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Monday, 23 June 2014

UN warns delays in major projects will raise power costs

As East African countries launch massive projects in the power sector, the United Nations Economic Commission for Africa (Uneca) is warning that delays in implementing them could push the region towards expensive alternatives.
Kenya, Rwanda, Burundi, Uganda and Tanzania are in various stages of ambitious energy expansion projects that could add some 10,000MW — or three times the current EAC installed capacity — to the power grid, offering a cheaper alternative to thermal power.
Kenya plans to add some 5,000MW to the national grid, Tanzania 3,000MW and Rwanda 500MW.
It is now feared delays could have far-reaching effects.
“Delayed energy planning and investment in the face of growing demand for electricity is likely to drive the energy portfolio to thermal technology, choices that have lower gestation period but higher per unit costs of generation, undermining the ability to supply affordable, available and reliable electricity,” said Uneca in a report titled “Energy Access and Security in Eastern Africa.”
The region is especially keen to diversify from thermal power, with the four countries banking on renewable power sources such as hydro, geothermal, wind and natural gas.
In April, the World Bank approved a $100 million loan to partly finance two hydropower plants in Rwanda that will jointly generate 48MW. Currently the country faces a daily shortage of 20-25MW of power.
In Tanzania, the country plans to add about 1,800MW of gas-fired electricity into the grid over the next three years, while Uganda has begun construction work on the Karuma dam.
Over the past two years, the region has been on an energy project upgrading drive, spending billions of dollars on infrastructure as it tries to reverse years of underinvestment that, coupled with the region’s low income levels, have kept millions of the region’s citizens out of the national grid.
For example, 80 per cent of the population in South Sudan and Burundi have no access to electricity compared with 70 per cent in Uganda and the Democratic Republic of Congo. In Tanzania, Rwanda and Ethiopia, the figure stands at 65 per cent.
Experts blame this on underinvestment in transmission lines as well as expensive connection fees.
For example, in the past five years, Kenya has raised the number of households connected to the national grid from about 700,000 in 2005 to an estimated 2.4 million, partly due to the construction of transmission lines in rural areas by the government through the Rural Electrification Authority.
But still, the high connection costs in the country — recently adjusted from Ksh35,000 to Ksh75,000 for households living 600 metres from a transformer — is still high for a country with a per capita income of about $1,000 where 46 per cent of the population lives below the poverty line.
The increased investment is expected to lower the cost of power with the Kenyan government, for example, estimating that in 2018 the retail price of a kilowatt of electricity will drop from Ksh19 to about Ksh9.
According to the Uneca report, while most countries in the region aim to make a transition to middle income status, this transformation will require rapid expansion of energy capacity to sustain economic growth to the middle income post.
For instance, while middle income countries on average have an electricity access rate of 82 per cent, with the exception of Seychelles (up to 17.8 per cent), all other member states have significant access deficit from middle income level.
“Energy insecurity is a major threat to sustaining economic growth and transformation in the region. Rapid deterioration in biomass energy resources, except in Rwanda — the only country in the region that registered a gain in forest cover — require immediate attention,” said Yohannes G. Hailu, energy expert and economic affairs officer at Uneca sub-regional office for Eastern Africa based in Kigali.
Mr Hailu, who is the lead author of the report, said regional energy market integration will need to be fast-tracked to avert a gradual slip towards greater integration of imported energy sources to generate electricity in the region.
The report shows that petroleum consumption is also surging in East Africa with all member states importing petroleum, which exposes the region to global energy markets shocks.
“Energy planners need to balance the urgent need to meet expanded energy demand with energy security,” he said, adding that a regional and country level energy security strategy and action plan are urgently needed to address the deficit.
Energy demand is growing amid rapid economic growth. In Uganda, for example, demand is growing fast at 7 to 9 per cent per annum while in Tanzania it is increasing at 12 to 15 per cent per annum.
Comparison of absolute consumption levels of petroleum from 2000-2011 shows that while consumption at the continental level increased by slightly more than 40 per cent, the rise in East Africa was 67 per cent. This constitutes a significant increase in exposure to global energy markets.
Price swings
For instance, disruption in the supply of imported energy, particularly hydrocarbons, and sharp swings in their price will introduce macroeconomic impacts that can undermine the momentum of the economic development taking place in the East African region.
“Dependence on imported energy poses a serious risk as many of the factors that determine its supply and price are outside the control of importing states,” the report says.
Disruption can also hamper proper functioning of the socioeconomic system just as unaffordability can hold back economic activities, particularly in energy intensive industries. Energy security is, therefore, a component of economic stability, the report notes.
“The most direct impact of dependence on imported oil is price hikes in global markets. Increases in oil prices in recent years (post 2008) have led to a drift in the current account balance of sub regional member states,” says the report.
By Berna Namata 0f The EastAfrican
Additional reporting by Peterson Thiong’o