Need for Capital Investments – Case for Power Utilities

The energy trilemma illustrates the need to balance dependability, cost, and sustainability for a nation, utility, or power pool. African countries have unique energy resources, opportunities, and challenges to achieve a balanced energy trilemma.

World Energy Trilemma Index 2022

The World Energy Trilemma Index ranks 127 countries on their ability to balance the three energy trilemma aspects, providing a platform to celebrate and learn from best practices. The top countries in the index remain largely unchanged due to their well-established energy policies and diverse energy systems.

Ethiopia, Kenya, Nigeria, and Tanzania are among the 10 most-improved countries in terms of access to affordable energy, while Zimbabwe, Mozambique, Malawi, Chad, Democratic Republic of the Congo, Benin, and Niger sit at the bottom of the 127 countries surveyed. Africa lags behind other regions in terms of power generation capacity and per capita energy consumption.

Africa Power Utilities

Many African power utilities have long been in difficult positions both operationally and financially. They are expected to maintain dependable power supplies, vide a cheap tariff, whilst taking care of environmental concerns in an era of evolving climate change challenges. The agenda of 3Ds digitization, decentralization, and decarbonization for energy squarely feeds into the delicate energy trilemma balance.

A number of African power utilities have been working on opening up the sector, whereas, generation, distribution, and retail are open to competition, with transmission and some distribution aspects remaining within state control.

The objectives of this have been to attract investment, improve efficiency, and tariff reduction. Countries like Rwanda, Kenya, and Tanzania have liberalized their energy sectors with mixed success. About 30% of all African utilities are still run as vertical entities. Low per capita energy consumption and ageing grid components have slowed the expected gains.

The objective of growing cross-border energy trade has been slow because of poor regulation, low levels of investment, and other barriers to trade. The South African Power Pool is the most advanced. Planned upgrades to the East African and West African power pools have been slow. We can learn many lessons from Nordic and European power pools in this regard.

Big economies within the continent, such as Nigeria and South Africa, are still experiencing serious power rationing largely due to lack of generation, frail transmission and distribution networks, and crippling power utility debt. South Africa is in the process of unbundling Eskom to three utilities to handle generation, transmission, and distribution.

This is expected to shore up the generation shortfall (that stands at more than 20 GW) by attracting more players into the generation space. Universal access to reliable, cost-effective, and clean energy is still a rolling challenge in Africa. The continent has about 500 million people who have no access to clean and cheap power as one of the key ingredients toward economic growth.

Decentralized generation and distribution, using sources such as wind and solar, will enable the continent to move faster in this area. This will go a long way in advancing the third leg of the energy trilemma—environmental sustainability. As per the International Energy Agency’s 2020 report, solar power is the cheapest source of electric power, followed closely by wind, thus the affordability aspect will be taken care of.

Current Situation

Power providers in Africa struggle with financial sustainability, with only the Seychelles and Uganda being able to cover their operating and capital expenses.

Africa-trilemma

For African power providers, the cost of providing electricity is compared against cash flow. from the World Bank Making power accessible to and viable for Africa’s utilities

The study’s major findings include, but are not limited to, the need to reduce commercial and technical losses to a maximum of 10% of the transmitted energy, the need for controlled tariff increases to fill cash flow gaps for tasks like grid maintenance and upgrade, the need for prepaid meters for all low-income households for better and less expensive collection, and the need for a low initial connection cost.

The average loss of energy by power utilities on the continent is 23% (as opposed to the global average of 10%), primarily because of operational inefficiencies, which are expected to cost $3.3 billion annually. If technical and commercial losses are reduced to 10% or below, an additional 11 countries may be able to cover their budgetary gaps.

Commercial and technological loss reduction may not be sufficient to end outages in many nations due to escalating electricity demand. A major difficulty is making capital investments for utilities with significant cash flow deficits. The cost of capital is quite high because to the considerable risk involved in investing in such utilities.

Middle-sized and large manufacturers are still being pushed by unreasonably high power prices to switch to less expensive alternatives, including solar, which further reduces the demand for electricity from already overburdened utilities. Except for Guinea and Sierra Leone, all of the top 10 African nations with the highest unit prices rely on generation powered by oil.

The aforementioned conclusions are supported further by a 2018 study titled “The future of power utilities in Africa” that was conducted by Clarion Energy and the Gordon Institute of Management Science (University of Pretoria). In order to increase the profitability of Africa’s power companies, the research emphasizes the significance of effective governance and improved cash flow.

Much to Be Done

African economies need access to clean, inexpensive, and reliable electric power, and the energy trilemma index needs to be improved.