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Rebuttal of World Bank’s utility affordability report

first_img Low carbon, solar future could increase jobs in the future – SAPVIA AFD and Eskom commit to a competitive electricity sector BRICS Featured image: Stock “The World Bank has very creditably assembled data with which it was able to draw a conclusion that old power watchers like me have long been concerned about,” states Clement Onyemelukwe, who is a chartered electrical engineer, mechanical engineer and economist.Using its recent researched data on the utility affordability of 39 grid power utilities in sub-Sahara, the Bank was able to examine the relationship between their costs and revenues.The Bank’s report Making Power Affordable for Africa and Viable for its Utilities found that of the 39 country utilities studied only Seychelles and Uganda were fully recovering their operational costs.It is necessary to add that current power systems in these two counties are very small. The World Bank findings have some important consequences.These findings come at a time when it is estimated that about $15-20 billion a year investment through to 2030 will be needed to achieve universal power access in the region. Progressive reliable power supply is said to be a ‘sine-qua-non’ for any meaningful economic development in the region. Public investment is needed to leverage private investment in this effort.If power utilities are not financially viable, private investment in power in the region will disappear and development banks’ power portfolios will increasingly be in danger.The report was basically, as it stated, a study of “the relationship between operational costs and revenues estimating the scope for reducing utility deficits by lessening operational inefficiencies, collecting tariff data to assess affordability and analysing electricity spending data for households”.For some reason, this utility affordability report specially laid emphasis on controlling staffing levels. It also referred to what it called “external shocks”, for which it listed change in oil prices, currency or rainfall, which it said can “exacerbate” the financial prospects of these utilities.Changing operational practices deemed viable solutionThe report also concluded that in one-third of the African electricity utilities, financial unviability can be solved by improving/changing operational practices and reducing over-staffing. It advised that by making the larger customers pay more, reducing financial unviability can be accelerated “without loss of welfare”.The Bank therefore, on that basis, concluded that “African electricity providers can be profitable and still make electricity affordable”.The report further concluded that two-thirds of utilities in Africa need tariff increases and that in these cases the funding gap cannot be bridged “simply by eliminating operational inefficiencies. Tariffs will have to be increased even after achieving benchmark operational efficiency”.Tariff increases is an admission that one is unable to recover one’s costs. As common in all African countries, the bulk of the customers cannot afford power price increase. Thus, there is a financial stalemate.Utility affordability at stake in AfricaOne would have expected the World Bank, following these unhappy conclusions, to have examined the capital costs of these African utilities to see how capital costs will affect their conclusions. The authors of the report did not – probably because they assumed that present capital costs of the African utilities complied with the capital expenditure model, which the authors told us were presented to them by the Bank whose details were however not presented.Reading current literature and publications/news on power in Africa and utility affordability is not a happy experience for an old power operator like me.Current literature gives the impression that power capital costs in sub-Sahara Africa are the same with those of the Western advanced countries and in some respects (smaller power stations, lack of economy of scale, financing, transport costs, foreign consultants, risk factors etc.) higher. The unfortunate truth is that the literature is largely correct.The position is therefore that when capital costs are included in the analysis, the financial viability of all African power utilities is worse than the World Bank report made out, making power financing portfolios in Africa increasingly untenable.This position will bring power development in the region to a possible grinding halt.Some of us early power practitioners in Africa foresaw this unhappy prospect. Save for Ghana, which won its independence in 1957, the bulk of sub-Sahara African countries got their independence in the 1960s. At independence, we were faced with economies that were mere appendages to those of our former colonial masters with little infrastructure and very high unemployment and poverty.The Nigerian power grid perspectiveI was by 1960 the Deputy Head of Planning in the Central Electricity Generating Board, CEGB, the then UK-wide generation and transmission power authority the year Nigeria got its independence. I was invited to take on as the Chief Electrical Engineer of the then Electricity Corporation of Nigeria, E.C.N.On arrival in Nigeria in 1961, it became clear to me, as an engineer and an economist that a lot of what I had planned and designed in the UK could not and should not apply to Nigeria.Capital intensive based designs and practices were not the way forward, I concluded. Looking at the future power prospects for Nigeria, I selected a 330kV power grid for Nigeria and closely supervised the initial designs of the present Nigeria 330kV grid with Kainji Dam as a new additional source of power, bearing in mind my conclusions.The world power industry at the time maintained dialogue. There were quite a number of international power journals and publications that facilitated discussions and arguments in which I participated actively and contributed many articles.The World Power Conference, initiated in the UK since 1924, organised annual conferences of power practitioners, designers, manufacturers and their politicians in different parts of the world simultaneously in English and French. Because of the British and French foundation of the World Power Conference, newly independent African countries automatically became members and set up their official national committees of the World Power Conference.In Nigeria, the Minister of Mines and Power set up the Nigerian National Committee of the World Power Conference with the Board Chairman of ECN as Chairman and I, as the Secretary. I presented papers for adapting power design and practices to suit the scarce resources, unemployment, and poverty in Africa at the World Power Conference held in Australia and Israel in 1962 and 1965. The bulk of the African delegates were behind the move just as there was substantial international support in the conference that Africans should do what their economies needed.Nigeria power, as a result, maintained high annual rising profits from 1961 to 1976, the last year it did so, due to new incoming power regimes. World Power Conference unfortunately ceased to exist in its form by 1999 when it became the present less-inclusive World Energy Council with its own international energy agenda.Exploitation of Africa’s power utility marketThe electricity industry world-wide has progressively become more capital-intensive especially in the period from 1990-2000 with the maturity of IT and related digital technology that has since accelerated automation and digitalisation in the industry.The President of Edison Electric Institute during the 2017 Edison Power Conference re-affirmed that the electrical power industry is the most capital-intensive industry in the US. Transferring this capital-intensity into Africa is economically clearly harmful and undesirable.The position in the US is similar in all Western economies, all now engaging in participating and exploiting the opportunities offered in the huge and growing market for power in Africa as African utilities are now totally dependent on inputs of design, equipment and capital from outside.The immediate result in respect of the two largest economies in sub-Sahara Africa is that Nigeria is running up a fast-growing power debt because its three-sector power system is financially unviable.At the same time, South Africa’s Eskom (the former triple A finance power utility) is now heavily in debt after it became necessary for it to transform from serving the minority advanced apartheid economy to take on the wider majority underdeveloped economy of South Africa.I was in South Africa in 1994 as a consultant, as apartheid ended. I was fully aware that Eskom needed to change its basic strategy in many directions. Eskom, however, refused even to attend meetings called to dialogue with the South African Municipalities who controlled a substantial part of South Africa’s sub transmission and distribution and even generation in a few cases at the time and who covered all black South African areas.Possible way forwardEskom today needs to make multitudes of strategic technical changes in strategy to help it to recover from its present financial debt problems to its earlier star financial and utility affordability status. The answer is not to dismantle it and start something new.African power utilities need to be assisted urgently to rapidly reduce their capital costs and turn their technical operations into labour-intensive operations based on earlier starts that were made decades ago, if the present looming power crisis in Africa is to be avoided.Note to that it is not possible to determine the proper economic energy mix in Africa (grid power vs. renewable energy) until the optimum economic position and pricing of grid power in Africa is determined.Clement OnyemelukweClement Onyemelukwe is a chartered electrical engineer, mechanical engineer and London University-trained economist. He was chief engineer of the Electricity Corporation of Nigeria 1961-1974 and is the author of several economic books. Clement is Chairman of Colechurch International Ltd in the US. UNDP China, CCIEE launch report to facilitate low-carbon development Generation Previous articleNigeria set to launch framework for low-cost microgrid energyNext articleEight trends to shape global PV and storage marketplace Nicolette Pombo-van ZylAs the Editor of ESI Africa, my passion is on sustainability and placing African countries on the international stage. I take a keen interest in the trends shaping the power & water utility market along with the projects and local innovations making headline news. Watch my short weekly video on our YouTube channel ESIAfricaTV and speak with me on what has your attention. RELATED ARTICLESMORE FROM AUTHOR Finance and Policylast_img read more