 | Energy as a Tool for Sustainable Development for African, Caribbean and Pacific Countries (EC - UNDP, 1999, 89 p.) |
 |  | CHAPTER 2: THE SUB-SAHARAN AFRICA REGION |
|
|
Energy Prices and Economic Incentives
Throughout much of Africa, energy-pricing policies have tilted the playing field against sustainable and equitable energy development. Conventional electricity and fuels are almost universally priced below their marginal cost. This reduces energy utility revenues, which inhibits the expansion of services to the un-served rural and peri-urban areas where the poorest live. It creates strong disincentives for investment in energy efficiency and lowers the ability of renewable energy to compete with conventional energy sources. Subsidies that allow low prices typically benefit the wealthy much more than the poor for whom they are normally intended.
Many African countries have tried to overcome these problems through a gradual phase-in of full marginal cost pricing, especially for grid electricity. This can have very positive impacts on the take up of energy efficiency as well as improving the competitiveness of renewables. This effect is usually weakened or wiped out by high inflation rates, however, combined with public objections. This has occurred in Zimbabwe, for example, and in Ghana (see Box 7).
Duties and taxes also discriminate against sustainable energy technologies in many countries. Renewable energy products such as solar-PV and water-heating systems, and the materials used to manufacture them locally, are often subject to government import duties and taxes. These taxes increase market prices relative to conventional fuels by 40 to 50% in Zimbabwe, for example. Renewable-industry representatives often cite such taxes as a major barrier to their competitiveness with conventional energy suppliers. Removing them can have very positive impacts, as in Ghana where the PV market has increased considerably since the government waived all customs duties and sales taxes on solar panels in early 1998.
The reform of discriminatory price and tax regimes is essential for building fair and sustainable markets for energy-efficient and renewable energy products. But there are also strong social and economic arguments for fiscal policies that deliberately favour these technologies. Four deserve special mention:
· Marginal cost pricing for conventional fuels and electricity has rarely been achieved and maintained in the face of inflation, in any country. Even if it were achieved, energy prices would fail to capture the negative externalities of conventional energy use, especially local and global environmental impacts, budgetary impacts of fossil fuel imports, and national security issues arising from high dependence on imported fuels. Positive fiscal incentives for REEFs can help to correct these failings.· The desire for quick returns by private sector developers may often conflict with longer term national interests. Government or development assistance funding may be needed to buy down the costs and/or provide guaranteed returns on more sustainable, longer term investments. The need for such measures is eloquently illustrated by current attempts to meet the power crisis in Burkina Faso (see Box 8).
· Many well-known market barriers prevent the implementation of even basic cost-effective energy efficiency measures. Grants, tax breaks, and other incentives can do much to overcome these barriers.
· Most REEFs are both novel and small-scale compared to conventional energy-supply systems. Potential investors often avoid them, or demand premium interest rates, because they are seen as high-risk ventures with large transaction costs for small loans. This point is particularly relevant to Africa, where many countries are only just embarking on energy sector reform and regulatory frameworks are far from established. As a result, factors that are crucial to investment decisions and risks, such as clear power purchase agreements (PPAs) for independent producers, are often not formulated, especially for smaller scale renewable options. Grants, guarantees and other measures can be designed solely to address these problems of investment risk without undermining broader unsubsidised market development.
|
Box 7. Economic Tariffs Encourage Energy Efficiency in Ghana The Government of Ghana accepted the principle of long-run marginal cost (LRMC) pricing for domestic electricity in 1987, but by the end of 1995 residential and bulk supply tariffs had only risen to about 50% of LRMC. In May 1997 tariffs were increased by some 300%. This led to a more than threefold increase in the rate of capacitor installations for power factor correction in industrial establishments. The tariff increases were later suspended following a massive public outcry and the rate of capacitor installations dropped. Tariff increases have been so eroded by rising inflation that the average tariff is now only about US$0.03 per kWh. Further tariff hikes of 136% for residential consumers and 54% for bulk power supply have been proposed which, if implemented, are expected to provide strong incentives for energy efficiency improvements in the economy as a whole. |
|
Box 8. Buying into More Sustainable Power Supply Options in Burkina Faso Delays over power sector reform in Burkina Faso have created major uncertainties for potential private investors. This has frozen planning activities and halted capacity expansion, despite growing demand for power on the interconnected grid. During 1998 the state utility (Sonabel) has had to impose power cuts and undertake high-cost emergency investments to avoid serious shortages: 12 MW of diesel units have been installed and construction of a 30 MW oil-fired plant is scheduled to start in early 1999. These investments will meet rising peak load demand for only one year. Meanwhile, studies show that a grid interconnection with either Ghana or the Ivory Coast, providing extra capacity based on hydro power or gas turbines, would be a better solution. Compared to these alternatives, the emergency investments have higher delivered kWh costs over the project lifetime and much higher greenhouse gas and other emissions. But in the absence of a stable post-reform framework and firm rules regarding power purchase agreements, etc., no investor is willing to consider the long-term commitments implicit in the alternatives. If the more sustainable alternatives are to be considered seriously, government or donor funding would be needed (i) to support urgent planning and engineering studies on the interconnection options; and (ii) to buy down the risk of the longer term investments by providing guarantees to potential private investors. |
Many of the reforms noted above are fraught with political difficulties and inter-ministerial struggles (for example, between finance and energy ministries over equipment duty and tax concessions). They call for strong leadership and advocacy from African energy ministries, in some cases with substantial backing from development cooperation agencies. A short list of priority actions by governments, in some cases requiring development assistance, is presented here.
· Start or maintain the drive to achieve marginal-cost pricing for conventional fuels and electricity, allowing for the eroding effects of inflation. Cooperation agencies can assist here by funding supporting studies on rational pricing strategies and policies (for example, life-line tariffs for poorer consumers and small businesses) and by funding regional reviews of energy prices, taxes and subsidies and their impacts on technology adoption, and other relevant issues. These studies could be used to identify both countries where efforts need to be increased and examples of successes that could be replicated.· Review, and apply where appropriate, fiscal incentives designed to nurture and scale up REEF markets (e.g. grants, tax concessions, soft financing, loan guarantees, etc.). These should be carefully designed and targeted to buy down initial costs, risks, and other implementation barriers. Subsidies for running costs are much harder to justify and have often been a principal cause of project failure.
· Set duties and taxes on REEF equipment which are no greater than (and possibly lower than) those paid on conventional energy equipment. Sales tax rebates may be preferable to removing import duties as they provide greater and direct benefit to locally produced energy products and services.
· Loosen controls that prevent operators of off-grid and mini-grid renewable energy systems from charging prices that recover full operating costs. As noted above, recent research has shown a willingness-to-pay that is many times higher than official electricity tariffs in many African countries.
· Provide grants, tax breaks, and other kinds of financial support for emerging renewable energy and energy efficiency technologies, particularly those that are locally manufactured. One successful model has been applied in Ghana, where a small levy on petroleum products is ear marked for financing REEF projects (see Box 9).
Development assistance agencies can help to support all such initiatives by ensuring that cooperation projects complement national policy changes. The creation of artificial markets where duties or taxes are suspended only for project-related activities is not uncommon in the region and should generally be avoided. Development agencies can also leverage their unique relationships with governments to encourage a holistic perspective on the roles and responsibilities of ministries, thus creating opportunities for identifying and rectifying conflicts between REEF and other policies, such as policies aimed at revenue generation. Development assistance would be well spent in support of efforts to find and eliminate examples of such conflicts, such as perverse subsidies and taxes.
|
|