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Electricity: The lights come on slowly

Posted on Wednesday, 13 April 2016 16:21

In the first ever address by a sitting United States president to the African Union, Barack Obama sung the praises of his administration’s signature policy for the continent: an ambitious, multi-agency initiative to increase electric-power generation known as Power Africa. “Instead of just sending aid to build power plants, our Power Africa initiative is mobilising billions of dollars in investments from governments and businesses to reduce the number of Africans living without electricity,” he told a packed room in Addis Ababa in July last year.

How do you measure whether they’ve facilitated a deal? How do you measure whether the deal would’ve happened without Power Africa?

But three years after Obama first announced the initiative, which aims to add 30GW of electricity and connect 60m households to the grid by 2030, it is struggling to get off the ground. The government claims the programme has brought projects covering just 4.1GW to financial close. This could rise 28 to nearly 25GW if hundreds of energy projects in more than 20 countries that are be- ing tracked are completed.

It’s official

The US House of Representatives’ approval of the Electrify Africa Act in February is a boost to Power Africa, giving the president the authority to develop a “comprehensive, integrated, multi-year strategy” to encourage African countries to strengthen their power strategies. The law also makes promoting power access to “at least” 50 million people in sub-Saharan Africa and “encouraging” the development of projects that can generate 20GW by 2020 into official policy.

One of the initiative’s successes is Ghana’s Kpone Independent Power Project, which was built at a total cost of $900m and will become operational this year. Power Africa officials say they reviewed loan documents, assisted with lender requests, consulted on negotiations over the power purchase agreement and provided due diligence.

However, the funds disbursed to projects under Power Africa still fall short of the target. The Export-Import Bank of the United States – the lead federal agency funding Power Africa activities – is authorised to issue up to $5bn in loans for US exports related to electricity projects. But, by March of this year the bank had only distributed $131.5m for seven Power Africa activities, according to a bank spokesperson, who added that “there are still millions worth in the pipeline”.

The Overseas Private Investment Corporation (OPIC), Power Africa’s second-largest US government financier, has fared better, with a portfolio of $1.6bn in investments, slightly above its initial $1.5bn commitment.

While some say Power Africa is pioneering a new financing model that could attract private sector investment into crucial infrastructure, others question the programme’s influence on the power sector in the countries where it is active.

Part of the problem with Power Africa is that it is hard to measure how the initiative has impacted power generation, says Catherine Wolfram, director of the University of California Energy Institute at Berkeley. “How do you measure whether they’ve facilitated a deal? How do you measure whether the deal would’ve happened without Power Africa?”

That is a view shared by the managing director of the Tanzania Electric Supply Company, Felchesmi Mramba: “The contribution of Power Africa has not been very tangible – you cannot basically quantify what it has contributed,” he said in his office in Dar es Salaam.

Power Africa is supposed to address both the investment gap and weak regulatory environments, offering technical support and project capital. But a lack of start-up capital is not the only thing holding back investors. Projects can frequently take eight years or more to approve. As Obama said in a speech in Tanzania: “If we are going to electrify Africa, we’ve got to do it with more speed.”

Bad payers

Paul Hinks, the chief executive of Symbion Power, one of the leading private sector beneficiaries of Power Africa support, laid out the problem in detail when he spoke about his company’s activities in Africa before congress in March 2014. He said that African governments had yet to cut much red tape. He did, however, emphasise that Nigeria, which was undergoing a privatisation of its energy sector with Power Africa’s support, was the exception to an otherwise bleak investment environment.

In particular, the age-old problem of payment remains. “If utilities do not pay producers promptly, the producers will, in turn, default on their payments to the very financial institutions such as OPIC, the Export-Import Bank and the US Trade and Development Agency, who help fund the investment,” Hinks told congress. “For more than two years, my company has been battling in one of the Power Africa countries to be paid fully and to be paid regularly. […] Our experience will discourage lenders from funding power projects.”

In the most recent report on Power Africa, the US international development agency USAID said the programme would help improve the efficiency of the energy sector by facilitating technical up- grades to power plants and helping governments to privatise the industry. “Looking ahead, we will scale-up financial support for plant refurbishment and expand our technical assistance on privatisation efforts,” the report stated.

For large-scale projects to succeed, reform is needed in multiple areas, according to Ben Leo, a senior fellow at the Center for Global Development in Washington DC. Besides the long approval process, he points to fee structures that often lead utilities to sell power for less than it costs to produce. It is a practice, he says, that has decimated the energy sector’s financial viability and discouraged investment.

Small projects benefit

Despite shortcomings, with its mix of financing, technical support and support for reform, Power Africa can still be credited with pioneering a new model of US development spending. Off-grid and small-scale projects – a central area of Power Africa support – may be able to succeed with a little help. But whether larger projects that can power hundreds of thousands of homes can be made to work with a blend of financing and technical support, or if they also need a wholesale reform of the energy sector in the countries they operate in to succeed, is still an open question – and one that Power Africa is currently testing.

Robert Perry, vice-president of the Corporate Council on Africa, co-led a power sector trade mission to five countries – Mozambique, Kenya, Tanzania, Nigeria, and Ghana – with assistant secretary of state Johnnie Carson in February 2012, which led to the inception of Power Africa. “I am optimistic because there are lessons learned along the way,” he says.

“That’s from the US government side, as well as the US investors’ side. I think individual African governments are getting a better understanding of what they can do – becoming better negotiators with US companies and establishing regulations to ensure the power sector is viable.”●

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