A new World Bank study presents a sobering assessment of the financial health of electricity utilities in Sub-Saharan Africa, and suggests how utilities can be profitable while extending affordable services for the poor.
“A central but under-reported issue on the movement to reach universal access is the financial health of electricity utilities,” says Lucio Monari, director: energy and extractive global practice at the World Bank.
“Less than half of utilities cover operating expenditures while several countries lose in excess of $0.25 per kWh sold. In this context, it will be difficult for utilities to maintain existing assets, let alone facilitate the expansion needed to reach universal access goals.”
Monari will address the Utility CEO Forum at the upcoming African Utility Week in Cape Town from 16-18 May and present results of a recent World Bank study: “Making Power Affordable for Africa and Viable for Its Utilities”.
The study looked at utility financial statements and power tariffs in more than 40 countries, and spending data in household surveys for 22 countries.
“It remains surprisingly difficult to get basic bread-and-butter data such as tariff schedules, operational performance data, and financial statements,” Monarai says. “We focused heavily on raw data collection directly from Sub-Saharan utilities.
“This study’s strength is that it distils lessons from dozens of countries. We hope it will help make Africa’s power sector financially sustainable and advance the goal of universal access to electricity.”
Key messages from the report suggest several ways of recovering the cost of supply and making electricity affordable:
* One-third of countries may become financially viable through improving operational efficiency.
* It is almost certain that increasing tariffs will be needed in the remaining two-thirds of the countries studied.
* Individual meters in poor households can help utilities target cross-subsidies better.
* Installing prepaid meters would benefit both utilities and customers.
* The first priority in increasing access to electricity is to make the initial connection affordable to the poor.
“To make the power sector more viable, sector governance and utility management need to be strengthened,” Monari says. “The regulatory framework should be clear and predictable, providing incentives for the utility to improve their performance. Privatization and unbundling can work where the conditions are right. Unbundling does have transaction costs that need to be considered and weighed carefully against the benefits of creating new institutions.”
The World Bank study focused primarily on grid electricity, says Mr Monari, adding: “While connecting to the grid is a solution for urban Africans and many people living in rural areas, rural electrification cannot rely solely or even largely on grid extension. Mini and off-grid electricity, especially from sources like solar, offers increasing potential to electrify homes in many rural areas of sub-Saharan Africa.”
The study states that South Africa has the most developed and complex electricity sector in sub-Saharan Africa and that its installed capacity alone is equivalent to the rest of the continent. Eskom also seemed to be one of the best performing utilities in the region with regards to technical and non-technical losses.
However, the report identified low tariff levels as a major issue. “As Eskom moves away from aged coal plants to modernise its generation fleet, prices will likely need to increase to cover the investment costs for capacity rehabilitation and expansion, or else the utility will continue to pose a fiscal burden to the government,” Monari says.