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Occasional  Paper 21:Opportunities for Cogeneration in a Reforming African Power Sector

 

 Edited by

Kassiap Deepchand


Executive Summary

 Most countries in Eastern and Southern Africa have initiated power sector reforms in the recent past. The majority of the countries reforming their power sector have undertaken corporatisation/commercialisation of the state owned utilities to enhance their financial performance. Compared to the other regions of the world, Africa’s power sector reforms have been slow. There appears to be much slower progress in the reforms that minimise or withdraw Government control of the power sector. This is evident in the establishment of independent regulatory agencies, amendment of the electricity law, restructuring and fully privatising the generation and transmission sub-sectors. 

A review of the impact of power sector reforms undertaken in the region shows mixed results. Power sector reforms, involving corporatisation/commercialisation of the power utilities, have significantly improved the financial performance of the state-owned utilities. The introduction of new management teams has also improved the financial performance of the utilities. With regard to technical performance of utilities, power sector reforms have led to improved performance of the generation side of the industry (mainly additional capacity by IPPs), but the distribution end continues to perform abysmally. In many African countries, system losses are above the nominal target of 12%. The main reason seems to be the continued control of electricity transmission and distribution by the inefficient state-owned power utilities. Power sector reforms also appear to have failed to address the issue of increased access to electricity, especially for the rural and urban poor.

Despite the immense potential, export of electricity generated from bagasse to the national grid has been insignificant. It is estimated that sugar factories in the Eastern and Southern African countries have the potential of producing electricity in the range of 2,500 GWh (continuous power) to 5,500 GWh (firm power) annually. Using 1996 electricity generation figures, it is estimated that in the majority of the countries in Eastern and Southern Africa, sugar factories could provide close to 10% of national installed capacity. The main drawback is availability of power all year round from cogeneration. Mauritius is, however, an exception. A total of 10 power plants with installed capacities varying from 11 to 80 MW are in operation. Around 360 GWh/year are exported to the grid from bagasse. The country has adopted a bagasse-coal substitution system to ensure power all year round.

What are the implications of these developments on the growth of cogeneration in Africa? Do the reforms provide any opportunities for the rapid promotion of electricity generated from bagasse? It is against this background that AFREPREN/FWD in collaboration with the Mauritius Sugar Authority hosted an Energy Training Course on “Power Sector Reforms-Implications for the Cogeneration Industry” between 20th and 25th August 2001 in Mauritius.

Partially due to the planned and on-going power sector reforms, dramatic transformation has taken place in the region’s electricity sector. This has created an enabling environment in which the cogeneration industry could flourish. One of the most significant developments is the review of tariffs.  In a number of countries, electricity tariff-reviews have resulted in prices that reflect the true cost of service delivery. The tariffs have risen to a level where it is attractive for sugar factories to consider selling power to the national grid.

One of the developments arising out of power sector reform is the establishment of independent regulatory agencies, which, to a certain extent, neutralised the monopolistic tendencies of power utilities. As a monopoly with quasi-regulatory powers, the utility could decide whether or not to purchase surplus power from sugar factories, and arbitrarily set the unit price of the electricity purchased. Some of the newly established regulatory agencies have the mandate to ensure an enabling environment for the free-entry of small- to medium-scale investors, such as cogenerators in the sugar industry. In addition, some of the regulatory agencies are expected to ensure reasonable returns on investment through favourable electricity tariffs. Partly as a result of the planned and on-going changes in the regulatory environment, there have been encouraging developments in the cogeneration industries of Uganda, Zimbabwe, Zambia and Kenya.

A significant impact of power sector reform is the increased emphasis on large-scale investment.  There are several drawbacks with regard to large-scale IPP developments in the region. Firstly, large-scale IPPs are not linked to the incremental growth in demand of the power sector. This could lead to over-capacity in generation, which is a burden to the economy. Cogeneration is, on the other hand, well suited to match the annual incremental growth in demand, which is usually relatively modest (less than 20 MW per year in many Eastern and Southern African countries).

Secondly, large-scale IPP development is generally a high-tech endeavour, which requires heavy capital investment, both of which effectively dissuades local investors. A small-scale IPP development such as a cogeneration plant, on the other hand, involves technology that can be locally managed. In addition, the capital requirements are modest and can be sourced locally.

Thirdly, large-scale capital-intensive IPP developments invariably attract the politically connected rent-seeking class. The controversial IPP deals in Zimbabwe involving YTL and in Tanzania involving IPTL are classic examples of the disarray that the rent-seeking class can cause. There is, therefore, a case to examine smaller IPPs, such as cogeneration plants, which are less capital intensive and provide ideal entry points for local participation in a privatised electricity industry.

The following issues emerged from the training course:

- Cogeneration cannot be isolated from the entire sugar industry. The Sugar Authorities in the region should be overhauled and realistic targets established for increasing the contribution of electricity to the national grid.

- The Governments have to clearly define the policies on use of bagasse for cogeneration and enact incentive measures to facilitate the development and implementation of bagasse energy projects. Of particular importance is how the revenue accruing from sale of energy generated from bagasse is to be shared.

- There are various financing mechanisms for the development of bagasse cogeneration plants. The potential to utilise funds promoting climate friendly technologies such as the Global Environment Facility should be fully explored.

- The need to streamline the Power Purchase Agreements (PPAs) between the utility, cogenerator and other stakeholders involved in the negotiation process. The negotiators should be well versed in the structure, fundamentals and components of the power purchasing agreements.

- There are new state of the art technologies in the market that can substantially increase the energy generated from the same amount of cane. Promotion of these technologies should be encouraged. In addition, modifications and improvements at the factory level to improve steam efficiency and minimise internal power consumption is essential.

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