Power privatisation suffers a setback

From the newsletter

The Niger government is taking full ownership of its national power utility company, NIGELEC, to give the country, which has been dealing with regular power cuts, control of its power sector. This is opposite to what we are seeing in other African countries like South Africa, Zambia, and Kenya, which are privatising their electricity sector for better services.

• Privatisation of national power utilities offers a way out for financially struggling African governments, burdened with ageing power infrastructure. Handing these utilities over to the private sector injects new capital and facilitates much-needed infrastructure upgrades.

• However, privatisation also brings challenges. Private companies typically need to charge cost-reflective tariffs, which are higher than government-subsidised rates. Still, better service and reliability in the long term are likely.

More details

• Niger has one of Africa's lowest electricity access rates at a mere 20% (significantly below the continental average of 50%). At the same time, its national power utility is plagued by deep-seated inefficiency and financial instability. The government wants to nationalise the utility for greater control, which seems unrealistic given it currently controls a 99% stake.

• Uganda also took similar action earlier this year when the government declined to renew Umeme Limited's 20-year concession. It claimed that the private company had made electricity expensive, rendering Ugandan products uncompetitive. The government opted for the state-owned UEDCL to take full control and committed to allocating funds to improve financial sustainability and expand electricity access. 

• Historically, state-owned enterprises (SOEs) dominated Africa's electricity sector, aiming to provide power as a public good. While some, like South Africa's Eskom, have achieved higher electrification rates over time, many SOEs across the continent struggle. They often face chronic financial fragility, failing to recover costs and relying heavily on government subsidies. Operational inefficiencies, including high transmission and distribution losses (due to ageing infrastructure and theft), and poor revenue collection are common. 

• Private sector participation is often sought to attract investment and improve efficiency. Countries with private involvement in electricity distribution report average system losses that are 7% lower than those with state-owned utilities. However, the profit motive of private entities often leads to higher, cost-reflective tariffs, which can disproportionately affect low-income households and industries.

• Renewable energy projects, particularly solar and wind, offer a promising path to more stable electricity prices for the private sector. The cost of solar PV and onshore wind has declined by 80% and 55% since 2010, making utility-scale renewable projects increasingly financially viable, leading to a lower levelized cost of electricity. This allows private power producers to offer price certainty that traditional utilities often reliant on volatile fossil fuel prices cannot match.

• Though privatisation is not the silver bullet to solve all electricity problems, the private sector can face obstacles such as currency and inflation risks that would necessitate government guarantees. For instance, Côte d'Ivoire's CIE showed great progress in expanding access, reaching 74%, while others, like Uganda's Umeme, achieved only 57%. This shows that privatisation alone doesn't guarantee universal access, especially in commercially unprofitable rural areas.

Our take

• Power privatisation won't be the sole solution to Africa's power problems. The private sector's efficiency is tied to the government's supportive policies, without which they crumble and barely survive to recoup their investment.

• Renewables, however, provide a safety net for private investors in determining electricity tariffs. Apart from currency and inflation risks, they can guarantee stable prices, unlike fossil fuels, which are affected by many market forces.

• Despite the benefits of private involvement, governments still need to support connections in rural areas. These regions typically have low consumption and offer minimal returns for private investors. Subsidies could be a crucial tool to encourage consumption and make these connections viable.