06 August 2012
With its high poverty levels and low degree of industrialization, Africa arguably faces the largest development gap of any region. Beyond the usual misery indices and welfare evaluation metrics, we have fundamental challenges that impede meaningful sustainable development. Energy is an incontrovertible challenge across sub-Saharan Africa (SSA).
Data from the World Bank and International Energy Agency (IEA) on energy poverty does not make for good visuals. Two out of three of SSA households—585 million people—live without electricity. In stark contrast, 99 percent of North African households have electricity supply. Only 14 percent of rural SSA households are linked to the grid. This compares unfavorably with Latin America where 74 percent of rural households are connected to power. The figures mask a more disturbing fact about electricity supply in most SSA countries: a high frequency of blackouts and unstable power supply. The World Bank estimates that SSA households experienced 91 days of blackouts in 2007.
Beyond low electrification, energy poverty extends into inefficient and perilous forms of domestic energy for cooking attributable to a lack of modern fuels and clean cookers. According to IEA reports, more than 80% of SSA households—653 million people—use biomass for cooking, with devastating consequences for people and the environment. In 2009, more than 1.45 million African lives were lost to household pollution caused by inefficient biomass cooking stoves. Fewer people died from malaria.
Business and Household Implications
The most inimical constraints faced by SSA businesses and households revolve around inadequate social infrastructure: electricity, water, communication services, security and transportation. Whereas businesses and households on other continents have come to take these services for granted, for African economic units, they remain prohibitively expensive, inadequate and, in some areas, unavailable.
As a rule, most businesses in my native Nigeria provide a large portion of their own utility services—sometimes pooling with others, but often solo—with dramatic implications for business viability. If you conflate these “extraneous” costs with extant country-specific costs, then the threshold for business viability escalates to deleterious levels.
To illustrate this phenomenon, let’s consider a glass manufacturer I helped raise capital for a few years ago. For confidentiality reasons, let me label it company X. The company, located near a port city in Nigeria, had as primary competitors two ailing local manufacturers and low-cost exporters from South East Asia. On paper, company X should have been very competitive given its seaport location, locally abundant primary raw materials, low real interest rates, and proximity to the domestic market. In reality, its products were uncompetitive with imported products.
Glass manufacturing requires blasting a furnace round the clock, every day of the week. Shutting the furnace abruptly or too quickly could result in very expensive damage. It also requires copious amounts of water for cooling. Since the public grid is epileptic, fluctuates when available and was believed destructive for sensitive equipment, Company X built its own electricity generation capacity. Two plants—each with 150 percent of the required capacity—ran in sequence as the primary energy source. The public grid served as back-up power for none-core equipment. The company also installed a large fuel storage tank and maintained a three-week fuel reserve as a necessary buffer against perennial fuel shortage. The story continues. Company X built a borehole, water treatment, and distribution equipment for the factory. It also required certain industrial chemicals as additives in the production process. These chemicals cost roughly the same in South East Asia, however, shipping costs (in 2010 Nigeria had the second-highest shipping insurance costs on earth) and an obtuse clearing process at the port, spiked the costs. In the final analysis, Company X’s products cost significantly more than its foreign competitors in the domestic market without an appreciable quality advantage. Without tariff protection, its performance outcomes fell below projections.
The Energy Challenge
A similar narrative exists with small businesses and households. These economic units face challenges in energy supply, potable water, transportation, and—in urban areas—security. While the more affluent households have power generators, boreholes, and private security arrangements, poorer households—which happen to comprise the majority—live with dilapidated public utilities or pre-modern forms of energy supply. Increasingly available mobile communications, Internet access, and school enrollment, convolve to increase the need for domestic energy. Today, more than one in two Africans owns a cell phone (ITU data 2011) and the attendant energy requirement for charging handsets. In a similar vein, more than two of three children are enrolled in school and often need lighting to read at night. There are also a multitude of public and private projects across the region that aim to increase computer usage, ownership and Internet access. Increasing urbanization, high urban poverty levels, urban congestion, scarcity and cost of modern fuels have deepened the energy challenge households face for cooking.
Middle-income households and small businesses have either adapted through a bewildering array of sub-optimal solutions or avoided certain modern necessities entirely.
Energy and the Environment
There is a temptation to accept the notion that low environmental standards are permissible for countries at a lower stage of development. Some emerging market nations—notably China—have argued for exemption from environment protection requirements applicable to OECD nations. Their contention is premised on (i) equity and (ii) development necessity. The equity argument is philosophical at its core. In this paradigm, wealthy industrialized nations produced the preponderance of historic pollution, either in absolute terms or on a per capita basis. Wealthier nations should therefore bear a proportional portion of emission reduction. Development necessity is a more tenuous argument, given the state of technology today. It is difficult to subscribe to the nation that large-scale development is incompatible with rigorous environmental standards. I believe the following ingredients can catalyze environmentally friendly development: intelligent engineering and design; sound public policy; pragmatic regulatory frameworks; and, stakeholder education.
Domestic Energy Solutions
Decades of planning, international conventions, and development aid have failed to resolve the energy challenge for SSA. If we borrow a leaf from the telecommunications industry, growth and access to communications occurred when the public sector relegated its role to mostly regulation and opened up the industry to private business. Furthermore, technology enhanced the scalability and unit cost of mobile telephony to overcome constrains earlier faced by fixed telephony infrastructure.
Today, scientists have made significant advancements in affordable and clean domestic energy solutions. American researchers continue to create ingenious designs that use a diverse range of energy sources—solar, biomass, fossil fuels, chemicals, and hydro—that can provide domestic energy at affordable costs. The challenge is commercializing these ideas by providing manufacturing scale, distribution, and logistics competence.
The prospective market is huge. At Viridis Energy, we project 180 to 300 million SSA consumers can purchase capital products that will provide domestic lighting, low electricity and cooking needs. Our vision is to provide affordable, clean retail energy solutions to SSA households and small businesses. We are currently building a pipeline of partnerships with innovative individuals and institutions to provide retail energy solutions. We have commenced relationships with researchers, industrial designers and an academic institution with a view to bringing two innovative retail products to market by first quarter 2013. Our criteria for product development qualification are simple: A product concept must be affordable, environmentally neutral and easy to transport. We are currently building distribution, support and marketing channels in Nigeria, Ghana, and Kenya.
We are optimistic that private sector involvement in investment, and healthy policy contestation and collaboration with governments and non-profits, would secure energy supply without worsening climate change. Market-driven measures can improve lighting, access to power, clean cooking facilities and ultimately lead to a massive reduction in energy poverty.
Matthias Chika Mordi spent over two decades in the finance industry across Africa where he led and co-led the turnaround of three ailing financial institutions. The most notable one is United Bank for Africa PLC, now one of Africa’s largest banking groups.
This article was originally published in the July/August edition of the Diplomatic Courier.