Africa Energy Transformative Impact, Lessons Learned, and the Way Forward

Energy Unit - Africa Region

World BankNovember 2013

Executive Summary

2

1. Energy sector development is necessary to reduce poverty and increase shared prosperity but presents large challenges

2. Africa energy portfolio growing exponentially – but not enough. Some key lessons learned

3. Great opportunities for transformative impact for the WB along the energy value chain

Why is this important?

What is needed?

What are we doing overall?

What are the key lessons learned?

What is the situation in each segment of the energy chain?

What current projects are

showing the way?

What should we focus on going

forward? Knowledge and Partnerships

AccessTransmission

and Distribution

Generation

Reduced cost of production (low carbon, low cost

generation)

Leverage our limited resources and expand south to south cooperation

Regional integration (regional power pool

development)

Improved pricing (sector reform, effective

tariff structures)

1. Energy Sector Development Challenges

3

Energy Access Reduces Poverty

4

Increased energy access = economic growth, poverty reduction, and shared prosperity Access to modern energy services linked to each of the MDGs

Examples:

South Africa - households with access spent 3–5% of their incomes on energy, compared with 14–16% for those without access

Tanzania - presence of electricity in a village increased income from nonfarm business activities by 61%. Nonfarm income in villages with electricity was 109 times that in villages without electricity

 Source:  http://www.ofid.org

Most of Africa

Source: AICD expenditure survey database 2007

Q1 Q2 Q3 Q4 Q502468

1012141618

2 4

5 6

12

Expenditure on electricity per quintile in Africa (US$)

East

South

Central

West

Average

Energy consumption per capita vs GNP per capita

Africa installed generation capacity is about 80 GW 600 million people and 10 million SMEs have no access Outside South Africa, consumption is 1% of OECD levels Energy growth not keeping pace with GDP (5% per year) Demand growing rapidly to about 800 TWh by 2020

30 countries face regular interruption of services Sales lost (interruptions): 6% formal, 16% informal sector Subsidies of $2 bn per year don’t always benefit the poor

Nearly 80% of households rely on solid biomass for cooking ~500,000 deaths a year are attributed to indoor pollution Lack of energy disproportionately affects women/children

Challenge: Low Access & Low Supply

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Africa has abundant low carbon, low cost energy development resources

Yet, large portion of energy generation relies on high cost thermal generation

45 GW of feasible Hydropower One of Africa’s most promising drivers

for green growth

Major reserves of Natural Gas West: Nigeria, Gulf of Guinea East: Mozambique, Tanzania

15 GW of Geothermal potential African Rift Valley

Over 1,000 GW of Wind and Solar Needs to be economically dispatched

with attentive siting and infrastructure6

Challenge: Resource Development

Challenge: Investment Need Currently, $9-10 billion invested yearly to provide first access to modern energy Africa needs up to $40-50 billion yearly for universal access by 2030

Currently, about 1-2 GW of new installed capacity deployed a year. Africa needs 6-7 GW Access growing no more than 1% per year in the last decade At this rate, less than 60% of Africans will have electricity in their homes by 2030

African Power Pool Regions

Avg. Yearly Investment ($B)

Cumulative Till 2020 ($B)

CAPP 6.5 52.0

EAPP 14.5 116.0

SAPP 18.5 148.0

WAPP 10.5 84.0

Total 50.0 400.0

Investment NeededCurrent Investment Trend

Financiers Avg. Yearly Investment ($B)

Cumulative Till 2020 ($B)

World Bank 1.5 12.0

Other Multilaterals 1.5 12.0

Emerging financiers 2.0 15.0

Private sector 5.0 41.0

Total 10.0 80.0

Energy Need

Financingshortfall of

80%

Energyshortfall of

80%

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8

Challenge: Private Sector Investment Insufficient Private sector investments in energy in Africa is 1% of all such investments

in developing regions (vs. 34% for South Asia, 26% for LAC, or 25% for ECA) Six SSA countries concentrate 80% of these investments* Leveraging private sector partnerships with innovative

mechanisms/increased focus on instruments such as PRGs critical

* Nigeria, Uganda, Cameroon, Ghana, Kenya, and Tanzania. Source: PPI database

2. Africa Energy Portfolio & Key Lessons

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Growing Africa Energy Portfolio

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Growth creates challenges, particularly in terms of disbursement Focus to increase currently low disbursement ratio Commitment at risk has steadily decreased

Pipeline of lending projects is large and diverse Planning US$ 1,012 million for FY 13 and US$ 2,269 million for FY2014 Focusing on key priorities: generation based on renewables, regional projects, access Broad engagement with clients for ESW/TA activities complements lending

In recent years, Africa Energy Portfolio has grown significantly 53 active projects for a total commitment of about US$ 9.4 billion in 2012 (vs. 3.8 in 2009)

1992199319941995199619971998199920002001200220032004200520062007200820092010201120120

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

5

10

15

20

25

150358 276 255

73 168380

57 160 72406

204 332 462 509733 776

1,270

4,991773

1,678

75 5

2 2

54

35

1

5 5

8

13

98

20

16

1312

16

Amount approved (US$ M)Operations approved

4,991

Demand for Assistance is Strong

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Needs of our clients are diverse and evolving

Lending preparation and/or supervision in 32 countries. Policy dialogue in others Clients increasingly demand financial support for large-scale generation and T&D projects Expect near-commercial speed for securing project financing and disbursement

Private sector is not systematically engaged Since financial crisis in 2009, only 10 IPPs in SSA reached financial closure until 2011 WBG involvement in 3 IPPs with capacity of 700 MW Basel III implementation is increasing the cost of long-term funding Top-tier developers and lenders cite importance of back-stopping government risk 8 PRGs ongoing and 5 under preparation

Type Total Lending 2007-2012 (US$ M)

% of Total

New thermal generation 4,145 33%Renewables 2,169 17%Energy efficiency 1,890 15%Transmission & distribution 1,664 13%Other energy 1,348 11%Upstream oil, gas, coal 1,275 10%Total 12,491

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Efforts to develop regional markets and institutions is essential West Africa power pool for collective solutions to problems of fragile countries Example: Sierra Leone and Liberia

Lending instruments of WB/IFIs/DFIs need to mirror client needs Lend directly to regional bodies

Need to focus on preparation of a bankable pipeline and build capacity Improve governments capacity building and planning from early on Large-scale generation and T&D projects More upstream interventions

World Bank needs to leverage other financiers In the past typically leverage ratio = IDA 1:1 and PRG 4:1

Successful sector reform is key (e.g. Kenya) But progress on reform is slow and uneven

Enabling transformational projects will require more efficient implementation Balancing new commitments against slow disbursements Bank procedures, e.g. environmental and social safeguards Commercially acceptable practices for PPP/PRG operations

Key Lessons Learned

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3A: Opportunities for Transformative Impact

Generation Transmission and Distribution Access

Knowledge and Partnerships

Country Hydro developed in last decade

(GW)

Hydro potential in next decade (GW)

Ethiopia 2.8 8.2

Guinea 0.8 4.3

DRC 1.3 4.0

Sudan 1.4 3.7

Mozambique 0 3.2

Cameroon 0.2 2.4

Zambia 0.5 2.0

Uganda 1.1 1.2

Ghana 0.4 1.0

TOTAL 8.5 30.0

Situation: Hydro and Thermal Potential

Country IPPs to date (GW)

Potential (GW) Technologies

South Africa 0.6 4.8 Coal

Nigeria 1.3 2.0 Gas

Botswana 0 1.2 Coal

Kenya 0.2 1.0 Geothermal, oil

Mozambique 0 0.8 Coal

Ghana 0.01 0.8 Gas

Namibia 0 0.7 Coal, Gas

Angola 0.01 0.6 Gas, oil

Tanzania 0.1 0.5 Gas, coal

Cote d’Ivoire 0.3 0.3 Gas

Uganda 0.2 0.3 Gas, oil

S. Sudan 0 0.3 Gas, Oil

Others 0.2 0.3 Gas, coal

Next 5-7 years 4.0 Mainly gas

TOTAL 3.1 13.3

ThermalHydro

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Bujagali Hydropower Project, Uganda $360 M in loans and guarantees Approved by Bank Board in FY08 250 MW additional capacity

Commissioned in October 2012 Expected to reduce electricity tariffs

by 25% (From $0.17/kWh to $0.13/kWh)

Improves access to electricity Reduces grid carbon intensity Promotes economic development

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Example: Reduced Generation Cost

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Situation: Opportunities for Gas to PowerGas: Game-changer?Resource:

Huge undeveloped discoveries Non-associated gas, LNG

Rationale for Bank involvement: Governance, macro management Industrial development

Possible Interventions: Revenue management TA Institutional capacity building Local gas market development Forward/backward linkages (SME’s)

Gas as a Squandered ResourceResource:

Huge proved reserves in Nigeria Mainly associated gas

Rationale for Bank involvement: Energy access Flaring avoidance

Possible Interventions: GGFR Gas and power pricing reform Risk/contract guarantees Infrastructure finance

Gas: Alternative to Coal?Resource:

Pipeline gas from Mozambique Potential coal-bed methane Offshore exploration beginning

Rationale for Bank involvement: Lower carbon growth strategy

Possible Interventions: Regional pipeline expansion Regulation of shale gas activities

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Situation: Mining Sector as a Key Energy Player Mining sector is growing rapidly

Growth around 6% in 2012 Large energy needs

Mining sector can be an anchor customer… Mining project can commit to buy large quantities of

electricity, ensuring viability of a generation project

…but it can also be a power supplier “Excess” power can be sold to the grid by mining

sector led generation projects. However mining companies have their own

agendas and partnership is complicated

Example: Lom Pangar Hydropower Project in Cameroon Mining sector interest contributes to importance of developing Lom Pangar Mining companies developing hydropower downstream of Lom Pangar dam will pay a

regulation fee GoC signed a decree mandating auto-producers (e.g. mining companies) to optimize the size

of hydropower plants and provide some energy to the public grid

Fast growing SSA countries often have an active mining sector

Project Capacity (MW) Investment (US$M)

Inga III (DRC) * 3,500 8,000

Grand Inga (DRC) * 40,000 80,000

Lom Pangar (Cameroon) *

30 on site + 120 downstream

460

Menengai (Kenya) * 400 850

Souapiti (Guinea) 515 1,000

Kaleta (Guinea) 240 450

Cahorra Bassa-North Bank (Mozambique)

1,245 1,300

Going Forward: Investments in Generation Major investment in large-scale high impact projects and PRGs Efforts on fragile states Continuous policy dialogue to create better institutions/frameworks - can help

bring private sector

Potential Key Projects High Level Taskforce Projects

(* WB involved now)

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19

Going Forward: Leverage Increase leverage to close investment gap

US$ 30-40B in additional investment needed Leveraging development financing with private capital is key Also valid for transmission and distribution projects

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3B: Opportunities for Transformative Impact

Generation Transmission and Distribution Access

Knowledge and Partnerships

Situation: Resources are Concentrated Renewable energy resources are widespread But, large-scale generation resources are

concentrated in a few countries. These countries have small domestic markets

--> There is a need for regional approaches Hydropower in 6 trans-boundary river basins

Ethiopia, DRC, Guinea, Ghana, Cameroon etc.

Thermal resources Gas (Nigeria, Mozambique, Tanzania, Mauritania)

Oil (Ghana, Gabon, Sudan, South Sudan)

Coal (South Africa)

Geothermal and Wind Kenya, Ethiopia, South Africa

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Countries in grey: potential net exportersCircles: Potential export capacity (red: funding not secured)

Situation: Regional Power Trade is Key

Development of regional Power Pools Infrastructure (construction of lines/substation) Institutions (utilities and government agencies) Reduces the cost of electricity Connects markets with resources Fosters overall economic growth Improves reliability of supply

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WAPP

EAPP

APP

CAPP

Power Pool

Yearly Cost Saving (US$B)

LRMC (% reduction)

CO2 Emissions

(mtpa)IRR (%) Key

resources

CAPP 0.2 22 4 22 Hydro

EAPP 1.0 0 20 20 Hydro, geothermal

SAPP 1.0 14 41 168 Hydro, coal, gas

WAPP 0.5 5 5 33 Hydro, gas

Total 2.7 - 70 -

Example: Regional Integration

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Eastern Africa Electricity Highway (Ethiopia-Kenya Interconnector)

Key interlink (backbone) for EAPP 400 MW bilateral trade initially $900 M under APL1 (Regional) Approved by Bank Board in FY12

1,000 km 500 kV DC Line Reduces electricity tariffs Kenya expects 20% reduction

(From $0.17/kWh to $0.14/kWh) Reduces grid carbon intensity

(Hydropower generation in Ethiopia)

Promotes regional trade and commerce Increases regional energy security Increases bilateral cooperation

Going Forward: Expanded Regional Agenda

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WAPP• Finance key regional

interconnection and large generation (e.g. hydro) projects

• Support national utilities in project preparation & implementation

• TA to WAPP Secretariat for investment planning

Key potential project (US$ million):

-Cote d’Ivoire-Liberia-Sierra Leone-Guinea (400) (ongoing with WB)

EAPP• Finance investments on key system-to-system interconnectors

• Capacity building to national utilities

• TA to EAPP Secretariat for regional planning and coordination

Key potential projects (US$ million):

-Kenya National Backbone (2,400)-Ethiopia-Kenya (1,200) (ongoing with WB)-Zambia-Tanzania-Kenya line (780)

SAPP• Finance investments on national transmission backbones and key interconnectors

• Support national utilities in preparation of key generation expansion projects (Inga)

•TA and risk mitigation at national/regional level

Key potential projects (US$ million):

-Inga-Zambia Interconnector (655)-Zambia Backbone (100)-Zimbabwe Backbone (96)-DRC-Angola (TBD)-Mozambique Regional Transmission Backbone (2,094) (Phase I, Stage I)

CAPP• Support early thinking about

developing power pool. Currently CAPP is not progressing , thus creating a gap between the other power pools

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3C: Opportunities for Transformative Impact

Generation Transmission and Distribution Access

Knowledge and Partnerships

Situation: Energy Affordability Challenge Historic cost of generation in Africa are exceptionally high compared to other regions Consequently, the tariffs are also high

At current high tariff levels, very few of the poor unconnected households can afford a connection

Yet, utilities are struggling to recover costs and rely on government subsidies

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Africa South Asia East Asia USA OECD 0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.200.18

0.07

0.0900000000000001

0.05 0.05

0.14

0.080.07

0.12

0.14

Average historic cost

Average residential tariff

Average generation costs from systems mostly based on hydro USc 10/kWh against almost

USc 30/kWh when mostly diesel.

Source: OECD and World Bank studies

Situation: Subsidies not Reaching the Poor Power subsidies absorb $2B per year

Between 0.5%-2.0% of GDP Huge burden on cash strapped government

Most poor lack access to electricity and do not benefit from subsidies

Cost recovery tariffs affordable to more affluent connected groups

Subsidies should target cost of connection and lower levels of consumption/income

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Analysis of Electricity Subsidy Programs

Source: World Bank, Water, Electricity,and the Poor - Who Benefits from Utility Subsidies?

Example: Improved Pricing Complex political economy of pricing and subsidies : need to protect poorest in particular

Example: Nigeria Power Sector Reform Ongoing sector dialogue / TA Broad level reforms and deregulation Privatization of Gen Cos and Dis Cos Improved efficiency and collection Willingness to move to cost recovery tariffs while protecting the poorest Linkages with diesel and kerosene prices

Multi-year tariff order (MYTO)

Residential tariff with life-line rates Targeted subsidies based on usage Low energy charge US$ 0.025/kWh One of the lowest tariffs in the region Charge exemption provided recently by the regulators for low income households

Other tariff classes see increases ranging from 20-50%

Commercial and industrial tariff groups: subsidies allocated to reduce burden28

Nigeria Tariff Structure (US$)

Going Forward: Enhanced Affordability Policy dialogue on tariff structure/levels and mechanisms

Increased protection of the most vulnerable populations Example: Côte d’Ivoire

Reducing inefficiencies of supply to reduce costs Example: Kenya power sector reforms

Ongoing privatization of state power utility - KenGen Market driven approach (raising funds on the local stock market) Improving the overall O&M performance of the utilities

Regulatory regimes to provide incentives and penalties For efficiency improvements (multi year tariff strategies) Pass through unforeseen costs (foreign exchange, fuel prices, etc.)

Sustainable business model for the utilities Recovery of costs (efficiency gains, reduced generation costs, etc.) While also improving affordability for masses (tiered tariffs)

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Situation/Going forward: Off-Grid Programs Opportunity to scale-up access from successful pilots Off-grid programs can provide cost-effective solutions

Lighting Africa Use of modern off-grid lighting for households and SMEs To date, 3.8M people provided access to clean, safe lighting Scale up to 20M homes (100M+ people) by 2020

Africa Clean Cooking Energy Solutions Addresses biomass degradation and climate resilience Framework approach to tackle sector wide issues Facilitates enterprise-based scale up of clean cooking Builds on both demand and supply side issues:

Efficient cookstovesClean fuel supply chains

Other Programs Biogas units (for heating, lighting, and cooking) Mini and micro-hydro power installations Mini and micro-grids serving communities

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3D: Opportunities for Transformative Impact

Generation Transmission and Distribution Access

Knowledge and Partnerships

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Improved global knowledge base and enhanced South-South Cooperation Know-how for improved pricing, better targeting of subsidies, etc. Clients want to learn from each other – Bank’s role of a connector Example: International community of practice through Africa Electrification Initiative

Accelerate policy reforms/sector frameworks Use of DPOs to improve viability of incumbent utilities and prepare enabling environment

Provide TA and financing for preparation of bankable projects Preparation and project implementation assistance

Provide TA and investment financing to support regional organizations Improved regional planning, coordination, technical and regulatory capacity

Opportunity to scale-up access from successful pilots: Sharing lessons on off-grid solutions Smaller renewable energy for households and SMEs Efficient Lighting Clean Cooking Biogas, mini-hydro, mini-grids, etc.

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Situation/Going forward: Knowledge

Present one WBG to clients for PPPs More Bank, IFC, MIGA coordination– sharing project pipelines – joint teams Example in Kenya for IPP Program (IDA’s sector engagement + IFC’s long-term lending + MIGA’s

insurance = leverage private capital) Periodic Coordination Meetings among DFI/IFI Partners

Identify common set of transformational projects (e.g. Power Pools) Enhance synergies and avoid duplication (e.g. on Fragile States)

Develop Standardized MOU with DFI/IFI Partners Harmonize and reduce differentiated lending requirements (Ex: aligning procurement, safeguards) Prioritize and coordinate project preparation

Deploy New Joint Instruments among DFI/IFI Partners To leverage large-scale financing needs (e.g. Nigeria, Mozambique) Longer tenors for private lenders/investors (e.g. PRG/PCG/MIGA )

Develop other partnerships when beneficial PIDA on transformative projects African Union on natural gas. SE4ALL, USAID, EU, Japan, Norway, Iceland, etc In country donors coordination activities

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Situation/Going forward: Partnership

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Conclusion and Next Steps AFR Energy Core Business to continue focusing on reduced cost of production, regional exchanges, access

enhancement, policy and utility reform and knowledge for our African clients

Knowledge and Partnerships

AccessTransmission

and Distribution

Generation

Reduced cost of production (low carbon, low cost

generation)

Leverage our limited resources and expand south to south cooperation

Regional integration (regional power pool

development)

Improved pricing (sector reform, effective

tariff structures)

Scale-up Energy Access • Target of 50M people added to service

by 2020• Collaboration (e.g. AU and UN SE4All)• UN SE4All Goal - Universal Access for

All by 2030

Scale-up Energy Supply• Rapid deployment of key projects• Contribution to at least 7 GW of

additional installed capacity by 2020• Overall target of 30 GW of

generation capacity added by 2020

Power Pool Development• Building institutions: TA for

power pools • Building infrastructure :

Financing, TA, convening power, etc.

An integrated, tailored approach that combines Knowledge and Finance through Partnership

Country Product Line IBRD/IDA - Grant Amount

Comoros PE KM=Electricity Sect. Recovery Project(FY 14 5.0

Burkina Faso PE BF-Electricity Sector Support {Project 50.0

Mali RE ML-Rural Electrification Hybrid System 5.0

Mali PE ML-Rural Electrification Hybrid System 25.0

DRC PE ZR-Inga 3 and Mid Size Hydro Dev. TA 50.0

Senegal GU SN-Taiba Ndiaye Independ. Power Producer 40.0

Sierra Leone PE SL-Energy Sector Utility Reform 35.0

Mauritania GU Banda Gas to Power Guarantee 32.5

Senegal GU Banda Gas to Power Guarantee 51.0

Mali GU Banda Gas to Power Guarantee 17.0

Gabon PE GA-Rural Elect. &Cap Bldg (FY 14) 30.0

Uganda GU UG PRG Hydropower (FY 14) 160.0

Kenya PE KE Electricity Modernization Project 200.0

Kenya GU Kenya Electricity Modernization Project 50.0

Cameroon GU CM-Add Fin for Kribi Gas Power project 40.0

Ethiopia PE Ethiopia Geothermal Project 150.0

Burundi PE BI-JIJI and Mulembwe Hydrepower 70.0

Tanzania GU TZ – Singida Wind 100MW IPP Project 100.0

Uganda PE UG Energy For Rural Transformation III 100.0

Uganda GE UG- GEF Energy For Rural Transform 3 8.9

Guinea PE GN Power Sector Recovery Project 50.0

Nigeria GU NG- Power Sect Guarantee Project 800.0

Pipeline FY14

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Questions