HomeFeatures/AnalysisExclusive interview with Lucio Monari

Exclusive interview with Lucio Monari

Lucio Monari is the Director of Energy and Extractive Global Practice at the World Bank. He will address the CEO Forum at the upcoming African Utility Week in May 2017 on a World Bank study on the “Financial Viability of Electricity Sectors in sub-Saharan Africa”.

World BankWe look forward to having you at African Utility Week, can we start with the most exciting energy and water projects that the World Bank is involved in on the African continent?
We have cross-border projects such as OMVG (The Gambia, Guinea, Guinea-Bissau, and Senegal), OMVS (Guinea, Mali, Mauritania, and Senegal), and CLSG (Côte d’Ivoire, Liberia, Sierra Leone, and Guinea), all in West Africa; and the Ethiopia-Kenya power systems interconnection project. The Lom Pangar hydropower project in Cameroon tackles chronic power shortages in that country.

In Rwanda, we are increasing access to households, public institutions, and small and medium-size enterprises through the Electricity Access Scale-up and Sector Wide Approach (SWAp) Development Project. In South Africa, the Sere wind farm project is generating enough power for more than 120,000 households.

We are also involved in projects in Kenya, including the Electricity Modernization Project—which will extend access to 630,000 Kenyans, improve service quality for existing consumers, and strengthen the financial position of the utility—and a solar off-grid access project under preparation. The World Bank Group also has a program called Scaling Solar.

At African Utility Week, you will specifically discuss your report “Financial Viability of the Electricity Sectors in sub-Saharan Africa”. How difficult was it to get all the necessary information to compile the report?
It remains surprisingly difficult to get basic bread-and-butter data such as tariff schedules, operational performance data, and financial statements. We focused very heavily on raw data collection directly from utilities in 43 countries in Africa (39 for technical and financial utility data, and another 39 for tariffs, with 35 countries where we had both). The three databases—tariff, technical and financial—are the first of such scale in sub-Saharan Africa.

We should qualify that many study conclusions are based on a snapshot of tariffs at a specific point in time, and similarly the comparison of revenues with costs also depends on world oil prices and other prices in the year the data were collected in each country.

One of the key messages from the report is that only two countries have a financially viable electricity sector, the Seychelles and Uganda, what are they doing right?
These results should be looked at in context. The point is not so much that these countries were doing well, but that the electricity sector was in poor financial health in nearly every country we examined.

These two countries have continued to display good operational performance. Uganda has made substantial progress in reducing transmission and distribution losses. Seychelles recently introduced tariff increases to reach cost recovery.

What were the key findings in the report about South Africa’s utility sector and its viability?
South Africa is the most developed and complex electricity sector in Sub-Saharan Africa. The installed capacity in South Africa alone is equivalent to the rest of the continent. Eskom remains the dominant player in the sector, but South Africa is unique in the vast number of municipalities, essentially acting as small distribution companies. The sector faces many critical challenges, including a lack of generation capacity which has led to some periods of scheduled brownouts in the last few years.

It should be noted that our report gives some helpful high level indicators, but the analysis is simplified in order to be able to compare dozens of countries. Results for any individual country should not be used as a substitute for an in-depth country‐level analysis, which would be needed to provide the basis for policy decisions.

That said, our report looked at the financial viability of Eskom and of the four issues it examined for the gap between revenue and expenses—tariff levels being too low, excessive system losses, failure to collect payments, and comparison of certain performance indicators with those in comparable countries in Latin America—and low tariff levels are identified as the major issue. As Eskom moves away from aged coal plants to modernize its generation fleet, prices will likely need to increase to cover the investment costs for capacity rehabilitation and expansion, or else the utility will continue to pose a fiscal burden to the government.

Technical and non-technical losses did not appear to be a major problem for Eskom, which seems to be one of the best performing utilities in the region on these indicators.

What are the other key messages from the report?
It suggests several ways of recovering the cost of supply and making electricity affordable, which include:

  • Absent system-wide optimisation, very few African countries have full cost recovery. Only two countries have a financially viable electricity sector. Only 19 countries cover operating expenditures. Several countries lose in excess of $0.25 per kWh sold. In this context, it will be difficult for utilities to maintain existing assets, let alone facilitate the expansion needed to reach universal access goals.
  • One third of countries may become financially viable through improving operational efficiency. If utilities could reduce combined transmission, distribution, and bill collection losses to 10% of dispatched electricity, deficits could disappear in one-third of the countries. However, expanding access to areas that are not yet covered will likely be more costly, potentially requiring tariff increases.
  • It is almost certain that increasing tariffs will be needed in the remaining two-thirds of the countries studied. In these countries, the funding gap cannot be bridged solely by eliminating operational inefficiencies, requiring tariff increases. Small and frequent tariff increases may find wider acceptance, as long as electricity access is reliable.
  • Installing individual metering. Deterred by the high upfront cost of connection, poor households tend to share one electricity meter. That often makes several poor households appear as one rich household consuming a lot of electricity to the utility, making them ineligible for subsidised lifeline rates. Individual meters in poor households can help utilities target cross-subsidies better. Aside from helping the poor, metering every customer separately and accurately is an essential component of making utilities financially viable.
  • Installing prepaid meters that would benefit both utilities and customers. For low-income households, the ability to pay in small increments helps align electricity payments with income flows, while utilities are guaranteed payments upfront. Prepaid meters also mean that users pay only for electricity consumed (and not for estimated consumption), and they are protected from disconnection.
  • Sharing connection costs. The first priority in increasing access to electricity is to make the initial connection affordable to the poor. One option is to share the costs across all electricity users, including large- and medium-size firms.

Under-pricing by utilities also receives considerable attention in the report, how are utilities determining their prices?
Examination of price-setting mechanisms was not a major area of focus of the report. However, we do know that while the majority of countries have regulators in place, many are still subject to political influence and the recommendations of the regulator are not always taken on board. That said, prices in many countries are already very high compared to those in other regions, making it difficult to raise tariffs further.

Did you find that renewables are starting to make a difference to the way utilities do business?
With prices falling internationally, renewables such as solar can make a difference in the utility cost structure and help diversify fuel sources. The World Bank has a new regional project under preparation that aims to help countries integrate large-scale solar photovoltaic into the grid.

What were the most surprising findings in your view?
We work in most of the countries in the study and were already familiar with these trends. What this study did was to quantify what we knew qualitatively.

Among the quantitative findings, we looked at the affordability of grid electricity access and use to households in 22 countries with national household expenditure surveys conducted in recent years. In 14 countries, the lowest possible cost for grid connection was equivalent to at least one month’s worth of household income for the poor, and as high as five times in one country. It is no wonder multiple connections are prevalent.

In four countries, consuming 30kWh a month—assuming the household is individually and accurately metered—would still have cost more than 10 percent of the household income among the poor.

In most other countries, however, 30kWh was affordable, meaning that more sharply targeted cross-subsidies for both the initial connection and electricity consumption would go a long way in helping to achieve the U.N. goal of universal access by 2030. With advances in energy efficiency, we may not need 30kWh a month to meet essential needs, except where electricity is used for heating in winter. That is, more efficient appliances make electricity use even more affordable.

Where do you see the sector in 10 years?
With technology moving so fast in the sector, it is hard to predict where we will be in 10 years. But what we hope is that there will be a better balance between access and affordability for clients and profitability for the utilities.

The World Bank will also have the opportunity to specifically address the Utility CEO Forum, what will be your message to them?
Privatisation and unbundling can work where the conditions are right. To make the power sector more viable, sector governance and utility management need to be strengthened. The regulatory framework should be clear and predictable, providing incentives for the utility to improve their performance. Unbundling does have transaction costs that need to be considered and weighed carefully against the benefits of creating new institutions.

Anything you would like to add?
This study focused primarily on grid electricity. While connecting to the grid is a solution for all urban Africans and many people living in rural areas, rural electrification cannot rely solely or even largely on grid extension.  Mini and off-grid electricity, especially from sources like solar, offers increasing potential to electrify homes in many rural areas of sub-Saharan Africa.

Babalwa Bungane
Babalwa Bungane is the content producer for ESI Africa - Clarion Events Africa. Babalwa has been writing for the publication for over five years. She also contributes to sister publications; Smart Energy International and Power Engineering International. Babalwa is a social media enthusiast.