A new Africa energy world: a more positive power utilities outlook

August 17th, 2015, Published in Articles: Energize

Africa faces a huge electricity demand challenge. Existing infrastructure is insufficient to meet current requirements, let alone the growth of the coming decades. Installed power capacity is expected to rise from 2012’s 90 GW to 380 GW in 2040 in sub-Saharan Africa. Nonetheless millions of Africans remain without access to electricity. Fortunately, difficulties such as the investment barriers facing the sector are being addressed. This is the executive summary of the PwC Africa Power and Utilities Sector Survey report. The full report can be downloaded here.

Angeli Hoekstra

Angeli Hoekstra

The PwC Africa Power and Utilities Sector Survey is based on research conducted between November 2014 and March 2015 with 51 people holding senior leadership positions in the power sectors of 15 African countries. Twenty two participants were from power utility companies, twelve were from independent power producers and investors, seven were from government energy departments, nine were from regulatory bodies, and one was from an organisation with interest in the sector. The majority of participants were CEOs, board members or hold senior management positions. This report examines industry opinion on these issues as well as a range of other important challenges facing the sector in the period ahead. The International Energy Agency’s (IEA’s) special report on Africa’s energy outlook, which was published in October 2014, revealed that 530-million people, primarily in rural communities, are without power. An era of rapid technological change is coming at a pivotal time in the expansion of African power infrastructure.

Bright spots among the challenges

Two-thirds (67%) of those interviewed cited ageing or badly maintained infrastructure as being of high or very high concern. Encouragingly, many felt this situation would improve, with only 39% predicting that it would be a similarly high or very high concern in five years’ time. If this proves to be the case, it is very significant. PwC estimates that raising the availability of generation by ten percentage points could add significantly to the continent’s gross domestic product (GDP). There are other near-term bright spots as well, with the level of concern about skills shortages and, to a lesser extent, market reforms easing in the next five years. However, other pressing concerns are not set to change. Affordability and access to primary resources were the other two issues among the top concerns mentioned, highlighted as high or very high concerns by around 60% of those surveyed and with very little change expected in the near-term future.

Optimism on a number of fronts

Insufficient generation and ageing infrastructure mean that planned power outages and load shedding are a well-established feature of life for many African power consumers. But the survey participants were optimistic that improvements are on the way. An overwhelming majority (96%) said there is a medium to high probability that load shedding will be the exception rather than the norm by 2025. Indeed, nearly three-quarters (72%) were confident enough to rate that scenario as a high probability. The mood of optimism also extends to regulatory change. An amazing 94% said there is a medium to high probability that, by 2025, the challenge of finding a market design which will be able to balance investment, affordability and access issues will have been largely solved.

An energy-transformed landscape

A range of technologies are combining, in different ways, to move power systems away from being top-down centralised systems to ones which are much more decentralised and fragmented. Seventy per cent of the respondents said there is a medium to high probability that advances and cost reductions in green, renewable off-grid technology will deliver an exponential increase in rural electrification levels by 2025. The prospect of future local mini-grids and off-grid distributed generation being an important feature of the African power mix, alongside centralised generation, is an energy market vision which was viewed as likely or highly likely by 83% of survey participants. But the majority of survey participants (54%) expect centralised generation and interconnections being the main future energy provision to meet demand growth in urban areas.

Business model transformation lies ahead

When respondents were asked about the impact of these and other changes on future power utility business models, only around 12% thought that future business models would be the same or similar. Instead, the vast majority (88%) said that power utility business models would be transformed. Most respondents said that some features of current models would remain in place but nearly a quarter (22% of all respondents) went so far as to say that business models would be completely transformed and unrecognisable from those operating today.

Cost-reflective tariffs remain a big challenge

Two-thirds of the participants identified the inability to recover the cost of new generation via current electricity tariffs as a major barrier to investing in new large-scale generation and transmission projects. Cost-reflective tariffs was a recurrent theme in the survey and headed the list of energy policy measures needed to address the key problems of expanding power provision and making existing assets more reliable. As many as 83% said that moving to cost-reflective tariffs would have a high or very high impact on increasing electrification and improving reliability.

Room for big performance improvement

While policy reforms are a key requirement, many African power utility companies are conscious of the need to reform their own organisations. Making limited resources go further is an essential part of maximising power availability and adding to investor confidence. The vast majority (70%) reported that cost-base savings and efficiency improvements of more than 10% are possible and many (42%) said there is scope for African power and utility companies to achieve savings in excess of 20%. Between 70 and 80% of all survey participants anticipate high or very high scope for performance improvement in asset risk management, customer service and capital project management. About 66% see the same big scope for improvement in loss reduction and in the development of local skills.

Private investment

Many of the essential prerequisites are in place for an increase in private investment and participation in the sector but there is still a considerable way to go. As well as the big issue of the need for cost-reflective tariffs, between a 33 and 60% of the survey participants reported that they didn’t feel there was sufficient transparency around the procurement of new power capacity and sufficient certainty on government backing for power purchase agreements (PPAs). Only 6% felt that the local commercial banking industry had sufficient liquidity to finance new power projects without some form of credit enhancement being available. Some said that even then such finance was not possible.

Acknowledgement

This executive summary of the report is published here with permission.

The full report can be downloaded here.

Contact Angeli Hoekstra, PwC, Tel 011 797-4162, angeli.hoekstra@za.pwc.com

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