Supplying a continent: energy access in Africa

I am starting a new series of several posts commenting on the supply and retail of electricity across Africa. This week’s post focuses on electricity access, with two future posts on the efficiency of electricity distribution and the structure of the sector across countries.

As of 2009, c.1, 317 million people (almost 20%) of the world’s population had no access to electricity. A significant proportion – 587 million lived in the African continent.

The chart below shows electricity access rates by country. The average rate for Sub Saharan Africa stood at 30.5% as opposed to 99% in North Africa. Uganda, Malawi, DR Congo, Mozambique, Tanzania, Burkina Faso and Lesotho had particularly low rates of approximately 10% with rural access below 5%.

Electricity access rates by country as of 2009

Source: IEA 2011 World Energy Outlook, see http://www.worldenergyoutlook.org/resources/energydevelopment/accesstoelectricity/

Some explanation for the low access seen…

There are several reasons for the low access rates (See for instance World Bank Group Energy Sector Strategy, Addressing the Electricity Access Gap, June 2010). These include, in no order:

High costs of supply – most African countries have low urbanization rates with large rural and peri-urban populations with low population densities. This makes the cost of extending the distribution and transmission network and the cost of connection especially expensive. According to the Rural Electrification Authority, it costs an average of $10,000/km to develop a medium voltage overhead line in Kenya. Moreover, this hard-to-reach population is often the poorest. As the chart below which maps electricity access and urbanization rates across countries shows, there is a moderate correlation between urbanization rates and electricity access. Uganda, Malawi, Kenya, Ethiopia are not only the least urbanized states in the continent, but also have the lowest electricity access rates as well. Conversely, Ghana, South Africa, Tunisia, Libya, Algeria are all relatively urbanized and have high access rates.

Relationship between urbanization and electricity access

Source: Urbanization rates as of 2013 – World Bank Indicators; Access rates as of 2009, see IEA 2011 World Energy Outlook,  http://www.worldenergyoutlook.org/resources/energydevelopment/accesstoelectricity/

Lack of appropriate incentives – the high cost of supplying rural areas coupled with limited capacity to pay for supplies makes it difficult for electricity companies to connect more households. High upfront costs of connection (wiring costs and connection costs) remain a barrier absent subsidies and tariff structures that are appropriately designed to recover the significant costs of connecting rural populations (see discussion of connection charges below).

Weak implementing capacity – successful rural electrification programs require political commitment, adequate resources both internally or in tandem with external partners and strong project management – not exactly the types of competences most state owned organizations are renowned for in Africa. It is instructive to note that countries which have reformed their electricity markets and/or privatized electricity supply companies have seen significant improvements in access rates (see examples of Uganda and Kenya below).

Shortage of generation capacity – most countries suffer from near permanent load shedding – and do not have even enough capacity to meet the existing already connected demand, this means that new (often loss making) rural connections are always a second order business.  One tried mechanism for solving this (and lack of capacity) is to hive off responsibility for rural connections to an independent organization which can prioritize this (countries with a Rural Electrification agency include – Uganda, Zambia and Kenya).

Increasing access – impact of electricity sector reforms

There has been some progress in the worst performing countries over the last decade. There are many reasons for this – including increased investment (across energy and transport infrastructure in general) and political prioritization at local and international levels. However, electricity sector reform that is ongoing (as shown in the examples of Uganda and Kenya in this section) has also contributed.

As noted above, Uganda and Kenya have some of the lowest access rates in the continent. Both countries have enacted significant sector reforms which have led to improvements in the electricity sector. Since mid-2000s, power generation increased steadily, distribution losses declined, and the number of customers served by grid-supplied power increased substantially.

Electricity sector market reform in Uganda began with the passage of the Electricity Act (1999); the establishment of a regulatory agency (2000); and the unbundling of the power utility (2001) and concessioning of its parts (2003–05). In 2006, power tariffs were almost doubled, raising the average effective tariff to US$.018 per kWh to reflect long-run marginal costs of power (See Trevor Alleyne, et al, Energy Subsidy Reform in Sub-Saharan Africa Experiences and Lessons, IMF, 2013).

In Kenya, reform efforts culminated in a new energy policy in 2004, substantial increase in power tariffs in 2005 to reflect long-run marginal costs, introduction of an automatic pass-through mechanism to adjust tariffs for changes in fuel costs, and reconstitution of the Electricity Regulatory Commission (See Trevor Alleyne, et al, Energy Subsidy Reform in Sub-Saharan Africa Experiences and Lessons, IMF, 2013).
 
In future posts discussing distribution efficiency and losses, and the role of the private sector we will revisit these and other countries. However, in terms of access, after limited progress early on, the number of customers with access to grid-supplied power in Uganda doubled between 2005 and 2013 while in Kenya it nearly tripled during the same period.

Connections growth in low access countries – Uganda and Kenya

Sources: Uganda - Annual report and IPO Prospectus for Umeme Ltd; Kenya – Annual Reports, Kenya Power; Ferdsult Engineering Ltd  http://www.ferdsult.net/concession.html; West Nile Rural Electrification Co.Ltd, see http://edoc.hu-berlin.de/series/sle/245/PDF/245.pdf; Kilembe Investments Ltd, see http://kilembeinvestments.com/index.php/about-kil/background

Connection charges…

Despite the examples highlighted above, challenges remain. It is possible to write several blog posts on each of the remaining challenges, however, in this post, I will zero in on connection charges as an impediment to increasing access.

Of the lowest access countries, Kenya has seen significant improvements.  ‘Access’ – defined as households living within 1.2km of Medium Voltage (MV) / Low Voltage (LV) line has improved considerably, rising from approximately 10% to over 80% over the last decade. Connectivity, however, defined as actual connection to electricity has barely improved as shown. This is because each household has to pay a connection charge of Sh32,480 ($400) for a single phase connection or Sh44,080 ($540) for a three phase connection.

The table below provides a snapshot of the minimum connection charges paid by households for electricity connection in Tanzania, Uganda and Kenya (see EED Advisory, Energy Access Review, June 2014). The per capita income across all three countries is fairly low - $572-994 as shown below, meaning to connect requires almost 40% of income in Kenya. So long as these charges remain, it will be difficult to increase connection substantively.

Minimum domestic connection charges in US$

Sources: EED Advisory, Energy Access Review, June 2014; GDP per capita (current US$), 2013, World Bank Indicators

The result of these charges is that although access has improved significantly, connectivity remains challenging – and may stall (Kenya Power has recently threatened to stop rural connections in favor of urban connections because of costs).  For a detailed analysis see Kenneth Lee, Eric Brewer, Carson Christiano, Francis Meyo, Edward Miguel, Matthew Podolsky, Javier Rosa, and Catherine Wolfram, Barriers to Electrification for “Under Grid” Households in Rural Kenya, NBER Working Paper No. 20327, July 2014.

Access vs. connectivity – the long term challenge of improving access

Sources: Access -% of population living 1.2km near a line based on REA press releases, 
Connections based on KPLC Annual Reports – calculated as domestic connections x average household size / population; population data - http://data.worldbank.org/country/kenya; average household size - Urban Poverty and Vulnerability
In Kenya, Background analysis for the preparation of an Oxfam GB Urban Programme focused on Nairobi, Sept 2009. For methodology see Catherine Wolfram, Power Africa: Observations from Kenya, July 15, 2013 at 
http://energyathaas.wordpress.com/2013/07/15/power-africa-observations-from-kenya/

There are several ways of dealing with high connections charges. The simplest is by providing a one-time connection subsidy to poor households who can afford to pay for internal wiring of the house and the energy consumption costs once connected (tried in Uganda and elsewhere).

Loans are also a solution. In Côte d’Ivoire a revolving fund allows potential users to borrow interest free loans for up to 2 years to finance a maximum of 90% of the cost of connection. Botswana has a similar program where the government offers loans of up to 95% of the cost, payable over 15 years at prime interest.  Loan schemes can also be operated by local banks and electricity supply companies. Kenya Power for instance operates several loan schemes. In partnership with Equity Bank (one of the largest financial institutions in the country) it offers those living within 600 m of a transformer an option of paying 30% upfront with the balance as a loan repayable over three years at an annual interest rate of 15% (extremely high – but comparable with commercial non-secured loans in the market) (see Raluca Golumbeanu and Douglas Barnes, Connection Charges and Electricity Access
in Sub-Saharan Africa, World Bank Policy Research Working Paper 6511, June 2013).

Senegal’s approach probably makes the most sense (and it’s a puzzle why other markets haven't at least tried it) – the local supplier provides financing for connections and wiring at a regulated interest rate which is then recovered in form of higher bills.

Conclusions:

Universal access to electricity would have significant, social, and economic impact on those currently without access.  Despite the low rates of access across the continent (and particularly East Africa), the picture is looking brighter than it seems – in countries that have made a concerted effort, access rates have improved significantly over the last decade, which makes me hopeful that the universal access rate by 2030 may just yet be met.

Powering the continent: nuclear energy

The focus of my posts so far has been to consider the case for renewables in the continent. I think the evidence laid so far is supportive of a strong case for renewable deployment. It is a case; I will continue to make with additional evidence. In this post however, I’ll make a detour to consider the case for nuclear energy.

A resurging interest in nuclear…

There has been an increasing interest in the development of nuclear energy in the continent.  In the East, Kenya established the Kenya Nuclear Electricity Board whose primary mission is to fast track the development of nuclear electricity generation in Kenya.  Further west, in March this year, speaking at the Nuclear Security Summit at The Hague, President Goodluck Jonathan announced Nigeria’s intention to develop nuclear power plants.  The country is planning to commission its first project, a 1,200 MW plant by 2020 and an additional 2,800MW by 2030. The previous government in Senegal announced in 2010, that it was considering building a nuclear electricity plant with French assistance with a timeline for 2020 commissioning.

The status (and brief) history of nuclear energy in Africa…

South Africa is the only country with operational nuclear power plants. It has two plants - Koeberg 1 (930MW) and Koeberg 2 (900MW) for a total of 1,830MW. These plants commenced operation in April 1984 and July 1985 respectively and are due to close in 2024 and 2025 respectively.  In addition to South Africa, 8 countries have research reactors – developed mostly during the cold war period. These are mostly small scale plants and are shown in the chart below.

Sources: International Atomic Energy Agency Research Reactors Database, http://nucleus.iaea.org/RRDB/RR/ReactorSearch.aspx; World Nuclear Association Information Library, http://www.world-nuclear.org/info/Facts-and-Figures/World-Nuclear-Power-Reactors-and-Uranium-Requirements/ http://www.world-nuclear.org/info/Country-Profiles/Countries-O-S/South-Africa/

Why the previous renaissance failed?

Despite the considerable interest in nuclear energy in the 1970s to early 1980s, widespread adoption never materialized (the Nigeria Atomic Energy Commission for instance was constituted during this period in 1976). I suspect even in its heyday in the early 1970s, (despite the generosity of Eastern and Western blocs) and a laxer attitude towards safety relative to now, the economics did not make sense. Most nuclear power plants built during this period were state financed or built with public money which most of the newly independent countries simply did not have.

The economics of /cost competitiveness of nuclear and commentary on its potential

The question then is whether things have changed, that is whether the economics makes this new renaissance enduring compared to the last. From a levelised cost basis (presented below) nuclear appears to be reasonably attractive and cost competitive.  It costs approximately $96/MWh – more expensive than geothermal, hydro or wind, but certainly cheaper than solar. It is also comparable to coal (the subject of a future post). On this basis, the answer to whether we should consider it is a qualified maybe.

Costs of wind, and other power generation technologies in $/MWh 

Source: US Energy Information Administration (EIA), Levelised Cost of New Generation Resources in Annual Energy Outlook 2014, April 2014

The cost metric cited above, however hides a few important aspects of nuclear which makes it unique as an investment case. Nuclear requires a lot of upfront expenditure.  It costs approximately $5,500 per kW. Given that most new plants are likely to be sized at 1,200MW or greater; this simply means that a single plant would require $6.6 billion. And that does not guarantee that it will be on time and on budget. Recent projects in Flamanville, France and Olkiluoto Finland have experienced significant cost and time overruns due in part to new designs, project management or other reasons. EDF’s Flamanville 1,600MW reactor originally had a cost estimate of €3.3 billion (in 2005) which has since been revised to €8.5 billion. If we conservatively assume a 50% cost overrun (less than EDF’s experience), we are still looking at roughly $10 billion in upfront capital expenditure.

(a) Can we afford this?

There are three crude measures of assessing whether nuclear should be an option. The first is financial – do most countries have the budget to finance a nuclear programme or not?
The chart below shows that the cost of a single plant is basically more than the annual revenues collected by all but nine countries. Moreover, if you assume a prudential threshold that the cost of a single project should not be more than 10% of annual revenues, then only a single country meets this threshold – South Africa.

Estimated national budget in $ million - 2011

Source: CIA World Factbook – See https://www.cia.gov/library/publications/the-world-factbook/fields/2056.html

I appreciate that such a project would be financed in part using long term debt, and that the capex would be over a 5 year period of time, so potentially affordable by a few more countries. In addition, there is a case that several countries combining forces could feasibly finance such a project. However, this does not detract from the fact that as an undertaking, outside South Africa, almost every other country would struggle to finance a single plant.

(b) Can the national power systems cope with this?

The second test is whether the electricity system in most countries could cope with this. The simple answer is that most national systems would not cope. Of the 49 countries shown in the chart, in all but 16, a single 1,200MW nuclear plant would provide more than the existing installed capacity. Of the remaining 16, with the exception of South Africa, Egypt and Algeria, a single plant would provide more than 15% of existing installed capacity, posing considerable challenges for grid operation.

Estimated size of the electricity system in MW of installed capacity - 2011

Source: US Energy Information Administration (EIA), International Energy Statistics - Total Electricity Installed Capacity by Country, 2011

Since electricity cannot be stored and is consumed when produced, the system operator normally keeps as reserve, enough capacity to back-up the single largest plant to ensure that in the event the plant fails, demand can still be met. Installing a 1,200MW reactor means that you would need a significant amount of back-up, probably equal to the size of the plant. You are therefore looking at over 2,400 in new capacity to ensure supply.

From the chart above - that is more than most countries currently have and would likely require significant investments to strengthen the grid and provide back-up just to ensure the plant can operate. It is possible that with greater regional grid interconnection this is less of an issue; however it is an important disadvantage of nuclear plants.

Four UK nuclear reactors owned by EDF Energy (2,300MW capacity) were shut down a few weeks ago for safety reasons following a routine inspection and are now likely to be offline until November or December this year – imagine having to suddenly shut down 50 or 60% of national electricity supply for several months to get a sense of the scale of the challenges nuclear would pose.

(c) How about safety?

Public perception of the safety of nuclear energy has been shaped by accidents such as Chernobyl, Three Mile Island and most recently Fukushima. Although there is considerable debate on the risk of nuclear energy, I personally think safety as a concern is overstated and with a robust safety infrastructure and regulatory regime, nuclear can be a safe means for generating electricity.

Having said that, developing such systems takes time and significant resources, which I am not confident any of the countries outside South Africa currently have or are likely to develop over the next decade.  Take Nigeria for example, last year it graduated a total of six nuclear engineers (very limited technical expertise) and in late March, nuclear scientists working for Nigeria's Center for Energy Research and Development, Obafemi Awolowo University, the Center for Energy Research and Training and Ahmadu Bello University threatened to picket the Nigeria Atomic Energy Commission (NAEC), if nothing is done to settle their back unpaid salaries (cannot even pay those available).

Success therefore will require a comprehensive legal framework and developing competences in licensing, monitoring and supervision of compliance with safety standards and security guidelines consistent with international /IAEA standards; investments in emergency preparedness, security measures, and environmental protection and establishing long-term financial arrangements for decommissioning and radioactive waste management as well as the associated liabilities.

Conclusions

I think the case for nuclear energy is fairly weak – most countries cannot afford it, existing grids would be unable to cope with it and the infrastructure and regulatory framework to ensure its safe operation is simply not in existent. Considering nuclear in my opinions is a bit like planning to spend your life savings on a Ferrari, when a Toyota or a Kia would do just fine.

*PS: 140,000 businesses / villages or households, each installing an average of 40kW, and spending c.$80,000 per unit, basically gives you the same amount of output - and far easier to achieve than financing a $10b programme!

Powering the continent: the counterfactuals – cost of generation

Over the last couple of blog posts, I have been reviewing the current status of deployment, cost competitiveness and long term potential of various power generation technologies in Africa.  In last week’s post I reviewed the costs of diesel generation – the primary means for power generation in rural Africa.

In this week’s post we review the costs of power across the continent. I am currently trying to pull together data on actual retail tariffs by country from disparate sources, but this is much harder than anticipated due to paucity of data, so it will be awhile until I share this.

The aim of last week and this week's post is to try and assess whether what is currently used to generate power (be it diesel or others) is cheaper than the cost of building out renewables or whether renewable sources are in fact cost competitive already.

Shown below are estimated costs of generation by country from a study dating back to 2008. See

(a) Vennemo, Haakon, and Ornica Rosnes. 2008. “Powering-Up: Costing Power Infrastructure Investment Needs in Africa.” Background Paper 5, Africa Infrastructure Country Diagnostic, World Bank, Washington, DC;  

(b) Cecilia Briceño-Garmendia and Maria Shkaratan. 2008. “Power Tariffs Caught between Cost Recovery and Affordability.” Policy Research Working Paper 5904, World Bank, Washington, DC.

I have updated these using IHS CERA’s Power Capital Costs Index (PCCI) – without nuclear, as of Q1 2014 and with minor tweaks on my read of the assumptions. The PCCI tracks and forecasts the costs associated with the construction of a portfolio of 30 different power generation plants (coal, gas, wind) indexed to year 2000. These updates are intended to generate a very rough proxy (assuming not much else has changed) of current costs of generation by country.

Estimated costs of generation in Africa, $/MWh

Cecilia Briceño-Garmendia and Maria Shkaratan. 2008. “Power Tariffs Caught between Cost Recovery and Affordability.” Policy Research Working Paper 5904, World Bank, Washington, DC.
IHS CERA Power Capital Costs Index (PCCI), See http://www.ihs.com/info/cera/ihsindexes/index.aspx

I have superimposed a red line – cost of wind; and a black line (cost of PV), and presented the same information in map format as well. Where costs are higher than those of wind and solar, these highlight cost competitiveness and vice versa.

Estimated costs of generation in Africa, $/MWh - and competitiveness of solar PV/wind

In over half of the countries presented, (assuming the costs of generation shown are reasonably accurate) means that developing solar / wind at today’s costs should be a no brainer.

In future posts, I will tackle why despite the economics, outside of South Africa, were are still seeing limited growth in power generation in general and renewables specifically. We will also review potential models for delivering solar (I am particularly intrigued by M-KOPA Solar model and similar small scale distributed generation models).