Power companies in Africa are on the verge of death – Vophs Africa

Ghana’s electric grid is in dire straits. In the mid-2010s, fuel supply shortages and droughts, driven by population growth, led to severe power shortages and frequent blackouts. Government Answered With generous offers on long-term power purchase agreements from private power plant developers, who in turn built an impressive new fleet of hydro, gas and geothermal facilities.

Today, the problem has gone the other way: Ghana has a lot of electricity, but the state utility is locked into contracts it no longer needs or wants, and runs $1 billion in annual deficits.

Now, the pandemic and the war in Ukraine are making the situation worse, pushing many facilities in Africa — long strapped for cash — into debt, according to an Aug. 23, Close to financial ruin. Research paper From the Energy for Growth Hub, a Washington think tank. In addition to the risk of blackouts and crippling public debt, the crisis is hampering climate action: Many utilities lack the means to build much-needed transmission lines and integrate renewable energy, even That while doing so will reduce utilities and their long-term costs. customers.

“You’re seeing a massive intensification of pressure on utilities,” said Katie Auth, the think tank’s policy director and a former senior energy official at the U.S. Agency for International Development. It’s a death spiral, and the biggest obstacle to large-scale deployment of clean energy in these markets.”

Factors leading to Africa’s utility bankruptcy

Auth identifies four factors pushing Africa’s efficiency to the brink:

🚢 Broken supply chain: War-related trade disruptions in Ukraine and pandemic lockdowns in China have driven up the cost of construction materials such as steel, copper and battery minerals and extended delivery times by months.

📝Trapped in contracts: As in Ghana, many utilities are stuck with power purchase agreements they cannot afford. Those who generate their own power often sell it at a fixed rate, meaning their margins are squeezed when fossil fuel prices rise. Meanwhile, many consumers were buying less electricity during the pandemic, or had their fees waived through government aid packages. In 2018, the most recent year with continuous data, a third of utilities in Africa were unable to break even. This gulf is growing.

💸 Cost of Capital: A general economic downturn and damaged balance sheets have raised the risk rating for many African countries, making borrowing more expensive. For example, Ghana’s risk premium more than doubled between July 2020 and July 2022. Because renewable energy projects need to provide a larger share of the overall cost than other forms of energy, they tend to be more expensive investments. For example, a typical solar plant can cost 140% more in Ghana than it would in the U.S., according to the report, due to capital costs.

🏛️ Less public investment: All of the above factors also reduce government coffers, so there is little willingness to implement clean energy tax breaks, sign new purchase agreements, or invest in major infrastructure such as transmission lines. .

Governments may need to reduce trade barriers that make it difficult for private foreign investors to invest in things like mining and battery factories and tighten oversight of labor violations in the sector. Multilateral institutions like the World Bank could extend loan guarantees to clean energy projects, and should prioritize utilities in allocating development aid and climate finance, Oath said.

“In a high-renewable future where countries are using large-scale wind and solar energy, there is a need for an extensive grid system that can sustain itself,” he said. “Heading into COP27, the conversation tends to be about mobilizing private capital for clean energy. That’s not going to happen under the current circumstances.”

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