Energy poverty, renewable energies and the Economic Partnership Agreements

15 December 2009

It is widely recognized that the availability of modern, reliable, and efficient energy services is an essential driver for development. Modern energy supports productive activities, is a determining factor of costs and global competitiveness and, in this sense, a pre-requisite for sustained economic and social growth. Yet, sub-Saharan Africa is characterized by some of the world's lowest levels of access to modern energy services with many rural areas recording electrification rates of less than 10 percent.[2] Renewable Energy Technologies (RETs) have the potential to accelerate universal access to modern energy, generate employment and investment opportunities, and contribute to sub-Saharan Africa's capacity to adapt to a changing climate.

This article describes the potential implications of the Economic Partnership Agreement (EPA) negotiations between the EU and African countries and argues that, if African negotiators are not alert to the potential pitfalls of EPAs, the growth of a promising embryonic renewable energy industry could be permanently stunted.[3]

Renewable Energy Technologies and Africa

Africa, especially sub-Saharan Africa, holds the potential to be one of the world's largest markets for renewable energy, given the continent's vast natural endowment in renewable energy sources (hydroelectric, geothermal, biomass, solar and wind potential[4]), as well as the fact that the majority of the population in sub-Saharan Africa lives in dispersed rural settlements, which favours decentralised RET units.

De-centralised RETs also prove strategic since the conventional power sector in sub-Saharan Africa is crippled, with governments in the region often resorting to very high cost stopgap oil-fired emergency power supply measures. As a result, many sub-Saharan African electricity tariffs are twice as high as tariffs found in much of the industrialized world and in other developing parts of Asia and Latin America. The high cost and poor performance of conventional power systems makes renewables competitive purely on financing terms. In contrast to industrialized countries that need to subsidize renewables on environmental grounds, renewable energy development in sub-Saharan Africa can be justified on economic grounds.[5]

As a result, there is now an emerging infant African renewable energy industry, particularly within the agro-industrial sector. For example, sugar-processing factories use one of their primary waste products, bagasse, to provide heat for sugar production and generation of electricity for their own internal use and export to the grid. Through cogeneration, the sugar industry in Mauritius meets over half the country's electricity needs and electricity sales are now more profitable than their sugar business[6]. The tea industry in eastern and southern Africa is also beginning to grow its energy business, taking advantage of the excellent small hydro potential that results from its location in the highlands combined with good rainfall patterns and numerous rivers. A number of tea plantations have become energy self-sufficient and are exploring possibilities of exporting excess electricity to national grids.[7]

The success of these installations demonstrates that renewable energy can play an important role in ensuring that agro-industries remain profitable and are better able to compete in a bruising world market of continuously falling prices for primary commodities. Having in mind that most renewable energy technologies are generally not very sophisticated-much of the required expertise is in the public domain-Africa faces a unique opportunity to establish a competitive RET industry with the concomitant benefits that accompany industrialization: generation of better paying and more secure jobs, rural development, more competitive export revenues, and increased government tax revenues.

EPAs and the liberalization of the renewable energy industry in SSA

The key question pertaining to the EPAs is whether they will assist or strangle the embryonic renewable energy industry in sub-Saharan Africa. Sub-Saharan Africa needs to tread carefully in order to avoid repeating the unhappy experience with liberalization and reforms linked to the energy sector and the World Bank-led Structural Adjustment.[8]

The few investors from more advanced economies that  deemed sub-Saharan African countries to be of interest asked for and secured enormously advantageous short-term deals that virtually eliminated all risks and allowed for higher than normal profits by means of some of the world's highest electricity prices to poor sub-Saharan Africa economies.[9] The financial crisis now affecting much of the industrialized world has resulted in many of the investors from more advanced industrialized countries losing interest in sub-Saharan Africa. The end result is that there are very few serious long-term large investors in the region's power sector, virtually no significant local investment in the power industry and continued under-performance of the electricity sector.

The unhappy result of liberalization of the power sector in many sub-Saharan Africa countries have led countries such as Senegal, Cameroon, Chad, Mali, and Cape Verde to return the power sector back to state hands, thus missing out on some of the more attractive benefits that liberalization and local private sector participation could deliver: in effect, throwing the baby out with the bathwater.[10]

It is possible that if sub-Saharan Africa's negotiators are not alert to the potential pitfalls of EPAs, a similar pattern could emerge with respect to renewable energy. The European renewable energy industry is likely to opt to expand production of renewable energy technologies in Europe to be exported to sub-Saharan Africa instead of establishing what it will probably consider as un-economic small renewable energy industries in these countries. In fact, many of the components of renewable energy technologies would be manufactured, under European license, in China, India, and parts of Southeast Asia, and simply assembled in Europe for onward export to sub-Saharan Africa. The resulting influx of over-engineered and unnecessarily sophisticated renewable energy technologies would place European-based service providers at an advantage and cut out local service providers. Moreover, given the low regulatory capacity of African governments, foreign investors could "cherry-pick" the most lucrative investments at the expense of more remote and poor rural users.

In order to avoid this scenario, it is particularly important that Africa's trade negotiators carefully consider the following:

Elimination of import duties on imports of RETs: The removal of import duties on renewables could lead to an influx of unnecessarily sophisticated and/or expensive technologies that utilize little local content.

Liberalization of investments: While proponents of investment liberalisation claim that liberalization can establish conducive conditions to attract much needed foreign capital, past experience in the energy sector in sub-Saharan Africa shows that liberalization does not always lead to a significant increase in foreign investment.

Liberalization of provision of energy services: Most policies that have accompanied the liberalization of Africa's power sector have been designed to attract large-scale foreign investors and have failed to mobilize and enhance the participation of local small-scale energy investors. Liberalization of the renewable energy sector could very well replicate the adverse impacts of power sector liberalization in sub-Saharan Africa.

Which way for EPA negotiations?

Past experience in energy liberalisation in African allows for the enumeration of the following lessons:

First and foremost, the European Union and African negotiators must truly treat EPAs as vehicles for sustainable development in sub-Saharan Africa. This implies that the EU's commercial interests in the agreements should be secondary to the development of a local infant renewable energy industry.

Second, liberalization must lead to a significant amount of new capital investment or expansion of existing investment in sub-Saharan Africa, not to surges in the import of finished renewable energy products.

Third, liberalization must be gradual and managed. This would require the speed of liberalization to be adjusted to reflect different levels of competitiveness in different renewable energy technologies.

Fourth, liberalization of the renewable energy industry should involve the local private sector in a significant way, particularly through the local manufacture of key components, the emergence of joint ventures, the transfer of technology and significant local shareholding in greenfield investments.

Last but not least, the success of EPAs and the associated liberalization in the African energy sector largely depends on capacity and skills of African EPA negotiators. The bulk of African trade negotiators have limited specialized expertise in energy and renewables and have not been able to forge effective partnerships with existing African renewable energy experts that can be found in national utilities, African academia, civil society, and diaspora. Forging these partnerships is likely to be a key factor to unlocking the benefits that EPAs could deliver to Africa's infant renewable energy industry.

[1] This article is based on a longer article, written by Stephen Karekezi, John Kimani, and Oscar Onguru (AFREPREN/FWD-Energy, Environment and Development Network for Africa), published by the German Marshall Fund of the United States: Jones E. and Martí D. (2009), "Updating the EPAs to today's global challenges". German Marshall Fund of the United States Economic Policy Series 09, available at: http://www.gmfus.org//doc/GMF7257_Final_Ebook.pdf

[2] S. Karekezi, J. Kimani, O. Onguru, and W. Kithyoma (2009). "Large Scale Hydropower, Renewable Energy and Adaptation to Climate Change: Climate Change and Energy Security in East and Horn of Africa." Nairobi, Kenya: Energy, Environment and Development Network for Africa (AFREPREN/FWD).

[3] Jones E. and Martí D. (2009), Updating the EPAs to today's global challenges. German Marshall Fund of the United States Economic Policy Series 09, available at: http://www.gmfus.org//doc/GMF7257_Final_Ebook.pdf

[4] S. Karekezi and T. Ranja (1997). Renewables Energy Technologies in Africa. London, U.K.: Zed Books Ltd. "The Eastern Africa Market Assessment Acceleration." Geothermal Market Assessment Report, Geothermal Conference Agenda. Washington, DC: Business Council for Sustainable Energy; Federal Ministry for Economic Cooperation and Economic Development, Undated. Note to CODEV: Hydropower Outlook for Africa. Accessed on August 27, 2009 at: http://www.energypartnership.eu/download/BMZ-DEV_Note_Hydropower_Outlook_for_Africa_2007.pdf

[5] S. Karekezi and W. Kithyoma,W. (eds) (2005). "Sustainable Energy in Africa: Cogeneration and Geothermal in the East and Horn of Africa-Status and Prospects." Nairobi, Kenya: Energy, Environment and Development Network for Africa (AFREPREN/FWD).

[6] Based on 2007 data from the Mauritian national utility (Central Electricity Board - CEB). It should be noted that cogeneration power stations in Mauritius are dual-fired: they use bagasse during the sugar harvest season (on-crop) and during the non-harvest season (non-crop) they use coal. Approximately 19% of Mauritius' electricity comes from bagasse.

[7] S. Karekezi, J. Kimani, O. Onguru (2006). "Contribution of Renewables to a Sustainable Power Sector in Kenya." Nairobi, Kenya: Energy, Environment and Development Network for Africa (AFREPREN/FWD).

[8] E. Marandu and D. Kayo (eds). (2004). The Regulation of the Power Sector in Africa: Attracting Investment and Protecting the Poor. London, U.K.: Zed Books Ltd; Stichele, M.V. (2005).

[9] "Dangers in Liberalization of Services and Investment in EPAs." SOMO Briefing, May 31, 2005. Accessed on August 21, 2009 at: http://syspro2.enda.sn/seminaire/docs/Services%20and%20Investments%20in%...'s.doc

[10] G. Gualberti, et al. (2009). "Electricity Privatizations in Sahel: A U-turn?" Energy Policy, doi:10.1016/j.enpol.2009.05.018

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