With all the talk about leapfrogging the grid, it is surprising how little the possible implications have filtered through to the debate about tariffs. The Africa Investment Exchange: Power and Renewables conference in London on 15-16 November saw a lively discussion about potential grid ‘disruptors’, in particular low-cost, small-scale renewable power sold directly to consumers. The technology has huge potential to provide clean power to households and industry at a fraction of the cost of the grid.
However, in a room filled with developers looking at the full spectrum of energy supply, it was striking how little this debate fed into the perennial arguments about cost-reflective tariffs. In a session in which there were calls for substantial tariff increases to unlock the flow of cash through the grid system, one participant was already providing power to industrial consumers in Nigeria at 10% less than the current, below-cost grid tariff.
In South Africa, where captive solar power providers also claim to be able to undercut the grid tariff by more than 10%, participants said that if national utility Eskom lost just 5% of its highest value customers it could lose nearly 40% of its sales. The situation is similar across the continent and is especially problematic because utilities, in many cases surviving only through recourse to the state’s credit rating or its balance sheet, rely heavily on their few lucrative industrial, commercial and mining clients to stay afloat.
The debate over cost-reflective tariffs is therefore surely too simplistic. For a start, what costs should these tariffs be reflecting? African utilities are faced with burdens not relevant to those in developed countries. Not only must they extend the grid – where this makes sense – to the many millions without power and service an extremely poor population, they must build their generation, transmission and distribution capacity out at a massive rate to compensate for years of underinvestment, and support the rates of economic growth required to make a dent on development objectives. The cost of providing power on most African grids – which investors are demanding be reflected – is consequently unusually high.
So African governments find themselves in something of a catch-22. Should they raise tariffs to the levels required to secure private investment in the grid, but risk sending customers off-grid? This approach already appears to be causing South Africa to attempt to restrict the ability of off-grid power providers to poach lucrative customers (AE 358/11).
There are examples of African countries that have successfully raised tariffs, such as Kenya, and others that have reformed the distribution industry to improve efficiency, such as Uganda. But the cost of off-grid and captive power has fallen so rapidly that some are questioning the extent to which these models are replicable. As off-grid companies extend their reach and increase their economies of scale, even the most efficient grids may not be able to compete for the choicest customers, given the additional costs they face. This trend is already apparent in parts of the developed world.
As a result, it may be that rather than a narrow focus on cost-reflective tariffs paid in full by the consumer, some consideration of whether an element of subsidy, concessional financing or even limited protection from competition might be necessary. There is no doubt that Africa needs to transition from its current grid system, which remains dominated by state-owned utilities; African Energy Live Data shows that in 2010 78% of all installed capacity was state owned, by 2017 this had only reduced to 77%. But with state power companies in most cases too large to fail and with no coherent system in place to ensure grid tariffs are able to compete internationally or with captive power, cost-reflective tariffs on their own may have serious unintended consequences.
- Browse our subscription options.