Opinionista Dirk De Vos 8 April 2014

Electricity: Africa’s secret weapon for economic unity

Electricity supply constraints are a significant hurdle to future growth, but a regional approach using market mechanisms will go a long way to addressing electricity shortfalls and to reducing expenditure on wasteful projects, to the benefit of electricity consumers and economies on the whole continent.

Despite all the efforts, Africa’s quest for unity has never really got off the ground. The objectives of the Organisation of African Unity (OAU), the forerunner of the African Union (AU) which was founded in 1962, included ridding the continent of the remaining vestiges of colonisation and Apartheid, promoting unity and solidarity among African states, and coordinating and intensifying cooperation for development. The AU has the stated vision for the African continent as an integrated, prosperous and peaceful Africa, driven by its own citizens and representing a dynamic force in the global arena”. Any assessment shows that Africa is very far from achieving the objectives of the OAU, much less the bolder vision of the AU.

There are several well-known reasons for this. When Africa was divided between the colonial powers, and the divisions formalised at the Berlin Conference, African borders were a result of contestation between the European powers, with no regard to African’s themselves. These dysfunctional borders persist to this day, and are responsible for many of the dysfunctional states. But that is the legacy, and realising the danger of never-ending wars, the OAU cemented those borders and made them inviolate.

To this day, Africa is the least integrated continent, both politically and economically. Trade between African states is a small proportion of total trade in any one African country. Almost every African country trades more with the developed world than it does with other African countries. Research done by Tralac, an organisation developing trade-related capacity in east and southern Africa, shows in great detail the extent to which this is true [1].

In economic terms, if an African country were to magically disappear, it would make little difference to the others. The terms of trade that African countries have with the rest of the world are not that different from colonial times. Africa exports raw materials and commodities, and imports the added value of processed and manufactured products.

In this respect, South Africa stands alone. Its exports to the rest of Africa include a wide range of manufactured goods and services, and it only imports raw materials and commodities from the rest of the continent. South Africa runs a trade surplus with every other African country except those countries from which it imports oil. So South Africa is not dissimilar to the rest of the developed world in its relationship with Africa.

However, South Africa benefits more from African growth than other developed countries because of its greater exposure and links to Africa by virtue of its location and African heritage. But within Africa generally, there is little opportunity to exploit the virtues of comparative advantage through which the net economic welfare of two or more countries is improved by specialisation in one product and trading the surplus with another country. Under these circumstances, any talk of a United States of Africa, or a common currency, is premature – but we can learn from the European efforts at unity and the European Union (EU).

The EU started modestly in 1950, eleven years before the founding of the OAU, as a community to integrate the coal and steel industries of Europe. The rest, including political union, was built on this foundation. It is true that European economies were much more integrated, even then, than African economies are now. Africans don’t need what other African countries produce, so finding something like coal or steel is harder. But something is emerging that could provide the foundation: electricity may be the perfect candidate.

Even with the electricity supply problems in South Africa, some 40,000 MW of generating capacity produces nearly 200 TWh of electricity per annum, just short of ten times that of Nigeria, a country with a population more than three times that of South Africa, and a GDP, as we have seen post its re-basing, 35% bigger than South Africa. Within Africa, only South Africa has broken the “chicken-egg conundrum”: it has an industrial economy – built on abundant and cheap electricity – which, in turn, can immediately absorb new generation capacity. Put another way, Medupi on its own, once fully commissioned, would represent 80% of all the electricity generated in Nigeria right now. Besides the technical shortfalls in Nigeria, a project the size of Medupi would not be built because its economy could simply not immediately finance or absorb the electricity produced in the short to medium term. It would need to build a grid as well.

So, because of a lack of industrialisation, electricity demand within Nigeria is not there, yet the shortage of electricity prevents industrialisation – the “chicken-egg conundrum”.

Africa’s great potential lies in the development of its vast hydroelectric potential. One could argue that all this is a dream that has been deferred for over a century. In 1906, well before the establishment of Eskom, the Victoria Falls Power Company was registered in then-Southern Rhodesia (Zimbabwe) “to harness the Victoria Falls and supply electricity to the mining industry on the Witwatersrand”.

But there is an existing precedent for the idea. The Cahora Bassa hydro-electric power plant in Mozambique already supplies nearly 65% of its total output to Eskom. The 11 TWh/annum of electricity received by Eskom from Cahora Bassa is just less than the total output provided by the Koeberg nuclear power station (about 13 TWh/annum). The contract with Eskom allows Mozambique to use excess Cahora Bassa capacity for its own development or to sell to its other neighbours.

This could be massively expanded. The table below shows the potential for Southern Africa’s two main rivers, the Congo and Zambezi.

Installed and potential hydro-power generation capacity for the Congo and Zambezi rivers.

Source: South African Power Pool (SAPP) Transmission and Trading Case Study by ECA [2]

The Southern African Power Pool (SAPP) was formed in the mid-1990s with several other southern African (SADC) countries. The institutional capacity of this body, being largely technical, functions better than is generally understood. But the impact of electricity trading is, for now, very limited. This is because, firstly, South Africa’s generation capacity completely dominates that of other SAPP members, and secondly, South Africa is represented on this body by Eskom, a monopoly with its own interests that are different from those of the country or the region. Even when economically unfavourable, Eskom favours its own generating assets above those of others.

A properly functioning power pool requires an operational market mechanism for trading electricity. In general, regional electricity supply is dominated by long-term bilateral agreements (like that for electricity from Cahora Bassa), and it is only the surpluses (which are not that much) that are traded via short-term energy market mechanisms.

While there are technical constraints to deeper integration, namely the reliability and security of the existing regional grid and its expansion, the biggest constraint is when national utility monopolies like Eskom feel threatened by the available market mechanisms and choose not to use them.

New technologies now make it possible to restructure our electricity industry on a regional basis. In many areas of the world, the generation of electricity and the retail sale of electricity are no longer seen as natural monopolies, and the entry of new players can be more easily accommodated. Competition, through the exploiting of comparative advantage, is now possible. South Africa’s draft updated Integrated Resource Plan for Electricity [3] anticipates increased imports of hydro-electric power, but for now this source of electricity remains at modest levels. But if we planned correctly on a regional (as opposed to a national) basis, the best projects with the most effective returns, the lowest costs of generation, and/or the lowest carbon dioxide emissions, would win.

This is important: according to the current SAPP plan, the medium- to long-term projects (to 2025) are expected to require US $83 billion for an additional 57,000 MW that will more than double the present regional generating capacity, and that a further US $6 billion for regional transmission investments. These are huge amounts of money but are in the ballpark of South Africa’s proposed nuclear programme. Moreover, South African companies would be able to contribute far more to hydro-electricity construction than a nuclear build programme. If South Africa was to be seen as a serious buyer of electricity or could provide the initial baseload demand (to coin a phrase), many regional electricity projects would become bankable.

Once constructed, many African countries would be able to develop their own industries and economies using the same power sources creating a fresh demand for South African manufactured goods and other services.

South Africa’s distance from its main markets has long being considered a disadvantage. It is therefore in our interest that our region continues to experience high rates of economic growth. Electricity supply constraints are a significant hurdle to future growth but a regional approach using market mechanisms will go a long way to addressing electricity shortfalls and reduce expenditure on wasteful projects, to the benefit of electricity consumers and economies in the whole region.

Most sensible Africans are as tired of pronouncements emanating from the AU headquarters in Addis Ababa, as the statements by the Pan-African Parliament in Midrand. It is time to build a proper foundation for African unity. A determined effort to develop trade in electricity would be meaningful. It could be the foundation and beginnings of our own African economic community, as the coal and steel industry was for the Europeans.

And who knows what could develop further from there? Africa might just escape the marginal role assigned for it at the Berlin conference 129 years ago. DM

References:

[1]      http://www.tralac.org/2013/10/02/africa-south-africa-trading-relationship

[2]      http://www.esmap.org/sites/esmap.org/files/BN004-10_REISP-CD_South%20African%20Power%20Pool-Transmission%20&%20Trading.pdf

[3]      http://www.doe-irp.co.za/content/IRP2010_updatea.pdf

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