Africa Energy: Private Sector-led Investments in Power Transmission

A new World Bank report finds that the private sector can play a vital role in financing, building, operating and building power transmission lines in Africa, helping take electricity to millions in the region.

Sub-Saharan Africa needs to get the private sector invested in power generation — and more investment in the transmission sector is “urgent,” says the World Bank in a 2017 report. With 600 million Africans without access to power, the continent faces severe limits to growth in every sector, from health and education to industrialization efforts and infrastructure growth.

“If we do not address the underlying reasons preventing Africans from achieving wider access to reliable and affordable electricity, economic growth on the continent will remain slow, keeping millions trapped in poverty,” said Makhtar Diop Vice President for the World Bank’s Africa Region in the report, Linking Up: Public-Private Partnerships in Power Transmission in Africa.

Diop lists weak power networks as a primary cause of the power shortages and poor quality of power. Traditionally viewed as the government’s responsibility, transmission networks have largely been neglected in privatization schemes and are being left behind in private investment, even though it requires a relatively small investment compared to other areas of the power sector.

Excluding South Africa, the sub-Saharan region has 229 kilometers of transmissions lines per million people, compared to Brazil’s 610km, Colombia’s 295km or the United States’ 807km.

The World Bank estimates the annual investment needed between 2015 and 2040 in all sectors of power production — generation, distribution and transmission — ranges between $33.4 billion to $63 billion per year. In comparison, the annual investment required to boost the transmission sector over the same period is just $3.2 billion to $4.3 billion.  But even then, many state-owned enterprises can’t foot the bill.

“Addressing these challenges will require new approaches to development financing; there is a disproportionately large funding gap affecting Sub-Saharan Africa’s power sectors which cannot be met by the limited public finances of client countries alone. Scaling up private participation along the energy value chain is necessary,” said Diop.

Private investment accomplishes several factors. First, it opens up new financing streams, especially project-finance, for cash-strapped governments. It also creates a “competitive and cost-reflective” price scheme, as the private sector will need to recoup costs. According to the report, this competitive pricing scheme has positive impacts on the power sector, as it increases transmission capacity, increases sales and reduces generation costs. Private investment is also often credited with bringing in top-tier management, technical skills and stronger accountability and performances plans.

To attract the private sector, African governments should focus on improving the investment climate and having the appropriate regulations and incentives in place.

Privatization schemes can include indefinite privatization, whole-of-grid concessions, Independent Power Transmissions and merchant investors.

In Peru, IPTs were credited with raising $1.8 billion, with competitive bids resulting in lowering annual costs by 36 percent. In India, the private sector has invested $5.5 billion in transmission and another $5 billion in projects are in the pipeline. Transmission privatization in Africa, however, has been “negligible.”

Nigeria and Kenya have taken steps to make way for IPT tenders, but none have been awarded. Other countries, like Senegal, specifically prohibit private investment in transmission lines.

Kenya, though on-track to meet its power generation targets to achieve universal access by 2020, estimates a $5.9 billion gap in financing between 2013 and 2030 in transmission lines. The renowned Lake Turkana Wind Power project, the largest wind farm in Africa, is complete but won’t be hooked up to the country’s grid until 2018 because of a delay in the transmission network. Kenya, which has aggressively pursued private sector involvement in generation, is now looking for private sector involvement in the transmission sector.

“Governments should work with international investors and potential providers of loan finance to build detailed business models that will attract international interest, and can be replicated across the African continent. The next key step is to move beyond merely considering how this business model applies within Africa, and piloting a few projects,” the report says.

This article contributed by our content partner: Africa Oil & Power
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