A case for sustainable energy exchange for West Africa

The absence of efficient power exchange in West Africa, experts say combats efforts to reduce the energy poverty that sees over 600 million people go to bed every night without power in sub-Saharan Africa.

The West Africa Power Pool (WAPP) is always cited as the sub continent’s closest dream to an energy exchange but even that arrangement suffers poor policy framework and full implementation has not taken off due to teething challenges mostly ineffectual transmission lines and distribution network.

Callixte Kambanda, chief infrastructure specialist at The Infrastructure Consortium for Africa states that the updated WAPP 2011 Master Plan foresees a number of projects that will help achieve the adequate energy trade (which includes a renewable energy proportion of 10 percent) by 2020 but the power trade in WAPP is still under bilateral or multilateral agreements and energy trade through WAPP has not yet started.

However the reverse is the case in Europe where there are more than twenty different energy exchanges. The most liquid exchanges are the European Energy Exchange (EEX) in Leipzig, Germany and Nord Pool Spot/Nasdeq Omx Commodities in Oslo, Norway.

Europe’s energy markets are so developed that within an energy exchange are the spot market, for short-term trading and the forward market, where the physical delivery of electricity or gas takes place at a future date.

The significance of energy trading has grown rapidly in Europe as a result of increased energy consumption as well as market integration. This is driven basically because countries in the region as it is true of others are aware they cannot cover its energy needs from its own sources today. Energy trading offers the possibility to ensure the needed supply of energy and protects from supply shortages and price fluctuations.

A recent KPMG report on sub-Saharan power outlook for 2016 states that the only available means of energy trade in sub-Saharan Africa is through regional power pools utilising bilateral trade agreements between countries. It observed that there are currently four Power Pools, namely the Southern African Power Pool (SAPP), West African Power Pool (WAPP), Central African Power Pool (CAPP) and the Eastern Africa Power Pool (EAPP).

“These are all in various stages of development with the Southern African Power Pool being the most advanced. The main challenges in setting up the Power Pools to a level of efficient operation include conflicting national policies and a need for significant transmission infrastructure investment in order to exchange power over borders. Currently, only minimal trading is done through the Power Pools, with less than 1 percent power traded in CAPP and EAPP and approximately 7 percent traded in SAPP and WAPP,” states the KPMG report.

Towards a sustainable energy exchange – the European model

A study of the operations of energy exchanges in Europe indicate that national policies were aligned through the structure of the European Union and the concept of open markets. Also significant transmission infrastructure investment was attracted through innovative project financing schemes and a competitive free market.

Swedish-owned Vattenfall, one of Europe’s largest generators of electricity clarifies the operation of the energy exchange stressing that the hub of the electricity market and the market price for electricity is determined on the power exchange spot market. Players on the spot market are producers, retailers and traders as well as large end users, mostly industrial customers.

Most of the producers sell their electricity on the spot market, where short-term trade in electrical power is done through day-ahead auctions. During the trading process, electricity producers who want to sell power to the spot market must send their sale offers for the amount of electricity they are prepared to deliver at various prices during the 24 hours of the following day to the power exchange by 12 noon on the day before the power is delivered to the grid.

Electricity retailers must send their purchase orders (corresponding to the amount of electricity they believe customers will consume during the 24 hours of the following day), and the amount they are willing to pay. The market price is then used by electricity retail companies to set the price of electricity for end consumers (the “electricity retail price”).

The market price may vary somewhat between different market regions, depending on physical transmission limitations that sometimes occur and the generation mix within each region.

The market price is determined by supply and demand, corresponding to the marginal cost of the last production unit that is required to meet demand in each hour. In Europe, this is normally on at par with the cost of producing electricity with coal or natural gas.

Unlike most other commodities, electricity cannot be stored. It is produced at the exact moment of demand. Therefore all the factors that influence supply and demand have an immediate impact on the price on the spot market.

It states that some factors that influence the price of electricity include fuel prices – for coal, gas, biomass and oil – and the prices for CO2emission certificates. Wind and weather, also play a role as they determine how much electricity is generated by wind turbines and hydroelectric stations and the weather also influences consumer behaviour.

Other factors include the capacities of power plants, their current technical condition and planned overhauls or unplanned outages, the state of the general economy influences demand. Also holidays are factored in the arrangement.

Electricity Pricing for the end user is composed where household or business is comprised of three part – price for power production, grid price, taxes and fees (renewable energy surcharge, energy tax, VAT, etc).

ISAAC ANYAOGU