Sub-Saharan Africa needs to bolster investments in electricity and power

20 February 2018 Authored by

As the region of Sub-Saharan Africa (SSA) prepares to enter a period of sustained economic growth, the demand for electricity across the region is expected to skyrocket over the next two decades. According to new data from consultancy A.T. Kearney, investment in the power sector will have to increase at twice the current annual rate in order to meet the growing demand.

After decades of relatively poor economic growth, the SSA region has been enjoying a sustained period of steady growth since the turn of the century. According to A.T. Kearney, the average GDP across the region has been growing at a steady rate of 5% since 2000, having more than doubled over the period despite entering difficult times recently as a result of a dip in oil and commodity prices across the globe. 

In addition, SSA cumulatively has the youngest population in the world, most of whom are set to enter the workforce over the next decade, demonstrating the scope for tremendous productivity. Add to this the fact that the region will surpass 1 billion mobile internet connections by 2022, and the fact that an increasing number of countries are food-secure, and one obtains a true picture of the region’s economic potential.

However, while economic and demographic indicators display promise, the region currently appears to lack the infrastructural foundation to accommodate these levels of growth. A report from management consultancy The Boston Consulting Group late last year revealed that SSA faces a staggering gap of a $100 billion in funding for infrastructure.

Electricity Demand in SSA

Therefore, at its core, the lack of infrastructure across the region can be attributed to a lack of investment in the sector. Since 1991, SSA has received a total of $77 billion for infrastructure, which is exceptionally minimal when compared to the individual country figures of Brazil and India at $433 billion and $227 billion respectively.

The power sector

According to the A.T. Kearney research, the sector that most wants for investment within the sphere of infrastructure is that of power. The firm reports that the SSA power sector is the least developed in the world, with a cumulative annual consumption of 500 terawatt hours (TWh), which is the amount of electricity consumed annually by France alone.

In addition, SSA is home to more than one half of the 1.1 billion people across the world who are deprived of access to electricity. Per capita consumption in the region stands at a mere 488 kilowatt hours (KWh), which falls considerably short of the global average of 3,104 KWh. In fact, South Africa, which is the second largest country by GDP in the region, is the only country with per capita consumption above the global average.

Spending in the SSA power sector

However, as elucidated above, the region is now on the rise in most departments, despite being historically underdeveloped. SSA is not only forecasted to have the highest population growth over the next few years, but will also have the second highest GDP growth rate in the world at 4.4%.

As the population grows and becomes more prosperous, the demand for electricity is expected to skyrocket. The emergence of urban centres will drive up the number of people with access to electricity from 35% to 75%. As a result, demand for electricity will grow at a steady rate of 4.1% till 2040, which is higher than any other region in the world by a considerable margin.

Therefore, there is a dire need for investment in the power sector to meet this spike in demand. Currently, investments in the energy sector have gravitated towards oil production, as a number of African economies are heavily dependent on the oil sector. The report appeals for, and predicts, a shift in these priorities over the next few decades.

Investments in SSA’s power sector

As stated in the report; “Over the next two decades, investment allocations among oil, gas, power, and coal should reflect changing priorities and the most pressing development needs. That means spending in the power sector should increase to around 50 percent of total investments, with approximately 30 percent going toward electricity distribution (see figure 2). This translates to approximately $13 billion (constant 2012 USD) of distribution investments annually through 2040—roughly twice the yearly amount between 2000 and 2017.”

SSA Budget Deficit

However, the public sector is an unlikely source of this investment, as most countries in the SSA region currently have a sizeable budget deficit. The deficit for the entire region combined stands at -4.5% of the GDP, which is considerably higher than the global average of -3.2%. Providing the required investment for the power sector would drive these deficits up by nearly 2 percentage points.

Nevertheless, the region’s investment needs are being taken care of to some extent by international funding, primarily in the form of aid. China, for instance, is the biggest investor in the infrastructure sector of Africa, with a total investment of $21 billion in the sector. Other countries such as the US are also actively investing in the region, amounting to nearly $20 billion.

Another development that will help with the government inability to invest is the transition of power distribution systems to the private sector. Most power distribution systems across the SSA region are publicly owned, and public sector organisations are actively working to restructure their operations to meet growing demand and optimise supply. However, the ownership itself is changing hands in a number of cases.

Electricity distribution utilities ownership

As elucidated by the report; “Today, electricity distribution utilities in 38 of 48 SSA countries are under state ownership and control (see figure 4). Many of the 10 SSA countries where private sector participants have been awarded licenses to fulfill the electricity distribution obligations did so in conjunction with broader power sector reforms. PSP has also been involved on a smaller scale in other SSA countries, including Liberia and Tanzania, typically through management contracts, where private sector participants have a smaller and more focused scope of responsibilities. Even so, PSP has produced mixed results in SSA electricity markets over the past two decades.”