Tariff Structures for Sustainable Electrification in Africa

The purpose of this study is to:

1. Review the electricity tariff structures in representative countries in Africa;
2. Assess these tariffs in terms of the long-term financial viability for the electricity sector and their ability to attract capital;
3. Offer suggestions regarding how to evolve to a healthier and more attractive tariff structure.

Based on these requirements, KEMA has undertaken a series of country studies investigating these issues. The list of countries was discussed and agreed with ECI also taking into account data constraints. The final list of countries of be reviewed includes Kenya, Cape Verde, Ghana, Tanzania, and Senegal.

The country reviews identified a number of commonalities which seem to be characteristic for the Sub-Saharan countries in general. These characteristics are as follows:

1. There is a strong growth in electricity demand
2. The level of network losses is very high
3. Financial performance of distribution utilities is low
4. Loss reduction is an important means of achieving sustainability

From the analysis, it seems that the main impediment for investments in the transmission and distribution sectors is the poor financial performance of the utilities. This is to a large extent driven by the high level of network losses. Increasing tariffs alone will therefore not likely solve the fundamental underlying problems. Rather the path towards sustainability would be achieved through a mix of effective tariff policies and efficiency improvement programmes.

An important consideration is the issue of affordability. The general economic level of development is lower than in the EU in the countries reviewed. A tariff increase has a proportionally greater impact on customers and is more likely to result in an increase in commercial losses. This leads to a negative feedback loop where higher tariffs lead to higher commercial losses, which in turn dampens the improvement in financial performance, triggering another round of tariff increase, et cetera.

A proper balance between tariff policy and losses reduction strategies is required for achieving a sustainable investment in electricity networks. Tariffs should be set at economic levels but incorporate a reasonable level of losses. Utilities should dedicate significant efforts towards the reduction of losses. Regulatory policies can help provide utilities with incentive frameworks to achieve such improvements. Possible strategies that could be followed by utilities include:

• Technical loss reductions aimed at the reduction of system loading by installing capacity and high-quality equipment, voltage level choice and control, increasing network maintenance, monitoring of the network, and continuously analyzing opportunities to improve;
• Commercial loss reduction by assuring metering accuracy and coverage, improving revenue collection, and enforcement of the rule of law, customer education, and applying targeted tariff schemes.

In conclusion, demand for electricity is growing rapidly. This presents clear opportunities. Considerable investment in the power system will be needed to serve this new demand. The main challenge will be to assure that investments brought about by the new demand also result in sustainable economic returns.