‘Significant implications’ for design of African power markets as renewables prices fall

Recent renewable energy price reductions, together with sub-Saharan Africa’s (SSA’s) formidable solar and wind resources, have made solar and wind technologies the cheapest sources of power in several countries, which carries significant implications, a newly published academic paper argues, for how the region’s relatively undeveloped power systems are designed.

Titled ‘Independent Power Projects (IPP) in Sub-Saharan Africa: Investment trends and policy lessons’, the paper has been co-authored by the University of Cape Town Graduate School of Business’s Professor Anton Eberhard, 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 back-up and auxiliary services.”

The authors forecast that IPPs will make an important and growing contribution to meeting SSA’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 argued 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.

“While the costs of running a competitive procurement program might be higher than those involved in directly negotiated projects, these are justified by the lower prices achieved,” the paper states, adding that competitive tenders are also more transparent and result in less corruption.

“For IPPs to flourish, Africa needs dynamic, least-cost planning, linked to the timely initiation of the competitive procurement of new generation capacity. This must be accompanied by the building of effective regulatory capacity that encourages the distribution utilities that purchase power to improve their performance and prospects for financial sustainability – and to widen access to electricity,” the paper concludes.