Want To Grow Africa's Economies? Invest in Energy

By Ken Opalo

According to a recent survey by Ernst & Young, 44 percent of businesspeople in Africa identified inadequate infrastructure as one of the key constraints to doing business in the region. This means that as Africa continues to grow in the next two decades, infrastructure development must top the investment agenda. General infrastructure development will be especially crucial as African economies undergo structural transformation from being primarily resource-driven to having bigger manufacturing and service sectors.

Indeed, Ernst & Young estimates that in 2012, 43.1 percent of investments in capital in Africa went to manufacturing as opposed to 12 percent that went to the extractive sector. A key area that will require greater and smarter investment to fuel the region’s economic growth will be the energy sector. 

Everyone knows about the energy woes of many an African country – from Nigeria’s infamous generators to the total lack of functional national grids in some African states. A few countries have initiated plans to boost their energy sectors through investment in power generation (like Ethiopia’s 6000MW Great Renaissance Dam on the Blue Nile), oil refining (Angola’s planned 200,000 bbl/day refinery in Lobito), and aggressive prospecting for fossil fuels (especially in eastern and southern Africa).

Despite these national efforts, however, for African states to ensure energy security for their growing economies, they must also think regional – and to some extent continental – when developing their respective energy sectors. As intra-Africa trade grows in the next two decades, there will be pressure to integrate energy markets as well. 

The reasons for a regional/continental approach to energy sector development are twofold. Firstly, investment outlays in energy infrastructure development are often prohibitively expensive because their viability relies on economies of scale, thus necessitating the pooling of resources. Ethiopia’s newest dam, for instance, will cost $4.7 billion. Not many African countries can afford such massive investments on one project. 

Secondly, there is the issue of markets. With 12 percent of the world’s population, Africa consumes a meager 3 percent of the world’s electricity. Of this, 75 percent takes place in North Africa (33 percent) and South Africa (45 percent). The remainder is shared out among all of the rest of Sub-Saharan African states. Furthermore, electricity connectivity on the continent remains relatively low, with rates averaging 43 percent (North Africa stands at 99 percent, with the other sub-regions between 12-44 percent).

This means that for projects like Ethiopia’s to make sense, access to international markets must be guaranteed. A key part of the Ethiopian project is the planned interconnector line linking the power station to the Kenyan grid. Joint investment and taking advantage of economies of scale will also help lower the cost of power in Africa.

At present the average tariff per kilowatt-hour in the region is $0.14 – compared to just $0.04 in Southeast Asia. It is estimated that investing in regional grids and hydropower will save the region up to $2 billion annually. This is music to the ears of sugar millers, cement manufacturers, and many small factory owners across the continent. 

With this in mind, African states have begun the process of integrating their power sector infrastructure, via regional power pools. The South African Power Pool (SAPP, established in 1995); the North African power pool (COMELEC , 1998); the West African Power Pool (WAPP, 2000); the Central African Power Pool (CEAPP, 2003); and the East Africa Power Pool (EAPP, 2005) are all initiatives to establish regional power markets and help harmonize energy policy. 

The COMELEC sub-region (27.4 GW, largely thermal, in 2009) has the highest connectivity and the best infrastructure. The region is also linked to the Middle East via the Egypt-Jordan interconnector line and Europe via the Morocco-Spain line (part of the future Mediterranean Electricity Ring, MEDRING). SAPP, with a capacity of 50GW (78.4 percent coal; 20.1 percent hydro; 4 percent nuclear and 1.6 percent diesel), is next in terms of infrastructure development. 

There is a plan to link the EAPP to states outside of East Africa as part of COMESA. The 19-state COMESA bloc has an installed capacity of 52MW (69 percent thermal and 30 percent hydro) and has since 2009 initiated a process to harmonize regulation and energy policy. In terms of regional (intra-power pool) trade in power, SAPP is ahead with 7.5 percent, WAPP 6.9 percent, NAPP 6.2 percent, EAPP 0.4 percent and CAPP 0.2 percent.  Clearly, there is a lot of room for improvement in levels intra-pool trade in power. 

All these developments are encouraging. But a lot more needs to be done. For starters African states must work harder to harmonize their energy policies. This will necessarily involve greater liberalization of their power sectors, especially with regard to power generation and distribution. There is also an urgent need to invest in interconnector infrastructure to ensure that power can be transmitted efficiently to market. In the Day Ahead Market (DAM) of SAPP, for instance, trading is limited by between 40-50 percent of the potential level due to lack of efficient transmission capacity.

Lastly, there will be a need to connect the regional power pools. This will reduce their overreliance on regional “anchor” economies (the best example of this is SAPP’s overreliance on ESKOM of South Africa, which has its own integrated resource plan). It will also create even bigger markets, including potentially the Middle East and Europe.  

Ultimately, whether or not the dream of regional and continental power interconnectivity is achieved will depend on politics. Unfortunately, so far things do not look good. Almost a decade after the idea of regional power pools set in, governments are yet to harmonize their power sector regulatory policies.

In many countries state monopolies dominate, with attendant inefficiencies. And across the continent power supply master plans are still very nation-centric and under the tight control of local vested interests. Moving forward, the challenge will be to convince governments and stakeholders – private sector and consumers alike – of the benefits of having an Africa-wide power market – which will necessarily require the liberalization of national power sectors.

The alternative will be more round-table discussions and promises of policy harmonization that never get fulfilled.