NEWS

Power utilities in Africa: A woeful tale of losses and poor governance

African households and industries have been pushed into a life of unreliable and expensive power as a result of inefficient, loss-making state-owned power utility firms with questionable governance structures. A study by Clarion Energy and the Gordon Institute of Business Science (University of Pretoria) shows that governance irregularities have become a major cause for concern for government-owned utility firms as they adversely impact the firms’ procurement processes.

The report dubbed The Future of Power Utilities in Africa (2018) notes that the future trajectory of African utility firms largely depends on the improvement of the quality of their governance structures and their precarious cash positions. The World Bank through a survey on power cost and reliability in Africa also revealed that electricity transmission and distributing firms on the continent are cash strapped and have allowed their assets to fall into disrepair, exacerbating power shortages. The survey, which sampled 39 countries on the continent in 2016, found out that only power utilities in Seychelles and Uganda were fully recovering their operational and capital costs but utility firms in only 19 countries were able to cover their operational costs from the cash they collected.

“Such large funding gaps prevent power sectors from delivering reliable electricity to existing customers, let alone expanding supply to new consumers at an optimal pace,” according to the survey report, Making power affordable and viable for its utilities. Cure for deficits “If utilities could reduce combined transmission, distribution, and bill collection losses to 10 percent of dispatched electricity and tackle overstaffing, an additional 11 countries could see their utility deficits disappear.” According to the report, utilities need to focus on achieving an acceptable level of service quality for a chance at cost recovery in tariff revenues.

“Raising tariffs while outages continue unabated is bound to invite a backlash. They could reduce costs by phasing out operational inefficiencies, implementing short-term measures to reduce the duration (if not the frequency) of outages, and addressing customer service quality in general.”

According to the report, serious shortcomings in operational efficiency, high costs of small scale operations, and overreliance on expensive oil-based electricity generation have increased costs of power supply in Africa, while underpricing and the inability of many customers to pay for electricity services have reduced utility revenues. In addition, a utility that does not cover its costs will struggle to deliver reliable electricity in sufficient quantity while inefficient utilities suffer from losses associated with transmission, distribution and bill collection. The report notes that financial sustainability of electric utilities in many African countries is precarious. According to the American Power Africa Initiative, most utilities in sub-Saharan Africa – whether state-owned or privatised – struggle to make ends meet. Ethiopia’s state-owned power distribution company Ethiopian Electric Utility estimates that pre-Covid-19 deficits amounted to nearly $100 million annually. In Nigeria, some privatised utilities lose as much as half of their allocated electricity supply due to technical faults, theft or customer non-payment.

“With more efficient operations and improved finances, utilities are better positioned to help weather and recover from the effects of Covid-19. Healthier utilities help create stronger energy sectors and point the way toward a brighter future for sub-Saharan Africa,” according to Power Africa’s annual report (2020).

Curse of unreliable systems According to the International Finance Corporation (IFC), unreliable utility distribution systems are a major drag on regional growth in Africa, with the cost of inefficiency in Africa’s power and water sectors valued at $4.5 billion annually. Along with financial costs, distribution losses also contribute to greater greenhouse gas emissions and increased water stress within the region. On average, electricity utilities in the continent lose 23 percent of all energy consumed due to operational inefficiencies, at a cost of almost $3.3 billion per year, compared to a 10 percent global average.

“Such inefficiencies undermine the future performance of utilities, dissuade investment, and harm the environment,” says the IFC. Africa is struggling with huge operational inefficiencies estimated at more than $3 billion annually which have caused the region to suffer the world’s highest energy prices, with most of its electricity providers barely breaking even, limiting their scope for reinvestment. Kenya Power, which is 50.1 percent owned by the state, is facing a demand crisis due to its inflated electricity bills, corruption and increasing shift to solar energy by households and industries. The firm disclosed in its annual report (2019) that demand risk is among major concerns to its operations as heavy-consuming industrialists seeking reliable and cheaper supply shift to solar power.

In July last year, the government reconstituted Kenya Power’s entire board as part of efforts to streamline its operations, enhance efficiency in power distribution and transmission and restore the firm to a profitability path. The firm’s system losses have increased to 23.46 percent from 18.68 percent in the past seven years. The firm attributes its high transmission and distribution costs to higher allowance for expected credit losses and provisions for obsolete and slow-moving inventories. In Uganda, Umeme Ltd is the country’s main electricity distribution company. The firm is responsible for distributing 97 percent of electricity through a 20-year electricity distribution concession from the government that took effect on March 1, 2005. State-owned Botswana Power Corporation has been making operating losses for years due to high import costs, nonperforming assets and operational inefficiencies, causing it to rely on government subsidies to stay afloat. Morocco is partially unbundling electricity sector by steadily allowing an increasing amount of private participation through a series of reforms introduced since the mid-1990s.

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