User Portal

Regulatory and policy incentives: Towards SADC energy security

June 2013
AS SOUTHERN Africa steps up efforts to improve power supply in the region, the question of guaranteeing energy security is expanding from the usual concerns around generation capacity to addressing pertinent soft infrastructure issues that create an enabling environment for investment in the sector.

While attention has focused on implementation of short-term measures such as construction of new power stations or rehabilitation of existing ones to improve generation capacity in the region, the debate is now shifting towards the policy environment and investment incentives for investors.

Southern Africa has suffered a shortage of electricity since 2007 as the growing demand exceeds supply and the expectation was that this energy gap would be addressed by 2014. However, the implementation of projects can lag behind their planned dates due to a lack of funding and other constraints.

SADC is now taking longer term measures to address the energy deficit and ensure selfsufficiency in energy generation and an end to electricity shortages, through an ambitious Energy Sector Plan that calls for the region to increase power generation by more than 70 percent and investment of more than US$170 billion over the next 15 years.

The Energy Sector Plan is part of the SADC Regional Infrastructure Development Master Plan approved by the 32nd Summit of SADC Heads of State and Government in Mozambique last year.

The policy environment in most SADC Member States does not encourage private sector participation in the energy sector. Generally, there is need for a review of the operating environment in the power sector to encourage investment, including Public-Private Partnerships (PPPs). This would involve a review of the legal and regulatory framework governing the sector.

With the exception of a few countries such as Zambia, the majority of SADC countries are yet to fully embrace the PPP concept despite being party to the SAPP Inter-Utility Memorandum of Understanding that formally allows private players to get involved in the energy sector.

Zambia has established a public institution that facilitates and promotes the implementation of PPPs.

A number of long-planned projects have failed to take off as the private sector has been reluctant to engage in partnerships with the public sector, mainly due to inappropriate financing formulas.

According to Lawrence Musaba, Coordination Centre Manager at the Southern African Power Pool (SAPP), there is need for SADC to put in place mechanisms that improve the attractiveness of the power sector for investors.

“One measure proposed is the provision of incentives for all investors in the power sector, both local and foreign,” Musaba said during a researchers workshop on the mid-term review of the SADC Regional Indicative Strategic Development Plan (RISDP) held in Harare, Zimbabwe, in May.

Proposed incentives include introduction of tax exemptions for investors involved in the construction and rehabilitation of power stations.

“For example, we are saying that Member States should allow for Value Added Tax and other tax exemptions for defined periods for those companies and investors who import power equipment and machinery,” said Musaba.

In addition, other incentives should include the introduction of rebates for power producers in the form of subsidies as well as government grants for power utilities.

According to the SADC Regional Energy Access Strategy, any subsidies to the energy sector should prioritise access over consumption.

While subsidies have an important role to play in extending access, subsidy programmes need to be carefully designed and targeted at the power producers to encourage more investment.

The rationale is that subsidies to consumer energy prices simply reduce the cost of energy for those who already have access to electricity.

For this reason, government or donor resources available for subsidies would contribute more to equity and efficiency objectives if they are spent on once-off capital subsidies than on subsidies to recurrent costs.

The SAPP is also proposing the creation of a Demand Side Management (DSM) fund to support DSM initiatives.

The rationale behind the fund is to compensate utilities for revenue losses emanating from the reduced energy usage as a result of the DSM initiatives.

SAPP is implementing various DSM programmes that include promotion of energy efficiency technologies such as the replacement of incandescent bulbs with Compact Fluorescent Lamps (CFLs) and introduction of the solar water heater programme, hot water load control, and the commercial lighting programme.

Switching from traditional light bulbs to CFLs has been an effective programme by SAPP to reduce energy use at home and prevent greenhouse gas emissions that contribute to climate change.

Research shows that residential lighting accounts for about 20 percent of the average home electricity bill in the SADC region. However, compared to incandescent bulbs, CFLs have been shown to save up to 80 percent of electricity consumption.

Similarly, the hot water load-control programme being pursued by SAPP has enabled consumers to install load control switches that automatically turn off power during peak periods or when appliances such as geysers have reached maximum demand.

To date, the majority of SAPP members have introduced the CFLs on a large scale. Other forms of DSM are at various levels of implementation.

Power savings realised from these four DSM initiatives between 2009 and 2012 amounted to 2,316 megawatts, according to SAPP.

It is envisaged that the DSM programme will include a public education campaign whose primary objective will be to increase awareness about energy efficiency.

However, the downside of implementing such initiatives is that they affect the viability of power utilities. Hence the need for the proposed fund. Other measures being considered include the use of costreflective tariffs, time of use tariffs, renewable energy feedin tariffs, as well as introduction of penalties for inefficient use of energy by customers.

Cost-reflective tariffs encourage people to move their electricity consumption from peak times to off-peak periods by adjusting the price charged at certain times of each day. This helps reduce the overall peak load and is referred to as load shifting, a common practice in many parts of the world.

Related to cost-reflective tariffs is the time-of-use pricing concept whereby electricity prices are set for a specific time period on an advance or forward basis, usually not changing more than twice a year.

Prices paid for energy consumed during these periods are pre-established and known to consumers in advance, allowing them to vary their usage in response to such prices and manage their energy costs by shifting usage to lower cost periods or reducing their overall consumption.

Renewable energy feed-in tariffs have been successful in increasing the use of renewable technologies worldwide. They encourage investment in renewable energy generation by offering long-term contracts to producers and guaranteeing to buy and pay for all the electricity produced.

Feed-in tariffs have proven wildly successful in Germany and other European countries such as Denmark and Spain, where they are credited with the much greater adoption of wind and solar power there than in the United States.

There is, therefore, need to embrace the principle of energy efficiency in SADC and adopt regulatory principles that incentivise efficient use of electricity and penalise wasteful usage.