African Governments Must Integrate Energy Markets To Benefit From The Net-Zero Energy Transition

Energy and Infrastructure

African Governments Must Integrate Energy Markets To Benefit From The Net-Zero Energy Transition

Commentary
Posted on: 17th January 2022
Sergio Portatadino
Technical Lead and Deputy Chief of Party, Power Africa Senior Advisors Group programme

    Leaders Should Prioritise Market Integration Over Expensive Domestic Power Generation

    Leaders Should Prioritise Market Integration Over Expensive Domestic Power Generation

    African governments returned from COP26 in November last year with more Western promises of a just transition to a net-zero carbon economy, despite the Western bloc failing to honour its own commitments on climate finance. But the supply of money is only one side of the equation: African governments have a critical role to play in creating markets and bankable projects that can absorb this finance.

    This was the theme of the fifth Africa Energy Market Place (AEMP) investment forum, which took place a week before COP26 and which was organised by the African Development Bank and supported by the Tony Blair Institute for Global Change (TBI). Five countries were invited to present their priority energy projects to potential investors: Tunisia, Guinea, Cameroon, Kenya and Mozambique.

    As these countries are very different from one another, the issues at stake and the opportunities varied greatly. However, one particular topic emerged from the discussions: market integration, a policy option that could play a pivotal role to ensure that sub-Saharan countries benefit from the transition to net-zero energy.

    Some of the energy problems faced by these countries are stark. The government of Mozambique talked about progressing the completion of its Mpanda-Nkwua 1500MW hydropower plant and is looking for partnerships with established and reliable off-takers to reduce both risk and cost as there is limited demand in Mozambique itself.

    Kenya’s representatives discussed its energy oversupply, the troubling costs and possible mitigation measures, including exporting to the wider Eastern Africa Power Pool which could reduce wasting generation capacity that has already been bought but which may be sitting idle.

    There are also abundant opportunities. Cameroon has huge potential to generate hydropower that could be used to complement the intermittent solar PV (the photovoltaic cells that make up solar panels) and constitute the baseload generation for central Africa, reducing the need to rely on hydrocarbons.

    Guinea is at the heart of the West Africa Power Pool with four international partnerships under way which will allow the country to rapidly increase connection to the grid in rural areas. Guinea is looking for funds to build 1700MW of new hydro and solar generation.

    Finally, Tunisia unveiled a historical partnership with Italy that will pave the way to export cheap and clean power from Africa to Europe, with huge financial benefits not just for Tunisia, but for all African countries that could export their energy surplus.

    To be competitive, investments in clean energy generation must be large enough to reduce costs. Governments need to de-risk these projects by creating a clear and transparent business-enabling environment.

    For example, the solar potential of the Sahel is huge as unit costs can be the lowest in the continent. The entire West Africa market could take advantage of it if sufficient capacity were developed there, rather than in countries with less solar radiation where the unit cost would be higher. However, the electricity demand in each of those countries, from Mali to Chad, is too small to justify such an important regional investment without a larger commitment from their neighbours.

    The solution to these challenges is market integration: a closer collaboration among African governments to expand the regional power pools, making it possible to accelerate the energy transition and reduce costs for the African population. Market integration would also:

    • facilitate the construction of power plants at a higher scale with reduced unit costs, as there will be more demand;
    • deliver important financial benefits through the optimisation of the generation of power where is more convenient. TBI calculated that, for the 14 countries of the ECOWAS, trading in power would bring an estimated benefit of $32 billion in the next decade;1 https://institute.global/sites/default/files/inline-files/ENGLISH%20West%20Africa%20Power%20Trade%20UK%20WHOLE%20LOW_1.pdf 
    • allow African governments to achieve more ambitious targets for the decarbonisation of power systems, and contribute towards achieving net zero: TBI calculated that trade alone would save 23 million tons of CO2 in West Africa over ten years;2 Idem. and
    • force countries to enhance the governance of their energy sectors and be compatible with the best providers.

    However, some African governments have started to place more importance on “security of supply” due to the lack of trust between exporting and importing countries. The fact that some say they prefer to reduce interdependency and rely on more expensive domestic power generation, means they will miss out on the significant benefits of market integration.

    It is of paramount importance that African governments and development partners cooperate to integrate their energy markets. This will reduce risk, increase capital to fund new renewable capacity, extend energy access, and ultimately turn the energy transition from a challenge into an opportunity.

    To promote market integration, African governments should pursue the following six reforms:

    • Empower the energy regulators and the market operators and turn them into executive bodies.
    • Apply financial discipline to ensure prompt payments for power supplies.
    • Adopt binding power purchase agreements (PPAs) to force producing countries to prioritise exports and eventually compensate the buyers in case of load shedding.
    • Accelerate the construction of transmission lines to connect countries and allow for regional trade.
    • Approve a transmission regulation that facilitates power exchanges.
    • Ensure that national master plans internalise the regional priorities.

    Political support is the most important prerequisite to the success of this vision for Africa. It is essential that leaders recognise that, if their countries want to grow stronger through energy transition, African unity and energy integration is the solution

    Lead Image: Getty Images