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Workshop Paper

On the

Topic: Issues in cross border power delivery and infrastructure

By

Ibrahima THIAM
Chairman,
ECOWAS Regional Electricity Regulatory Authority (ERERA),
Accra, GHANA

NERC and National Judiciary Institute Workshop


Asaa Pyramid Hotels, Kaduna
12 – 14 July 2010
1. Power sector characteristics of ECOWAS

The Economic Community of West Africa States comprises the fifteen Member States of Benin,
Burkina Faso, Cape Verde, Cote D’Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali,
Niger, Nigeria, Senegal, Sierra Leone and Togo. It covers approximately 6.1 million km² with a
population of about 260 million.
In terms of structure, ECOWAS comprises several institutions, namely, the Authority of Heads of
States and Government, The Council of Ministers, the Parliament of the Community, the Court
of Justice and the ECOWAS Commission. There exist also several well-defined specialized
institutions intervening in the various sectors. The headquarters of the Community is in Abuja,
Nigeria.
The ECOWAS region has significant but unevenly distributed primary energy resources as
exemplified by the facts that 23,000 MW of its hydroelectric potential is concentrated in five of
the 15 Member States, of which only 16% has been exploited; 98% of proven reserves of crude
oil, natural gas and coal are in Nigeria (about 30% of the continent’s proven reserves for crude
oil and natural gas); traditional biomass is more readily available in the southern half of the
region due to the semi-arid nature of the northern part; and considerable wind energy
resources along the coastal region and on specific sites inland. However, the vast solar energy
potential with very high radiation averaging 5 to 6 kWh/m2 throughout the year and
everywhere defies this trend.
The average overall access rate to electricity across the region is about 20% (40% and 6% to 8%
for urban and rural areas respectively). The region had an installed electricity generation
capacity in 2008 of 13494 MW, of which about 7000 MW was available, (consumption of 40000
GWh) for its 260 million population compared to that of Central America with 10271 MW for 42
million.
The power sector of West Africa is plagued with inadequate generation capacity, low
electrification, low consumption and high political interest with its ramifications. It is also
characterized as ageing and neglected, inadequate and very high end-user prices resulting from
high profit margins and costs for providing the services. In addition, it has the following
peculiarities:
 Significant untapped primary energy resources;
 Vertically integrated utilities and small electricity markets;
 Protected utilities and dominant players;
 Limited cross border interconnections and low access rate;
 Weak infrastructure (losses and under-investment) and regulatory environment;
 Unstructured approach to private sector; and
 Lack of a common local trading currency.

2. Issues in cross border electricity exchanges and infrastructure

The small size of the individual national power markets underlines the importance of
cooperation and integration to create scale economies and assure the much needed reduction
in end-user prices while ensuring a reasonable rate of return to investors in the sector.
However, building infrastructure and cross border exchanges between 15 independent nations,
as is the case for ECOWAS, has a cocktail of issues that go with it. These issues can be identified
and broadly classified as political, technical, market and finance/economic related.

2.1 Political

Cooperation must be founded on trust, openness and shared values and norms. It must also be
devoid of rivalry, inward-looking and inequality. Culture that embodies all these nature of
humanity, therefore, is a major political issue in this regard. Another is that of interference and
corruption that penalize end-users and the economy as a whole.
Also stability, security and governance (rule of law, independence of the judiciary and
legislature, unchecked executive powers etc.) are country political issues that investors are
sensitive to, especially in this sector with long and extended years for recovery of investments
and high exit barriers.

2.2 Technical

A sector structure that is not stable or does not exist at all triggers some nervousness in
participants in the power sector and further increase risks and uncertainties associated with
sector performance and operations such as supply security and quality. This is particularly true
where national autonomy of supply is non-existent as is the case in all the Member States of
ECOWAS.
Prior to the global downturn, the world witnessed swift changes in ownership of manufacturing
companies but in the aftermath, checking out of companies seems to be the new trend. For the
West African region, in general, being mainly a consumer of technology, a technical issue is the
obsolescence of technology in use in the power sector (ranging from software (billing,
accounting, SCADA, etc.) to hardware such as electro-mechanical components as a result of
product change and/or winding up of the original equipment manufacturer.
Also, planning and coordination for an interconnected network is an important issue in cross
border electricity exchanges and infrastructure where the services provided are more useful
and cost effective where they are produced and transmitted just in time for use and any
mismatch or lack of coordination can be disastrous to man and machine for a some time to
come.

2.3 Market

A fundamental tool and weapon for effective regulation is information. Therefore, information
asymmetry is one big issue at the market place. This issue is even more prominent where the
risk of a dominant operator and market power/abuse are prevalent. Other dimensions of issues
relating to the market are those of ineffective dispute resolution mechanisms and regulatory
risks (values, resources, enabling legislations, enforcement and compliance, and the impact of
regulatory decisions of the regulator).
Furthermore, the unconcluded debate on climate change invites speculative costs and/or wait-
and-see strategy and neither of these helps to provide the much needed funding for the power
sector.
2.4 Financial /Economic

The global financial downturn does not in any way reduce the investment needs of the power
sector in Africa and yet has the potential to increase its cost of capital. It is important to note
that the cost of capital is an important parameter in the power sector as it is:
- A measure of the capital structure of an operator;
- The litmus test for project financiers;
- The threshold rate of return for investors;
- Not obvious and needs to be estimated by regulators; and yet
- Potentially disruptive to projects if it is seen to unduly favour any party at the
expense of another.
But issues related to its determination for West Africa can be problematic given that fiscal and
monetary regimes across borders are not harmonized, most of the utilities are not traded in
stocks, transparent financial information is limited, and comparable utilities are hard to come
by because of their peculiarities. Other issues associated with the cost of capital are the
solvency and capital structure of the utilities.
Also, as investors are risk averse while desirous of wealth maximization, the desperate state of
the power sector in the region can be exploited by investors to require overburdened security
and returns that do not match their exposure.

3. Addressing the issues identified

The mechanisms for addressing the issues identified above could individually or collectively
respond severally or singly to all and/or their categories.
The one tool for the management of political issues is to educate, raise awareness and
empower the consumers since they ultimately pay (directly or indirectly) for all allowed costs in
the sector while being the capital that elects politicians. Another is to empower and strengthen
community institutions and insulate them from state political interference in order to create a
regional power market and diminish the significance of nationalism and artificial national
boundaries.
The above measures could provide the fertile grounds on which the response to all other
categories of issues can germinate.
The sector regulators should help bring sanity to the regional electricity market that is founded
on an established regional sector policy and an investment framework that are mirrored at the
state levels. Community legal instruments must also be used to harmonize the sector
structures, promote regional initiatives and trade and facilitate compliance and enforcement. In
this regard, the ownership of Generation, Transmission and Distribution should be unbundled
and Transmission should neither be owned by either Generation or Distribution. Furthermore,
the regulators should be empowered and equipped to intervene appropriately in the sector. In
pursuit of their mandate, the regulators should also be able to cooperate with other institutions
in other sectors. The financial sector regulators and security exchange commissions are typical
example wherein the utility regulators can monitor ownership of operators and also securities
instruments in the power market.
The above must then be crowned with explicit technical rules that are available and known to
all. The need for adaptation and continuous improvements of these rules require that a
fundamental tool to address the issues in this respect is a full complement of indigenous human
resource capital. This capital could provide for stringent and transparent rules for performance
(planning, operations and maintenance), tariff setting, market functioning, data collection and
information dissemination. It shall also support informed decision making, particularly in the
design of optimal capital structures of operators, and in the recommendation of appropriate
fiscal and monetary interventions to reduce the cost of capital to the sector.

4. The experience of the energy sector of ECOWAS

The performance of the power sector over the years has been unsatisfactory. Despite
implementing power sector reforms aimed at stimulating private sector participation and
liberalization, national power utilities in the region have not been able to attract any significant
private investment. In fact, the national power utilities have continued to be under-capitalized
and charge rates below cost, and hence have not been able to access financial markets or
attract investors for upkeep and expansion projects. Over 60% of the region’s electricity
generation capacity runs on petroleum fuels and as such, every escalation of oil prices do have
a devastating effect on most of the economies in the region. Furthermore, the national
electricity markets are too small for any meaningful gain from economies of scale. Against this
background, the region’s power utilities face enormous challenges in providing quality energy
services to existing consumers and expand coverage. Therefore, the desire of Member States of
ECOWAS to realize electricity interconnections through the joint implementation and sharing of
primary energy resources of the region has been manifested to confront the sector challenges.

7.1 Approach

The initiatives of ECOWAS date back to its regional Energy Policy of 1982 that seeks to
harmonize Member States’ energy policies and increase collective energy autonomy. However,
the Community instrument that has given impetus to the regional energy programme and
particularly free wheeling and dealing in energy goods and services is the ECOWAS Energy
Protocol that was adopted by the Heads of States and Government of ECOWAS in 2003. The
Protocol is a product of a process that started with the adoption in December 1999 by ECOWAS
of the principle to create a West Africa Power Pool. This Protocol establishes a legal framework
to promote long-term cooperation in the energy field with a view to achieving increased
investment in the energy sector, and increased energy trade in the West Africa region1. The aim
of the Protocol is to:
- guarantee and ensure free access to energy, equipment and energy products
between Member States ;
- define non discriminatory rules for exchange and conflict resolution ;
- attract and protect private investment;
- ensure environmental protection and energy efficiency.
1
Article 2 , ECOWAS Energy Protocol A/P4/1/03
7.2 Progress

Since the adoption of a common Energy Policy and the principle on the creation of the West
Africa Power Pool culminating in the ratification of the ECOWAS Energy Protocol, ECOWAS has
taken a holistic approach to addressing the challenges of the energy in the region. This has
resulted in the establishment of the following specialized institutions of the Community:
- The West African Gas Pipeline Authority (WAGPA) to supervise the West Africa Gas
Pipeline Project connecting at first the countries of Ghana, Togo, Benin and Nigeria for
natural gas from Nigeria to displace the use fuel oil and diesel for electricity production
in the other countries. WAGPA is also the regulator for the interstate Gas Pipeline.
- The West Africa Power Pool Secretariat (WAPP Secretariat) that is responsible for the
facilitation of the implementation of the priority interconnection programmes of the
electricity sector as identified in the Regional Generation and Transmission Master Plan
of 2005;
- The ECOWAS Regional Electricity Regulatory Authority (ERERA) for the supervision of the
regional electricity market; and
- The ECOWAS Center for Renewable Energy and Energy Efficiency (ECREEE) that is a
center for research and development of renewable energy and energy efficiency for the
region.

Other initiatives of ECOWAS that can help to improve the operating environment of the energy
sector in the region are the creation of:
- The West Africa Monetary Institute (WAMI) and the West Africa Monetary Zone
(WAMZ) within the framework of the West Africa Monetary Union (WAMU) for the
establishment of a common currency and harmonized fiscal and monetary policies:
- A Projects Planning and Development Unit (PPDU) to coordinate priority infrastructure
initiatives within ECOWAS in order to ensure improvements in the scale, speed and
quality of infrastructure investment, and particularly from the private sector;
- A Regional Environmental Policy; and
- A Regional Investment Code as a regional common code on investments.

7.3 WAPP

ECOWAS adopted, in December 1999, the principle of setting up a West African Power Pool in
pursuit of the aspirations of the May 1982 Decision on the community energy policy that seeks
to harmonize Member States Energy Policies and increase collective energy autonomy. This
lead to the development and adoption of an ECOWAS Energy Protocol in 2003, a Regional
Electricity Generation and Transmission Master Plan in 2006, and the establishment of a
specialized institution, the West Africa Power Pool Secretariat (WAPP Secretariat), in July 2006
to facilitate the implementation of the identified priority projects of the regional Master Plan.
The cross-border electricity networks interconnection between Member States has made
remarkable progress leading to two interconnected sub-systems as follows:
• The sub-system comprising seven Member States (Burkina Faso-Cote d’Ivoire-Ghana-
Togo-Benin-Nigeria-Niger) and managed by separate national power companies which
have bilateral contracts between them for supplies and, also in the case of Ghana,
wheeling of electricity.
• The Organisation de Mise en Valeur du Fleuve Sénégal (OMVS) comprising two Member
States (Mali and Senegal) and a non-member state (Mauritania) operates a common
power system (hydroelectric dam and transmission line) interconnecting its three
member countries and serves mainly to share output from the hydroelectric station.
The rest of the Member States (Cape Verde, Gambia, Guinea, Guinea-Bissau, Liberia and Sierra
Leone) are on their stand-alone electricity networks. The Cape Verde is an island and not
included in the power pool in the medium term.
It is envisaged that the strengthening and upkeep of the transmission network infrastructure
would take place in the planning horizon 2007-2011, and that further cross border transmission
interconnection would be realized between 2012-2016 to interconnect the majority of the
Member States and establish the regional market.

7.4 ERERA

Within the framework of the West African Power Pool (WAPP), the Member States of ECOWAS
have in January 2008 created the ECOWAS Regional Electricity Regulatory Authority (ERERA).
This independent entity is for the purpose of regulating cross border electricity exchanges and
giving support to national regulators of the electricity subsector of Member States.
ECOWAS desires that regional regulation should help to improve governance by supporting the
liberalization of exchanges and by promoting the respect of contracts and sectoral standards by
all partners. It aims to increase confidence between actors in the sector and hence facilitate the
involvement of private actors.
The missions assigned to the ERERA are mainly defined around the following:
- development and follow-up of the implementation of uniform rules for the
management of the exchanges carried out between the interconnected systems, in
order to maximize their technical effectiveness;
- follow-up on electricity wholesales between the various operators of the member States
and analysis of their effectiveness in order to prevent anti-trust practices;
- development of mediation procedures and control of the respect of commercial rules
and contractual commitments by the partners;
- development of an effective communication between the governments, the regulators
and the electricity utilities on topics of mutual interest,

In pursuit of these missions, ERERA shall contribute to the implementation of conditions


favourable for public and private investment, ensure regulation of regional electricity
exchanges, assist the ECOWAS Commission in the definition of regional sector policies and in
the harmonization of policies and national power structures, and support the establishment of
the regional market and its opening up to competition.
In tandem with the evolution of the regional electricity market, ERERA foresees that the first
stage (2007-2011), is mainly to improve reliability and rationalization of the current inter-state
supplies, define and prepare the market, and expand exchanges through the organization of a
short-term market. The next stage (2012-2016), is to ensure the monitoring/supervision of the
existing market and prepare for the establishment of the regional whole-sale market through
the development and improvement of the operating rules, harmonization of rules and
institutions, and the preparation and launching of the whole-sale regional electricity market.
The period after 2016 is expected to be the cruising phase of a liberalized and functional
regional electricity market.
Against this backdrop, the immediate priorities of ERERA are:
• Establish a harmonized and functional legal and institutional framework at state and
regional levels;
• Induce competition through:
• Benchmarking of existing actors;
• Eligible customers’ access to the Transmission network;
• Optimum unbundling of utilities;
• Encourage diversification of elect. Generation; and
• Capacity building to support new roles for the market actors.

5. Conclusion

Governments have abundant instruments to meaningfully facilitate the development of the


energy sector in West Africa. For this to happen effectively, it not enough to have separation of
powers between the three arms of government (legislature, executive and the judiciary) but to
have specialized institutions for the sector with distinct mandate that is respected by all.
In the era of public funding and ownership, overlap and/or conflict of objectives, roles and
functions between the consumer, owner, operator and regulator did not seem to cause major
problems even where they all resided with government. However, at present, the electricity
sector is very much in need of funding beyond what the national budgets can offer and aid for
investment in the sector has dried up partly due to competing and compelling social needs as
well as unprecedented budget deficits of traditional donors. It goes without saying that the last
hope for funding for the sector activities will have to come from the private sector. The
government carrying on in the traditional fashion will be dysfunctional and a recipe for poor
sector performance as either the private sector will not come or if they do at all the premium
shall be too high and the burden to the end-users too much.

In order to avoid any undue interference, governments must embraced reforms that clearly
unbundle the utilities and assign unconflicting roles to actors in the sector. The governments
should then engage in providing effective and responsive policies and legislation for sustainable
development of the sector. The governments should be involved in supporting increased access
to modern energy services through rural electrification programmes. The catalyst for this menu
is effective regulation by a well-resourced independent regulator that is founded on an
adequate, consistent and coherent enabling legislation.

Finally, given the uneven distribution of primary energy resources between countries and the
small sizes of the electricity markets of the majority of the individual countries, governments
should facilitate and embrace international cooperation and electricity market integration.