Unlocking Regional Energy Infrastructure Development through Market Integration

LAGOS, Nigeria, Capital Markets in Africa: Regional energy infrastructure is a key enabler for regional energy markets. Africa has huge potential to grow its energy markets hence the need to develop robust regional energy infrastructure. To do this requires heavy investment in the production, transportation, and distribution of energy products to end users. Considering the existing high level of commitment by African countries and regional institutions, which have prioritized energy as a priority sector and the commitment to prioritize energy by major financiers, including donors; there is an opportunity to achieve desired results and unlock the development of regional energy infrastructure and regional energy markets in Africa.

The current President of the African Development Bank (AfDB) has set up five strategic objectives for the Bank and at the forefront is the energy sector, “Light up and power Africa”. Thus, the recently approved strategy of the “New Deal on Energy in Africa” has a strategic objective to achieve universal access by 2025.

This article focuses mainly on the power sub-sector. It explores what is needed to unlock the development of regional energy infrastructure in terms of investments, capacity development, the role of the private sector and that of the African governments and regional institutions as well as the benefits of energy markets integration.

Regional infrastructure and Energy markets in Africa
Current status
Currently, Africa has set up five regional institutions to facilitate regional power trading. Those are the four regional power pools: Southern Africa Power Pool (SAPP), Eastern Africa Power Pool (EAPP), Central Africa Power Pool (CAPP), Western Africa Power Pool (WAPP) and the Northern Association of Power Utilities in the Maghreb countries, COMELEC (Comité Maghrébin d’Electricité). Nonetheless, the only regional power market exists in the SAPP, where a competitive energy market in the form of a Day-Ahead Market (DAM) was introduced in 2003 (Short-Term contracts made anonymously through the power pool and where guarantees are required). In the other power pools, there exist power trade arrangements under bilateral agreements. There are many challenges African regional power pools are facing, among the key ones: lack of cross-border interconnections, low power production capacity (chronic power deficit) and weak institutional capacity.

A lot of efforts have been made in the last two decades to interconnect African countries through regional power interconnectors. Almost all the power pools have projected to have energy markets in place before 2020. In SAPP, WAPP and EAPP the last miles to interconnect all countries, as well as reinforcement of existing power interconnectors, are under construction. SAPP already has a functioning regional dispatch and market center while EAPP and WAPP have plans in place for the construction of the regional dispatch and market centers in their respective regions. The CAPP has also planned to interconnect its member countries.

In COMELEC there are long existing bilateral trade agreements but there is no regional energy market planned. Notwithstanding the efforts made, a lot still needs to be done in terms of regional interconnection and of increasing the generation capacity. In addition, the weak institutional capacity will need to be addressed if proper regional energy market is to be achieved by 2020 as planned.

Unlocking regional energy infrastructure development through markets integration
Due to the small size of economies of most African countries (see box 1 below) with the subsequent low energy consumption, the energy markets integration is not an option for all African countries, it is a must. Why?

Energy markets integration
The integration of energy markets will help the countries not only to benefit from economies of scale but also to attract more foreign investments since investors would look at the wider market access. Furthermore, these foreign investments are highly needed to meet the huge financing gap for infrastructure development.

“PIDA Energy Outlook report, 20141 ” , US$96.5bn of investments are needed per year for the energy sector to achieve 69% average access rate to modern energy services in Africa by 2040. Comparing this to the US$22.4bn of current total spending on energy sector (ICA Annual report 2014), the financing gap represents US$ 74.1bn alone for the year 2014. The same study concluded that the full regional integration scenario would help to save cumulatively by 2040 US$ 1,117bn (or US$ 43bn p.a.) and Energy efficiency policies are expected to save 139 GW (16.7%) of capacity needs.

In addition, interconnecting the power pools will increase energy supply security since the peak demand of the different regions do not happen at the same time, henceforth allowing one power pool to import cheap power from another power pool, e.g. the time difference between WAPP-SAPP and WAPP-EAPP are respectively two and three hours. The regions have also different sources of energy, which will maximize the energy mix ratio. It has been recognized that sharing common interests contribute to enhanced peace stability among the countries, hence having common regional public goods, such as hydropower plants, regional interconnectors would contribute significantly to peace and security sustainability among the countries. Those are very clear benefits of African energy markets integration, which demonstrate that the whole continent and its partners have benefits in investing in regional energy infrastructure.

What else needs to be done?
African countries need to enhance regional and national policies in order to attract more investments needed for generation, transmission and distribution projects. Some key examples of policies can be given:

(i) At the national level, improving the performance of the power utilities is key, particularly their balance sheets, reducing the level of losses and increase technical performance in general. It is also important to integrate agreed regional priorities into national priorities.
(ii) At the regional level, the countries and the Regional Economic Communities (RECs) need to strengthen the legal status of the power pools, e. g. allowing them to enter into power purchase agreements with Independent Power Producers (IPPs) to supply directly the power to the pool. This will reduce significantly the transactions costs for regional energy projects since the IPP will deal only with one entity acting on behalf of countries involved in a given IPP. The private sector is needed to contribute to filling the

The private sector is needed to contribute to filling the above-mentioned financing gap. Therefore, enhanced dialogue with the public institutions is required to reduce the perception of the (high) risk associated with African business environment. It should not be considered that the public institutions alone need to approach the private sector. It should be both ways, then the private sector has also benefited in tapping into the huge available opportunities for investments keeping in mind that the rate of return on investment in Africa is one the highest in the world. Donors and all stakeholders need to conjugate their efforts to assist countries and regional entities in enhancing the quality of project preparation. Thus, it is here suggested to consider the following: (a) increase financing going to project preparation (PP) by both the donors and the African countries, (b) enhance the skills of the staff involved in PP, and (c) undertake actions to increase local private sector participation in financing energy infrastructure. This would increase in turn the level of skills and capability of future O&M of the constructed infrastructure.

According to the PIDA projections on investment needs and considering the fact that project preparation takes 5 to 10% of the project investment costs (World Bank), the financing gap for PP can be estimated at USD 8.1bn per year (10% rate used) while the current level of financing for PP is estimated at around USD 1.2bn. Finally, there is a growing appeal to governments to motivate national pension funds and central banks to use part of their reserves to invest in infrastructure development. The African Development Bank has provided opportunities for such investments by creating the Africa50 Infrastructure Fund (http://www.africa50.com/).

Contributor Profile

Mr. Callixte Kambanda is Chief Infrastructure Specialist at the Infrastructure Consortium for Africa (ICA), which Secretariat is housed by the African Development Bank in Abidjan, Côte d’Ivoire. He is a holder of an MBA in Project Management from the Maastricht School of Management and a Master’s degree in Electrical Engineering from the University of Applied Sciences, Kaiserslautern, Germany.

Mr. Kambanda has an extensive experience working in the energy sector, particularly with African countries, Regional Economic Communities and Specialized institutions for the Energy Sector.

He led the work on different ICA publications on Energy, especially on IPPs in Africa and on Power Pools. He coordinated the implementation of a number of power projects in his country Rwanda, while he was working with the Rwandan Power Utility. He led the implementation of different key activities at the ICA, including the work on Project Preparation and the setting up of a Network of Project Preparation Facilities in Africa.

Before joining the ICA in January 2008, Mr. Kambanda was working as Executive Secretary of the Eastern Africa Power Pool (EAPP). He is member of different Professional Associations: Germany Engineer Association (VDI) and until July 2006, he was the chairman of the Rwanda Electrotechnical Committee for Standardization.

This article was featured in the INTO AFRICA August edition, with focuses on Infrastructure Finance in Africa.