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Africa Energy Transformative Impact, Lessons Learned, and the Way Forward

Africa Energy Transformative Impact, Lessons Learned, and the Way Forward . Energy Unit - Africa Region World Bank November 2013. Executive Summary. Access. Transmission and Distribution. Generation. Why is this important? What is needed?.

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Africa Energy Transformative Impact, Lessons Learned, and the Way Forward

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  1. Africa Energy Transformative Impact, Lessons Learned, and the Way Forward Energy Unit - Africa Region World Bank November 2013

  2. Executive Summary • Access • Transmission and Distribution • Generation Why is this important? What is needed? • Energy sector development is necessary to reduce poverty and increase shared prosperity but presents large challenges • Africa energy portfolio growing exponentially – but not enough. Some key lessons learned • Great opportunities for transformative impact for the WB along the energy value chain What are we doing overall? What are the key lessons learned? What is the situation in each segment of the energy chain? What current projects are showing the way? What should we focus on going forward? Reduced cost of production (low carbon, low cost generation) • Regional integration • (regional power pool development) Improved pricing (sector reform, effective tariff structures) Knowledge and Partnerships Leverage our limited resources and expand south to south cooperation

  3. 1. Energy Sector Development Challenges

  4. Energy Access Reduces Poverty • Increased energy access = economic growth, poverty reduction, and shared prosperity • Access to modern energy services linked to each of the MDGs Energy consumption per capita vs GNP per capita Most of Africa  Source:  http://www.ofid.org • Examples: • South Africa - households with access spent 3–5% of their incomes on energy, compared with 14–16% for those without access • Tanzania - presence of electricity in a village increased income from nonfarm business activities by 61%. Nonfarm income in villages with electricity was 109 times that in villages without electricity Source: AICD expenditure survey database 2007

  5. Challenge: Low Access & Low Supply • Africa installed generation capacity is about 80 GW • 600 million people and 10 million SMEs have no access • Outside South Africa, consumption is 1% of OECD levels • Energy growth not keeping pace with GDP (5% per year) • Demand growing rapidly to about 800 TWh by 2020 • 30 countries face regular interruption of services • Sales lost (interruptions): 6% formal, 16% informal sector • Subsidies of $2 bn per year don’t always benefit the poor • Nearly 80% of households rely on solid biomass for cooking • ~500,000 deaths a year are attributed to indoor pollution • Lack of energy disproportionately affects women/children

  6. Challenge: Resource Development Africa has abundant low carbon, low cost energy development resources Yet, large portion of energy generation relies on high cost thermal generation 45 GW of feasible Hydropower One of Africa’s most promising drivers for green growth Major reserves of Natural Gas West: Nigeria, Gulf of Guinea East: Mozambique, Tanzania 15 GW of Geothermal potential African Rift Valley Over 1,000 GW of Wind and Solar Needs to be economically dispatched with attentive siting and infrastructure

  7. Challenge: Investment Need • Currently, $9-10 billion invested yearly to provide first access to modern energy • Africa needs up to $40-50 billion yearly for universal access by 2030 • Currently, about 1-2 GW of new installed capacity deployed a year. Africa needs 6-7 GW • Access growing no more than 1% per year in the last decade • At this rate, less than 60% of Africans will have electricity in their homes by 2030 Current Investment Trend Investment Needed Financing shortfall of 80% Energy Need Energy shortfall of 80%

  8. Challenge: Private Sector Investment Insufficient Private sector investments in energy in Africa is 1% of all such investments in developing regions (vs. 34% for South Asia, 26% for LAC, or 25% for ECA) Six SSA countries concentrate 80% of these investments* Leveraging private sector partnerships with innovative mechanisms/increased focus on instruments such as PRGs critical * Nigeria, Uganda, Cameroon, Ghana, Kenya, and Tanzania. Source: PPI database

  9. 2. Africa Energy Portfolio & Key Lessons

  10. Growing Africa Energy Portfolio • In recent years, Africa Energy Portfolio has grown significantly • 53 active projects for a total commitment of about US$ 9.4 billion in 2012 (vs. 3.8 in 2009) 4,991 • Growth creates challenges, particularly in terms of disbursement • Focus to increase currently low disbursement ratio • Commitment at risk has steadily decreased • Pipeline of lending projects is large and diverse • Planning US$ 1,012 million for FY 13 and US$ 2,269 million for FY2014 • Focusing on key priorities: generation based on renewables, regional projects, access • Broad engagement with clients for ESW/TA activities complements lending 10

  11. Demand for Assistance is Strong • Needs of our clients are diverse and evolving • Lending preparation and/or supervision in 32 countries. Policy dialogue in others • Clients increasingly demand financial support for large-scale generation and T&D projects • Expect near-commercial speed for securing project financing and disbursement • Private sector is not systematically engaged • Since financial crisis in 2009, only 10 IPPs in SSA reached financial closure until 2011 • WBG involvement in 3 IPPs with capacity of 700 MW • Basel III implementation is increasing the cost of long-term funding • Top-tier developers and lenders cite importance of back-stopping government risk • 8 PRGs ongoing and 5 under preparation 11

  12. Key Lessons Learned • Efforts to develop regional markets and institutions is essential • West Africa power pool for collective solutions to problems of fragile countries • Example: Sierra Leone and Liberia • Lending instruments of WB/IFIs/DFIs need to mirror client needs • Lend directly to regional bodies • Need to focus on preparation of a bankable pipeline and build capacity • Improve governments capacity building and planning from early on • Large-scale generation and T&D projects • More upstream interventions • World Bank needs to leverage other financiers • In the past typically leverage ratio =IDA 1:1 and PRG 4:1 • Successful sector reform is key (e.g. Kenya) • But progress on reform is slow and uneven • Enabling transformational projects will require more efficient implementation • Balancing new commitments against slow disbursements • Bank procedures, e.g. environmental and social safeguards • Commercially acceptable practices for PPP/PRG operations

  13. 3A: Opportunities for Transformative Impact Knowledge and Partnerships

  14. Situation: Hydro and Thermal Potential Hydro Thermal

  15. Example: Reduced Generation Cost Bujagali Hydropower Project, Uganda $360 M in loans and guarantees Approved by Bank Board in FY08 250 MW additional capacity Commissioned in October 2012 Expected to reduce electricity tariffs by 25% (From $0.17/kWh to $0.13/kWh) Improves access to electricity Reduces grid carbon intensity Promotes economic development

  16. Situation: Opportunities for Gas to Power • Gas: Game-changer? • Resource: • Huge undeveloped discoveries • Non-associated gas, LNG • Rationale for Bank involvement: • Governance, macro management • Industrial development • Possible Interventions: • Revenue management TA • Institutional capacity building • Local gas market development • Forward/backward linkages (SME’s) • Gas as a Squandered Resource • Resource: • Huge proved reserves in Nigeria • Mainly associated gas • Rationale for Bank involvement: • Energy access • Flaring avoidance • Possible Interventions: • GGFR • Gas and power pricing reform • Risk/contract guarantees • Infrastructure finance • Gas: Alternative to Coal? • Resource: • Pipeline gas from Mozambique • Potential coal-bed methane • Offshore exploration beginning • Rationale for Bank involvement: • Lower carbon growth strategy • Possible Interventions: • Regional pipeline expansion • Regulation of shale gas activities

  17. Situation: Mining Sector as a Key Energy Player Mining sector is growing rapidly Growth around 6% in 2012 Large energy needs Mining sector can be an anchor customer… Mining project can commit to buy large quantities of electricity, ensuring viability of a generation project …but it can also be a power supplier “Excess” power can be sold to the grid by mining sector led generation projects. However mining companies have their own agendas and partnership is complicated Fast growing SSA countries often have an active mining sector • Example: Lom Pangar Hydropower Project in Cameroon • Mining sector interest contributes to importance of developing Lom Pangar • Mining companies developing hydropower downstream of Lom Pangar dam will pay a regulation fee • GoC signed a decree mandating auto-producers (e.g. mining companies) to optimize the size of hydropower plants and provide some energy to the public grid

  18. Going Forward: Investments in Generation • Major investment in large-scale high impact projects and PRGs • Efforts on fragile states • Continuous policy dialogue to create better institutions/frameworks - can help bring private sector Potential Key Projects High Level Taskforce Projects (* WB involved now)

  19. Going Forward: Leverage • Increase leverage to close investment gap • US$ 30-40B in additional investment needed • Leveraging development financing with private capital is key • Also valid for transmission and distribution projects

  20. 3B: Opportunities for Transformative Impact Knowledge and Partnerships

  21. Situation: Resources are Concentrated • Renewable energy resources are widespread • But, large-scale generation resources are concentrated in a few countries. These countries have small domestic markets --> There is a need for regional approaches • Hydropowerin 6 trans-boundary river basins • Ethiopia, DRC, Guinea, Ghana, Cameroon etc. • Thermal resources • Gas (Nigeria, Mozambique, Tanzania, Mauritania) • Oil (Ghana, Gabon, Sudan, South Sudan) • Coal (South Africa) • Geothermaland Wind • Kenya, Ethiopia, South Africa Countries in grey: potential net exporters Circles: Potential export capacity (red: funding not secured)

  22. Situation: Regional Power Trade is Key WAPP • Development of regional Power Pools • Infrastructure (construction of lines/substation) • Institutions (utilities and government agencies) • Reduces the cost of electricity • Connects markets with resources • Fosters overall economic growth • Improves reliability of supply EAPP CAPP APP

  23. Example: Regional Integration • Eastern Africa Electricity Highway • (Ethiopia-Kenya Interconnector) • Key interlink (backbone) for EAPP • 400 MW bilateral trade initially • $900 M under APL1 (Regional) • Approved by Bank Board in FY12 • 1,000 km 500 kV DC Line • Reduces electricity tariffs • Kenya expects 20% reduction • (From $0.17/kWh to $0.14/kWh) • Reduces grid carbon intensity • (Hydropower generation in Ethiopia) • Promotes regional trade and commerce • Increases regional energy security • Increases bilateral cooperation

  24. Going Forward: Expanded Regional Agenda • WAPP • Finance key regional interconnection and large generation (e.g. hydro) projects • Support national utilities in project preparation & implementation • TA to WAPP Secretariat for investment planning • Key potentialproject (US$ million): • -Cote d’Ivoire-Liberia-Sierra Leone-Guinea (400) (ongoing with WB) • EAPP • Finance investments on key system-to-system interconnectors • Capacity building to national utilities • TA to EAPP Secretariat for regional planning and coordination • Key potential projects (US$ million): • -Kenya National Backbone (2,400) • -Ethiopia-Kenya (1,200) (ongoing with WB) • -Zambia-Tanzania-Kenya line (780) • SAPP • Finance investments on national transmission backbones and key interconnectors • Support national utilities in preparation of key generation expansion projects (Inga) • TA and risk mitigation at national/regional level • Key potential projects (US$ million): • -Inga-Zambia Interconnector (655) • -Zambia Backbone (100) • -Zimbabwe Backbone (96) • -DRC-Angola (TBD) • -Mozambique Regional Transmission Backbone (2,094) (Phase I, Stage I) • CAPP • Support early thinking about developing power pool. Currently CAPP is not progressing , thus creating a gap between the other power pools

  25. 3C: Opportunities for Transformative Impact Knowledge and Partnerships

  26. Situation: Energy Affordability Challenge • Historic cost of generation in Africa are exceptionally high compared to other regions • Consequently, the tariffs are also high Average generation costs from systems mostly based on hydro USc 10/kWh against almost USc 30/kWh when mostly diesel. Source: OECD and World Bank studies • At current high tariff levels, very few of the poor unconnected households can afford a connection • Yet, utilities are struggling to recover costs and rely on government subsidies

  27. Situation: Subsidies not Reaching the Poor • Power subsidies absorb $2B per year • Between 0.5%-2.0% of GDP • Huge burden on cash strapped government • Most poor lack access to electricity and do not benefit from subsidies • Cost recovery tariffs affordable to more affluent connected groups • Subsidies should target cost of connection and lower levels of consumption/income Analysis of Electricity Subsidy Programs Source: World Bank, Water, Electricity, and the Poor - Who Benefits from Utility Subsidies?

  28. Example: Improved Pricing • Complex political economy of pricing and subsidies : need to protect poorest in particular • Example: Nigeria Power Sector Reform • Ongoing sector dialogue / TA • Broad level reforms and deregulation • Privatization of Gen Cos and Dis Cos • Improved efficiency and collection • Willingness to move to cost recovery tariffs while protecting the poorest • Linkages with diesel and kerosene prices • Multi-year tariff order (MYTO) • Residential tariff with life-line rates • Targeted subsidies based on usage • Low energy charge US$ 0.025/kWh • One of the lowest tariffs in the region • Charge exemption provided recently by the regulators for low income households • Other tariff classes see increases ranging from 20-50% • Commercial and industrial tariff groups: subsidies allocated to reduce burden Nigeria Tariff Structure (US$)

  29. Going Forward: Enhanced Affordability • Policy dialogue on tariff structure/levels and mechanisms • Increased protection of the most vulnerable populations • Example: Côte d’Ivoire • Reducing inefficiencies of supply to reduce costs • Example: Kenya power sector reforms • Ongoing privatization of state power utility - KenGen • Market driven approach (raising funds on the local stock market) • Improving the overall O&M performance of the utilities • Regulatory regimes to provide incentives and penalties • For efficiency improvements (multi year tariff strategies) • Pass through unforeseen costs (foreign exchange, fuel prices, etc.) • Sustainable business model for the utilities • Recovery of costs (efficiency gains, reduced generation costs, etc.) • While also improving affordability for masses (tiered tariffs)

  30. Situation/Going forward: Off-Grid Programs • Opportunity to scale-up access from successful pilots • Off-grid programs can provide cost-effective solutions • Lighting Africa • Use of modern off-grid lighting for households and SMEs • To date, 3.8M people provided access to clean, safe lighting • Scale up to 20M homes (100M+ people) by 2020 • Africa Clean Cooking Energy Solutions • Addresses biomass degradation and climate resilience • Framework approach to tackle sector wide issues • Facilitates enterprise-based scale up of clean cooking • Builds on both demand and supply side issues: Efficient cookstoves Clean fuel supply chains • Other Programs • Biogas units (for heating, lighting, and cooking) • Mini and micro-hydro power installations • Mini and micro-grids serving communities

  31. 3D: Opportunities for Transformative Impact Knowledge and Partnerships

  32. Situation/Going forward: Knowledge • Improved global knowledge base and enhanced South-South Cooperation • Know-how for improved pricing, better targeting of subsidies, etc. • Clients want to learn from each other – Bank’s role of a connector • Example: International community of practice through Africa Electrification Initiative • Accelerate policy reforms/sector frameworks • Use of DPOs to improve viability of incumbent utilities and prepare enabling environment • Provide TA and financing for preparation of bankable projects • Preparation and project implementation assistance • Provide TA and investment financing to support regional organizations • Improved regional planning, coordination, technical and regulatory capacity • Opportunity to scale-up access from successful pilots: • Sharing lessons on off-grid solutions • Smaller renewable energy for households and SMEs • Efficient Lighting • Clean Cooking • Biogas, mini-hydro, mini-grids, etc.

  33. Situation/Going forward: Partnership • Present one WBG to clients for PPPs • More Bank, IFC, MIGA coordination– sharing project pipelines – joint teams • Example in Kenya for IPP Program (IDA’s sector engagement + IFC’s long-term lending + MIGA’s insurance = leverage private capital) • Periodic Coordination Meetings among DFI/IFI Partners • Identify common set of transformational projects (e.g. Power Pools) • Enhance synergies and avoid duplication (e.g. on Fragile States) • Develop Standardized MOU with DFI/IFI Partners • Harmonize and reduce differentiated lending requirements (Ex: aligning procurement, safeguards) • Prioritize and coordinate project preparation • Deploy New Joint Instruments among DFI/IFI Partners • To leverage large-scale financing needs (e.g. Nigeria, Mozambique) • Longer tenors for private lenders/investors(e.g. PRG/PCG/MIGA ) • Develop other partnerships when beneficial • PIDA on transformative projects • African Union on natural gas. • SE4ALL, USAID, EU, Japan, Norway, Iceland, etc • In country donors coordination activities

  34. Conclusion and Next Steps • Access • Transmission and Distribution • Generation • AFR Energy Core Business to continue focusing on reduced cost of production, regional exchanges, access enhancement, policy and utility reform and knowledge for our African clients • Scale-up Energy Supply • Rapid deployment of key projects • Contribution to at least 7 GW of additional installed capacity by 2020 • Overall target of 30 GW of generation capacity added by 2020 • Power Pool Development • Building institutions: TA for power pools • Building infrastructure : Financing, TA, convening power, etc. • Scale-up Energy Access • Target of 50M people added to service by 2020 • Collaboration (e.g. AU and UN SE4All) • UN SE4All Goal - Universal Access for All by 2030 Reduced cost of production (low carbon, low cost generation) • Regional integration • (regional power pool development) Improved pricing (sector reform, effective tariff structures) Knowledge and Partnerships Leverage our limited resources and expand south to south cooperation An integrated, tailored approach that combines Knowledge and Finance through Partnership

  35. Pipeline FY14

  36. Questions

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