Power Trade in Africa and the Role of Power Pools
Power trading in Africa started in the 1950s, in the form of bilateral agreements between Democratic Republic of Congo and Zambia. This trade involved a 500 kV high voltage DC power supply that was 1,700 km in length. Other bilateral agreements followed in different parts of the continent until the development of the first power pool. The Southern Africa Power Pool (SAPP) was created in 1995. It is now the most advanced power pool on the continent. SAPP introduced the Short-Term-Energy Markets (STEM) in April 2001, which run on daily and hourly contracts. This ignited the development of a competitive energy market in the form of a Day-Ahead Market (DAM) in 2003 (with short-term contracts made anonymously through the power pool and where guarantees are required).
The Western Africa Power Pool (WAPP) was established in 2001 to promote energy trade between member countries. The updated WAPP 2011 Master Plan foresees a number of projects that will help achieve the adequate energy trade (which includes a renewable energy proportion of 10%) by 2020. Currently the power trade in WAPP is still under bilateral or multilateral agreements and energy trade through WAPP has not yet started.
The Union of Power Utilities in Africa (UPDEA) assisted Eastern Africa and Central Africa regions in establishing the Central Africa Power Pool (CAPP) and the Eastern Africa Power Pool (EAPP), in 2003 and 2005 respectively. The two power pools are still in the developmental stage. The EAPP moved forward very quickly. The EAPP System Master Plan (2011) and the study on the Regional Market Operation Center (RMOC) have projected the DAM (Day-Ahead Market) will be fully operational by 2017. The North African countries have an Association of Power Utilities, the “Comité Maghrébin de l’Electricité (COMELEC)” established in 1989.
All four power pools in South, West, Central and East Africa and COMELEC are recognized, specialized institutions in their respective Regional Economic Communities (RECs). Although all power pools are working hard to promote energy trade, the level of energy traded in 2009 ranges only between 0.2% (in CAPP) and 7.5% (in SAPP) .
Challenges and opportunities
As is widely reported, many African countries have faced a power supply deficit during the last decade. In 2008 there were approximately 25 countries facing a deficit. There are many reasons for a power deficit, but the most compelling reasons are the poor planning and lack of maintenance of existing facilities. Although financing has been key impediment to increase generation capacity, the level of the deficit could have been reduced significantly if adequate planning and maintenance were applied. In addition, the lack of involvement of private sector as well as the low capacity of public institutions to address those issues have also been key negative contributing factors. Also, unfortunately “regional” programs and regional planning has not been integrated adequately.
Nonetheless, the current trends indicate a positive outlook for African infrastructure: particularly for the power sector. The rapid growth of energy demand, accompanied by a growing middle class on the continent has pushed individual countries and RECs to act strategically and to take regional planning and integration more seriously. Thus, the African Union Commission (AUC), NEPAD Agency (NPCA) and the African Development Bank have developed a continental and consensual Programme for Infrastructure Development in Africa (PIDA), which provides an outlook for the development of African infrastructure (2011-2040). The focus of PIDA is on regional projects and programs. For the energy sector, the PIDA Priority Action Program (PIDA-PAP), if implemented, will boost the energy trade within the power pools and between the power pools. This will have a positive impact on: (i) the cost of the kWh due to economies of scale, (implementation of big projects serving many countries); (ii) energy mix (countries with dominant hydro potentials supplying those with dominant thermal (gas and coal) potentials); (iii) increased access to modern energy services, which in turn will trigger increased access to clean water and improved health care system.
The 2011-2040 PIDA Energy Outlook foresees the increase of energy demand from 590 TWh to 3,100 TWh and the installed capacity to grow from 120 GW to 700 GW (considering only units above 50 MW). To meet the future demand total projected investment needs (CAPEX) by 2040 are USD 43 billion per annum, whereby investment needs for regional transmission lines are USD 5.4 billion per annum. Regional integration would save about USD 33 billion per annum .
Considering the financing needs mentioned above, the involvement of different sources of financing, including the private sector is critical. Public spending in 2011 was estimated at only USD 5 billion per annum. The private sector would certainly seize the opportunity of the yearly needed generation capacity of 7,000 MW and 22,000 MW of cross-boarder trade to invest in the African infrastructure development - provided that efforts are made at individual country levels, and most importantly at regional levels to create conducive environment for private sector participation. It is worth noting that there are currently only about 23 medium to large-scale IPP (Independent Power Producers) projects to date in Africa, concentrated mainly in 11 countries .
What needs to be done to boost regional power trade?
In addressing the above challenges and opportunities many things should be done:
- Mobilize investments for the physical intra-regional infrastructure. This would include strategizing the mobilization of domestic resources. Some countries and RECs have already started considering infrastructure bonds. The African Development Bank has also appealed African countries to use Central Bank reserves for infrastructure development. There is also an emerging idea of using pension funds.
- Conducive legal and regulatory framework for the private participation. This would include legally empowering the power pools to act on behalf of RECs (and governments), particularly on power deals. Thus, a private sector entity wanting to invest in a regional project would have to deal with one entity instead of a complicated deal-structure with many countries.
- Continued strengthening of the institutional capacity and skills of the power pools and directorates in charge of energy in the RECs. A certain focus should be paid to enhancing the capacity and skills for structuring and negotiating power deals with the private sector, e.g. PPA (Power Purchase Agreements).