This session is part of the Clean Energy Regulators Initiative Webinar Programme. Theme 9 - Energy Access Module 5: Analysis of Electricity Tariffs in Africa This session has several purposes: Review electricity tariff structures in Africa; Assess tariffs in terms of long-term financial viability for the electricity sector and ability to attract capital; Offer suggestions to evolve to a healthier and more attractive tariff structure. Countries analyzed: Kenya, Cape Verde, Ghana, Tanzania, and Senegal. Overall findings: Strong growth in electricity demand Network losses very high Financial performance distribution utilities low Loss reduction important Tariffs should be set at economic levels but incorporate reasonable level of losses, while utilities should work on significant reduction of losses. Regulatory policies should incentivize such improvements.

1. DNV GL © 2013 SAFER, SMARTER, GREENERDNV GL © 2013
Tariff Structures for Sustainable
Electrification in Africa
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Webinar prepared for the European Copper Institute
Presenter: Dr. Viren Ajodhia

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Agenda
 Project purpose
 Approach
 Country case studies
– Kenya
– Cape Verde
– Ghana
– Tanzania
– Senegal
 Conclusions & Recommendations
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3. DNV GL © 2013
Project purpose
1. Review the tariff structures in representative countries in Africa
2. Assess these tariffs in terms of the long-term financial viability for
the electricity sector and their ability to attract capital
3. Offer suggestions regarding how to evolve to a healthier and more
attractive tariff structure
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Approach

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Approach – Define customer categories
 DNV KEMA defined four customer categories based on a review of
national load profiles
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Source: DNV GL

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Approach – Focus on Main Tariff Elements
 Some tariff elements are based on rather specific criteria and
complex pricing schemes, but represent only a minor share of total
grid charges
 Overview of tariff elements that have been included in or excluded
from the analysis:
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Source: DNV GL

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Approach – Tariff Comparisons
 Comparisons made at the level of the end-user tariff, due to
relatively limited unbundling of the electricity sector in Africa (i.e.
between generation, transmission, distribution and supply)
 Includes the costs of all government fees such as environmental taxes,
et cetera but excludes costs of Value Added Taxes (VAT)
 Comparison Basis
– All prices converted into EUR per kWh
– Average price for each of the four customer groups
– Domestic, Small Commercial, Large Commercial, Industrial
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Approach – Financial Performance
 Return on Capital (ROC; pre-tax nominal) used as overall indicator of
financial performance
 Type of Analysis
– Assessment of tariff adjustments for utility to break-even
– Assessment of tariff adjustments for utility to get Rate of Return of 10%
(assumed as starting point for financial healthy performance)
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Country Case Studies

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General
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 Country studies of:
– Kenya
– Cape Verde
– Ghana
– Tanzania
– Senegal

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Kenya
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 Population – 41 million
 GDP – 32 billion USD (2010)
 16-18% of the Kenyan population has access to electricity
 Network losses is around 19%
 energy demand forecast: from 7.4 TWh in 2009 to 92 TWh in 2030. This
corresponds to an annual increase of 12.8%
 Power generation capacity largely dependent
upon hydropower; Highly sensitive to
weather conditions
 Tariffs are set in a relative independent
manner with automatic adjustments for fuel,
inflation, and exchange rates
Sources: CIA World Factbook and LCPDP by Energy Regulatory Commission, March 2010 Source: DNV GL

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Kenya – Calculation of average and required tariffs
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Source: http://www.kplc.co.ke
 Kenya Power achieves relatively healthy results with current tariffs
generating ROC of 8.5% in 2010/2011
 If a ROC of 10% were to be reached, tariffs would have to increase
with 1.8%
 Potential for higher returns through reduction of losses
Source: DNV GL

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Cape Verde
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 Population – 516,000
 GDP – 1.65 billion USD (2010)
 Electrification in rural areas over 95%
 Network losses 26%
 Installed capacity is approximately 116 MW, including 25 MW of
wind power and 7.5 MW of solar power. The remaining share is
generated by diesel power stations spread across the islands
 Dispersed islands and their inherently small power stations have
resulted in high electricity costs
 No ‘Industrial consumption category’ according to DNV GL
grouping, due to lack of HV grid
Sources: CIA World Factbook and World Bank, 2011

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Cape Verde – Calculation of average and required tariffs
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 ROC of minus 10.5% means the financial prospects of Electra are
precarious
 For a break-even result, tariffs would have to be increased by
11.0% and even by 21.6% to achieve a ROC of 10%
 Potential for higher returns through reduction of losses
Source: DNV GL

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Ghana
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 Population – 24.8 million
 GDP – 38.6 billion USD (2011)
 Electrification is about 72%
 Network losses 27%
 Installed capacity is 2,186 MW at the end of 2010 and consisted of
hydroelectric power (1,180 MW) and thermal power (1,006 MW)
 The power market consists of a regulated and a deregulated part
– The regulated market is made up of all customers who are not bulk
customers of electricity and is subject to regulated prices
– Bulk customers can negotiate power prices directly with power producers
(deregulated)
Sources: Ghana Ministry of Energy and Electricity Company Ghana, 2010 /2011; Public Utilities Regulatory Commission
(PURC)

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Ghana – Calculation of average and required tariffs
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 ROC of 2.4% means tariffs are currently above the break-even
level
 Tariffs would have to increase by 13% to reach a ROC of 10%
 There is a very high tariff for the small commercial group. This
suggests some degree of cross-subsidy to other consumer groups
 Potential for higher returns through reduction of losses
Source: DNV GL

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Tanzania
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 Population – 42.7 million
 GDP – 38.6 billion USD (2011)
 Electrification is about 14%
 Network losses 24.3%
 Installed capacity: 887 MW; available capacity: 660 MW in 2010,
consisting of hydroelectric and thermal power
– In 2010, 73% of total power was generated by the four hydropower
stations
– Severe droughts can reduce available generating capacity by 25 to 45%
 260 MW of emergency power generation contracts have been
signed since May 2011
Sources: Tanzanian Ministry of Energy and Minerals and Ministry of Finance and Economic Affairs, 2011; V. Mapoza (Frost
& Sullivan), 2011

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Tanzania – Calculation of average and required tariffs
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 Current ROC is minus 7.2%
 Overall tariffs would have to increase by 27% to achieve a break-
even situation and by 64% to achieve a ROC of 10%
 Potential for higher returns through Loss reduction
Source: DNV GL

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Senegal
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 Population – 13.0 million
 GDP – 25.4 billion USD (2011)
 Electrification is about 42%
 Network losses 22%
 Installed capacity: 700 MW in 2010, consisting of hydroelectric
(10%) and thermal power (90%; diesel generators and gas turbines)
 About 375 MW (2 power stations) in new, additional coal-fired
capacity is being commissioned
Sources: CIA World Factbook; IEA ‘World Energy Outlook 2010’; Senelec, 2011; African Development Bank, 2009; the
Korean Times, 2012

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Senegal – Calculation of average and required tariffs
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 Tariffs are almost sufficient for Senelec to break-even, current
ROC is -0.1%
 Increase of 8.5% would be required to reach a ROC of 10%
 Senegal’s tariff structure seems to be more cost reflective than
others showing a clear reduction in prices for larger customers
 Considerable increase in returns can be reached by reducing
network losses.
Source: DNV GL

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Conclusions

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Conclusions – Strong Demand growth and potential
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Source: DNV GL

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Conclusions – Weak financial performance but large potential
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 Comparison of average tariff for domestic and industry versus
realized rate of return. The size of the bubble represents the level
of network losses
Source: DNV GL
EU: 0.13 EUR/kWh
Reference

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Conclusions – Possible impact of loss reduction
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 Tariff increase to achieve 10% ROR
– Scenario 1: Network losses remain the same
– Scenario 2: Network losses reduced to benchmark of 12%
Source: DNV GL

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Conclusions
 The country reviews identified a number of commonalities which
seem to be characteristic for the Sub-Saharan countries in
general:
– Strong growth in electricity demand
– High potential in demand
– Low financial performance
– Very high network losses
 Loss reduction is an important means of achieving sustainability
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Recommendations
 A proper balance between tariff policy and losses reduction
strategies is required for achieving a sustainable investment in
electricity networks:
– Tariffs should be set at economic levels but incorporate a
reasonable level of losses
– Utilities should dedicate significant efforts towards the reduction of
losses
– Regulatory policy and incentives will be imperative
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27. DNV GL © 2013
SAFER, SMARTER, GREENER
www.dnvgl.com
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Dr. Viren Ajodhia
Viren.Ajodhia@DNVGL.com
+31648925401
Tariff Structures for Sustainable Electrification in
Africa
Webinar prepared for the European Copper Institute