In this column called “The Indicator”, we will be taking an economic or financial statistic from East Arica and breaking it down into bite-sized nuggets of knowledge for investors.
This month’s indicator figure is 14.8.
14.8 US cents is the average cost for one kilowatt hour (kWh) of electricity for East African domestic and industrial consumers.
How much is one kilowatt of electricity?
The average iPhone or Android can be powered for an entire year with 1 kWh and in Sub-Saharan Africa, excluding South Africa, energy consumption per capita is estimated at 150 kWh.
How do EAC electricity prices compare to each other and to other countries?
With an average price across the EAC of 14.8 US cents we find that Burundi has the lowest electric tariffs to consumers and Rwanda has the highest. In comparison to other African nations, Nigeria has recently raised the electricity tariff to be equal to 14 US cents per kWh.
In wealthier countries the electricity price is mixed. The average cost in the United States is slightly lower at 12 US cents per kWh. In Japan the average cost of a kWh of electricity is 26 cents and in Australia the cost is 29 cents using most recently available data.
Why does energy cost more in some countries than others?
The cost of capital in a country along with type of the electricity infrastructure affects the cost.
The riskier the global capital markets view a country the more expensive the financing will be for its energy infrastructure. An ‘AAA’ rated country with bankable buyers of electricity can borrow at much lower rates than power generation organizations that must pass the costs of borrowing on to consumers.
Overall, a country that uses coal and hydropower offers among the least expensive energy to consumers and countries that rely upon liquid petroleum for energy generation can be seen as being among the most expensive.
If a country does not have internal energy resources to tap into, it will need to buy resources from the global energy markets, a process with its own costs and additional challenges. Because of this, higher energy prices are common to island nations.
On the transmission and distribution side, the older the equipment, infrastructure and distribution systems the higher the losses and maintenance costs.
Further variation in cost can be explained by the use of subsidies to spur economic growth. This is likely the case in Burundi and also with other countries offering low tariff levels.
What energy resources does EAC have and how does it affect costs?
Hydropower has risen to prominence in Tanzania and Uganda. This low cost energy generation method is excelling but suffers from a lack of distribution infrastructure. Once this is strengthened hydropower energy can better reach the highly dispersed population.
Tanzania has been endowed with large natural gas reserves, as much as 53.5 trillion cubic feet and featured in a prior Indicator column. Natural gas can be expensive to extract, but highly cost efficient once operation is underway.
Kenya has managed to lower energy costs to consumers due to long-term investments in developing its geothermal energy production. This stable source of renewable energy gives Kenyan consumers more consistent access to electricity.
The EAC countries have high solar energy potential. A significant debate involves land use for solar versus use of land for agricultural or mining purposes. Biomass energy is another option but its effectiveness is intensified the closer cultivation is to generation to avoid transportation costs.
Will energy get cheaper or more expensive in East Africa?
That depends on resources and the role of government in economic incentives.
In Tanzania energy costs are projected to rise in the short term slightly, but the addition of natural gas will provide the market with more energy so long-term prices are anticipated to stabilize or lower slightly.
In Kenya geothermal developments are anticipated to reduce costs slightly as energy production grows to scale.
Rwanda’s cost is higher than average but lower for key industries to incentivize investment and the growth of critical industries. For consumers, the price is anticipated to remain stable or possibly rise.
Energy prices in Uganda are scheduled to reduce to 20 US cents per kwh for consumers. Commercial and industrial users anticipate similar reductions in their tariffs. Similar to Rwanda, Uganda’s Energy Regulatory Authority justified these reductions by citing the recent economic improvements and progress.
What effect does cheaper energy have on an economy?
Energy is a critical component of any economy, and especially in developing economies.
Like finance, the health of the energy sector directly affects many segments of the economy: agriculture, manufacturing, and services sectors.
Any large jump in energy costs will affect those three parts of the economy by raising their internal production costs which are usually passed onto the consumer.
A reduction in energy prices makes input costs to industrial production cheaper allowing for lower prices and increased affordability which in turn increases revenue and continued business, and macroeconomic growth.
How can I learn more?
This month’s indicator data was sourced from several sources including:
The East African Community Facts and Figures Report (2015) http://eac.int/
About the authors:
David L. Ross is Managing Director of Statera Capital and US Ambassador to the Open University of Tanzania active in growing companies in Eastern and Southern Africa through primary investment, investment advisory, strategic partnerships, and executive education. Connect on LinkedIn at https://tz.linkedin.com/in/davidlross1 or at [email protected]