COLUMN-Electrification in Africa, a question of credit: Kemp

Tue Apr 29, 2014 5:57am EDT

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(John Kemp is a Reuters columnist. The views expressed are his own)

By John Kemp

LONDON, April 29 (Reuters) - Electrification was the greatest achievement of the 20th century, according to the U.S. Academy of Engineering.

For people in North America and Europe, the availability of power at the flick of a switch has become so commonplace it is no longer remarkable.

But for 1.2 billion people in sub-Saharan Africa and developing Asia, electricity was still a dream in 2011.

More than 300 million people in India were without access to electricity, which the International Energy Agency defines as consuming at least 250 kilowatt-hours per year for a rural household and 500 kilowatt-hours for an urban one.

Nigeria, Indonesia, Ethiopia, Democratic Republic of Congo, Bangladesh and Pakistan each had more than 50 million people without power.

Another 43 nations, virtually all in sub-Saharan Africa, had at least a million people with no electricity (link.reuters.com/jug88v).

But the big obstacle to electrification in Africa is not constructing power stations and building overhead power lines. It is working out how to help the region's households - many with limited and irregular cash flows, little collateral and no access to credit - to pay for the huge investment needed to bring electricity to them.

ECONOMIC EXCLUSION

In March, an official from the U.S. Agency for International Development (USAID) testified to the Senate Foreign Relations Committee: "Over a year, a refrigerator uses six times more electricity than a Tanzanian citizen, and it would take an Ethiopian citizen two years to consume the amount of electricity that an American does in three days."

He added: "Sub-Saharan Africa (excluding South Africa) generates 28 gigawatts of power for more than 900 million people - about the same as Argentina generates for 42 million people. And on any given day, a quarter of that energy is unavailable due to inefficient outdated infrastructure."

No electricity means no development. "Without electricity they (the rural population) have no lights, and their children must do their homework under dangerous paraffin lamps. Using a computer for schoolwork or anything else is impossible," Symbion, an independent power producer, told the committee.

There is no refrigeration to preserve food and cooking is done on wood- or dung-burning stoves that cause deforestation, greenhouse emissions, and toxic fumes that are responsible for an estimated 2 million premature deaths a year.

RURAL ELECTRIFICATION

Africa is rich in energy. There are enormous untapped resources of gas, oil, coal, geothermal, solar and wind power that could easily meet the region's requirements.

The usual problems of war, corruption, lack of investment, poverty and the immense distances involved in bringing power to remote rural communities have all contributed to the failure of electrification.

More than half of urban dwellers in sub-Saharan Africa have access to electricity, but the comparable figure for rural communities is under 20 percent.

In that respect, the problem of bringing power to rural Africa is no different from other parts of the world, including the United States.

On the eve of the Great Depression, 44 percent of the U.S. population was still rural, around 50 million people; almost none had electricity. The federal government played a decisive role in the 1930s in spreading power outside the cities through New Deal agencies such as the Rural Electrification Administration and the Tennessee Valley Authority.

Governments and international donors will have to play a similar role in Africa. The biggest problem, however, is getting people to pay for power.

Power stations, hydro dams, wind and solar farms, as well as the transformers and overhead power lines that make up the grid, are enormously expensive and require massive capital investment up front that must be recovered over time from local utilities and ultimately households and businesses.

CREDITWORTHINESS

In most countries, local or regional utilities pay for the construction of generation and transmission assets, and then recover the cost from their customers' bills. But in much of Africa and Asia, utilities struggle to charge their customers enough. Political interference prevents them from charging a sufficiently high price to recover their costs, and non-payment or late payment is endemic.

Even in areas served by power plants and distribution systems, electricity theft and non-payment of bills are common. In much of the region, communities lack the means or the credit to make credible promises to pay the costs of installing new generation and connecting them to the power supply.

Customers fail to pay utilities, which default on payments to independent power producers and transmission operators, which in turn default on their loans from project financiers.

The returns on rural electrification have been low and the risks high. Symbion, the independent power producer, complained to the Senate it was owed $70 million at the end of February by utilities in one African country.

"This level of debt is simply unsustainable for a company of our size. Whilst we have every confidence that the host government will eventually pay us, the cash-flow problems that the situation has created cause considerable disruption to our operations," Symbion said.

"Not being paid on time or at all is at the top of the fear list for the private sector."

Foreign investors remain wary. Africa attracted an average of just $8.4 billion in foreign direct investment in utilities in 2011 and 2012, according to the United Nations Conference on Trade and Development's "World Investment Report 2013". That figure, which includes gas and water as well as electricity and is for the whole continent, is woefully inadequate.

POWER AFRICA INITIATIVE

The Obama administration is trying to promote a more coordinated approach while boosting exports for U.S. construction firms and equipment manufacturers. The Power Africa Initiative, launched last summer, aims to install 10,000 megawatts of new generation capacity, connect 20 million new customers, and improve electric reliability across the continent.

Six countries (Ethiopia, Kenya, Tanzania, Ghana, Liberia and Nigeria) have been selected to participate in the first phase but the administration hopes to add more over time.

USAID, as well as the Export-Import Bank of the United States, the Overseas Private Investment Corporation (OPIC) and U.S. representatives at the multilateral development banks have been instructed to make electrification projects a priority.

U.S. lawmakers have proposed an Electrify Africa Act (HR 2548), a largely symbolic piece of legislation that would declare it the policy of the United States to encourage electrification in Africa and instruct the U.S. Treasury and other agencies to prioritise electrification funding.

The aim of these programmes is to use government funding, loan guarantees and diplomatic backing to encourage greater investment from the private sector. But unless the payment and credit problem can be resolved, electrification is unlikely to make much progress.

GOING OFF GRID

One solution is to encourage off-grid and community-based generation. Small-scale local projects require less capital up front. They may be more suited to rural communities. There are no expensive high-voltage transmission networks to build. And the problems with grid management and control can be avoided.

Crucially, micro-generation projects may be able to avoid some of the payment and credit problems, as well as the political interference and corruption, that bedevil large-scale centralised generation and transmission systems.

"Decentralised off-grid and mini-grid solutions often offer the swiftest, cleanest and most innovative solutions to energy poverty by sidestepping the need to connect to the national electricity network," USAID said.

The aim is to tie payment closely and visibly to consumption. Many rural communities already have some form of mobile phone service. Mobiles avoid the problems of laying expensive fixed lines and trying to recover the costs from subscribers; users are charged on pay-as-you-go plans.

In Kenya, USAID is backing several innovative projects including a pay-as-you-go lighting service, and a metered solar power and battery system. In Tanzania, OPIC is funding software that will allow customers to pre-pay for electricity via their mobile phone.

In the cities, Africa needs more central generating and transmission capacity. However, extending the power grid to rural areas is probably uneconomic, and off-grid and micro-grid solutions make more sense. (Editing by Dale Hudson)

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