*Powering Africa How Captive Generation Can Electrify the Continent/
Foreign Affairs 16.09.16*

How Captive Generation Can Electrify the Continent

By Megan Reilly Cayten and Morgan D. Bazilian

Sub-Saharan Africa is living through a crisis in power supply. Thanks to
decades of underinvestment in, and mismanagement of, electricity
infrastructure, the region’s power grids are underpowered and
dysfunctional. Sub-Saharan Africa today consumes 30 percent less
electricity than South Korea, despite having 20 times its population, and
on March 31 of this year, the entire country of Nigeria—population 180
million—generated no electricity for two hours. Even where electricity is
available, it may be of low quality, which can be just as damaging. The
cost of such dysfunction can be high: a 2014 report from the International
Energy Agency (IEA) estimated that businesses in sub-Saharan Africa lost
nearly five percent of their annual sales owing to power outages. No wonder
unreliable power supply has been identified by business leaders as the
single most pressing obstacle to the region’s growth, ahead of corruption,
red tape, and access to capital.

Yet despite its energy deficit, the region’s growth, which averaged 5.1
percent annually from 2007­ to 2014, still beat the global average. Such an
impressive performance underscores what sub-Saharan Africa’s economy could
achieve if liberated from the constraints imposed by its inadequate power
supply. Lifting those constraints may prove expensive, however. According
to a study by McKinsey & Company, the cost of the necessary investments in
the region’s electricity grid is estimated at some $800 billion through
2040­—a outlay that can be met only by attracting private capital from
abroad. Historically, private investment in the region has been limited in
scope because of political risk, economic uncertainty, and other
challenges. But there are opportunities to supply reliable power to
sub-Saharan Africa that, if properly structured, offer both compelling
returns and a sure path toward development.


To date, investment in Africa’s power sector has tended to focus either on
large, centralized generation projects (such as power plants) or on
small-scale rural electrification schemes that service individual farms and
households. Both are necessary. Yet large plants have encountered, among
other challenges, diseconomies of scale due to fuel supply constraints,
inadequate infrastructure, and a lack of viable customers. Rural
electrification, meanwhile, is important for those who receive its
benefits, but recent studies in India and Kenya suggest that its overall
economic impact may be negligible. Between these macro and micro
approaches, however, there is another method, captive power generation,
which may offer a profitable means to quickly build capacity while
stimulating broader economic growth.

Captive power generation refers to the installation of small
power-generating units (or “assets”), often by businesses, in order to
provide electricity for their own service or manufacturing needs. Powering
an enterprise with a diesel generator, for instance, is a well-known
example of captive power generation. Rather than relying on a large-grid
infrastructure, a captive power delivery model allows assets to be
strategically located in high-demand areas. In recent years, technology
improvements have meant that captive power assets are now more affordable,
efficient, and flexible than ever before, making them a more viable method
for addressing the problems caused by low-quality electrical services.

In sub-Saharan Africa, poor infrastructure, a difficult operating
environment, and a lack of local expertise have made grid maintenance
difficult and led to high operating costs and wasted resources—three to
five times more power is lost in transmission and distribution than would
be normal in a well-run grid. As a result, this type of power development
is often a losing investment: based on one analysis, to break even, the
average power utility in sub-Saharan Africa would need to charge its users
72 percent more than users in a properly functioning grid; in reality, they
are charged 50 percent less, largely for political reasons. In these
conditions, private investors often require guarantees from governments or
international financial institutions as a prerequisite for investment,
which can increase complexity and overhead costs. In sub-Saharan Africa,
poor infrastructure, a difficult operating environment, and a lack of local
expertise have made grid maintenance difficult and led to high operating
costs and wasted resources.

Captive power generation offers an attractive alternative. It improves
reliability and quality of power supply (essential for manufacturing);
reduces or eliminates reliance on transmission and distribution
infrastructure; significantly reduces the time, planning, and investment
capital required for new projects; allows projects to operate more
independently of government; and makes it possible to add and subtract
assets as demand fluctuates. When supply exceeds demand, the excess can,
under certain technical and regulatory arrangements, be fed back into the
grid. And because the power-generating units are typically small and
mobile, they may be recovered in the case of contractual default.

Most important, distributed generation enables power supply companies to
choose their customers based on their credit quality, rather than contract
by necessity with a centralized grid’s single buyer—often a distribution
company or government-owned utility with bad credit. This ability to choose
more trustworthy customers makes it possible for third-party power
suppliers to seek private investment for individual projects or portfolios,
with limited or little need for institutional guarantees. Giving growing
companies access to reliable power, moreover, allows them to expand their
business, stimulating broader economic growth.

In fact, some in sub-Saharan Africa already use a form of captive power. In
the absence of effective centralized grids, those with the need and the
ability to pay (mostly businesses) rely on diesel generators. According to
the IEA, in 2012, privately owned diesel generators supplied nearly five
percent of the region’s total electricity, with 80 percent of that
diesel-generated power sold to businesses. The capacity of Nigeria’s diesel
generators is estimated at 12 gigawatts—four times the installed capacity
of the grid—and the country’s businesses generate 59 percent of their own
electricity. As a result, in Nigeria power accounts for four to eight times
as much of the manufacturing production costs as in other similar
economies. In sub-Saharan Africa more broadly, the cost of running backup
generators is equivalent to anything from one to four percent of GDP.

Still, businesses that generate their own backup power are able to mitigate
less than 50 percent of the costs of poor electricity supply, and diesel
fuel, as an import, is expensive and vulnerable to supply shocks—as when an
April 2015 strike by diesel importers crippled the Nigerian economy.
Fortunately, technological and cost improvements mean that small generation
units are now available using a wide variety of fossil and renewable fuels,
including natural gas and solar, depending on what is locally available.
And expanded to an industrial scale, such captive generation would provide
a cleaner and more efficient alternative to the raft of existing diesel
generators, improving local power generation as well as cutting down on air
pollution. Captive generation would thus help “green” the continent’s
industrialization, a task that African leaders have already recognized as a
priority. Reducing reliance on diesel would also strengthen the entire
economy’s resilience to fuel supply shocks, whether from natural or
man-made disasters.

An unreliable power supply is bad for nearly every sector of an economy,
but it does not affect all of them equally. In sub-Saharan Africa, as in
most regions, it is the largest firms that suffer the most from power
outages and voltage fluctuations. These large companies often operate in
sectors such as technology or manufacturing, which are widely seen by
development economists as the backbone of a country’s economy owing to
their contributions to employment, productivity growth, and high living
standards. Very few countries have escaped poverty without first developing
a strong manufacturing economy. But in sub-Saharan Africa, manufacturing’s
proportion of overall GDP has shrunk over the last two decades, and
manufacturing productivity is 30 percent lower than in other developing
regions. Lack of affordable and reliable electricity is one of the major
reasons for this stagnation. Improving the quality and quantity of
electricity supply for commercial and industrial users will allow
businesses and entire economies to expand.


Captive power generation offers a scalable platform capable of reducing the
typical risks associated with emerging markets power investment. But to be
successful, it requires a number of conditions, including a favorable
policy and regulatory environment, an established local industrial base, a
reliable fuel supply, the technical know-how to install technology and
maintain it over time, and the business skills to negotiate the many small
contracts involved in a distributed power platform. Nor is it a panacea.
Although providing electricity to businesses will undoubtedly have a
positive effect on regional development, it will not turn the lights on for
the 600 million residents of sub-Saharan Africa who currently lack access
to modern electricity services.

Yet captive power generation offers the most scalable, bankable investment
in power supply today, as well as the one most capable of catalyzing wider
economic growth. To support the model as well as enhance its development
impact, power sector policymakers should prioritize the generation of
high-quality power for productive use in targeted industries such as
manufacturing. They should also encourage regulations that permit private
entities to self-generate and contract with each other for the sale and
purchase of electricity, and that allow captive assets owners to sell their
surplus back into the grid. For those projects relying on natural gas
supply, the development and liberalization of local gas markets and
enhancement of gas-processing and transportation networks are vital.

Private enterprise has a long tradition of going where government cannot or
will not go. International investment typically brings with it a range of
positive externalities, such as transparency, standardized accounting,
pollution control, workplace safety, and other best practices from around
the world. Sub-Saharan Africa’s power needs are vast, and to provide the
necessary billions in investment, the region will have to attract private
capital. A well-executed captive power strategy, which offers investors
returns even as it delivers major developmental benefits for the region,
offers a promising solution. Success will not come easily, but the upside
is great: a more modern, prosperous, and dynamic sub-Saharan Africa.

To post to this group, send email to southsudankob@googlegroups.com
To unsubscribe from this group, send email to 
Visit this group at https://groups.google.com/d/forum/southsudankob
View this message at 
For more options, visit https://groups.google.com/d/optout
You received this message because you are subscribed to the Google Groups 
"South Sudan Info - The Kob" group.
To unsubscribe from this group and stop receiving emails from it, send an email 
to southsudankob+unsubscr...@googlegroups.com.
To post to this group, send email to SouthSudanKob@googlegroups.com.
Visit this group at https://groups.google.com/group/SouthSudanKob.
To view this discussion on the web visit 
For more options, visit https://groups.google.com/d/optout.

Reply via email to