Towards an efficient, sustainable energy sector

Did Electricity Generation Company (Egenco) and Aggreko escape regulatory scrutiny in coming up with their wholesale prices?

The exercise of market power, harmful to public interest, can be exacerbated by generation level horizontal integration. What is the nature of the business relationship between Egenco and Aggreko?

Any mounting bills due to possible market power exercising for  which Electricity Supply Corporation of Malawi (Escom) may ask for a bailout by government are ultimately a burden on the taxpayer and, therefore, harmful to public interest.

Malawi Energy Regulatory Authority (Mera) must loathe dejure or defacto horizontal integration of generation companies. It must, on the contrary, aim for horizontal deconcentration.

Recently, there was much hype about commencing generation of electricity from coal at Kammwamba in Neno District. At what stage are we with Kammwamba? Whatever the case is, government and Mera must ensure that it is rolled out as a truly independent power producer.

I commiserated with a colleague who, on account of her conscience and professional ethics, opted to rather resign than acquiesce in a deal conspicuously devoid of fiscal probity. The episode was the height of a collusive malevolent interference by officials in government and board in the day-to-day management of Escom.

Damaging ethnocentricity and wanton abuse of procurement processes lingered unabated. The overarching lesson from what happened at Escom, and most probably at other State-owned companies in the energy sector must be that it should never be allowed to happen again.

The company’s management team must still be breathing a sigh of relief following the appointment of a more professional board. With guidance from the latter, the former can now focus on substantive issues such as the introduction of an independent power wholesaler currently a topical issue. 

Whither separate dingle buyer

It is generally agreed that the success of electricity industry restructuring relies on competitive generation and a robust transmission system. Due to valuation difficulties and the fear of giving away a national asset for a song, many countries have opted to keep the transmission grid State-owned. But how should it be managed in a liberalised power industry?

The weight of opinion appears to be for a single buyer procuring power from competing generation companies and hauling it to distribution companies over the transmission grid. The single buyer model has a variety of organisational forms.

But it is difficult to see swaying advantages for creating an entirely different company as single buyer. Establishment of such a quango can only have the effect of creating unnecessary expenses.

Secondly the operational focus of a separated single buyer is likely to be narrowed to financial transactions and not holistic to include critical issues of grid management, which currently fall under Escom. Such a dichotomy may be demotivating to employees. More so if the recruitment of management and key employees was on considerations other than merit.

The most viable option for the single buyer model  is the designation of the Escom’s Transmission Strategic Business Unit as single buyer. Economies of scale can be maintained and staff morale can be boosted as wrong perceptions accompanying the other option can be avoided. 

A transitional period should be allowed during which the cost-reflecting pricing equilibrium between the Transmission Strategic Business Unit as single buyer and Escom as the distributing company can be established. Teething problems and other pertinent issues can be identified and resolved. Sale and purchase transactions can initially be based on shadow prices anchored on electricity tariffs approved by Mera.

After transition, The Transmission Strategic Business Unit can now become a fully incorporated  single buyer preferably with another name, taking over over all the assets, liabilities and of course the trained and experienced staff of the former Strategic Business Unit.

Unbundling distribution and other services

Yet another option is for the role of single buyer to be assumed by Escom and turn our attention further afield. The Distribution Strategic Business Unit can be unbundled into three or four regional distribution strategic business units which, after a transitional period, can be incorporated.

Our city councils and large municipalities can join the fray as distributors for their cities and towns. Without much ado, several distribution companies can emerge in our power market.

The flip side of the active single buyer model is that it assumes all the market, financial and regulatory risks. Poor payment discipline can make it a contingent liability on public coffers. But a single buyer can have a specialised department to be solely concerned with collections from bulk customers and timely payment to the power generation companies.

The department can engage in invoice discounting, trade debt insurance and other initiatives designed to improve the debt to sales ratio. We can learn from what others have done, but blind copying like blind following can be dangerous.

The scope for reforming our power sector is expansive. In time, a number of distribution companies and large customers may be able to buy directly from competing Independent Power Producers (IPPs) offering electricity from different sources.

Escom’s role may become more of coordinating power procurement from the different generation companies and more concerned with optimal power aggregation and merit dispatching. Escom’s remit of ensuring system stability will become more accentuated.

Interconnecting with neighbouring countries

Malawi still stands alone in the regional power market. As interconnections loom on the horizon, we should be on our guard. The take and pay clauses in the bilateral agreements should be realistic and we should insist on interconnectors being highways allowing for power flow in either direction.

The lessons in the very initial negotiations for a power purchase agreement between Escom and Hydro-Cahora Basa, then privately owned and headquartered in Lisbon, which purported to preclude us from participating  in  the regional power pool, should not be lost.

Conclusion

Lack of political will has become almost a mantra yet it is only government commitment that can ensure prioritisation of the energy sector and allocation of requisite funds.

In his discourse on mindset change, Vice-President Saulos Chilima quoted Stephen Covey that “the key is not to prioritise what is on your schedule but rather schedule your priorities”.

But the words that hold promise are from the State of the Nation Address delivered in Parliament by President Lazarus Chakwera: “Our intervention to cut the power deficit will be to work with the Mozambican authorities to ensure that the deadline for connecting to their electricity grid in 2022 is not missed. Once this is done, Malawi will have access to the Southern Africa Power Pool.

“In addition, we will resume construction of the country’s 60 megawatts  [MW] solar power project and secure a strategic sponsor for the 350MW Mpatamanga Hydro Power Project.

‘“We are also concluding IPPs agreements, which will require new leadership at Escom to facilitate such reforms as new tariff structures that reflect market realities. We will, in addition, revisit many of the existing energy contracts and petroleum production sharing agreements in line with the law, ending those that are unsustainable and signed under questionable terms during the previous administration.” n

*Kandi Padambo is a former chief executive officer of Escom