In recent years, there has been a growing recognition of the need to reform and modernise the electricity sector in Africa. The traditional model, dominated by large vertically integrated utilities, is being challenged by the fight against climate change, technological advancements in renewable energy, and the need for competitive pricing.
As a result, several African countries have embarked on the path of unbundling and deregulation to increase efficiency, attract private investment and promote competition.
One of the key players in this transformation is South Africa, where there are ongoing discussions and plans to unbundle Eskom, the country’s state-owned electricity utility.
Eskom has historically held a monopoly over the generation, transmission, and distribution of electricity in South Africa. However, the utility has faced numerous challenges, including financial difficulties, ageing infrastructure, and issues related to governance and corruption. Unbundling Eskom is seen as a crucial step towards addressing these challenges and creating a more efficient and sustainable electricity sector.
To gain insights into the unbundling and deregulation process, it is valuable to examine the experiences of other African countries that have already undertaken similar reforms. We explore some key lessons learned from Zambia, Ghana, Nigeria, Kenya and Uganda (for an in-depth analysis of Africa’s various approaches to energy deregulation and unbundling, read ENSafrica’s latest Africa Regulatory Round-up.)
Zambia
Zambia embarked on the unbundling and privatisation of its electricity sector in the late 1990s and early 2000s. The aim was to introduce private sector investment and competition, reduce costs, and expand electricity access in rural areas. The process was gradual and involved selling stakes in various parts of the sector to private investors while maintaining regulatory oversight.
Zambia’s experience highlighted the importance of ensuring proper risk allocation in contracts, balancing local content requirements with competitiveness, establishing robust regulatory frameworks, providing clear and consistent policies, and engaging local communities.
Ghana
Ghana initiated the unbundling of its power sector in the 1990s to address inefficiencies and meet growing demand. Reforms aimed to encourage private sector participation in electricity generation and increase efficiency. The introduction of a competitive tender process for power purchase agreements with independent power producers helped reduce generation costs.
However, challenges arose in managing high electricity tariffs and renegotiating power purchase agreements. Ghana’s experience emphasised the need for adequate planning, rigorous contract negotiation and monitoring, transparency and diversification of power sources.
Nigeria
In Nigeria, the unbundling and deregulation of the electricity sector began in 2001 with the goal of attracting private sector investment, improving efficiency, and increasing access to electricity. The process involved unbundling the state-owned Power Holding Company of Nigeria into separate generation, transmission, and distribution companies.
Nigeria faced several challenges in this process, including inadequate infrastructure, excessive politicisation of the process and lack of funding. Nigeria’s experience highlighted the importance of clear and comprehensive regulatory frameworks, stakeholder engagement, effective implementation and enforcement of regulations and addressing infrastructure challenges.
Kenya
Kenya embarked on the unbundling and deregulation of its electricity sector to ease pressure on public funds, attract private investment, mitigate an imminent energy crisis, promote competition, and improve efficiency. The process occurred in two phases, starting with separating policy and regulatory roles from commercial activities, separating generation from transmission and distribution, introducing cost-reflective tariffs and dismantling the state-owned utility. This was followed by various aspects of domestic reform.
Kenya encountered various challenges, including significant financial losses. Key lessons from Kenya’s experience include the importance of proper planning and preparation, clear and comprehensive regulatory frameworks, stakeholder engagement and transparency and accountability in the deregulation process.
Uganda
In Uganda, the unbundling of the electricity utility aimed to address chronic power shortages, high operating expenses, and insufficient investment in new capacity. The government sought to attract private investment and expertise to improve operational efficiency and increase capacity. Although issues related to poor infrastructure, slow electrification in rural areas, high traffic and alleged political interference were prevalent, there were a number of benefits.
Lessons from Uganda’s experience include the importance of clear regulatory frameworks, addressing infrastructure challenges, and ensuring transparency and accountability in the deregulation process.
Applying lessons learned to Eskom’s unbundling
When it comes to South Africa’s unbundling of Eskom, it can benefit from the lessons learned in other African countries. Clear and comprehensive regulatory frameworks should be established to prevent issues related to slow project approval and ineffective regulation enforcement.
Effective implementation and enforcement of regulations will be crucial to ensure compliance with performance standards. Attention should also be given to infrastructure challenges, ensuring proper risk allocation in contracts, and balancing local content requirements against competitiveness.
Furthermore, it is essential for South Africa to have a long-term perspective on its electricity sector reforms. This includes diversifying power sources, promoting renewable energy, and planning for the development of a robust and reliable grid.
Additionally, the importance of transparency and accountability cannot be overstated, both in the allocation of revenue and in the negotiation and monitoring of contracts.
Conclusion
The unbundling and deregulation of the electricity sector in Africa are significant steps toward creating more efficient, competitive, and sustainable energy systems. South Africa’s plans to unbundle Eskom align with this trend and offer an opportunity to learn from the experiences of other African countries.
By drawing on the lessons learned from Zambia, Ghana, Nigeria, Kenya, and Uganda, South Africa can navigate the challenges and seize the opportunities presented by the unbundling process. Through careful planning, effective regulatory frameworks, and stakeholder engagement, South Africa can pave the way for a more resilient and dynamic electricity sector that meets the country’s energy needs in the 21st century. DM
Eric le Grange is an Executive, Project Development, Project Finance and Oil & Gas at law firm ENSafrica; Amina Kaguah is ENSafrica Managing Partner, Ghana; Nigel Shaw is ENSafrica Managing Partner, Kenya; Rachel Musoke is Head of ENSafrica, Uganda; and Celia Becker is an ENSafrica Executive, Africa Regulatory and Business Intelligence.