Electrification Africa

The Challenge
Background
Electricity is the backbone of economic development. However, still the African continent
lags far behind the world on its electrification especially in rural areas. Furthermore, private
sector is the vehicle of choice for electricity sector development. However, private sector
involvement in the energy business requires a number of upstream ground work
prerequisites from a risk aversive financiers perspective. Consequently, there exists a need
to furnish an environment that is attractive for private investor. This requires a strong
regulatory framework that ensures the private capital of the leveled playground. There is a
great lack in this aspect within the African continent.
Africa Europe Action Plan is the background for cooperation between Europe and Africa in
Energy. The conventional wisdom in Africa tells us to follow the development model already
trekked by developed countries. However, historically speaking, those Mega projects
established in the developed world came in succession of multiple smaller projects. The
Choice of private sector as the vehicle of choice for infrastructure projects puts a huge
burden on the African countries.
Infrastructure Investment Characteristics:
i- Long term investment
Infrastructure investment is a long term investment with pay-back periods that may
go up to 15 or 20 years. This hugely increases the risk of the investors. Therefore,
the investor should seek higher returns to efficiently utilize its funds.
ii- Asset specific

Infrastructure investment one established on the ground cannot be utilized in any

other application other than its original intention. This makes the whole contract
susceptible to leverage application from both parties, whether service provider or offtaker. This is a mutual risk that should be ameliorated foy both parties.
iii- Capital intensive
Energy infrastructure is a capital intensive business. The business is characterized
by a high fixed to variable costs ratio. The huge capital required is a hindrance that
prohibits small lighter more liquid investors to participate in. Hence, the financing
mechanism of choice is large heavy weight financial approaching the project in a
syndicated manner.
Efforts to establish an investment Friendly environment in Africa
Indeed the continental cause of establishment of an investment friendly has been lead by a
multitude of initiative including the Africa-Europe Action Plan. The Africa Europe Action Plan
has identified priority Areas for action. Those areas are:
Mobilising additional resources and support for access to energy services.

Create adequate political and regulatory frameworks.

Support implementation of regional and national energy access policies.

Regional and intercontinental integration of energy systems and markets.

Support priority "win-win" projects, as identified by NEPAD, PIDA, TEN, etc.

Build institutional capacity to plan and implement integration plans.

Enabling environment for scaling up investments and mobilising private capital.

Implement stable, equitable and transparent investment conditions.

Intensify efforts to attract European investment to Africas energy sector.

Renewable Energy and Energy Efficiency.

Create appropriate institutional capacity: renewable energy/energy efficiency

policies; support centres; resource mapping.

Support renewable energy and energy efficiency programmes and projects

Reduction of gas flaring and venting.

o Support the World Bank Global Gas Flaring Reduction Partnership.
Develop institutional and technical capacity.

Support capacity building for national, regional and continental institutions

(RECs, power pools, UPDEA, AFUR, AFREC, AFSEC) for instance on
information systems, databases, planning, standardisation, etc.

Political and technical dialogue, contacts and exchanges.

Support technical and political dialogue on: projects and programmes for
interconnections, access, capacity building;

evaluate possible specific European contribution to priority actions;

encourage twinning between homologue agencies and authorities.

Examples of Upstream Ground Work

Indeed the establishment of an investment friendly environment requires many upstream
works to start including:
Policy Guidelines
There exists a need to establish policy guidelines within the continent. The objective is that
those guidelines if adopted by continental, regional, and national bodies will bring harmony
to the legislative and regulatory framework within the continent. This in itself will alleviate a
good part of the risk associated with the regional projects. The purpose of those guidelines
is to be eventually shared with the African Union Commission and adopted through the
African Union due process for implementation on both regional and continental levels. The
proposed guidelines are:
Internal Market Regulations Guidelines
Similar to the present worldwide best practice, there exists a need to establish a guideline
for the internal energy markets regulation within the continent. The AU member countries
should buy in and accept those guidelines. This requires extensive harmonization effort with
the AUC.
Cost of Service Guidelines
Cost recovery and tariff setting are the corner stones for an appealing electricity sector.
There must be a continental consensus on the rules of electricity cost of service estimation.
This requires an effort in building those guidelines based upon the present practices in the
various countries of the continent.
Utilities Financial Planning Guidelines
The establishment of the credit worthiness of the utilities within the continent is crucial for
the intervention of the private sector. Our experience shows that investors eventually eye
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the credit worthiness of the off-taker together with its accounting practices as a pre-requisite
for engagement into further ventures in business. Consequently, there exists a dire need to
bring the international practices afore to the African utilities to assist in promoting their
profile.
Cross Border Energy Trade Guidelines
Energy cross border trade is a difficult issue to tackle. However, established guidelines for
cross border trade should increase competitiveness of the electricity industry within the
continent thus increasing its appeal to private investors.
Transmission and Distribution Utilities Benchmarking and Performance
Enhancement
Parallel to the establishment of the aforementioned guidelines, a performance monitoring
mechanism that covers technical, financial, and economic performance of the energy sector
should be put in place. This mechanism is primarily concerned with the Electricity sector
natural monopolies, viz., transmission and distribution. This mechanism shall monitor the
impact of the introduced policies and provide feedback for necessary actions whenever
necessary. They require the establishment of a performance measurement mechanism to
guarantee a minimum service level for the customer. Indeed, incentive regulation requires
the establishment of such mechanism in place to allow the gains of improved performance
to pass through to the customer.
Capacity Building
Lack of capacity is a chronic problem in the continent. It is a challenge to build, sustain, and
grow this capacity within the continent. However, no due effort shall be spared to invest in
African people.
SMEs in Energy
The African continent is endowed with a multitude of renewable resources including solar
potential, geothermal, wind, and lush forests. However, some of those resources are not
exploited because of competitiveness to other forms of fossil energy. The other, viz.,
biomass is exploited in a non sustainable manner ending into the shrinking forestry in
Africa. The challenge is how to devise a policy on renewables to bring up this potential while
achieving the development goals in a sustainable manner.
One big advantage of the renewable projects is the modularity of the project itself. This is a
business opportunity for the continent small investors. There is a need to bring in a whole
set of legislative tools within a policy framework to tap into the SMEs potential to engage in
the energy business in Africa. The prices offered by the Renewables of Africa are
competitive with all other types ofgeneration including hydro. The question is how to
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introduce this business in a manner that will eventually result in a spiral positive feedback
loop that will result in the economic growth of the business.
Conclusions
The African continent is facing an electrification challenge. The challenge is huge and
should not be under estimated, especially, with the private sector set as the means to
bridge the financing gap for the infrastructure investment. Numerous ground works are
required to establish this investment friendly environment. SMEs in energy, especially
renewables, is a fast parallel track for the electrification of the continent. Still lots of
background work needs to be done, however, counting on the continent inventory of
entrepreneurship this path may provide wider economic benefits to the continent at large.