Sustainable Energy in sub-Saharan Africa: Finance, Regulation and Markets

Article By Magnus Uju Amajirionwu, PhD
Professor of Environment & Sustainable Development
Coordinator, EMBA Environmental Management Programme

 

The sub-Saharan Africa is, geographically, the area of the continent of Africa that lies south of the Sahara. According to the United Nations, it consists of all African countries that are fully or partially located south of the Sahara. The area is populated by a little over a billion people.

Sub-Saharan Africa’s energy systems face an enormous challenge. The region currently has the lowest electricity generation capacity and experiences the most acute forms of energy poverty in the world. Except for South Africa, on a per capita basis, sub-Saharan Africa is the lowest consumer of modern forms of energy (e.g. petroleum, electricity, coal and new renewables) in the world. The region’s low consumption of modern energy is largely due to continued heavy reliance on traditional biomass fuels coupled with underdeveloped modern energy subsectors especially petroleum and electricity.

Sub-Saharan Africa has been trapped in an unfortunate cycle. The little renewable energy infrastructure present there has been undermined by the effects of climate change and an overreliance on hydropower. The inability of local institutions to produce and provide sufficient, reliable and clean energy through renewables has resulted in millions of people reverting to environmentally harmful energy sources. These include the burning of kerosene, wood, and other assorted biomass, which collectively result in heightened fossil fuel emissions that could be averted.  Renewable energy and energy efficiency options have been identified as important for the development of the sub-Saharan African energy sector. However, these options have not yet attracted a significant level of investment or policy commitment.

Finance

Financing presents a fundamental challenge for advancing renewable energy in sub-Saharan Africa. Public finance will not be able to cover these costs and thus it is imperative that public finances, along with donor and non-governmental support, be dedicated towards efforts that leverage private finance in the sector. At the same time, it is imperative that opportunities for increasing public finance must be pursued by reducing wasteful and regressive expenditures and addressing illicit financial flows.

Public and donor support should go toward reducing taxes, tariffs, and import costs on renewable energy components; undertaking resource assessments; subsidizing basic electricity allowances and connection fees; and creating and supporting institutions focused on promoting learning around new technologies. To help promote investment in technologies that increase energy access, it will be important to develop policies that reduce the risk for private investors, such as making grid expansion plans transparent, and to create institutes to train the relevant technicians. Finally, there is a need to promote financial inclusion and increase access to credit for both potential consumers and local entrepreneurs.

Regulation

In most African countries utilities are still state-owned, and although many countries have committed themselves to a programme of liberalization and privatization of the electricity sector, only Cameroon, Côte d’Ivoire, Egypt, South Africa, and lately Nigeria, have made significant advances in the liberalisation of their electricity sectors. Regulation is required to ensure fair competition is maintained and to prevent anti-competitive behaviour by companies with market power that can harm consumers and competitors. Motives for regulation in competitive markets also include environmental protection (e.g. to reduce harmful emissions such as CO2, SO2, NOx, etc), and social justice.

Regulation is the primary tool to address those market distortions and is, when carefully designed, capable of serving a range of policy goals related to energy supply, including improved market functioning, poverty reduction and sustainable development.

Ensuring fair competition regarding electricity generation requires the creation of a marketplace which is open to both existing generators and which does not induce barriers to deter newcomers. Regulation should prevent the capture of sufficient market power by a single generator or by groups of generators such that prices can be controlled by the entity.

Fair competition is also necessary in the electricity supply function, i.e. the firms who buy from generators and sell to consumers. Significant regulatory issues include consolidation of companies within the function such that one or more companies can come to dominate the function, though this must be balanced with the economy-of-scale advantages that consolidation can bring and the cost reductions that can thus be passed on to the consumer.

Markets

The current energy market in sub-Saharan Africa is heavily reliant on hydropower, fossils, biomass and kerosene to meet daily energy requirements. Access to electricity and natural gas is limited and largely restricted to the urban population. Rural electrification rates across sub-Saharan Africa are low, with over 600 million people lacking access to basic electricity requirements. The situation is currently undergoing a change as organisations with expertise in off-grid electrification are providing access to electricity through renewable energy resources, such as solar PV. Governments in countries like Kenya are supporting programmes and projects that aim to improve access to electricity for rural areas with a view to meeting overall electrification targets and uplifting the economy.

Inadequate infrastructure remains a core challenge for African power utilities, especially in sub-Saharan Africa where development in power generation and transmission capabilities is unable to keep pace with the growing demand. One reason for this is the lack of investment and financial creditworthiness of power utilities to maintain operations, as well as to invest in upgrading infrastructure. Inefficiencies in the value chain are considerable with utilities not realising the true value of generated power. Additionally, with the declining cost of solar and wind technologies, utilities face stiff competition from independent power plants (IPPs) which now offer competitive prices – even challenging base load coal generation.

Conclusion

Falling prices for renewable energy technologies—principally solar energy—mean that there are now novel possibilities for providing households with access to electricity and addressing energy poverty. However, electricity is expensive compared with household incomes in the region, regardless of the technology used. Based on current estimates, so long as a household is buying electricity from the grid, an average household in sub-Saharan Africa will only just be able to afford the minimum amount of electricity needed to meet the definition of energy poverty. Considering electricity from distributed sources, the average household would not be able to afford enough electricity to meet even its most basic energy needs. Ensuring that the poorest households in the region can access electricity and meet their basic energy needs will likely require significant support.

Credit:

https://www.smart-energy.com/issues/2018-issue-2/african-energy-market-overview/

https://www.oxfamamerica.org/static/media/files/oxfam-RAEL-energySSA-pt1.pdf

http://climate.org/revolutionising-renewables-in-sub-saharan-africa/

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