Profound policy implications

A newly published academic paper offers something of a valuable signpost for African policymakers as they grapple with the problem of adding new electrical capacity at scale in a context of major global technological change – developments that will, undoubtedly, have material implications for the way future power markets are designed and operated on this continent and elsewhere.

The most important change has been the recent price reductions in renewable-energy technologies, such as wind and solar. This fact, together with sub-Saharan Africa’s formidable solar and wind resources, is making renewables technologies the cheapest sources of power in many countries, which carries signifi- cant policy implications.

Titled ‘Independent Power Projects (IPP) in Sub-Saharan Africa: Investment trends and policy lessons’, the paper has been coauthored by the University of Cape Town Graduate School of Business’s Professor Anton Eberhard and independent consultant Katharine Gratwick, as well as Elvira Morella and Pedro Antmann, both of the World Bank.

The authors see renewable energy breaking through on the continent – both in scale and price – a “breakthrough” facilitated, in part, by competitive procurement or auctions, which deliver lower prices and increased transparency when compared with renewable-energy feed-in tariffs or directly negotiated contracts.

Renewable energy is, therefore, able to compete with fossil-fuel- based sources, but will need to be complemented with flexible resources, owing to their variable production profiles. “This calls for a re-evaluation of the role of utilities and power markets in balancing the system and contracting appropriate backup and auxiliary services.”

The authors forecast that IPPs will make an important and growing contribution to meeting sub-Saharan Africa’s power needs, but urge policymakers to place greater emphasis on power planning and competitive procurement to ensure a “fair allocation of risk” across private investors, utilities and governments.

“Power planning cannot be neglected and is an essential first step towards greater private-sector power investment. Sound planning means that countries are able to project future electricity demand correctly, decide on least-cost supply options, and anticipate how long it would take to procure, finance and build the required generation capacity.”

There should also be an explicit link between planning and the timely initiation of competitive bids or auctions for long-term contracts for new power.

The authors argue that competitive tenders for long-term contracts will, more often than not, result in better investment and price outcomes than feed- in tariffs or directly negotiated projects.

“For IPPs to flourish, Africa needs dynamic, least-cost planning, linked to the timely initia- tion of the competitive procurement of new generation capacity,” the paper states, adding that competitive tenders will also result in less corruption.