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Energy transition, a new path to power in Africa

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Energy transition, a new path to power in Africa

Africa’s power sector can be accelerated in the transition to new energies, with information gleaned from other places where unbundling has already started in earnest.

JOHANNESBURG, South Africa, October 11, 2021 / APO Group / –

Africa is currently on the cusp of a transition to a new energy paradigm, in which technological and business innovations are delivering increasingly decentralized energy to the peoples of the continent in new ways.

Download the document: Energy transition – a new path to power in Africa

A recent white paper published by global management consulting firm Kearney outlines the overarching strategic considerations for African utilities to chart the course for sustainability in the context of this global paradigm shift. Entitled A New Energy Path to Viability for African Utilities, the paper presents the broader macroeconomic trends shaping the transition.

Kearney’s partner Igor Hulak explains the dual mandate of energy utilities in Africa, which play a vital role on the continent. “The availability of electricity is essential for economic growth and, more importantly, for social development. Utilities must provide sufficient and affordable power for these two imperatives, ”adds Hulak.

He added that an adequate supply of electricity foreshadows the overall economic development of a country. Conversely, insufficient availability of electricity has been identified as a major obstacle facing African businesses, having been ranked 1st in sub-Saharan Africa in the face of other challenges such as finance, informal corruption and taxes.

The 3 main drivers of the transition to what is called the world of new energy; decarbonization, decentralization and digitization are also facilitating the historic tendency of nations to liberalize their energy sectors as they grow and develop economically. In most African states, liberalization has not yet fully started, and integrated, state-controlled monopoly public services (VUIs) are still responsible for all the main functions of the sector: production, transmission and distribution, or sale. Some states such as South Africa, Nigeria, Kenya, Ghana and Egypt are in the initial phase of liberalization and have seen the emergence of independent power producers (IPPS) whose power and capacity are sold to VUI under long-term power purchase agreements.

“African leaders are strategically planning the natural transition to the more organic market of the next stage of liberalization over the next few years, in which parastatal VUIs are legally and functionally unbundled into separate entities for production, transmission and sale,” Hulak remarks.

“While European public services have largely unbundled from a position of strength, struggling African public services face a very different reality. The many challenges associated with the commercialization of operations and the management of an unbundled electricity network are formidable and complex. Unbundling will not be an easy path, but we must face obstacles head-on if we are to ensure a sustainable African electricity sector, ”says Hulak.

Hulak notes that unbundling brings 3 important advantages: transparency, competition and the potential for private sector participation. Increased competition boosts the efficiency of production, as well as services and collection.

In later phases, the IUVs are fully unbundled and there is a vibrant environment for private sector participation in both distribution and sales, resulting in a competitive and healthy wholesale market. These hybrid business models have already been implemented in much of Europe, Asia and the Americas.

Due to the historic timing of liberalization in Africa, African states should benefit from the advent of cost competitive renewable energy and embrace decarbonization as they embark on the path of liberalization.

“African utilities now have the opportunity to take many steps taken by other countries on the path to liberalizing energy supply,” says Hulak. “Technological breakthroughs, economies of scale, state-sponsored decarbonization and a culture of innovation enable African power producers to take advantage of the continent’s abundant wind and solar resources. Renewable energies are on the way to becoming a major contributor to Africa’s energy mix ”.

Kearney’s white paper looks at case studies of relevant African utilities from South Africa and Ghana and examines the lessons that can be learned from their efforts so far.

He notes that several African IVUs, including Eskom, face a myriad of difficulties resulting from inadequate maintenance of infrastructure. In monopoly models, the absence of competition means that there are few incentives to improve efficiency.

“Many monopoly UVIs in Africa are now starting to break away from a compromised position of over-reliance on government subsidies. In this archaic model, state-run VUIs are heavily subsidized with funds from other more profitable economic sectors. The artificially reduced household tariffs generated by such systems close the affordability gap, but ultimately these models are unsustainable and typically result in public service debt, especially when subsidies fluctuate with changing times. changing government priorities, ”Hulak explains.

Several years ahead of most African states in modernizing and developing their energy markets and hailed as the leader in the electricity sector on the continent, Ghana has paved a path from which other African VIUs can be inspired to modernize and develop their energy markets.

Like several other African UTIs, Ghana has also started to separate from a weak position, in a difficult socio-economic context. Initially, the sector was unbundled into separate generation and transmission services, with regulatory bodies created in parallel for: technical regulation and licensing; as well as for economic regulation and the setting of tariffs. This unbundling was a first step for the subsequent introduction of PPIs into the national energy mix and the establishment of the wholesale electricity market for large customers.

Since then, Ghana has pursued the path of reform and innovation in the electricity sector, including the attempt to introduce private sector participation in electricity distribution. Even if this initiative has not yet succeeded, it does not call into question the fundamental directional correctness of the path the country is taking.

In summary, Hulak notes that Africa’s traditional VIUs have the opportunity to embrace the new energy world rather than combat it – leveraging their already existing expertise and resources to expand their portfolio of new energy products and services. ‘in a customer-centric way.

“The electricity sector in Africa can be accelerated in the transition to new energies, with information gleaned from other places where unbundling has already started in earnest. The strategic dilemma for African governments now is to focus on imported technologies for decentralized solutions or to develop integrated networks. This last route requires more time and investment, but would stimulate local economies, ”he concludes.

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