New Voices in Africa - The Impact of Covid-19 on South Africa and Nigeria’s Power Sector

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Founder & MD of DLO Energy Resources Group (Pty) Ltd

With a bit under 1.5 million reported cases, Africa seems to be relatively spared by the virus, compared to other continents. The African continent has however felt the economic effects of the global Covid-19 crisis since its onset, causing it to enter recession for the first time in 25 years. The World Bank growth forecasts now vary between -2.1% and -5.1% in 2020, from 2.4% in 2019. Beyond these seemingly limited and general predictions, Institut Montaigne wanted to dig deeper into the impact of the pandemic on six different sectors on the continent: energy, information and technology, education, media and communications, the agro-food industry and finally, the arts. How have they weathered this crisis? What challenges do they each face? How are these sectors being shaped by the Covid-19 crisis, and is the change here to stay?

And who can better answer these questions than young African leaders who are active players in these very sectors? Mahaut de Fougières, Policy Officer for International Affairs at Institut Montaigne, has interviewed six Young Leaders from the French-African Foundation, for this six-part series. We begin with the power sector, which has been greatly impacted by the global economic downturn and the lockdowns introduced in a number of countries across the African continent. Linda Mabhena-Olagunju, Founder and Managing Director of DLO Energy Resources Group (Pty) Ltd, a wholly African female-owned and independent power producer, shares her analysis of the impact of Covid-19 on South Africa and Nigeria’s power sectors.

The impact of the Covid-19 pandemic on global health has been widely reported across the world. What is underreported is the success of the African continent’s handling of this crisis. Africa is often criticized for poor leadership. However in this instance, its leaders managed, for the most part, to provide their citizens with decisive leadership to curb the spread of the pandemic. Most African governments had a clear strategy which included strict lockdown measures, mask wearing policies and mass testing. As a result, the continent was able to keep its infection and death rates down.

Whilst the continent has been successful in managing the pandemic, it now has to deal with the economic fallout as countries around the world face recession. A majority of African economies are heavily resource-based and with the global resource downturn, many had already been struggling prior to the global lockdowns. Covid-19 has merely put pressure on underlying economic deficiencies primarily linked to years of mismanagement of state funds, underinvestment in public infrastructure and a failure to implement economic reform policies. As lockdown measures are eased, there is a scramble by African governments to save their ailing economies and create employment for an increasingly agitated and unemployed youth population. The International Monetary Fund has projected that sub-Saharan Africa will enter into a recession for the first time in 25 years due to the Covid-19 pandemic, with growth falling to -3.2% in 2020 from 3.1% in 2019. Many African countries are in great debt and have a limited fiscal capacity to absorb the looming economic crisis.

A number of taskforces and advisory committees have been appointed to think of ways to stimulate economies across the various countries. In my view, Africa is not a continent without brilliant ideas and policy writers. What we are is a continent with a chronic inability to implement these policies. A perfect example can be found in the power sectors across sub-Saharan Africa. A large part of the continent’s power sector has suffered from underinvestment as well as a failure to implement the various energy reform policies proposed over the years.

No Growth Without Energy

According to the International Renewable Energy Agency (IRENA), Africa has 147 GW of installed capacity, which to put into perspective, is the total amount of power produced by China every 1 or 2 years. Various studies have shown the link between the consumption of electricity and the rate of growth in the GDP. On average, electricity consumption in sub-Saharan Africa, with the exception of South Africa, is 153 kWh per annum which is one fourth of the rate of consumption in India and just 6% of the global average. Nearly 600 million people in Africa lack access to power and this has had huge ramifications on businesses’ expenses. IRENA has found that the lack of access to power costs the continent up to 5% in the growth of its GDP annually. It is a widely accepted fact that there can be no meaningful economic growth without access to affordable and reliable electricity supply. Any economic response that does not have increased power generation as well as an investment into grid and transmission infrastructure at the top of its agenda is bound to fail.

IRENA has found that the lack of access to power costs the continent up to 5% in the growth of its GDP annually. [...] There can be no meaningful economic growth without access to affordable and reliable electricity supply.

Globally, Covid-19 lockdown measures have significantly decreased commercial power demand with many industries being closed or operating at minimum capacity. The opposite has obviously been true for domestic power demand which has spiked during the lockdown. The decreased commercial power demand has also meant a decrease in revenue for Africa’s ailing power utilities. In some instances, it has meant a slowdown in the development of power projects on the continent. As two of Africa’s largest economic players, South Africa and Nigeria present interesting examples of the impact of the pandemic on the power sector.

South Africa’s Self-Imposed Power Problems

South Africa’s power usage has followed the global trends. In response to the decreased demand for commercial power during the early stages of the country’s lockdown, its power utility Eskom, which produces 95% of the country’s power and accounts for 45% of power produced on the African continent, found itself in the odd position of having more generated capacity than required by its consumers. Whilst it was clear to those in the industry that the reprieve would be short-lived, Eskom, in a cost saving effort, looked to implement the force majeure provisions in their power purchase agreements with independent power producers operating in South Africa under the country’s Renewable Energy Independent Power Producer Procurement (REIPPP). However, a few weeks after Eskom’s initial notification of an implementation of force majeure, the country returned to its rolling blackouts as lockdown restrictions were eased. Power generation has come back to the top of the agenda again and strides are being made to fix the self-imposed power problems in the country. Unlike other African countries, South Africa had made great headway initially through the introduction of private investment in its power sector through its REIPPPprogram which was initially considered to be one of the best in the world for investment. Within the 8 years of its inception, REIPPP has attracted 4 billion South African Rands in committed private sector investment (24% of which is foreign direct investment) and it has managed to create approximately 38 701 jobs. Unfortunately, the program faced challenges when procurement of new generation capacity ceased due to a number of political factors during the Zuma administration.

Prior to the global pandemic, the South African economy was already in crisis due to a number of factors including the looting and mismanagement of state-owned enterprises, chronic power outages and a failure to implement economic reforms. The Covid-19 lockdown measures merely added further pressure on the government to reform the economy, and power is a key factor to this reform. As pressure mounts to grow the economy, the Minister of Mineral Resources and Energy, Gwede Mantashe, has finally given clear indications to the country and investors that the ministerial determinations that would open the way for procurement of the 11 813 MW of new generation capacity would be gazetted within a week, and that the long awaited fifth bidding round under REIPPP would commence by December 2020. The one positive to come out of this pandemic is that it has been able to incite procurement for much needed power, which in turn will lead to new investment and job creation.

REIPPP [...] has managed to create approximately 38 701 jobs. Unfortunately, the program faced challenges when procurement of new generation capacity ceased due to a number of political factors during the Zuma administration.

The Cost of Power Shortages in Nigeria

Another economic giant on the continent facing worse power issues is Nigeria. With a population of approximately 195 million people, the country has an installed power generation capacity of approximately 12 500 MW. To put this in perspective, South Africa’s population is approximately 57 million people and its installed generation capacity is approximately 51 309 MW and it still suffers from rolling blackouts. To say Nigeria has a power crisis would be an understatement. The economic cost of the power shortages in Nigeria is approximately $28 billion per annum, equivalent to 2% of its annual GDP. According to the 2020 Doing Business report, the lack of electricity supply ranks as one of the major constraints for the private sector.

Prior to the Covid-19 pandemic, the Nigerian Electricity Supply Industry (NESI) was facing operational constraints, which included the lack of cost-reflective tariffs, inadequate metering of consumers, poor collection rates and massive debts to the country’s Generation Companies who were owed 72% of their revenue in 2019.

In an attempt to address issues around the lack of cost reflective tariffs, the Nigerian Electricity Regulatory Commission (NERC) approved a tariff increase. The tariff was increased from 30.23 Naira per kwh to 62.33 Naira per kwh. During the Covid-19 lockdowns, NESI and distribution companies reported a loss of 50% in revenue collections. Whilst it is generally accepted that the tariff increase was long overdue, it comes at a time when the country is facing slowed growth and citizens are faced with increasing unemployment and harsh economic conditions. It remains to be seen whether the increase will result in increased revenue or whether it will merely lead to a further decrease in revenue collections from a client base that is predominately facing financial constraints.

With the exception of South Africa, sub-Saharan Africa has struggled to attract large scale power investment from the private sector primarily because most of these countries (for example Namibia, Botswana, Zimbabwe and Mozambique) have not set out clear energy procurement plans that are big enough to attract long term investments. South Africa’s REIPPP is scalable, however it also faced challenges when procurement was effectively stopped when there was new political leadership. To date there has been no new procurement of power for approximately 5 years and this has negatively impacted investor confidence and killed a number of local companies. The lack of regulatory clarity and the "stop-start" approach has negatively impacted investor confidence in the country with many adopting a "wait and see" approach.

The lack of regulatory clarity and the "stop-start" approach has negatively impacted investor confidence in the country with many adopting a "wait and see" approach.

The other challenge that has historically plagued power projects in sub-Saharan Africa has been the issue of a lack of bankable offtakers. Traditionally, where there is a large scale power procurement programme, it is usually a state owned entity that acts as the buyer/offtaker for the electricity produced by independent power producers (IPPS), however, in order for this model to work, the offtaker needs to have a bankable balance sheet so as to pay for the power purchased. In most instances, these entities are not bankable and as such require government guarantees to stand behind their liabilities. Recently, the Nigeria Bulk Electricity Trading Plc (NBET) failed to pay generation companies for the power it purchased.

NBET is a government-owned entity which buys electricity in bulk from generation companies through power purchase agreements and then sells it through vesting contracts to the distribution companies, which then supply it to the consumers. Amongst other things, such as appropriate risk allocation under PPAs, cost reflective tariffs etc., serious fiscal support from the Nigerian Federal Government would be required to make NBET functional and bankable for investors.

A Momentum for Progress in Africa

All in all, the initial first steps required to advance the South African and Nigerian power sectors have been taken both at a policy and regulatory level. One hopes that the momentum created by the economic urgency linked to the Covid-19 pandemic will lead to a more sustained approach to power sector regulation as opposed to the historic stop-start approach. It is also important to keep in mind that the progress of both countries is meaningless without the fiscal support required to make projects bankable, and that usually involves government guarantees to protect investors from exposure to political risk. If we are honest with ourselves, Covid-19 has not really created new problems per se, it has merely brought our old issues to the fore, hopefully this global wake-up call forces us to progress.

Copyright: FLORIAN PLAUCHEUR / AFP