The Tanzanian Electricity Industry Needs Enduring solutions - By Vincent Maposa,
The Tanzanian Electricity Industry Needs Enduring solutions - By Vincent Maposa,
Tanzania, East Africa's second largest economy, is currently experiencing power shortages that are anticipated to restrain the country’s potential for economic growth. The power shortages have resulted in up to 12 hours of daily load shedding, leading the IMF to adjust Tanzania's 2011 economic growth forecasts from 7.2 percent down to 6.0 percent. Furthermore, inquiries into the causes of the prevailing power crisis caused delays to the approval of the Ministry of Energy and Minerals (MEM) 2011/2012 budget, as parliamentarians grappled with contextualizing the scale of the crisis, before granting approval. In response, the MEM has developed an ambitious power plan, whose successful implementation will see Tanzania increase its installed electricity capacity by 65% within 12 months at a cost of US$ 318.0 million. However, legitimate concerns have been raised by stake-holders over the MEM and TANESCO's ability to supply uninterrupted electricity to Tanzania's key economic sectors.
In 2010, Tanzania had an installed electricity generation capacity of 887 MW, but only 660 MW of this capacity was available to the grid. Electricity demand of 879 MW exceeded available capacity by 33.2%. Much of Tanzania's electricity is generated from four hydro-powered stations, but the increased occurrence and intensity of droughts has significantly reduced Tanzania's generating capacity (to between 25 and 45 percent during severe droughts). The implications of droughts on the availability of power were forecasted even before 2004, when the first severe drought occurred. But in the last 7 years the Tanzanian electricity industry has achieved limited success in diversifying its energy feedstock mix. The Songas gas fired power station, with an installed capacity of 190 MW, is the only thermal power station that supplies sizable capacity to the national grid. Approximately 260 MW of emergency power generation contracts have been signed since May 2011, to prevent the power crisis spiraling further out of control.
The role of the private sector in Tanzania’s electricity industry
There are clear indications that the Government of Tanzania (GoT) is not yet ready to relinquish control of TANESCO. The GoT believes that TANESCO’s inefficiencies can be minimized through means other than comprehensive privatization of the state power utility. However, the prevailing power crisis provides irrefutable evidence of planning, implementation and operational ineffectiveness on the part of both the MEM and TANESCO. There are fundamental reasons for the GoT’s opposition to the privatization of TANESCO, such as the protection of public interests. The public sector's role is perceived as that of guarantor of public service equality. Furthermore the electricity industry remains a strategic sector whose activities have significant implications on the performance of the Tanzanian economy.
Questions have been raised concerning the lack of private sector investment into long-term electricity generation capacity. However, the financial viability of private power projects is dependent on the returns, attainable from revenue collection. The current low level of electricity tariffs make the construction of large capacity power plants unfeasible, as evidenced by TANESCO's operating loss of US$ 18 million in 2010, whilst charging an average tariff of 8.6 USc/kWh. The MEM and the Electricity and Water Utilities Regulatory Authority (EWURA), have not published Feed in Tariffs, for the various feedstock available to the electricity industry. Without clear Feed in Tariffs (for all possible feedstock) and well-defined information on allowable deal structures, potentially viable power generation opportunities will not be developed. Uganda, Tanzania’s East African neighbor has already announced highly differentiated, Feed in tariffs (FIT) for its renewable energy which specify capacity caps for technologies, and the relevant tariff setting mechanisms.
Potential Power Projects
Tanzania has a significant amount of natural resources that has facilitated the development of a sound project pipeline, from which a thriving private power generation sector should develop. However, the nature of the project requires a considerable amount of capital in order to be developed.
The planned Mchuchuma Thermal Power Plant should have a capacity of between 400MW-600MW. In March 2011, China’s Sichuan Hongda Co Ltd won the bid to develop the power plant at an estimated cost of US$ 3.0 billion. The deal also involves the mining of coal at Mchuchuma, as well as an iron ore mine at Liganga. Though the intricacies of the power purchase agreement (PPA), and other modalities have not been confirmed, it is widely believed that Sichuan Hongda will become Tanzania’s largest independent power producer (IPP). This highlights a noticeable trend within resource-rich African countries, of allowing mining firms to develop power for their own use and sell the excess power to the national grid. Thus, mining sector development could be the key to averting future electricity crises.
Several other power projects, such as the Stiegler’s Gorge Power project, also exist in Tanzania’s project pipeline. But the major constraint to their development is a lack of financing. If fully developed, the Stiegler’s Gorge project should be able to provide 2,100 MW of relatively inexpensive electricity to the national grid. Several investors have expressed interest in Tanzania’s power sector, but as yet no concrete development has resulted from this interest.
The lack of follow-through from financiers and developers, who initially show interest in projects, has been blamed on a lack of power sector reforms that would allow for the viable operation of IPPs, particularly the upward adjustment of electricity tariffs to profitable levels. Without the ability to self-finance capacity additions, and faced with imminent power shortages that could derail Tanzania’s economy, the GoT is left with no option but to raise tariffs in order to create an enabling environment for IPPs. In the absence of a private Independent Systems and Markets Operator, grid strengthening maintenance and repair remains the function of TANESCO. The US$ 479 Million Iringa-Shinyanga Project, which entails the construction of a 400 kV transmission line, is expected to reinforce the transmission grid and catalyse private power generation.
Electricity prices in Tanzania
The Energy and Water Utilities Regulatory Act gives EWURA the mandate to issue, renew and cancel licenses of companies participating in the electricity industry. EWURA is also responsible for economic and technical regulation of the Tanzanian electricity industry. Prior to this year, Tanzania’s last electricity tariff adjustments occurred in 2008, so generators of power had to soak up increasing costs borne out of inflation or feedstock price rises. In the past, it was extremely difficult for Electricity and Water Utilities Regulatory Authority (EWURA) to allow TANESCO to increase tariffs to profitable levels. The GoT tried to ensure that electricity was affordable to domestic and commercial (non-industrial) end users, who together accounted for 63% of total electricity consumption. The few industrial consumers of electricity who could have afforded higher tariffs accounted for less than 20% of overall consumption, so an across-the-board increase in tariffs would have a pronounced affect on Tanzania’s domestic and commercial end users. Attempts at cross-subsidization also had minimal effects on TANESCO’s balance sheet.
In recent times, significant growth within the mining industry has resulted in increased electricity demand from the industrial sector. Industrial sector entities, that previously generated their own power, are intent on growing their operations and require the availability of electricity to enable such growth. The stated willingness of the industrial sector to pay higher, but reasonable, tariffs has prompted EWURA to revisit its tariff determination policies. In November 2010, TANESCO sent a Multi-Year Tariff Order Application to EWURA, requesting average tariff increases of about 26% per annum from 2011 to 2013. In January 2011, EWURA granted TANESCO a 21.3% increase, signifying intent by Tanzania’s policy makers to minimise the effect of tariff rises on the industry’s operations and growth. In general, tariffs are expected to continue increasing in order to; cover TANESCO’s losses, pay for emergency power generation and fund capacity expansion, either directly or indirectly.
Conclusions
The provision of emergency power by companies, such as Aggreko, will mask some of the effects of the power crisis in Tanzania in the short to medium term. However, industry participants will be keen to see the direction government policy takes, in order to come up with long-lasting solutions to Tanzania’s electricity situation.
Vincent Maposa, Energy and Power Systems Industry Analyst at Frost & Sullivan
