Chikuni Ijumba Paper ESIv12 Geithv2

7/28/2019 Chikuni Ijumba Paper ESIv12 Geithv2

1/5

Electricity Sector Reform in Africa: Convergence and

Diversity of Approaches

Edward Chikuni, Nelson Ijumba, Leon Chetty, andAkshay Saha

School of Electrical, Electronic and Computer Engineering.

University of KwaZulu NatalDurban, South Africa

[email protected], [email protected]

Ogbonnaya OkoroDepartment of Electrical Engineering,

Michael Okpara UniversityUmdike, Nigeria

[email protected]

Abstract For many years most large utilities and undertakingssuch as those in electricity production, mining, agriculture,

transportation have been controlled by state organs, often called

"parastatals" or state enterprises. In the '70's and 80's, African

economies did not have severe economic challenges; some

countries were even booming (e.g. Nigeria of the '70's). With the

passing of time, populations grew and so did unemployment andmany African countries experienced financial woes. Service

delivery too suffered through inefficiency, over-manning and bad

management. Economists and management consultants were

brought in from institutions like the World Bank and the IMF.

The word "restructuring" soon became a buzz word. The basic

philosophy was that these state controlled organizations should

operate along business lines. In this paper we examine how four

representative countries, Nigeria, Namibia, and South Africa

have approached the restructuring issue and the progress they

have made.

Keywords: ESI Restructuring; Electricity Reform; ElectricalPower, Energy, Southern and West African Power Utilities

I. INTRODUCTIONThe manner in which restructuring is developing very much

depends on the decisions taken at quite high levels ofgovernment (e.g. cabinet) and typically policy directives aregiven to a relevant ministry to implement these decisions. Theministry usually uses a legal instrument, such as a broad basedAct of Parliament and / or white paper, which empowers it invarious ways to administer the Act. In the countries relevant tothis paper one of the things that we find is that the Minister willappoint a Regulator who willbe mandated to do the day to daytasks of the sector. Such a regulator may be generically bedesignated an Energy Regulator, as in South Africa or the

USA. In Namibia, there is one Regulator for the ElectricitySupply Industry, and there is still some uncertainty as towhether, there should only exist one Regulator for the wholeEnergy Sector.(ESI). Having said this, there is no doubt thatthe Electricity Sector is quite complex and electricity iscertainly a commodity that is very sensitive lack of it not onlydegrades our lifestyles, but also indeed our livelihoods. Why aregulator? A regulator is, when he or she does the job properlylike a good, unbiased referee, appointed to save consumersfrom monopolistic tendencies of services providers andregulators are certainly needed in these early days of Africanrestructuring, to thwart monopolistic tendencies. There for the

Regulator also sets tariffs. But this is not only what theregulator should do. The regulator ought to facilitate newplayers in Electricity Supply business. For the business ofGenerating Electricity, these are called, Independent PowerProducers, IPP. As new Generators and Electricity Distributorsenter the scene, it becomes quite obvious that the Regulatoralso needs to generate and enforce standards. It could beimagined that as competition approaches near perfect levels,tariffs, more or less set themselves. But then another evil couldemerge: some service could cut corners to lower their costs.Thus the Regulators role in setting standards and ethics comesto the fore.

II. RESTRUCTURING MODELSA. Power Sector Reform, Nigeria

Nigeria has come a long way in electricity production, thefirst generation having started around 1898 with a 60kWgenerator. Since these early beginnings there have been

numerous organizational changes, from with ElectricityCorporation of Nigeria (ECN), Nigerian Dam Authority(NDZ), National Power Authority (NEPA), and presently wehave the Power Holding Company of Nigeria (PHC or PCHN)[1]. Today, the average annual demand is about 2600MW,Igbinovia and Osayi [2]. For a country with an estimatedpopulation of over 120 Million, it is clear that demand faroutstrips supply (Switzerland with a population of less than 10million has a maximum demand of 30 000 MW). The Nigerianmodel is based on a holding company (presently PHC) concept.For generation there are Business Units, i.e.:

Kainji/Jebba Hydro Power Plant Business Unit Egbin Electric Power Business Unit Delta Electric Power Business Unit Afam Electric Power Business Unit Sapele Electric Power Business UnitThe wholesale buyer for the electricity generated is the

transmission company, Transyco. Transysco is and will be theonly transmission company. For reasons of cost, reliability andefficiency, it is established practice almost world-wide to haveone transmission operator. However, when we observe the ESI


2/5

globally we see that some are independent (ISO) (e.g.California Independent System Operator (CAISO).Interestingly we see in the US also the existence of privatecorporations, e.g. ABB and AREVA operating as ISOs. TheAfrican ESI has not, in general, reached this stage and SystemOperators tend to be at best, as in the case of Namibia, businessunits of a holding company.

B. The Namibian ESIBefore expounding the structure in Namibia, we believe it

is best first to explore the historical origin of the currentdevelopments. For this we briefly relate the United Kingdomexperience. It is in this country that we find the early pioneersof the philosophy of regulation, chief among these Hunt andShuttleworth and Littlechild [3] and latterly Stern [4].According to Stern the new model for utility services will beanchored on the following philosophies:

Utility services will be provided by a set ofcommercialized companies.

Monopoly elements (e.g. the transmission) will beseparated from potentially competitive elements.

Competition is actively introduced into the potentiallycompetitive elements

Private capital is introduced where possible andappropriate, particularly into the competitive elements,typically with privatization of some or all of theexisting assets.

Most if not all of the countries that have undertaken tointroduce electricity reform have understood the necessity toeffect these reforms on a graduated, cautious basis. First, welearn from Littlechild that there exists four models adopted byutilities in various countries. These are:

[1] Vertically-integrated monopoly [2] Monopsomy [3] Wholesale Competition [4] Full Customer ChoiceUnderstanding the dynamic structure of the above models is

useful because almost every country including Namibia has asan objective progression to the full customer choice stage. Atthe same time every country in this process wants to ensure thatthere will be no casualties especially among disadvantagedgroups. Closely related to the above reform models isterminology and words that are used in the electricity supplyindustry (ESI). These are listed and defined below:

Restructuring: Changing of the ESI from a monopolisticsituation to one in which competitive forces are allowed tocome into play.

Deregulation: the process in which previous tight regulatorycontrol through either state or private monopolies are relaxed.Regulation still exists but the regulations are more light-handed(as opposed to heavy-handed) are performance related in theirapplication to both natural monopolies and competitive entities.

Commercialization: the introduction of commercialincentives into a state department. This is often the first steptowards selling off a commercially viable activity.

Corporatization: the process of turning a state tradingdepartment into a State-Owned Enterprise. This Enterprise isthen obliged to operate under normal business laws andcompete on a level playing field with private firms. Thecreation of NamPower Holdings is part of the process. Thecreation of separate business units responsible forTransmission, Distribution and Generation is unbundling.

The vertically integrated monopoly is illustrated in Figure 1.The rest of the models are illustrated in Figure 2, 3 and 4.

GENERATION

TRANSMISSION

DISTRIBUTION

CONSUMERS

Figure 1. VIM Monopoly

IPP OWN

GENERATORSIPP

SINGLE WHOLESALE BUYER

CONSUMERSCONSUMERS CONSUMERS

DISTRIBUTION

COMPANY

DISTRIBUTION

COMPANY

DISTRIBUTION

COMPANY

Figure 2. Monopsomy


3/5

IPP IPP IPP

TRANSMISSION NETWORK / W HOLESALE MARKET


DISTRIBUTIONCOMPANY

DISTRIBUTIONCOMPANY

DISTRIBUTIONCOMPANY

Figure 3. Wholesale Competition

IPP IPP IPP


DISTRIBUTIONCOMPANIES

WHOLESALE MARKET

TRANSMISSION NETWORK

RETAILERS

Figure 4. Full Customer Choice

In terms of Littlechilds four models, Namibia may beplaced comfortably at model 2, the Monopsomy. In theNamibian model, distribution is now in the hands ofindependent regional distribution companies and the remainderof Nampower has been re-organised as illustrated in Figure 5.It shows that below the Holding company are two main units,Transmission and Generation. Transmission business units.Listed below transmission is the Wires Business (TWB), the

System Operator (SO) and Transmission Supply Business(TSB). Not listed are other units such as the single buyer (SB)and units that are involved with energy trading and meteringadministration.

NamPower (Holding Company)

Nampower Transmission

TW B SO TSB

Generation

Figure 5. Namibia, the Nampower Structure

In terms of performance, the Namibian main player,Nampower, is doing well. It has a very favourable credit(Fitch) Rating which shows as a utility that will be favoured by

investors. Unlike utilities in the same business world-wide, ithas traditionally paid dividends to its main share-holder, theGovernment of Namibia. This is remarkable performance for acountry that imports more than half of its electrical energy. Itis able to make such achievements through good, modernmanagement practices and tools such as SAP. It is also in theprocess of rolling out a Strategic Plan based on the BalancedScore card with systems linked to its performance managementsystem (PMS). It has invested and continues to invest ininfrastructure, key projects being the addition of a 3rd generatorat the Ruacana hydro power station and the recently completedprojects intended to link the Namibian and Zambian Networks,facilitating trade between Zambia, Zimbabwe and Botswana.

The 350kV, MW HVDC inter-connector is based on the ABBHVDC Light technology. It runs between 300 between Mulilonear Zambia (330KV AC network) and Gerus (400 kV ACnetwork) in central Namibia. Figure 6 shows the newconverter station.

Figure 6. Converter Station, Gerus, Namibia


4/5

The other players in the new dispensation are the regionalelectricity distributors, REDS. Eventually the model will becloser to Figure 7 in which the transmission aspects will also beunbundled.

NORED (Northern RED) is the largest and coverslarge swathes of territory in north and north eastNamibia

CENORED (Central RED) covers western Namibia,including the costal cities of Walvis Bay andSwakopmund

Erongo RED, covers central Namibia, endowed withthriving mining activity.

Nampower Ge n Kudu IPP Kunene IPP

Single Buyer / TSO

Northern RED Erongo RED

SAPP Imports

Other DistributorOther RED

CustomersCustomers Cus tomer s C ustomer s L ar ge Use r

Figure 7. Future Reform Structure for Namibia

An interesting development in the Namibian Electricity sectorscenario is the emergence of IPPs, a notable one being a WindEnergy generator run by the City of Walvis Bay.

III. SOUTH AFRICAWay back in 1997, only five countries (South Africa,

Egypt, Algeria, Nigeria, and Libya) accounted for 78% (8.9quads) of all energy consumption, and 84% (22 quads) of all

energy production, in Africa [5]. In this group, South Africa isby far the largest Energy Producer and Consumer, surpassingvastly populated nations of Nigeria and Egypt combined. In2019 the installed capacity was in excess of 40000 megawatts[6]. The overall situation is depicted in Table I [7].

Over a period of more than a decade there have been movestowards reform and there have been several studies andrecommendations. The energy policy white paper of 1998

gives one an idea of the thinking of the South AfricanGovernment and on electricity, it says:

To ensure the success of the electricity supply industry as a

whole, various developments will have to be considered bygovernment over time, namely:

giving customers the right to choose their electricitysupplier;

introducing competition into the industry, especiallythe generation sector;

permitting open, non-discriminatory access to thetransmission system; and

encouraging private sector participation in theindustry.

So far however, more than 10 years after this, there has beenlittle progress on the ground, but recent electricity shortagesand price-hikes have meant that once again, electricity reform

is once again, firmly on the agenda. Presently however themodel that is in place in South Africa is that of a statemonopoly, dominating the industry. Interestingly, it is thoughtthat the model that will most likely emerge is the one Namibiahas largely, already adopted [ 8], illustrated in Figure 8.

Figure 8. A possible reform model for South Africa.

IV. CONCLUSIONSIn this paper we have only been able to present a small

sample of countries and doubtless there is a lot of activity inmany other countries in the south, central, eastern, western andnorth Africa. The pace towards electricity reform has beenslow and many countries remain very cautious. There seems tobe great fear that reform means that the huge subsidies someconsumers benefit from will be removed during the process of


5/5

reform, exposing the consumer to high electricity prices.However, we note that in the case of Namibia, a net energyimporter has presently electrical energy prices lower than thosefor example of South Africa. We note however that a verylarge segment of African countries a moving towards reformand several have already started the process of enacting a gridcode, an instrument that will greatly facilitate the reformprocess.

REFERENCES

[1] http://en.wikipedia.org/wiki/Power_Holding_Company_of_Nigeria.Accesed: 18 February, 2011

[2] S.O. Igbinovia and S.O. Osayi,. A Case Study of Electrical Energy andDemand Trend in Nigeria from 1973 to 2007, Journal of Economicsand Engineering, ISSN: 2078-0346, May 2010

[3] S. Littlechild, Regulation of British Telecommunications Profitability(Report to the UK Secretart of State for Industry), February 1983

[4] J. Stern, What the Littlechild Report Actually Said, RegulationWorking Paper No. 55, London Business School.

[5] http://www.hubbertpeak.com/africa/africa.pdf, last accessed 23rd March,2011.

[6] http://www.esco.org.za/pdf/new/Electricity_Overview%202010.pdfSouth Africas Electricity Industry, 2010, Accessed 18th Febraury,2010

[7] T. J. Hammons, Bai K. Blyden, Andries C. Calitz, Alfred B. Gulstone,Elese Isekemanga, Raymond Johnstone, African ElectricityInfrastructure Interconnections and Electricity Exchanges, IEEETransactions on Energy Conversion, Vol 15, No4, December, 2000.

[8] http://www.gsb.uct.ac.za/files/StanfordCUPBookChapterp215-253_6.pdf , Anton Eberhard, The Political Economy of power sectorreform in South AfricaAccessed 23 March, 2011.

Documents

Chikuni Ijumba Paper ESIv12 Geithv2