East African Countries Will Have Electricity They Cannot Use, Unless They Focus on Their Transmission Infrastructure Now
INTRODUCTION
Inadequate transmission line infrastructure can be economically crippling, particularly for countries that have “take-or-pay” agreements, excess electricity generation supply, and limited financial resources. In the next four years, Ethiopia, Kenya, Tanzania, Uganda and Rwanda could find themselves in the severe financial predicament of having too much electricity, with not enough people to buy it or use it.
Power Africa¹, the U.S. Government-led effort to double access to electricity in sub-Saharan Africa, assessed projected generation and transmission in key East African countries to see if the new power generation projects that Power Africa is seeking to support would ultimately be able to deliver power to people and industries. This analysis was undertaken after observing how the KivuWatt methane extraction project in Rwanda and the Lake Turkana Wind Project in Kenya were limited in their ability to transmit power after the power generation projects were completed, resulting in financial losses that could have been avoided if there had been better transmission planning. In both projects, power generation came online with inadequate transmission lines in place. While Power Africa has been successful promoting new power generation projects, currently tracking more than 800 potential power generation projects, that new power will not benefit people and countries if it cannot be delivered to homes and businesses. Unused power generation facilities result in lost opportunities and lost revenues for governments. Power Africa’s 2.0 strategy focuses on power transmission, distribution and the enabling environment. This strategy helps identify potential gaps, vulnerabilities and opportunities in transmission infrastructure so that countries, development partners and the private sector can more effectively prioritize investments, optimize regional power costs, and avoid similar problems in the future.
To assess the projected power demand over the next five years, Power Africa analyzed the anticipated order in which planned power generation and transmission projects are expected to come online in five East African countries² — and mapped this against the backdrop of projected demand and impact on pricing. While this analysis captures a snapshot of expected project timelines, the goal is to provide stakeholders with data and information to help prioritize investments, in order to mitigate the impact of potential infrastructure deficiencies and help countries optimize costs through a combination of domestic production and regional power trade.
KEY FINDINGS OF THE ANALYSIS
Four key findings are relevant for governments and development institutions focused on the region³:
- Energy surplus is already a reality. Based on current on-grid demand, a regional electricity surplus currently exists and this surplus is expected to grow over the next four years, at which point all five of the countries studied (Ethiopia, Kenya, Rwanda, Tanzania, and Uganda) will be in a surplus position.
- Transmission infrastructure must be accelerated. To take advantage of the surplus, and to unlock the regional trading potential, several key regional transmission projects need to be prioritized and accelerated, including: (i) the Ethiopia-Kenya-Tanzania (EKT) transmission line, (ii) the internal Loiyangalani-Suswa line in Kenya, and (iii) the Uganda-Rwanda interconnector.
- Investment is required in hard infrastructure and energy systems management, as well as trading arrangements. System upgrades and management controls (i.e., energy scheduling, outage management, emergency planning and system protection) are needed so countries can interconnect without adversely impacting their systems or those of their neighbors. Power trading (i.e., cross-border Power Purchase Agreements (PPAs), wheeling agreements, access rights) also must be in place.
- Increased private sector financing of transmission infrastructure is needed. The infrastructure deficit relating to transmission is too large to be addressed by governments and development finance institutions (DFIs) alone. Therefore, there is a need to pursue private sector financing through PPP and other models in countries where it makes sense. Kenya is already pursuing this option to accelerate transmission line development from the current 4,000 KM to 10,000 KM by 2020.
The potential impact of regional trade is significant. Power Africa estimates that countries included in this analysis could save $500 million by importing power instead of using expensive emergency power⁴. The investment required over the next two years, however, to unlock this impact is $40-$50 million ($30-$40 million for operational readiness investments, as well as approximately $10 million for technical and project management support related to transmission line acceleration).
THERE IS A GROWING ENERGY SURPLUS IN EAST AFRICA
Power demand will likely be met with projects already in the pipeline, so governments, development partners, and other stakeholders should more closely scrutinize further support for additional generation projects. There is anticipated overcapacity in the region, even after building in an adequate reserve margin. However, this overcapacity is not spread evenly across countries. As of December 2017, while Ethiopia had a surplus of 1,392 MW, Tanzania had an undersupply of 495 MW, suggesting potential for increased regional trade if adequate hard and soft infrastructure can be put in place in time.
If the buildout of generation projects are developed as planned, in the next four years this surplus is expected to triple to a regional overcapacity of 2,689 MW, with each country expected to have overcapacity. Power exports from Ethiopia to other countries such as Sudan and Djibouti by 2022 might help mitigate this oversupply, but not enough to consume the full amount of available power. This surplus could be seen as an opportunity to catalyze regional economic growth. However, it could also have a material negative financial impact on the region. If surplus generation assets sit unused, payments on those assets still accrue, which can drive up the price of electricity for consumers. Countries in East Africa should establish a dialogue to develop a coherent and mutually beneficial planning approach; to explore ideas such as demand stimulation; increased regional trade, and potential export markets outside of the immediate East African region.
Supply and Demand Evolution Across East Africa, 2017 and 2022:
TRANSMISSION TRANSACTIONS SHOULD BE ACCELERATED WHERE POSSIBLE
To take advantage of the existing regional surplus, and to fully unlock the regional trading potential, several key regional transmission projects need to be prioritized and accelerated, including (i) the Ethiopia-Kenya and Kenya-Tanzania portions of EKT, (ii) the internal Loiyangalani-Suswa line in Kenya, and (iii) the Uganda-Rwanda interconnector.
Currently, there is an energy surplus in Ethiopia, Kenya and Uganda, and an energy deficit in Tanzania and Rwanda. Regional trade is inhibited by the lack of transmission infrastructure running from Ethiopia to Tanzania, and lack of interconnection between Rwanda and the rest of the region. A significant transmission bottleneck exists due to the delay in connecting the Lake Turkana Wind Project to the grid. Nevertheless, by 2020, it is expected that the Kenyan domestic transmission constraint will be largely resolved, and the Ethiopia-Kenya transmission line and the Uganda — Rwanda interconnectors will be in place. Unfortunately, however, the connections into Tanzania will likely come online much later. The Ethiopia-Kenya line and Kenya-Tanzania line are particularly important given that they will be able to transmit inexpensive power from the country with the highest energy surplus (Ethiopia) to the country with the highest energy deficit (Tanzania) and further down to the Southern Africa Power Pool (SAPP). The World Bank recently approved a $455M credit for the Tanzania-Zambia Interconnector project, which will connect East Africa Power Pool (EAPP) countries to SAPP. In its economic analysis, the World Bank found that, “the potential benefits of power trade between Tanzania, and other members of the EAPP, with Zambia, and other members of the SAPP, are substantial.”⁵ It notes that the timing and extent of this benefit heavily relies on completion of interconnections like this, and commercial and administrative arrangements being put in place between trading countries.
Status of regional transmission lines:
Progress across these lines is expected to fully unlock regional transmission and enhance power trade by 2022. There would be significant incremental value if some of these lines could be completed earlier, given that generation capacity is already in place and functional in Ethiopia and Kenya, and these countries could be exporting into other countries in the region.
The chart below articulates the current situation regarding individual transmission lines, and the required interventions needed for each, in order to maximize value for the regional electricity market overall.
Action summary by priority transmission lines:
Generation Projects Coming Online by 2022:
In addition to the list of priority projects identified above, the following is a list of well-known projects that are intended to come online by 2022. This list is intended to be as comprehensive as possible, however may not be completely exhaustive.
SIGNIFICANT ADDITIONAL INVESTMENTS REQUIRED TO ENABLE REGIONAL TRADE
In addition to ensuring that the regional transmission infrastructure is in place, significant effort also needs to be placed on enabling effective regional trade through a combination of investments in energy system management (i.e. energy scheduling, outage management, emergency planning and system protection). In addition, countries must ensure that trading arrangements (i.e., PPAs, wheeling agreements and regional framework for relevant transactions) are effectively in place. Targeted actions required to enable regional trade include:
- Utilities investing in readiness to trade. Investments are required at the utility level across the region to enable trade through effective energy system management. These investments include energy scheduling, outage management, emergency planning, system protection and operational readiness for each utility. This investment is projected to cost $30 — $40 million across the different utilities in the region.
- Completing wheeling agreements. Exports from Ethiopia need to be wheeled through Kenya and Uganda to Tanzania and Rwanda. However, wheeling agreements are not finalized nor does an EAPP level framework exist for advancing these deals. High-level cost estimates for this activity are approximately $1 million.
- Adjusting PPA capacity for Ethiopia-Tanzania trade. The draft PPA between Ethiopia and Tanzania has a maximum capacity of 400 MW. This capacity would need to be raised for Tanzania to take advantage of the full import opportunity from 2020. However, Tanzania will need to consider interconnection reliability, power reserve requirements, and security concerns regarding reliance on imports in deciding how much to purchase. If Tanzania wishes to increase its energy independence, it must fast-track development of generation projects with shorter lead times including wind and natural gas projects. High level cost estimates for this PPA review are approximately $1 million.
- Establishing a bilateral trading platform and transmission wheeling service for cross-country transit for East Africa. Current PPAs are for long-term arrangements (up to 25 years). As the surplus builds up, there is a need to facilitate short term trading (up to 2 years duration) for energy, capacity and reserves. Such arrangements will make it easier to enter into bilateral trades between EAPP members, and between EAPP members and non-EAPP members that are interconnected to complement, and coexist with, a future centralized day-ahead market platform, when it becomes operational.
- Developing frameworks for financing transmission through the private sector. There is an increasing financing deficit for transmission. Countries in the region need to explore alternative models and put in place alternative frameworks for financing infrastructure. This has proven successful in Asia and Latin America. Kenya has set in motion this effort with support of the World Bank and Power Africa. Other countries could follow suit to accelerate investment in transmission, especially for commercial load centers such as industrial parks and mines.
These constraints are currently a greater impediment to trade than the hard infrastructure requirements, given that there are several scenarios under which the hard infrastructure would be in place without trade occurring. The cost of the recommended interventions and training is estimated at $50 million total, with the potential financial benefit over the four-year period to 2022 of more than $700 million.
Overall, the potential impact of enabling inter-regional trade is significant, with savings from importation versus cost of emergency power of approximately $500 million for Tanzania and approximately $5 million for Rwanda. Ethiopia has the potential to earn approximately $200 million in export revenue to Tanzania between 2018–2021.
CONCLUSION: WHERE DO WE GO FROM HERE?
Various types of financial and technical support are required to help accelerate the transmission lines and soft infrastructure investment needed to enable regional trade — both in East Africa and elsewhere across the continent. Power Africa’s network of partners — such as the World Bank, International Finance Corporation (IFC), Agence Francaise de Developpement (AFD), the European Union, Norfund, and Japan International Cooperation Agency (JICA) — collectively bring these resources to the table, and are working collaboratively to address both the infrastructure and enabling environment issues facing East Africa. A recently signed partnership with the Republic of Korea includes a $1 billion commitment by Korea to finance the construction of power sector infrastructure, including over 1,000 KM of transmission lines, in sub-Saharan Africa by 2023. As with most Power Africa partnerships, it also included a joint commitment to strengthen the enabling environment and advance policy reforms through constructive dialogue with African governments. East Africa is ripe for an opportunity to leverage this financing and technical assistance with other private and public sector partners. One current example is Power Africa’s cooperation with the Tony Blair Institute, which is helping coordinate donor support for the EAPP and design of appropriate wheeling agreements and PPAs.
New and innovative DFI concessional financing models are needed to decrease the need for government investment and further encourage privately-financed transmission models. Policy and regulatory reforms are also needed to spur private sector investment.
Several of the lines under discussion (e.g., EKT Ethiopia — Kenya, the Rwanda and Uganda interconnectors, and the Loiyangalani — Suswa line) require technical assistance to ensure improved project management, and rapid project execution. Power Africa and its development partners (including the World Bank, the IFC, the AfDB, and JICA) could provide this type of support as well as the support required for the actions to enable regional trade, including strengthening of utility capabilities, completing wheeling agreements, or re-structuring PPAs. Securing funds for these investments needs to be prioritized to ensure that operational readiness does not become a bottleneck to trade once major interconnector lines are complete.
All the arrows are pointing in one direction: the critical need to accelerate transmission infrastructure and operational readiness — including three priority lines in particular — in order to take advantage of the current and expected surplus in East Africa (and to stop the financial hemorrhaging on generation facilities that are completed but not online). This must be done in parallel with certain enabling environment improvements. This is why Power Africa 2.0 includes a stronger focus on working with partners to advance enabling environment reform and accelerate transmission infrastructure across the continent.
This article makes the findings of this analysis available to African government officials, development partners, and other stakeholders, so that we can collectively use our resources more strategically to leverage the necessary investments and advance reforms. Power Africa is a steadfast advocate and partner in East Africa and remains focused on bringing affordable, reliable electricity to hundreds of millions of African homes and businesses not in 10 years, but much, much sooner.
FOOTNOTES
¹ This work was conducted with support from the Tony Blair Institute for Global Change, McKinsey and Company, and African government officials.
² Countries in this analysis included Ethiopia, Kenya, Rwanda, Tanzania, and Uganda only.
³ For purposes of this report, “region” refers to the five countries that were included in the analysis (Ethiopia, Kenya, Rwanda, Tanzania and Uganda).
⁴ Between the period 2018–2022.
⁵ The World Bank, “Project Appraisal Document for the AFCC/RI-3A Tanzania-Zambia Transmission Interconnector Project”, May 25, 2018.
