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IMFSurvey Magazine: Countries & Regions

Africa's Power Supply Crisis: Unraveling the Paradoxes

Hydroelectric project in Lesotho: sub-Saharan Africa's electrification proceeding more slowly than in other low-income countries (photo: AFP/Newscom)

AFRICA'S ENERGY SHORTAGE

Africa's Power Supply Crisis: Unraveling the Paradoxes

IMF Survey online

May 22, 2008

  • Sub-Saharan Africa has endemic electricity shortages
  • Meeting the subcontinent's infrastructure needs is challenging
  • Utilities in the region must become more efficient

Sub-Saharan Africa (SSA) faces major infrastructure challenges in its power sector, according to analysis in the IMF's Regional Economic Outlook for sub-Saharan Africa.

In 2007 alone, nearly two-thirds of the countries in the region experienced an acute energy crisis with frequent and extended electricity outages. Although conflict and drought triggered several of these crises, in most cases the cause was electricity supplies failing to keep pace with growth in demand.

Even South Africa, which accounts for more than half the electricity production in the region, faces periodic rounds of rolling power cuts because supply has stagnated in recent years. In addition, throughout the SSA region, access to electricity services, especially in rural areas, is extremely limited. Only 24 percent of the SSA population has access to electricity compared to 40 percent in other low-income countries, and the region's expansion of electrification is proceeding more slowly than in other low-income countries as well.

Deeper malaise

The recent energy crises reflect a deeper malaise. To understand and ultimately address the causes of SSA electricity problems, the World Bank has taken the lead on the Africa Infrastructure Country Diagnostic (AICD)—a two-year, donor-community program aimed at understanding infrastructure issues in the SSA region. AICD is nearing completion.

The AICD developed a comprehensive information base and conducted analytical studies which identified four paradoxes in the electricity sector that shed light on the complex challenges to be faced.

Abundant energy but little power. Although the region is richly endowed with both renewable and exhaustible energy resources, its installed power generation capacity is no more than that of Spain. One reason is that Africa's energy resources tend to be concentrated in a handful of countries which face physical and political barriers to trade that make it difficult for them to deliver energy to the main centers of demand often located in other countries. Moreover, most of the countries rich in energy resources are too small to finance the large investments needed to develop these resources on their own.

High prices but even higher costs. Although some SSA countries have very low prices, on average, electricity tariffs across the region are relatively high by international standards—at $0.13 per kilowatt-hour. Even so, revenues usually are barely sufficient to cover operating costs, not to mention capital costs. One reason is that in countries relying on small-scale diesel generation the average operating costs of power systems can be as high as $0.30 per kilowatt-hour. In addition, average revenues fall short of average tariffs because a large portion of utility revenue is never collected. The high prices and costs of electricity in SSA also pose a serious concern about affordability for the poor, the vast majority of whom lack access to service.

Widespread but ineffective reforms. As of 2006, more than 80 percent of SSA countries had enacted a power sector reform law, 75 percent had experienced private participation in power, about 66 percent had corporatized their state-owned utilities, more than half had established a regulator, and more than one-third had independent power producers. But few countries have adopted the full range of reform measures. Moreover, reform programs typically followed an orthodoxy that aimed at creating competition among private electricity suppliers, but few energy markets in SSA are large enough to support the multiple suppliers needed for a competitive environment. As a result, despite reform measures, utility performance continues to be disappointing and associated hidden costs can absorb as much as 2 percent of GDP.

High expenditure but inadequate finance. To redress its chronic power shortages and make reasonable progress on electrification, SSA needs to invest about 3 percent of GDP in the power sector, mainly to generation assets, and allocate a similar amount for operations and maintenance. Both would be a sharp increase from current levels. Public investment in the power sector in SSA currently averages no more than 0.7 percent of GDP, while 2 percent of GDP is allocated to operations and maintenance.

Volatile financing flows

Official development assistance (ODA) to public investment in the power sector has been modest and highly volatile over the last decade. Similarly, despite a substantial number of transactions, private participation in infrastructure (PPI) in the sector has averaged less than half of the ODA funds available, and the flows have also been highly volatile, reflecting the lumpiness of such investments.

Combined, these sources of external capital to the power sector amount to no more than 0.1 percent of the region's GDP—far below the financing needed to make significant progress toward expanding access to electricity services. In recent years, the China Ex-Im Bank has emerged as a major new financier of power infrastructure, which has helped to fill the gap. Between 2001 and 2006 Chinese commitments averaged $1.7 billion a year (about 0.2 percent of the region's GDP), more than ODA and PPI combined.

Increasing cross-border trade in electricity, either through participation in regional power pools or through bilateral power purchasing agreements, is a potential vehicle for substantially increasing financing for investment. To some degree, loans for major projects could be underwritten by the importing countries. With major gains from economies of scale, as well as tapping low-cost hydro resources, it is estimated that handsome rates of return could be achieved, even after factoring in the costs of cross-border transmission links.

The way forward

The policies 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 reforms designed to increase efficiency and boost competition through private participation have in many cases failed to deliver the expected results: unbundling has been limited; failures of transactions and projects have been frequent; and there has been minimal additional investment.

There must be sustained, concerted, and simultaneous action on three strategic and interdependent priorities: regional scaling-up of generation capacity; improving the effectiveness and governance of utilities; and expanding access through sector wide engagement. Efforts to boost generation and regional power trade will stumble if the utilities, which will continue to be central actors in the sector, remain inefficient and insolvent.

Expanding electricity distribution systems without taking measures to tackle the shortages in generation and to improve transmission capacity would be futile. And focusing exclusively on utility reform would be fruitless unless a start is made on substantial, long-gestation investments in both generation and access to improve quality of service and render the utilities viable.

Short-term measures

Because it will take time for these actions to yield results, they need to be complemented by short-term measures such as demand-side management and loss-reduction programs—notably, enhanced bill collection and initiatives to tackle electricity theft. In addition, because universal household electrification is decades away, off-grid models based on innovative renewable technologies can be cost effective. For example, low-cost portable solar lanterns are one consumer product that could be accessible and affordable to the rural public, and the "Lighting Africa" initiative supports the development of the market.

The road to universal access to reliable electricity supplies in SSA is long and difficult. It will require quality high-level planning, international cooperation, and a dedication to transparency and good governance. But the rewards would be substantial—lower-cost and abundant energy to support economic growth and poverty reduction.

Comments on this article should be sent to imfsurvey@imf.org


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