Sustained Investment in Sub-Saharan Africa’s Power Hinges on Local and Regional Distribution Companies


Refocusing on distribution sector performance

While central governments’ efforts in sub-Saharan Africa — with the support of the donor community — often focus on reducing risks to investment in new generation, the long-term financial and political sustainability of increased energy access depends equally on the success of local distribution companies. As noted in Mark Tomlinson’s earlier blog post, achieving the Sustainable Development Goals (SDGs) for electricity access will require some $800 billion in investment from now until 2030. Absent this, overall economic growth could slow by as much as 5 percent per annum.

As energy reforms continue across the sub-continent, policymakers and donors, guided by the SDGs, must now also improve the local policies, regulations, and institutional capacity critical to the success of electricity distribution. Small or large grid-connected or mini-grid distribution companies fulfill the vital role of collecting revenue from residential and commercial end users in exchange for providing electricity. Ultimately, it is the cash flows from payments to distribution companies that underwrite any investment in energy security and supply, including additional generation capacity.

This post identifies several key issues by first explaining the role of distribution companies in energy markets and then suggesting initial approaches to improving their performance. Notably, the ways we understand and support improved service delivery and revenue collection in the electricity sector are common to other utility-type service sectors.

Why distribution is critical: Follow the money

In modern, open energy markets, distribution companies are responsible for successfully delivering electricity to residential and commercial end users at the point of sale, in exchange for payment. Like the grocery stores that sell food or the fueling stations that sell gasoline, distribution companies represent the retail sector collecting revenue that is then passed back up through the value chain to private generators and transmission system operators, in the case of grid systems. In either case, if end users are not paying the full cost of the electricity, just as if we do not pay the full cost of the food in our grocery stores, investment in infrastructure falls and upstream producers simply stop producing.

End-user orientation is not new, but perhaps neglected

Improving energy access through modern and innovative distribution is a not new idea. In places where conventional, large-scale infrastructure approaches are either failing to reach rural populations or to reliably serve customers in cities, “beyond the grid” distribution companies are filling the gap. The most prominent examples are mini- and micro-grid developments, as well as distributed generation and other energy solutions at the level of individual households and small commercial enterprises. As the costs of distributed generation have fallen, particularly for systems based on hybrid PV solar and storage, independent distributors can effectively organize individual demand into sub-markets capable of financing construction, operation, and maintenance for local power. In Kenya and Tanzania, for example, customer-oriented mini-grid systems that integrate mobile payment technologies are leapfrogging grid extension organized by the central government.

At the same time, to the extent that policymakers and donors focus on large-scale investment in new grid-connected generation plants and national transmission systems, they may be neglecting the distribution sector’s ability to deliver electricity to, and collect revenue from, end users. Ongoing losses from theft and poor equipment plague the sector across sub-Saharan Africa, for example. Distribution companies also lack local capacity for transparent governance, sound financial management, and technical know-how necessary to reduce those losses from theft and waste. As a result of these common challenges, reform efforts at the central government level — often led by the donor community — have been largely unable to increase electricity access on the back of locally-controlled and managed companies that pass revenue back up through the power markets.

Not all retail actors are the same

To fully understand the challenge of improving distribution company performance, it is important to understand the economics of utility services overall. Energy supply, like water supply, wastewater treatment, and solid waste management, represent both public services and private goods. They are public services because they require large capital investments and contribute to shared economic growth. Cheap electricity enables households, small businesses, and large industrial enterprises to grow, trash collection and disposal reduces disease and improves qualify of life, and access to water coupled with wastewater treatment speaks for itself — all shared benefits of a local utility company’s work. Electric distribution companies are also retail sellers of a private good because they exchange payments for delivery of a scarce product, e.g. kilowatt-hours, to individual buyers. Unlike grocery stores or gas stations, these markets are what economist call “natural monopolies.” Natural monopolies function optimally when retailers are able to control enough of the end-user market to pay for the very high upstream capital and maintenance costs necessary to produce and deliver the final product.

Next steps: Identify the challenge and refocus on the retail sector

In sub-Saharan Africa, like anywhere else, distribution companies are tasked with arguably the most difficult role in power markets: collecting revenue to provide steady cash flows into the market on the one hand, and providing reliable, often constant, electricity in a timely fashion to customers on the other. In Nigeria today, for example, recently privatized distribution companies are simultaneously loathed for their bad performance while being expected to modernize under some of the most difficult socioeconomic circumstances imaginable. Regardless, they are the last entity between power supply and consumption, the final “power off-taker” in the parlance of energy professionals. Successfully creating, maintaining, and improving retail power services is therefore critical to broader market performance.

Oft-cited challenges at the distribution level include: political manipulation of wholesale power supply, which undermines distributors’ ability to provide power as promised to local customers; local entities’ inability to fully account for costs of personnel and the purchase, installation, and maintenance of equipment for distribution systems; collusion between collectors and customers to steal revenue; and broader social perceptions of electricity supply as a public right, which overlook the costs of energy as a private good.

In light of the tremendous demand for power in sub-Saharan Africa, policymakers, regulators, donors, and even private investors need to support more interventions on behalf of distribution that result in true payment-for-service models. Among others, these should include:

1. Capacity building and training to improve customer relations and increase professionalism of “front-line” staff

The experiences of mini-grid companies provide examples of successful businesses that focus on customer needs, installing “pay-as-you-go” collection systems and streamlining maintenance and operations. The same practical, business-minded management should drive the performance of distribution companies buying and selling power to customers on the grid. Front-line personnel who interact with customers need professional and technical training to practice quality service provision to those buying their power. Controlled studies in Bihar, India, led by the Energy Policy Institute at the University of Chicago (EPIC), indicate that under the right incentive schemes, front-line staff will work with end users to reduce theft and increase service provision, for which customers are willing to pay higher tariffs.

2. Asset planning and acquisition combined with operational capabilities

To perform effectively as service companies, distributors need the ability to identify asset needs, pay for acquisition and installation, and successfully operate those assets. This includes inverters, meters, poles and wires, data collection and management systems, and truck fleets, among others. The assets plans in turn dictate the skill requirements for new personnel to operate them. Both asset and personnel/operational planning need to be driven by a commitment to understand and deliver what the customer wants.

3. Financial planning and management expertise

Distribution companies also support delivery on national and sub-national policies directed at economically disadvantaged populations. These usually take the form of “lifeline” tariffs for targeted classes of end users. In the absence of rigorous financial planning and accounting practices, however, the need to recover full costs and deliver on social objectives can result in hidden cross-subsidies that exacerbate inequities.

As we energy development professionals continue our work in sub-Saharan Africa, we must pay careful attention to the health and strength of distribution companies and the retail sector. They are too often overlooked in the quest for more generation and transmission capacity, but are responsible for arguably the most important part of the power market value chain. 

Michael Ashford is the director of Chemonics’ Water, Energy, and Sustainable Cities Practice.

Posted in: Sustainable Energy
Leave a Comment

What About Unpaid Care?


Around the world, mothers, wives, daughters, and sisters support the resiliency of their communities in the face of adversity and inequality. As a member of the business development team in the East and Southern Africa Division at Chemonics, I’m exposed to the cross-cutting interventions designed to support women throughout our work across all technical areas. There is now a debate within the development community that reducing and redistributing unpaid care work (UCW) is a key factor to...

Read More »

Q&A with Christy Sisko on the Revenue Capital Approach


This post is the first of a two-part blog series, originally featured on Microlinks, showcasing a question and answer session with Christy Sisko, technical manager for Asia and Middle East Economic Growth Best Practices at Chemonics, on the revenue capital approach and its revolutionary effect on the small and medium enterprise (SME) financing world. This post is a follow-up piece to Microlinks' April 25 event, Revenue Capital: Reducing, Rewarding, and Realigning Risk, which explored key...

Read More »

Having Fun Learning: Team Development Games that for Some Reason Work Around the World


In the late ‘80s, I set off for Nigeria to prepare a team of trainers who would eventually facilitate week-long courses on supervisory skills for family planning supervisors under the USAID-funded Family Health Services project. I had never been to Nigeria, or anywhere else in Africa for that matter. By that time, I had a fair amount of training and facilitation experience, but mostly in Latin America. What would it be like in Nigeria? Could I use the same training games that I had used...

Posted in: Chemonics
Read More »

To Bring On Partners, Know Your Pitch


In development, we are constantly improving our ability to do meaningful work and becoming more demand-driven in our approaches. While some improvements are disruptive technologies like digital financial services, others are simple changes to the way we operate. One of the topics from the recent SEEP Women’s Economic Empowerment Global Learning Forum that really resonated with me and has been utilized with great success on our USAID Colombia Rural Finance Initiative (RFI) is the concept of...

Read More »

From Entry-Level to Executive at Chemonics


I’ve had the honor of hiring a lot of people during my career at Chemonics. In the last few years while serving as senior vice president for our West and Central Africa and Haiti business unit, and now as senior vice president for Human Resources, I’ve made it a practice to have the final interview with every entry-level staffer my team hires. I do this not only because I think it’s important to meet potential colleagues, but also because I have an important message that I want to communicate to...

Posted in: Chemonics
Read More »

Politics Matter: How Implementers Can Do Development Differently


It makes intuitive sense at many levels: power and politics matter. We know this to be true in our own hometowns, organizations, or governments: different formal and informal alliances, power imbalances, and motivators — stemming from kinship or affinity, party politics, economic interests, cultural ties, race and gender relations, and other informal systems — determine a great deal of why people act as they do around otherwise stolid matters related to achieving an institution’s...

Read More »

3 Questions with Hanife Limani: Opening Doors in Kosovo


Hanife Limani is the monitoring and evaluation, citizen engagement, and communications manager for the USAID Partnerships for Development project in Kosovo. Why is social inclusion important for the development of Kosovo? Kosovo declared its independence in 2008 and as a new country has made significant progress towards consolidating its institutions. Social inclusion is a particularly important element to consider during the development and consolidation of the new country’s institutions and...

Read More »

3 Misconceptions that Limit Progress for Refugee Communities


By Sanida Kikic and Nicholas Sabato As the world witnesses the largest displacement of individuals in human history, we must advocate for these communities, especially on World Refugee Day. But while most of us sympathize with the plight of refugees, there are three common misconceptions about today’s refugee crisis that impact sustainable refugee empowerment. For those looking to support refugees in rebuilding their futures, it is critical to understand and address these misconceptions so that...

Posted in: Strategic Solutions
Read More »

3 Questions with Maria Olanda Bata: Withstanding Storms in Mozambique


Maria Olanda Bata is the chief of party of the USAID Mozambique Coastal Cities Adaptation Project (CCAP) and a food security, early warning, and disaster risk reduction specialist. CCAP works with vulnerable coastal cities in Mozambique to improve their resilience to climate variations and extreme weather. What are the biggest risks if cities in Mozambique do not become more resilient? It would be a catastrophe. Right now, we’re starting to see the impact of extreme climate events, and we know they...

Read More »

3 Questions with Christelle Beyers: Bringing Low Emissions and High Rewards to South Africa


Christelle Beyers is the project development specialist for the USAID South Africa Low Emissions Development project (SA-LED), which provides technical assistance in support of South Africa’s transition to a low-carbon economy. SA-LED supports the design and implementation of municipal low-emissions development (LED) projects. What does a successful project life cycle look like and what obstacles do municipalities face during implementation? During the project life cycle, we look at two main...

Read More »

The Push and Pull of Power Reform in Sub-Saharan Africa


Private investment in sub-Saharan Africa’s power sector is critical to regional economic growth. Achieving the Sustainable Development Goals (SDGs) for electricity access will require some $800 billion in investment from now until 2030. Taking no action will thwart economic growth by 2-5 percent per annum. Reducing the risks of investment is therefore key to unlocking private capital flows. The public sector plays a critical role in reducing those risks. For example, in Nigeria, the central bank...

Posted in: Sustainable Energy
Read More »

Climate-Smart Agriculture Means Changing Policies, Not Just Changing Techniques


By Lyndsey Romick and Lark Walters By 2030, global food producers will need to feed an estimated 8.3 billion people, reflecting an increase of about 1 billion from the world’s population in 2015. Nearly one-third of the world’s current population, or approximately 2.5 billion people, depend on agriculture for their livelihood. However, increasingly frequent severe weather events caused by climate change are threatening food production. A 2015 study on extreme weather and global food system...

Read More »

Improving Nutrition Doesn’t Necessarily Mean Introducing a New Crop


The livelihoods of rural households in Tajikistan are highly dependent on agricultural production, yet farmers are not able to produce enough food to meet their own needs. It is sadly ironic that in an area dominated by farming, malnutrition among children is common and also causes many health problems for women of reproductive age. Farmers in Khatlon Province invest a significant amount of their time and money in agriculture, yet they lack knowledge on how to increase production. To improve the...

Read More »

New Report Synthesizes Evidence on Climate Risks to Health in Africa


This blog post originally appeared on Climatelinks. Thanks to aggressive interventions in recent decades, remarkable progress has been made across sub-Saharan Africa in reducing child mortality, malaria deaths, and stunting rates, and improving overall health. But these gains may be lost as climate and weather variability put more people at risk of infection and death from climate-sensitive diseases. In East Africa alone, for example, malaria infection rates are expected to rise with 45 to 65...

Read More »

3 Questions with Michele Piercey: Conflict and Exclusion as the Front Door for Extremist Recruitment


Michele Piercey is the director of Chemonics’ Peace, Stability, and Transition Practice. She is an international development practitioner with 17 years of experience, including 10 years working on political transition and countering violent extremism (CVE) programs in Iraq, Afghanistan, and Tunisia. In February, a famine was declared in South Sudan. And in 2016, the media frequently linked the conflict in Syria to the country’s extreme drought. What do we know about the complex relationship...

Read More »

3 Questions with Tracy Shanks: Lighting the Investment Spark


Tracy Shanks is a director in Chemonics’ West Africa and Haiti Division and a former senior vice president of the Afghanistan and South America divisions. She has 18 years of experience in private sector development, trade, and investments, and has served as the chief of party for three USAID projects in the economic growth sector. You’ve had experience stimulating investment in different countries, from Paraguay to Palestine. What are some ways that you’ve attracted investors in your career? I’ve ...

Read More »

Transforming Public Finance — A Proven and Scalable Information Systems Solution in Haiti


“Reducing corruption stands at the heart of the recently established Sustainable Development Goals (SDGs).” The World Bank made this statement in its November 2016 brief on anti-corruption, and the concept doesn’t necessarily come as a surprise. Corruption, inefficiency, and lack of transparency often hurt vulnerable groups the most, putting up barriers and distorting access to resources and services. Blockchain technology has captured the imagination and vision of development practitioners...

Read More »

Giving a Voice to the Little Guy: Advocacy in Agriculture


It’s no secret that agriculture is an important sector in the field of international development. The presence of farming, agricultural technologies, and agriculture policy is a certainty in nearly every country around the globe. Within this sector there are some 500 million smallholder farms worldwide; more than 2 billion people depend on them for their livelihoods. These small farms produce about 80 percent of the food consumed in Asia and sub-Saharan Africa. It is important to help these...

Read More »

Promoting Secured Transaction Reform in the Middle East and North Africa


Modern secured transaction laws increase the availability of credit and reduce its cost, by ensuring that lenders can collect debt and enforce their rights in movable property collateral through a timely and inexpensive process. From a global perspective, the Middle East and North Africa (MENA) region is significantly behind in pursuing and operationalizing reforms to increase access to and availability of secured credit. As seen in the table below with data from the latest World Bank Enterprise...

Read More »