Story of Africa’s loss-making electricity utility companies

African households and industries have been pushed into a life of unreliable and expensive power as a result of inefficient, loss-making power utility firms with questionable governance structures.

A study by Clarion Energy and the Gordon Institute of Business Science (University of Pretoria) shows that governance irregularities have become a major cause for concern for government-owned utility firms as they adversely impact the firms’ procurement processes.

The report titled, ‘The Future of Power Utilities in Africa, notes that the future trajectory of African utility firms largely depends on the improvement of the quality of their governance structures and their precarious cash positions. 

The World Bank, through a survey on power cost and reliability in Africa revealed that electricity transmission and distributing firms on the continent are cash strapped and have allowed their assets to fall into disrepair, exacerbating power shortages.

The survey, which sampled 39 countries on the continent, found out that only power utilities in Seychelles and Uganda were fully recovering operational and capital costs while utility firms in only 19 countries were able to cover their operational costs from the cash they collect.

“Such large funding gaps prevent power sectors from delivering reliable electricity to existing customers, let alone expanding supply to new consumers,” the survey notes. 

Cure for deficits
“If utilities could reduce combined transmission, distribution, and bill collection losses to 10 per cent of dispatched electricity and tackle overstaffing, an additional 11 countries could see their utility deficits disappear.”

According to the report, utilities need to focus on achieving an acceptable level of service quality for a chance at cost recovery in tariff revenues.

“Raising tariffs while outages continue unabated is bound to invite a backlash. They could reduce costs by phasing out operational inefficiencies, implementing short-term measures to reduce the duration (if not the frequency) of outages, and addressing customer service quality in general.”

The report notes serious shortcomings in operational efficiency, high costs of small scale operations, and overreliance on expensive oil-based electricity generation. 

These, together with others, have increased the cost of power supply in Africa, while underpricing and the inability of many customers to pay for electricity services have reduced utility revenues.

In addition, a utility that does not cover its costs will struggle to deliver reliable electricity in sufficient quantity while inefficient utilities suffer losses associated with transmission, distribution and bill collection.

The report notes that financial sustainability of electric utilities in many African countries is precarious.
According to the American Power Africa Initiative, most utilities in sub-Saharan Africa – whether state-owned or privatised – struggle to make ends meet.

Ethiopia’s state-owned power distribution company Ethiopian Electric Utility estimates that pre-Covid-19 deficits amounted to nearly $100m annually.

In Nigeria, some privatised utilities lose as much as half of their allocated electricity supply due to technical faults, theft or customer non-payment.

In Uganda, according to available details, Umeme, which is the biggest power distributor in the country, loses close to Shs100b annually due to power theft and vandalism. 

Curse of unreliable systems
According to the International Finance Corporation (IFC), unreliable utility distribution systems are a major drag on regional growth in Africa, with the cost of inefficiency in power and water sectors valued at $4.5b annually.

Along with financial costs, distribution losses also contribute to greater greenhouse gas emissions and increased water stress within the region.

On average, electricity utilities on the continent lose 23 per cent of all energy consumed due to operational inefficiencies, at a cost of almost $3.3b per year, compared to a 10 per cent global average.

“Such inefficiencies undermine the future performance of utilities, dissuade investment, and harm the environment,” says the IFC.

Africa is struggling with huge operational inefficiencies estimated at more than $3b annually, which have caused the region to suffer the world’s highest energy prices, with most of its electricity providers barely breaking even, which limits their scope for reinvestment.

Status in Uganda and Kenya   
In Uganda, Umeme is the main electricity distributor, distributing 97 per cent of supplied grid electricity through a 20-year distribution concession. 

However, government has blamed Umeme for failing to bring down tariffs despite low bulk purchase and huge government investment over time. The charges remain high due to high power losses, which are recouped through tariffs. A unit of electricity costs an average of Shs700 for domestic consumers.   

In Kenya, Kenya Power, which is 50.1 per cent owned by the state, is facing a demand crisis due to inflated electricity bills, corruption and increasing shift to solar energy by households and industries.

The firm disclosed in its annual report (2019) that demand risk is among major concerns to its operations as heavy-consuming industrialists seeking reliable and cheaper supply, shift to solar power.

The firm’s system losses have increased to 23.46 per cent from 18.68 per cent in the past seven years, which is attributed to high transmission and distribution costs to higher allowance for expected credit losses and provisions for obsolete and slow-moving inventories.

In Botswana, the state-owned Botswana Power Corporation has been making operating losses for years due to high import costs, nonperforming assets and operational inefficiencies.
Morocco is partially unbundling electricity sector by allowing an increase in private participation through a series of reforms.