2. Background to the problem

The discussion in this section will highlight SSA’s energy (with focus on oil andgas) dependence and vulnerabilities in the context of its economic and socialconditions. In addition, it seeks to provide a framework for a better appreciationand understanding of the magnitude and complexity of Africa’s energy prob-lems in the context of the MDGs.

2.1 The nature and character of Africa’s energy and development problems

The socio-economic context of the problem is highlighted in Table 1. The poordevelopment indicators such as per capita income, life expectancy, and mortal-ity rate evident in the data, is compelling. This is the context of SSA’s compar-ative energy poverty, which is the subject of the following discussion.

Aggregate primary energy consumption in Africa in 1965 was 58.7 mil-lion metric tons of oil equivalent (Mtoe). This grew at an average annual rate of4.7 percent to reach 73.7 Mtoe in 1970. By 1980, energy consumption hadalmost doubled to reach 141.5 Mtoe, representing an annual growth rate of


X

almost 8 percent. In the 1990s, consumption of commercial energy deceleratedto 2.5 percent. In 2003 and 2004, growth of over 4 percent was experienced.However, this was followed in 2005 by a sharp decline in growth to 1.5 percent.In comparison, the increase in primary energy consumption in China was animpressive 16.2 percent and 15.9 percent in 2003 and 2004, respectively. Therewas a slowdown in China’s energy consumption to 9.2 percent in 2005. Eventhen, this was about six times more than the increase in the African region. Theglobal consumption growth of 3.1 percent between 2000 and 2005 was pro-pelled by China’s consumption growth of 10.8 percent. Africa’s energy con-sumption grew at the global rate while that for Asia was 6.6 percent. In the Euro-pean Union (EU) and Organization for Economic Co-operation and Develop-ment (OECD) there was a marginal consumption growth of 1 percent.

It is conventional wisdom that expanded access to commercial energy isa fundamental factor in achieving sustainable development in any country. Thecontrasting pattern in energy-economy relationships between African coun-tries and other countries is illustrated in Table 2, which shows data on energyper capita and income per capita for selected developed and developing coun-tries. It is evident that African countries feature mostly at the lower end of theladder. They are characterized by low energy and low income per capita. Thelow energy consumption-economy relationship in African countries by globaldevelopment standards, reveals some dimensions of the scope of the quantumincrease in oil and gas consumption per capita required to catch-up with thenewly industrializing economies of Asia and Latin America. Achieving vastlyimproved access to modern energy services on a sustainable basis in the shortto medium term, is fundamental to sustained and rapid growth in income anda marked increase in the well-being of the population.


Key socio-economic development indicators in Africa Table 1

Population Land GNI per Growth Life MortalityCountries 2004 area capita rate expectancy rate

’000 km2 $ Annual At birth Under 52004 average years per 1,000

Oil and gas exporting countries

Angola 15.5 1,247 930 4.6 41 260.0

Algeria 32.4 995 1,250 71 40.0

Cameroon 16.0 465 810 2.7 46 149.4

Cape Verde 0.5 4 1,720 40.0 70 36.4

Chad 9.4 1,259 250 3.6 44 200.0

Congo, Dem. Rep. 55.9 2,267 110 0 44 205.0

Congo, Rep. 3.9 342 760 -0.5 52 108.0

Côte d'lvoire 17.9 318 760 -2.4 46 193.6

Egypt, Arab Rep. 72.6 995 1,250 0 70 36.0

Equatorial Guinea 0.5 28 - 0 43 204.0

Gabon 1.4 258 4,080 0.3 54 91.0

Libya 5.7 1,760 4,400 0 74 20.0

Nigeria 128.7 911 430 2.7 44 196.6

São Tomé and Príncipe 0.2 1 390 2.3 63 118.0

Sudan 35.5 17 1,660 -0.7 57 91.4

Oil and gas importing countries

Benin 8.2 567 4,360 5.7 55 152

Botswana 1.8 274 350 0.3 35 116

Burkina Faso 12.8 26 90 0 48 192

Burundi 7.3 465 810 2.7 44 190

Central African Republic 4.0 623 310 0.3 39 193

Comoros 0.6 2 560 -0.1 63 70

Djibouti 0.8 23 - 0 53 125.6

Eritrea 4.2 1,000 110 1.3 54 82

Ethiopia 70.0 258 4,080 0.3 42 166.4

Gambia 1.5 10 280 0.8 56 122

Ghana 21.7 228 380 2.4 57 112


X

Table 1

Population Land GNI per Growth Life MortalityCountries 2004 area capita rate expectancy rate

’000 km2 $ Annual At birth Under 52004 average years per 1,000

Guinea 9.2 246 160 1 54 155

Guinea Bissau 1.5 28 160 3.8 45 203.0

Kenya 33.5 569 480 0.3 48 119.5

Lesotho 1.8 30 730 1.9 36 112.2

Liberia 3.2 96 120 -2.8 42 235.0

Madagascar 18.1 582 290 -1.5 56 122.6

Malawi 12.6 94 160 -0.3 40 175.2

Mali 13.1 1,220 330 2.3 48 219.0

Mauritania 3.0 1,025 530 4.0 53 125.0

Mauritius 1.2 2 4,640 2.9 73 15.2

Morocco 29.8 446 1,570 3.0 70 43.0

Mozambique 19.4 784 270 6.2 42 151.6

Namibia 2.0 823 2,380 3.2 47 63.4

Rwanda 8.9 25 210 0.3 44 203.0

Senegal 11.4 193 630 1.6 56 136.6

Seychelles 0.1 0 8,190 -2.3 - 13.5

Sierra Leone 5.3 72 210 5.3 41 282.8

Somalia 8.0 627 - 0 47 67.0

South Africa 45.5 1,214 3,630 2.2 45 67.0

Swaziland 1.1 17 1,660 -0.7 42 126.0

Tanzania 37.6 884 320 4.6 46 126.0

Togo 6.0 54 310 -0.7 55 139.6

Tunisia 9.9 155 2,650 3.4 73 25.0

Uganda 27.8 197 250 1.8 49 137.8

Zambia 11.5 743 400 0.3 49 137.8

Zimbabwe 12.9 6,736 1,784 0 37 129.0

Sub-Saharan Africa 726.4 23,619 600 2.0 46 168.2

North Africa 160.5 2,382 2,270 3.0 71 32.8

All Africa 876.9 29,358 803 1.9 50 137.6

Source: World Bank African Development Indicators 2005


Per capita energy and income for selected developed Table 2and African countries

Per capita gross Per capitanational income energy

Country 2005 2004

Per capita gross Per capitanational income energy

Country 2005 2004

Norway 59,590 424.0

United States 43,740 342.7

Sweden 41,060 257.9

Japan 38,980 177.7

United Kingdom 37,600 166.5

Netherlands 36,620 251.4

France 34,810 186.1

Germany 34,580 178.3

Italy 30,010 142.3

Hong Kong 27,670 159.1

Singapore 27,490 444.6

Kuwait 24,040 470.0

United Arab Emirates 23,770 925.4

Korea, South 15,830 185.5

Saudi Arabia 11,700 236.5

Seychelles 8,290 147.7

Libya 5,530 133.0

Mauritius 5,260 45.0

Botswana 5,180 32.6

Gabon 5,010 29.4

South Africa 4,960 115.2

Malaysia 4,960 107.1

Namibia 2,990 27.5

Tunisia 2,890 33.4

Algeria 2,730 38.6

Swaziland 2,280 18.2

Cape Verde 1,870 5.5

China 1,740 45.9

Morocco 1,730 13.8

Angola 1,350 12.2

Indonesia 1,280 19.7

Egypt 1,250 33.1

Djibouti 1,020 55.8

Cameroon 1,010 5.2

Lesotho 960 2.7

Congo Rep. 950 4.9

Côte d'Ivoire 840 6.5

India 720 14.5

Senegal 710 5.8

Sudan 640 3.8

Comoros 640 2.3

Mauritania 560 16.9

Nigeria 560 8.1

Kenya 530 5.3

Benin 510 4.0

Zambia 490 11.1

Ghana 450 6.6

Burkina Faso 400 1.4

Chad 400 0.3

São Tomé and Príncipe 390 8.1

Mali 380 1.0

Guinea 370 2.4

Togo 350 6.5

Central African Republic 350 1.4

Zimbabwe 340 16.9

Tanzania 340 2.0

Mozambique 310 7.3

Gambia, The 290 2.6

Madagascar 290 2.1

Uganda 280 1.5

Niger 240 1.4

Rwanda 230 1.5

Eritrea 220 2.5

Sierra Leone 220 2.5

Guinea-Bissau 180 3.8

Malawi 160 2.0

Ethiopia 160 1.2

Liberia 130 2.6

Congo (Kinshasa) 120 1.5

Burundi 100 1.0

Source: Energy Information Administration for Energy: and World Bank, World Development Indicators for income


X

2.2 African oil production and consumption in global perspective

The trends in African oil production and consumption in comparative perspec-tive are shown in Figure 1 and Figure 2. The generally upward trend in Africa’sshare in global production is shown in the graph. Oil consumption in Africa was531 thousand barrels per day in 1965 compared to 3.25 million barrels per dayin Asia, almost 12 million barrels per day in Europe and 13 million barrels perday in North America. Oil consumption tripled to 1.7 million barrels per day in1985. By 2005, consumption level was about 2.8 million barrels per day. Oil con-sumption in North America was nine times that of Africa in 2005. Africa’s share

Africa’s share in world oil production 1965–2005 Figure 1

Percent share

6

7

8

9

10

11

12

13

14

Source: BP Statistical Review of World Energy 2006

1965 1970 1975 1980 1985 1990 1995 2000 2005

Africa’s share in world oil consumption 1965–2005 Figure 2

3,0

2,5

2,0

1,5

3,5


1965 1970 1975 1980 1985 1990 1995 2000 2005

Percent share


of global consumption in 2005 was only 3.4 percent compared to a productionshare of about 12 percent. Africa’s share in global production has been between10 percent and 12 percent. This compares disappointingly with 3 percent ofglobal oil consumption in the past decade. In fact, prior to the 1990s, the shareof Africa in the world oil consumption was less than 3 percent.

Most African countries are net energy importers. For most of them, thesharp increase in the cost of energy imports, coupled with the increasinglyscarce sources of traditional energy due to rapid depletion, have created whatcan be called a double energy squeeze. The severe impact has eroded some of thegains in economic reforms in recent years and exerted strong pressure onmacroeconomic stability and economic growth.

2.3 African gas in global perspectives

Total gas production in Africa in 2005 was 163 billion cubic meters, 43 percentmore than the production level in 1990. Africa’s role in global gas supply hasbecome more significant in recent years. Africa’s gas producers have not grownin size and number as in the case of oil because of the more expensive nature ofgas investment through pipeline or liquefaction and shipping through LNG.There is substantial regional disparity in geographical distribution of the pro-duction driven by location of reserves. West Africa (Nigeria) dominates SSA’s gasproduction.

Total gas consumption in Africa in 2005 was 6.9 billion cubic meters, 86 percent more than the consumption level in 1990. Natural gas consumptionis low in Africa and the region’s role in global gas consumption is minimal. How-ever, there are good prospects for increased regional consumption of gas as illus-trated by the West African Gas Pipeline project (WAGP). The expensive natureof investment in domestic and regional gas infrastructure through pipeline is themajor constraint on more significant gas consumption. More gas to power proj-ects is the key to greater use of gas in the African region. There is wide regionaldisparity in geographical distribution of gas consumption because demand islargely driven by gas infrastructure and location of reserves in Africa.

2.4 Electricity consumption

Electricity consumption and production data reveal another dimension of SSA’senergy conditions. Tables 3 and 4 present useful information to highlight thelow level of energy consumption in SSA. The low level of electricity consump-tion per capita is an indicator of energy poverty in the region.


X

Electric power consumption (kWh per capita) Table 3in African countries 1970–2001

Country 1970 1980 1990 2000 2001

Algeria 115.25 288.41 492.53 637.72 662.16

Angola 91.02 64.87 64.65 100.96 108.60

Benin 11.56 34.29 38.90 68.12 76.01

Cameroon 149.91 195.65 194.31 170.34 160.88

Congo, Dem. Rep. 172.35 127.69 58.14 46.57 43.16

Congo, Rep. 53.52 51.03 150.54 75.15 82.32

Egypt, Arab Rep. 204.71 414.32 707.05 1,024.15 1,072.51

Ethiopia 17.84 17.00 17.66 22.03 25.32

Gabon 167.78 750.34 789.78 790.45 804.31

Ghana 307.67 403.43 303.02 340.72 297.21

Kenya 65.96 96.36 117.47 116.77 120.31

Libya 164.37 1,058.29 1,703.71 2,300.01 2,250.27

Morocco 121.29 233.00 355.41 461.16 475.19

Mozambique 47.17 33.49 48.34 266.06 341.19

Nigeria 28.99 47.73 83.77 69.49 68.17

Senegal 69.65 99.71 98.45 132.68 135.11

South Africa 2,062.04 3,288.59 3,618.20 3,774.51 3,860.14

Sudan 23.67 31.60 48.87 67.00 74.17

Tanzania 30.05 37.75 54.38 58.49 62.14

Tunisia 145.54 398.46 617.32 992.81 1,018.91

Zambia 1,015.84 1,053.52 730.50 537.04 583.05

Zimbabwe 662.29 965.16 789.86 809.97 831.40

NOT AVAILABLE: Botswana, Burkina Faso, Burundi, Cape Verde, Central African Republic, Chad, Comoros, Côte d'Ivoire, Djibouti,Equatorial Guinea, Eritrea, The Gambia, Guinea, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius,Namibia, Niger, Rwanda, São Tomé and Príncipe, Seychelles, Sierra Leone, Somalia, Swaziland, Togo, UgandaSource: World Bank WDI


Electric power transmission and distribution losses Table 4(percent of output) in African countries 1970–2001

Country 1970 1980 1990 2000 2001

Algeria 10.7 11.7 15.1 16.3 15.7

Angola 25.1 25.0 28.6 14.5 14.5

Cameroon 5.2 7.6 13.9 25.7 23.1

Congo, Dem. Rep. 5.1 12.7 13.7 3.8 3.5

Congo, Rep. 4.5 31.0 18.8 65.3 69.5

Egypt, Arab Rep. 9.8 12.9 10.1 13.4 13.4

Ethiopia 6.9 5.4 10.0 10.0 10.0

Gabon 1.8 0.8 10.2 17.8 17.8

Ghana 6.1 4.7 8.6 14.7 24.0

Kenya 17.9 14.6 15.7 21.3 21.0

Libya 33.1 35.0 28.4 20.1 20.1

Morocco 10.6 11.1 5.0 6.4 6.5

Mozambique 29.7 78.4 6.4 3.0 8.3

Nigeria 13.2 49.3 37.6 38.7 37.8

Senegal 6.1 9.5 13.9 17.3 7.4

South Africa 7.1 7.1 6.5 7.7 7.8

Sudan 24.6 20.1 23.9 15.3 15.3

Tanzania 13.6 12.1 21.6 25.0 23.5

Tunisia 13.3 12.6 10.4 11.1 10.6

Zambia 19.3 5.5 3.7 2.9 2.9

Zimbabwe 6.1 10.3 7.1 21.3 21.4

NOT AVAILABLE: Benin, Botswana, Burkina Faso, Burundi, Cape Verde, Central African Republic, Chad, Comoros, Côte d’Ivoire, Djibouti, Equatorial Guinea, Eritrea, The Gambia, Guinea, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Namibia, Niger, Rwanda, São Tomé and Príncipe, Seychelles, Sierra Leone, Somalia, Swaziland, Togo, Uganda Source: World Bank WDI


X

2.5 Dimensions of the energy problem in Africa: duality in the energy economy

Energy access is widely recognized as a key factor in achieving sustainablehuman development and significant improvement in human well-being acrossthe globe. Historically, this was the case for the developed countries duringtheir growing process. In the following discussion, we shall use access to elec-tricity to illustrate the scope of Africa’s energy access problem. The relativelylow level is clear when compared to other parts of the world. Even SSA countrieswith a relatively high level of economic development also consume more elec-tricity per capita.

Most African countries exhibit poor access to electricity. Access is lessthan 25 percent for the total population for the period 2000 to 2004. However,the countries in the North Africa region have a very high access rate. In fact,these countries have almost full access in both urban and rural areas. The prob-lem of access is more acute in rural areas in the other parts of Africa as shownin Figure 3. Yet, the majority of the population live in the rural areas and theproblem of poverty is often more acute in the rural areas. Notably, wide accessto electricity is fundamental to sustainable development and poverty reductionin the region.

2.6 Energy import dependence in African countries

The degree of energy import dependence in African economies in recent yearsis shown in Table 5. Although the ratio of oil imports to total imports rangesfrom less than 1 percent in a few countries, to over 25 percent in several othercountries, the information reveals a substantial dependence on oil imports inmany countries.

Table 6 shows African countries in terms of their share in oil importedinto the region. Although most African countries are net oil importers, SouthAfrica is the leading oil importer in the region. It accounts for almost one inevery four barrels of oil imported in the region. South Africa’s level of economicdevelopment is a major factor in this occurrence.

2.7 Biomass energy use in SSA

The final indicator of energy poverty is the share of biomass energy in relationto total energy consumption in the region. It is the highest in the world. Thereis a strong correlation between the level of economic development and theshare of biomass in energy production and demand.


Source: World Bank: African Development Indicator 2006

Access to electricity in selected countries in Africa Figure 3

1) TOTAL POPULATION

Algeria

Angola

Benin

Botswana

Burkina Faso

Burundi

Cameroon

Central African Republic

Chad

Comoros

Congo, Dem. Rep.

Congo, Rep.

Côte d’Ivoire

Egypt

Eritrea

Ethiopia

Gabon

Gambia, The

Ghana

Guinea

Guinea-Bissau

Kenya

Lesotho

Libya

Madagascar

Malawi

Mali

Mauritania

Mauritius

Morocco

Mozambique

Niger

Nigeria

Rwanda

Senegal

Sierra Leone

South Africa

Sudan

Swaziland

Tanzania

Togo

Tunisia

Uganda

Zambia

Zimbabwe

2) URBAN RURAL

0Percent 20 40 60 80 100 0 20 40 60 80 100


X

Energy imports (percentage of commercial energy use) Table 5in African countries 1970–2001

Country 1970 1980 1990 2000 2001

Algeria -1,034.7 -415.8 -326.1 -390.9 -387.2

Angola -132.1 -118.4 -370.9 -413.5 -484.8

Benin 9.7 -6.7 -5.9 29.1 30.7

Cameroon 10.9 -107.5 -127.2 -93.7 -82.7

Congo, Dem. Rep. 12.4 0.7 -0.6 -5.4 -4.8

Congo, Rep. 25.6 -448.7 -736.2 -1,294.7 -1,330.0

Côte d’Ivoire 34.4 22.1 23.9 5.6 0.4

Egypt, Arab Rep. -108.8 -103.4 -71.0 -17.9 -14.1

Ethiopia 5.8 5.3 6.4 7.4 7.5

Gabon -498.1 -433.0 -1,151.5 -788.4 -698.1

Ghana 23.1 20.4 15.8 26.7 28.4

Kenya 17.3 18.6 16.7 18.4 16.0

Libya -8,184.0 -728.7 -492.2 -297.1 -271.7

Morocco 74.6 82.9 88.1 94.5 94.5

Mozambique 9.3 5.8 4.6 1.7 0.0

Namibia - - 66.6 74.6 74.7

Nigeria -208.4 -115.0 -111.1 -126.2 -101.4

Senegal 38.6 42.9 37.5 44.2 43.4

South Africa 16.7 -12.3 -22.6 -31.7 -29.1

Sudan 18.5 15.1 15.9 -56.7 -57.8

Tanzania 9.7 8.9 7.4 6.6 7.3

Togo 18.1 19.0 20.3 27.9 29.8

Tunisia -140.4 -76.1 -24.3 16.4 16.1

Zambia 21.4 10.0 8.9 4.0 4.9

Zimbabwe 6.9 14.7 10.2 13.7 13.2

NOT AVAILABLE: Botswana, Burkina Faso, Burundi, Cape Verde, Central African Republic, Chad, Comoros, Djibouti, Equatorial Guinea,Eritrea, The Gambia, Guinea, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Niger, Rwanda, São Toméand Príncipe, Seychelles, Sierra Leone, Somalia, Swaziland, UgandaSource: World Bank World Development Indicators 2005


Share of fuel in merchandise imports 2000–04 Table 6

Benin 17.4

Botswana 6.5

Burkina Faso 24.4

Burundi 16.5

Cameroon 17.8

Cape Verde 13.1

Central African Republic 11.0

Comoros 4.1

Côte d'Ivoire 17.1

Ethiopia 12.0

Gabon 3.2

Gambia 10.6

Ghana 1.6

Guinea 21.7

Kenya 24.3

Madagascar 23.3

Malawi 2.7

Mali 21.9

Mauritius 13.2

Mozambique 11.7

Namibia 10.4

Niger 16.9

Nigeria 16.0

Rwanda 15.6

Senegal 18.3

Seychelles 26.3

Sierra Leone 39.7

South Africa 14.5

Sudan 3.1

Swaziland 12.6

Tanzania 16.5

Togo 23.0

Uganda 10.0

Zambia 11.2

Zimbabwe 13.7

Algeria 0.9

Egypt 8.3

Libya 0.7

Morocco 16.7

Tunisia 10.3

NOT AVAILABLE: Angola, Chad, Congo, Dem Rep., Congo Rep., Djibouti, Equatorial Guinea, Eritrea, Guinea Bissau, Lesotho, Liberia,Mauritania, São Tomé and PríncipeSource: World Bank: African Development Indicator 2006

The current energy situation illustrates the dimension of Africa’s effort requiredto achieve widespread access to adequate and reliable commercial energy ataffordable prices for the millions of its low-income people. Without vastlyimproved access to affordable energy services, of which oil and gas constitutethe dominant input, sustainable development and improved living standardsin the Africa region would be difficult to achieve.


X

Biomass energy consumption (percent of total energy) Table 7in African countries for selected years 1970–2001

Country 1970 1980 1990 2000 2001

Algeria 0.2 0.1 0.1 0.3 0.2

Angola 81.2 77.6 69.5 68.4 67.8

Benin 90.3 90.6 94.1 70.9 69.3

Cameroon 85.8 78.3 77.3 78.8 79.2

Congo, Dem. Rep. 82.2 82.7 85.0 93.5 93.6

Congo, Rep. 71.1 67.8 69.5 61.6 67.3

Côte d’Ivoire 65.1 63.1 72.4 65.8 66.0

Egypt, Arab Rep. 8.3 4.5 3.5 2.7 2.6

Ethiopia 93.9 94.4 93.1 91.7 91.7

Gabon 45.0 38.6 60.5 60.6 61.9

Ghana 68.7 68.8 74.6 66.3 66.4

Kenya 82.3 80.2 79.4 77.6 80.1

Libya 5.8 1.6 0.9 0.8 0.8

Morocco 5.2 5.1 5.4 4.1 4.2

Mozambique 88.1 91.7 94.7 88.3 86.1

Namibia - - 16.0 15.2 15.2

Nigeria 93.9 79.9 78.2 79.8 79.1

Senegal 61.4 57.1 62.2 55.8 56.6

South Africa 10.4 9.7 11.1 11.5 11.2

Sudan 81.2 84.3 83.3 83.6 79.8

Tanzania 90.0 90.3 91.1 91.5 90.7

Togo 81.8 80.8 79.7 72.1 70.2

Tunisia 33.0 21.7 19.5 15.2 15.3

Zambia 64.1 66.0 73.7 81.9 81.3

Zimbabwe 55.7 56.3 48.0 57.4 59.0

NOT AVAILABLE: Botswana, Burkina Faso, Burundi, Cape Verde, Central African Republic, Chad, Comoros, Djibouti, Equatorial Guinea,Eritrea, The Gambia, Guinea, Guinea-Bissau, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Niger, Rwanda, São Toméand Príncipe, Seychelles, Sierra Leone, Somalia, Swaziland, UgandaSource: World Bank, WDI 2005


3. Sustainable energy and development future in Africa: supply-side issues

The considerable interest in the provision of adequate, reliable and efficientenergy infrastructure services derives from its essential role in achieving rapideconomic growth and sustainable development. Arguably, the lack of ade-quate growth-promoting energy infrastructure systems is one of the majorfactors explaining the elusive quest for sustained economic growth and pros-perity in SSA.

3.1 Policy issues and challenges

Figure 4 provides an overview of the interlocking nature and complexity of theissues associated with energy supply in SSA. For the purpose of this discussion,we shall categorize the issues and challenges into three sets. Set A denotes com-plex energy issues that need specialized analysis by experts. Widely acceptablesolutions can be found for such issues. Set B encompasses difficult issues wherethere is wide divergence of objectives and premises on which decisions aremade. Set C consists of politically controversial issues. The intersection of SetsA, B and C yields the subset labelled VII, which indicates the complex, difficultand controversial nature of the interaction between politics, economics, law,environment and engineering. These factors are associated with tackling SSA’ssustainable energy and development questions.

Interlocking issues in sustainable energy supply in SSA Figure 4

I

VI

VII

II III

IV V

Set AComplex issues

Set BDifficult issues

Set CPolitically controversialissues


X

The scope of the investment problem and enormity of the policy challengesassociated with electricity crisis have provided three stylized facts: the currentlow level of electricity and energy consumption per capita by global develop-ment standards; the dismal state of socio-economic conditions in an economyjust recovering from almost two decades of poor performance and deepeningpoverty; and the low human development indicators. Clearly, anything shortof energy poverty elimination, given that wider access to regular and reliableelectricity is a key element of this strategy, would be unacceptable. The invest-ment and capacity expansion needed to achieve energy poverty elimination islarge. Coping with SSA’s future energy supply challenges involves complex eco-nomic, political, technological, institutional and environmental factors. Thiswould involve the interactions of the four principal actors that are active in theenergy markets, namely, consumers, producers, investors and the government.But, the scope of this paper limits our discussion to supply issues.

One of the basic factors in securing the electricity future is the energy mixover the next decades. Table 8 provides some estimates of fossil fuel reserves.There are also significant alternative renewable energy resources, consisting oflarge and small-scale hydro, solar, wind, geothermal and biofuel potentials. Theabundance of primary energy resources compared to the energy needs of theeconomy and society is incontrovertible. While both energy resources will beused in the future, the continued dominance of fossil fuels supplemented byhydroelectricity is envisaged for the foreseeable future. Coal, hydro, solar, biomass, wind and nuclear energy technologies are alternative electricity gen-eration options under consideration.

However, developing and deploying cleaner energy should be part of themedium-term investment strategy. The focus, however, should be to progres-sively adopt cleaner fossil fuels and with increasing focus on renewable energysources, to meet rural electricity demand. Of interest is the intention of some

Energy resources in Africa Table 8

Type of energy Reserves estimates

Crude oil 117.20 billion barrels

Natural gas 14.08 trillion cubic meters

Coal 50.34 billion metric tons



countries in the region to achieve 10 percent of electricity supply to be derivedfrom renewable resources by 2025. Coal and nuclear energy are also on theoptions list.

We shall now discuss some of the emerging issues in the design of a strat-egy to propel SSA to a new energy level in the search for eliminating energy andincome poverty.

First the shift to a new institutional arrangement, where much of mod-ern energy services would be driven by the private sector, is apparent in recentreforms. Public provision of electricity service has been an abysmal failure inSSA as evident from the earlier discussion. So, what should be done given theresource endowment, the political, economic, technological, environmentalconstraints in the region? Two Economic Commission of West African States(ECOWAS) initiatives, the West African Power Pool (WAPP) and West AfricanGas Pipeline (WAGP) and the South African Power Pool (SAPP) suggest new andattractive investment and supply directions in the region. However, meeting thechallenges of providing an adequate, reliable and widely accessible energy serv-ice involves more than summing up numbers (the megawatts, barrels, cubicmeters and investment figures) and getting other technical issues right.

Second, the investment challenge has several dimensions, namely, size,source, plant mix, security of investment and input supply. Others are humanresource requirements, investor/producer incentives, for example, electricitytariff level and structure, regulatory framework and macroeconomic environ-ment. The current level of demand underestimates the true level of interrup-tions given the high level of suppressed electricity demand. The estimation ofpotential level and growth in demand must incorporate these factors for greaterforecasting accuracy. Based on these factors and the current decay in the energysystem grid, the numbers look staggering by historical standard. For example,generating capacity approaching 6,000 GW may be required by 2030 to elimi-nate current electricity poverty and raise electricity per capita from the currentextremely low level. The investment challenge must be appropriately situatedin the context of a constrained multi-objective incentive compatible withregional optimization problems.

The mobilization of the financial resources to support transforming thesenatural resources to “energize” the economy on its path of sustainable humandevelopment is a major issue that would pose significant challenges. A dramaticscaling-up of investment in energy infrastructure capacity is required in thenext three decades. The amount of investment to meet the region’s energy sys-tem expansion could exceed $1 trillion in the next few decades. This financing


X

requirement will be huge by regional standards. Besides, the capital require-ment must be situated within the context of the global capital market compet-itiveness and risks in the industry. This investment is enormous given theantecedent of the industry in the past decades. While the investment scale isdaunting, it is not insurmountable. The right institutional framework, policyconsistency, appropriate incentive structure and security of investment andinput would guarantee the flow of required investment. The example of thetelecommunication industry provides strong support for this position. The suc-cess achieved in turning around moribund public telecommunication systemsto a vibrant industry with one of the fastest system growth rates in the world,has been due to the combination of the right institutional framework, policyconsistency and appropriate incentive structure. Both domestic and foreigninvestors and producers have important roles to play in achieving sustainableenergy future in SSA. A supply system underpinned by full deregulation and privatization and anchored on price competition is now the conventional wisdom. The region has little choice in following this policy direction. However,there is no universal one-fits-all model, though most energy systems are private-sector driven. A public-private sector mix can also be a viable option.This may be particularly pertinent in the development of pro-poor and environ-mentally clean renewable energy resources such as solar, wind, wave and otherclean energy forms.

Third is the pricing of energy services, especially oil, gas and electricityfrom both conventional and non-conventional sources. There has been a ten-dency for Independent Power Producers (IPP), which are mostly private sectorowned, to lock high tariff into their Power Purchase Agreement (PPA) for unnec-essarily long periods notwithstanding production from more efficient plants inthe future. They prey on the difficult domestic environment to extract highmonopoly profits from PPA. The key principle should be energy pricing thatguarantees attractive rate of return to investors adjusted for industry risk andsecurity of investment.

A fourth consideration concerns risks associated with investment tostrengthen energy supply. They are in four dimensions: economic, socio-political, technological and environmental (methane leaks, post-Kyoto proto-col requirements and climate change compatibility, nuclear accidents spills).Optimal sharing of these risks among the three principal actors in the electric-ity market, namely, consumers, investor/producers and the government, isessential for efficient allocation of resources in the industry-sustainable electric-ity future in SSA.


A fifth issue is the human resource requirements of a robust and reliable energysupply system, which is fundamental to a sustainable electricity future in SSA.The demand on local and foreign skilled workers will be immense. However, asin the telecom industry, having the appropriate incentive structure is essential,given the globalized, regional and national demand for electrical, mechanical,computer engineering and other skills. These are needed to support a vibrantindustry at the center of the African energy map.

In summary, several policy challenges emerge from the foregoing discus-sion. The creation of an efficient, reliable and environmentally sustainableenergy industry that efficiently meets the demand that will rise substantially inthe next decade requires the construction of more power plants and sizableexpansion of the transmission and distribution systems in the next decade. Theeconomic and political environment must be conducive to make the goal of asustainable and secure electricity future affordable. Market-responsive pricing ofenergy services is central to securing a sustainable energy future in SSA. Giventhe nature of the additional capacity expansion, the large amount of investmentrequired must be private-sector driven. Energy sector reforms based on marketcompetitiveness should provide sufficient new opportunities for domestic andforeign investors who should align their investment objectives to the needs ofAfrica. Domestic demand must be integrated into a regional energy framework,and supply policies in the region must be mutually consistent and coordinated.

4. Energizing the human development process in Africa: outline of an action plan

The policy agenda to support a sustainable energy future anchored on marketcompetition would be shaped by a number of considerations:

• The current initial economic and energy conditions highlightedby low human development indicators and energy access, posesignificant challenges to achieving sustainable energy future ina relatively short time.

• Oil and gas supply will remain a central factor in the quest for asustainable energy future in which expanded energy access is akey goal.

• World energy markets will be characterized by market priceuncertainty in the near future.

• A large amount of investment is required to rationalize and makeSSA energy industry more globally competitive.


X

• The political, economic and institutional framework for pro-active sub-regional and regional approaches to economic andenergy development is relatively weak. Membership overlaps inseveral regional economic organizations are a reflection of thisproblem.

• Finally, there is the greater competition for the increasinglyscarce private capital in the world economy.

Can Africa achieve the objectives of expanded energy supply andaccess, and also eliminate duality in the energy economy that should drive itssustainable energy future plan, given the multi-dimensional challengesdescribed above? The answer lies in the design and implementation of appro-priate policy strategies embodied in an action plan. Before elaborating on theaction plan it is important to identify a number of principles that shouldunderpin such a plan.

First, the plan must be based on deepening the current economic, socialand political reforms. The importance of that for the twin objectives derivesfrom the role of sound economic and social policies for sustainable develop-ment. Second is an improved alignment of economic and energy developmentpolicies in the country, at sub-regional and regional levels. The central role ofexpanded energy access in achieving the MDGs strengthens the argument forthis principle. Third is the promotion of increased domestic value added to oiland gas in Africa through the expansion of downstream activities to meet bothregional and export demand. This must go beyond refineries to petrochemicalindustries and other higher-end-value products in the sector. Fourth is deepen-ing integration efforts to create dynamic inter- and intra-regional markets forgoods, including energy. This must address the issue of competitiveness. Open-ness and transparency in oil and gas that minimizes transaction costs in domes-tic, sub-regional and regional energy markets is another principle that shouldguide the action plan. Fifth is the convergence of the fiscal and legal frameworkfor energy market operations and regulation in the region. The sixth principleconcerns the need to be aware of the moral hazard problem associated with pro-viding financial resources to countries affected by higher energy prices. Suchresources have the potential to reduce the incentives of beneficiaries from tak-ing the required policy measures for the emergence of a more efficient domes-tic energy market that helps to reduce vulnerability to external oil marketshocks. Seven, there should be defined roles for key stakeholders in the region,among which are the African Union, the AUC, African Development Bank(AfDB), United Nations Development Program (UNDP) and other development


banking institutions such as the World Bank, the OPEC Fund for InternationalDevelopment (OFID), the European Union (EU) and other development stake-holders. Finally, and perhaps the most important, is long-term and credibleregional and sub-regional commitment to a sustainable energy vision anchoredon the emergence of efficient oil and gas markets in the next few decades.

4.1 Outline of an action plan

Important elements of an action plan based on short and medium-term meas-ures can be sketched around the following imperatives.

Short term

• Establishment of an appropriate institutional infrastructure tosupport the mobilization of financial, human and institutionalresources that will help to mitigate the short-term impact ofenergy price shocks.

• Establishment of quick disbursing funds to provide disadvan-taged countries relief through grants and loans to import oil asemergency strategy to mitigate the adverse balance of paymenteffects of price shocks. Accordingly, we propose an AfricanEnergy Fund. This Fund would be a central element of the strat-egy to mitigate the short-term impact of energy price shocks inthe African energy supply. However, one must be aware of themoral hazard problem associated with providing financialresources for countries affected by higher oil and gas prices.

• Promoting the use of financial market instruments through thespot and futures markets to hedge against price volatility and itsimpact on supply that occur from time to time. Developing thecapacity to use this sophisticated instrument demands resourcepooling, possibly on a sub-regional basis.

• Promoting price-shock mitigating mechanisms that will mini-mize the moral hazard problem associated with providing finan-cial resources for countries that are severely affected by higher oiland gas prices. This will help to promote and strengthen theincentives for such countries to take the necessary policy for theemergence of a more efficient domestic energy market that helpsto reduce their vulnerability to oil price shocks.


X

Medium to long term

• Establishment of appropriate institutional infrastructure to sup-port the medium-term dimensions of expanded energy supplyand access and their sustainability;

• Development of human resources and institutional and financialassistance to support a viable and competitive energy industry;

• Encouraging extensive sharing of knowledge and technology onupstream and downstream activities in the energy industry inthe region;

• Promoting the harmonization of economic and energy policieswith sustainable energy future integrated into the developmentprocesses and policies at the country, at sub-regional andregional levels;

• Promoting the fast-tracking and strengthening of energy inte-gration initiatives to create dynamic inter- and intra-regionalmarkets for energy and other energy goods;

• Revamping of policies and practices in the production, procure-ment, trade and distribution of imported energy;

• Promoting the rationalization of the supply and distribution ofoil products at country and sub-regional levels to ensure indus-try revitalization in contrast to the current industry state that ischaracterized by poorly maintained and utilized productioncapacity producing sub-optimal product mix;

• Elimination of the fragmentation in energy markets acrosscountries and regions in Africa with the focus on the establish-ment of a competitive African energy market;

• Adding more value to energy resources in Africa through expan-sion of production and export of refined oil and gas products andpetrochemicals to meet domestic, regional and export demand;

• Sustaining improved governance in the energy industry espe-cially the hydrocarbon industry based on openness and trans-parency thereby further strengthening the current ExtractiveIndustry Transparency Initiative (EITI) to which many oil pro-ducing countries have subscribed. This will help to minimizetransaction costs in domestic, sub-regional and regional energymarkets;


• Creation of an environment where doing business will be attrac-tive in contrast to the current situation where the region is iden-tified as among the most difficult for business to operate;

• Alignment of the fiscal and legal framework for energy marketoperations and regulations at the sub-regional and eventually atthe regional level;

• Promoting price-shock mitigating and other mechanisms thatwill help to promote and strengthen the incentives for the emer-gence of a more efficient domestic energy market that helps toreduce their vulnerability to external oil-market shocks;

• Promoting an environmentally responsible development ofenergy resources;

• Promoting research and information collection and dissemina-tion required on energy demand and supply by end users, prices,costs, inventory movement management, investment andregional and international energy trade flows on a timely andconsistent basis. The economics of the downstream segment ofthe oil and gas industry needs in-depth analysis; and

• Promoting the development of alternative energy with focus onrenewable energy including biofuels.

Certainly, a new partnership between the public and private sectorswould have to be forged to meet these challenges. In any case, the substantialreduction in public-sector resource availability forecloses a high profile govern-ment participation in the provision of the economic infrastructure services.Half-hearted policy measures can only compound the enormous problems inthe sector at escalating social cost.

5. Concluding remarks

There is plenty of catching up to do for African countries. The region’s currentdevelopment crisis suggests economic growth rates that far exceed its historicalexperience if it must get close to the MDGs. Annual per capita Gross DomesticProduct (GDP) growth of 4 percent might have been acceptable a decade agoand 2 percent long-run growth half a century ago. However, achieving anannual per capita GDP of less than 4 percent will be grossly inadequate to matchthe growth of human aspirations in the region. In fact, achieving the MDGsimplies an exponential growth at 7 percent yearly. Clearly, increased energy


X

supply and demand anchored on a more efficient utilization of resources and backed up by a market-driven incentive structure is essential to achieving sustainable energy and human development.

Success in achieving a sustainable energy and economic future in Africamust be based on the design and implementation of appropriate and harmo-nized regional and national policies backed up by adequate financial, techni-cal and other support from the international community. The internationalcommunity must view the regional effort as an important element in the globalstrategy for achieving sustainable human development. Hence, identifying andfinding innovative ways of tackling the constraints to efficient, environmen-tally responsive, affordable and expanded access to energy services must be seenas a regional and global initiative by policy makers and development partnersin the SSA region in the next few decades. The degree of success of the strate-gies adopted will determine the extent to which Africa will share in the gainsfrom the material prosperity associated with globalization, and more impor-tantly, achieving the MDGs.

Obviously, no issue is more pressing at this very early but critical junctureof the 21st century, than a solid understanding of the multi-faceted nature ofAfrica’s oil and gas problem. This is particularly so, given the central role oil andeventually natural gas will play in advancing human well-being and economicdevelopment in the foreseeable future. Besides, in a multi-ethnic and oftenpolarized and impoverished society, the use or misuse of this non-renewable nat-ural resource would remain an important factor in the existence (or lack) ofsocial harmony and political stability in the medium term. Understandably, effi-cient and effective management of Africa’s oil wealth to serve as a strong anchorfor achieving sustainable economic freedom and livelihoods in an environmentcurrently defined by serious oil and gas-induced environmental degradation,poverty and low living standards, large-scale unemployment and numeroussocial conflicts, will be the prime challenge of the first half of this century.

The main conclusion of this paper is that Africa can eliminate the sub-standard state of modern energy services and ensure the supply of the largeinvestment required to support sustainable energy development that underpinsa significant reduction in poverty. However, sustainable energy developmentthat underlines a significant reduction in poverty is contingent on several con-ditions. There must be a strengthening of the institutional infrastructure, gov-ernance structure and accountability to support allocative and technical effi-ciency, as well as restrain arbitrary rent-seeking government interventions inthe economy. In addition, the creation and sustenance of an incentive-based


competitive market system supported by market responsive energy pricing thatguarantees adequate risk-adjusted rates of return for investors but that minimizesdeadweight loss associated with market monopoly power, is of utmost impor-tance. The establishment of a well-targeted support system (partly in the form ofsubsidies) to drive expanded supply of clean energy based on renewable energyresources is a key policy issue. Finally, there is a need to foster a strategic PPP todrive a new energy paradigm that is anchored on renewable energy sources thatwill minimize carbon emission and climate change. The emergence of sustainableenergy and human development in SSA goes beyond delivering adequate and reli-able energy services to end-users. It also involves giving the population wideaccessibility to environmentally friendly and reliable energy supply.

In conclusion, a number of observations are necessary. First, energy devel-opment must be integrated into sustainable development in which sustainedimprovement in the general well-being of the people and enlarging their socialchoices are key elements. Second, the expanding of social and economic oppor-tunities based on energy resource wealth must take cognizance of the naturaland social environment of wealth creation. The environmental consequences ofextracting and using energy should be incorporated in economic planning andpublic policy. Third, sustainable development is also about economic, social andpolitical freedom. Fourth, the well-being of the poor and disadvantaged peopleis of utmost importance and must be explicitly factored into the process of devel-opment of energy resources. It is clear that “Africa’s energy question” is not onlycomplex and difficult, but also politically controversial as it involves a set of eco-nomic, social, political and environmental goals that are not necessarily mutu-ally reinforcing. Finally, sustainable development is about a better world for allcitizens supported by advances in skills, knowledge, capability and choice.Africa’s energy wealth must be used to achieve rising income per capita, bettereducation, better health, higher life expectancy, full employment and social sta-bility achievable in the shortest time possible. The AfDB and AU aided by inter-national financial institutions such as OFID have complementary strategic rolesto play in making a success of Africa’s energy and development future.

Africa faces immense multi-dimensional challenges in achieving a sus-tainable energy and economic future embodied in the twin objectives of elim-ination of income and energy poverty and expanded energy access. However,the alternatives are few, considering the current development divide that Africahas to bridge. The key message is that success or failure depends critically on thepolitical will of the leadership to permanently erase the ghost of economic andpolitical marginalization that has characterized the region in the past.


X

Bibliography

AYOGU, M. (2006). Infrastructure Development in Africa: Prospects and Challenges. Paper presentedon Economic Development in the Millennium, AERC-AfDB Project on Africa’s Development,African Development Bank, Tunis, November 2006.

BRICENO, CECILIA, ANTONIO ESTACHE AND NEMAT SHAFIK (2004). Infrastructure Servicesin Developing Countries: Access, Quality, Costs, and Policy Reform. World Bank Working Paper Seriesno. 3468, Washington, DC.

COLLIER, P. AND J. GUNNING (1999). “Explaining Africa’s Economic Performance.” Journal ofEconomic Literature, 37: 64-111.

EASTERLY, W. AND R. LEVINE (1997). “Africa’s Growth Tragedy: Policies and Ethnic Divisions.”Quarterly Journal of Economics, 112(4): 1203-50.

JORGENSON, D.W. (1984). “The Role of Energy in Productivity Growth.” The Energy Journal 5(3):11-26.

TOMAN, M.A. AND B. JEMELKOVA (2003). “Energy and Development: An Assessment of theState of Knowledge.” The Energy Journal 24(43): 93-112.

UNDP (2005). Energy for Sustainable Development. UNDP. New York.

WORLD BANK (1994). Infrastructure for Development: World Development Report 1994. The WorldBank and Oxford University Press.

WORLD BANK (2000). Can Africa Claim the 21st Century. The World Bank, Washington DC.

WORLD BANK (2003). Making Services Work for the Poor People. World Development Report 2004. TheWorld Bank and Oxford University Press, Washington DC.


Acronyms and Abbreviations

AfDB African Development BankAFREC African Energy CommissionAIES African Energy Information SystemAMADER Agence Malienne pour le Développement de l’Energie

Domestique et de l’Electrification RuraleAREED African Rural Energy Enterprise DevelopmentASER Agence Senegalaise d’Electrification RuraleAU African UnionCAPP Central African Power PoolCSD Commission on Sustainable DevelopmentDFI Development Financial InstitutionsEAPP East African Power PoolECOWAS Economic Commission of West African States EIA Energy Information AdministrationEU European UnionFDI Foreign Direct InvestmentFEMA Federal Emergency Management AgencyGDP Gross Domestic ProductGEDAP Ghana Energy Development and Access ProjectHIP Heavily Indebted PoorHV High VoltageIEA International Energy AgencyIFI International Financial InstitutionsIPCC Intergovernmental Panel on Climate ChangeKENGEN Kenyan National Power CompanyLDC Least Developed CountriesLIC Low Income CountriesLPG Liquefied Petroleum GasMDGs Millennium Development GoalsMTOE Metric Tonnes of Oil EquivalentNBPF Nile Basin Power ForumNBSSI National Board for Small-scale Industries


NEPAD New Partnership for Africa’s Development

NGO Non-Governmental Organization

ODA Official Development Assistance

OECD Organization for Economic Co-operation and Development

OFID OPEC Fund for International Development

OMVG Gambia River Basin Development Organization

OMVS Senegal River Development Organization

OPEC Organization of the Petroleum Exporting Countries

PPA Power Purchase Agreement

PPP Public-Private Partnership

PRSP Poverty Reduction Strategy Papers

PSI President’s Special Initiative

REA Rural Energy Agency

REC Regional Economic Communities

RESCO Rural Energy Supply Companies

SAPP South African Power Pool

SEDB Small Enterprise Development Board

SME Small and Medium-sized Enterprises

SSA Sub-Saharan Africa

TPES Total primary energy supply

UN United Nations

UNCTAD United Nations Conference on Trade and Development

UNDP United Nations Development Program

UNECA United Nations Economic Commission for Africa

UNEP United Nations Environment Programme

UNF United Nations Foundation

UNFSTD United Nations Financing System for Science and Technology

UNIDO United Nations Industrial Development Organization

VRA Volta River Authority

WAGP West African Gas Pipeline

WAPP West African Power Pool

About the authors

Akin Iwayemi holds a PhD in Economics and is a Professor of Economics at the Universityof Ibadan, Nigeria. His research and teaching interests include energy, environmental anddevelopment economics, areas in which he is extensively published. Professor Iwayemi is the immediate past president of the African Econometric Society (2007 – 2009) and thecurrent president of the Nigerian Association for Energy Economics.

Suleiman J. Al-Herbish has been Director-General of the OPEC Fund for InternationalDevelopment (OFID) since November 2003. Before joining OFID, he was Governor of Saudi Arabia (with rank of Deputy Minister) to OPEC for 13 years. Mr. Al-Herbish has a BAin Economics and Political Science from the University of Cairo, Egypt, and a Master’s inEconomics from Trinity University, Texas, USA. He is a vocal proponent of energy povertyeradication.

Roger M. Gaillard is a lead infrastructure officer at the African Development Bank. A civilengineer by profession, Mr. Gaillard is a graduate of the High Institute of Technology, Lausanne, Switzerland. His specialist fields are energy, hydropower and dams.

Pradeep Monga is an energy expert with over 35 years experience in the fields of energypolicy, strategic planning and technology cooperation. He is presently working as Directorof Energy and Climate Change at the United Nations Industrial Development Organization,Vienna, Austria. Dr. Monga has a PhD in Renewable and Rural Energy.

Phil U. Chineyemba is a maintenance specialist at Mobil Producing Nigeria, a subsidiaryof Exxonmobil, where he has worked since 1984. His area of focus is rural energy access.

Lawrence Agbemabiese is a program officer with the United Nations Environment Program, where he is responsible for UNEP’s energy enterprise development projects in Africa and China. His multidisciplinary knowledge has been directed primarily at pro-moting investments in small and medium-size enterprises as tools for poverty eradication.

Waqar Haider is a senior energy specialist at the World Bank. He has over 25-years of professional experience in energy planning and management, sectoral restructuring and reform, regulatory regime development, and private sector participation and the privatization of utilities.

Steve Olumuyiwa is a special technical assistant to the Minister of State for Power of Nigeria.He is a system operations specialist with considerable experience in the construction andoperation of hydro power stations, transmission lines and substations.

Adeola Adenikinju holds a PhD in economics from the University of Ibadan, Nigeria,where is a Professor of Economics. Dr. Adenikinju’s research interests include petroleumand energy economics, macroeconomic modeling and economic development issues. He has consulted for organizations such as the European Union, the United Nations andthe World Bank, among others.


Parkring 8, A-1010 Vienna, AustriaP.O. Box 995, A-1011 Vienna, Austria

Telephone: (+43-1) 515 64-0Fax: (+43-1) 513 92 38

www.of id.org

energy poverty 39 - ofid

Documents