Sub-Saharan Africa should encourage investment in energy sector

  

An interesting news article from CNBC Africa came to our attention on Friday morning. According to the report, Uganda’s power sector has returned 50MW to the grid after one of the two thermal power plants, which were shut down over unpaid government subsidies, came back on line.

Broadly speaking, there has been a mounting power supply crisis in Uganda that has also sparked unrest within the country. “As we speak we have an extra 50MW on the grid. Load-shedding should now reduce significantly from the 24-hour cycle we’ve been experiencing,” said Willy Turyahika, deputy MD of the state-run Electricity Transmission Company Limited (UETCL). Uganda’s power deficit now stood at about 130MW in peak demand, he said.

The country started subsidising electricity consumption after tariffs rose sharply in 2006. The subsidies, however, are becoming increasingly hard for the government to stomach in light of high global oil prices. The government is mulling termination of the subsidies. According to the Electricity Regulatory Authority (ERA), the government spends about $240.5 million annually on power subsidies.

The Ugandan case demonstrates the nature of the energy crisis across sub-Saharan Africa and indeed around the globe. According to a World Energy Outlook released by the International Energy Agency (IEA), although the recovery in the world economy since 2009 has been uneven, and future economic prospects remain uncertain, global primary energy demand rebounded by 5.0% in 2010.

However, this has pushed carbon emissions to a new high. Furthermore, subsidies on fossil fuels (oil) have jumped to over $400 billion. In fact, the number of people without access to electricity has remained high at 1.3 billion, around 20% of the world’s population. Despite the priority in many countries to increase energy efficiency, global energy intensity has worsened and events such as those at the Fukushima Daiichi nuclear power plant and the turmoil in parts of the Middle East and North Africa (MENA) have cast doubts on the reliability of energy supply.

Growth in Primary Energy Demand

Growth in Primary Energy Demand; Source: IEA

As the graph above illustrates, China is currently the world’s largest energy consumer. The IEA estimates that in 2035 it will consume nearly 70% more energy than the USA. The ordeal therefore faced by governments in sub-Saharan Africa along with the rest of the world is not only to meet the increasing demand for energy but to also tackle climate change issues. While the demand for fossil fuels such as oil and coal will remain high, the idea is to encourage lower carbon emissions and promote greener technologies such as solar and wind energy.

However, for sub-Saharan Africa, the main priority in the short to medium term, in our view would be encouraging investment in the sector given the energy supply and demand mismatches.

Imara is an investment banking and asset management group renowned for its knowledge of African markets.




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