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Africa’s Transmission Sector: Private investments vital to drive growth [free access]

July 7, 2017

Energy policies have started to move to centre stage in Africa due to the increased focus on rapid economic growth. The governments of African countries are adopting ambitious targets for power generation, backed by far-reaching reforms of their energy sectors. However, in order to ensure that this growth is sustainable and for countries to achieve their real growth potential, African governments need to prioritise the provision of reliable and affordable electricity to industry and communities. 

 

In order to firmly plug Africa into the global economy, a reliable electric power infrastructure is required. Transmission is a crucial part of the electricity value chain in Africa. So far, transmission-related infrastructure has mostly been financed by public sources. However, given the fact that just 35 per cent of the continent’s population has access to power, there is a definite need for a new model. Some countries in Africa, including Nigeria and Kenya, are thus evolving new models of financing by encouraging investments from private players.

 

A recent report, ‘Linking up: Public-Private Partnerships in Power Transmission in Africa’, released by the World Bank strongly recommends private investments in the segment. The report examines various models involving private investments followed globally and their suitability for the African subcontinent. It estimates the average annual investment requirement to expand the transmission network in the African region during the 2015-2040 period to be between USD3.2 billion and USD4.3 billion. For the power sector as a whole, the estimated investments are pegged at USD33.4 billion to USD63 billion during the 25-year period up to 2040. The report indicates that private investments in transmission infrastructure could help expand electricity coverage in Africa as well as ease financing constraints on the region’s power utilities.

 

The report refers to four different business models used to attract private investment in transmission, namely, privatisation (with ownership transfer), whole-of-grid concessions, independent power transmissions (IPTs) and merchant investments. With the restructuring and liberalisation of power markets in the developed countries, private companies finance a large share of transmission investments in the Americas and Europe. The report draws on successful efforts in developing countries in Latin America and Asia. Specifically, it examines IPTs in the four countries of Brazil, Peru, Chile and India, where major power sector reforms were undertaken to privatise the sector. It shows that between 1998 and 2015, private investments worth over USD24.5 billion were collectively raised to finance transmission lines in these countries. This has facilitated the addition of close to 100,000 km of new transmission lines. It further mentions that IPTs resulted in 36 per cent savings in annual project costs in Peru and facilitated the construction of over 21,000 km of new transmission lines in India (from 2006 to 2016). The report also examines the case study of the Philippines, considering the performance of long-term concessions for the whole grid rather than for individual lines. It recommends adopting the IPT model, which has not been introduced by any African country so far, to involve private investors in the region’s transmission sector.

 

The report further lists 10 steps to attract private investments in the sector. Key recommendations include developing the right policy, legislative and regulatory frameworks; introducing new models for concessional lending; determining the right stage for tendering transmission projects; ensuring adequate revenue flow and credit enhancement for projects; and tailoring independent power transmission projects (more details in box below).

 

Another multilateral agency, the African Development Bank (AfDB), which is one of the major funding sources for the region’s power sector, has iterated that electricity is a priority sector as far as infrastructure investment needs for the continent are concerned. It is also encouraging African governments to incentivise and enable private investors to realise their full potential. For this, it believes that putting in place a conducive and predictable macroeconomic, business, property rights and fiscal environment is a prerequisite.

 

Efforts towards privatisation of the electricity generation sector in the region have resulted in investments of USD25.6 billion by independent power producers, with an installed capacity of 11 GW. Given that the private sector is already actively involved in the power generation segment in Africa, its participation in the transmission sector could be increased if suitable investment conditions are created. Presently, the transmission segments in all African countries continue to be owned and operated by the respective state-owned utilities. However, in some countries such as Algeria, Egypt, Ghana, Kenya, Nigeria and Uganda, the transmission function is handled by a separate company, though under the ownership of the state.

 

Nigeria has followed a different model. In 2005, it created Transmission Company of Nigeria (TCN), the management of which was contracted out in July 2012 to the Canada-based Manitoba Hydro International (MHI) for three years for USD23 million. MHI, however, took control of the company in March 2013 and handed it back to the government in July 2016. More recently, the Nigerian government has decided to go ahead with the contractor finance model. Under this model, private investors will be invited to bid, procure and build sections of TCN’s transmission projects. The government is expected to auction projects worth USD200 million for the first tranche under this new model. However, there are challenges related to TCN’s financial and operational performance.

 

In another instance, the Kenyan power sector has managed to attract significant private sector investments as a result of the government’s concerted efforts to bring about power sector reforms and tariff rationalisation. For the first time in the transmission sector, Kenya Electricity Transmission Company Limited (KETRACO) plans to follow the public-private partnership (PPP) route to implement transmission projects in the country. Kenya has planned significant investments of KES256 billion for the 2016-2024 period. Of this, KES180 billion has been secured from various development agencies, including the AfDB, World Bank and KfW. KETRACO plans to develop over 9,400 km of transmission lines and 13,320 MVA of transformation capacity by 2024.

 

In terms of existing infrastructure, Global Transmission Research estimates Africa’s transmission network to comprise a line length of over 150,000 km and a transformer capacity of around 315 GVA at 110 kV and above voltage levels. The line length is estimated to have increased at a compound annual growth rate (CAGR) of about 3.2 per cent since 2006 while transformer capacity has increased at a CAGR of 3.5 per cent. Majority of the existing networks are based on alternating current (AC) technology with only 2 per cent of the total line length estimated to be direct current (DC) lines. Similarly, almost the entire line length is overhead network with less than 200 km of underground and undersea cables. Global Transmission Research estimates that around USD32 billion was invested in Africa’s power transmission sector between 2006 and 2015. However, investments in the region’s transmission networks have remained inadequate, thereby reducing the capability of the networks to withstand contingencies.

 

Recognising this, substantial investments have been planned for the future. According to Global Transmission Research, the 10 largest African utilities have planned an investment of over USD52 billion during the 10 years up to 2025. It is estimated that over three quarters of this will be made in four countries—Algeria, South Africa, Egypt and Nigeria. Further, almost 60 per cent of the planned investment is envisaged for the development of new projects whereas 35 per cent of the investment is planned for upgrades and modernisation of assets. This data is skewed by the expected investment plan of South Africa, which has plans to invest significantly in refurbishment and renovation as compared with other Africa countries. Most countries are focusing on building and strengthening their domestic grids through simultaneous development of lines and substations. Majority of the new projects are proposed in South Africa, Kenya, Tanzania, Mozambique and Nigeria.

 

Past experience indicates that actual investments have fallen short of the predicted requirements by large margins. According to the World Bank, only 19-36 per cent of the estimated investment need of Africa’s power sector was actually expended on an average annually (at USD12 billion) in the past decade. Therefore, the region’s traditional approach to financing transmission must be supplemented. Particularly given that most African power utilities are not profitable and depend on government support for funding. This model is hitting constraints on the total level of government borrowing.

 

The region has great potential to attract private investors, both domestic and foreign, which are expected to respond positively to new market opportunities. Transmission sectors in the African countries have already begun to attract attention, mostly driven by the need to better utilise regional resources, with significant financial help from development agencies. Backed by the prospects of selling electricity to Europe, North African countries have developed aggressive plans to utilise their high renewable energy potential and invest in associated transmission infrastructure. In other parts of Africa, proposals to build electricity interconnections call for heavy investments in transmission grids. These are expected to be developed with financial aid from donor and development institutes. Several cross-border projects are also underway in the region.

 

Challenges notwithstanding, the growing demand for energy, regulatory and social reforms and the need for infrastructure investment are making Africa one of the world’s top energy investment destinations. As the governments show their willingness to provide incentives and assurances to attract investors, more foreign players are expected to seek opportunities to partner with governments and local communities.

 

Box: Key recommendations of recent World Bank Report