Namibia offers lessons as BPC gets more billions
Mbongeni Mguni | Monday March 11, 2024 12:13
Under the original Transitional National Development Plan covering the financial years between April 2023 and March 31, 2025, the Botswana Power Corporation (BPC) was allocated P1 billion in support from government.
The Corporation was due to receive the bulk of the P2.68 billion approved by Parliament under the TNDP for “electricity generation transmission and distribution,” a description that includes tariff subsidies and support to import electricity as well as rural electrification, grid extension and the installation of renewable energy.
In February, Finance ministry documents emerged indicating that this allocation had been increased to P4.13 billion, with the BPC now set to receive P1.5 billion in the 2024–2025 financial year which begins on April 1.
The Corporation has received billions of pula in direct help from government over the years, support that helps it pay its loans for generation projects such as Morupule B. However, the funds are chiefly to cover the gap between the BPC’s costs of importing or producing electricity and the levels at which it sells this to different customers in the economy.
According to the BPC’s own numbers, between March 2019 and March 2022, the government paid out P2.4 billion in tariff subsidies to the Corporation to help cover the gap.
The support continued despite the competing priorities posed by COVID-19 and the pledge by both the Corporation and government to gradually transition towards cost-reflective tariffs.
Why cost-reflective?
According to the last available figures, the BPC’s average costs per kilowatt hour are presently 30 thebe below the break-even point. This is despite tariff increases of 10%, 22% and three percent in April 2018, April 2020, and April 2021 respectively.
The BPC, government and even industry agree that tariffs need to be cost-reflective, for several reasons. Cost-reflective tariffs support the entry of the private sector into electricity generation, thus creating a competitive industry that besides spreading access, also heightens product and service innovation. Such tariffs would also enable the BPC to stand on its own, weaning it off the public purse and enabling it to evolve into strictly a producer of electricity, allowing for the unbundling of the industry, which is something government has looked into before.
The tariff challenge for government, which ultimately approves adjustments, is to balance between the BPC’s economics and the greater public good, especially as the national priority is to spread electrification and its benefits such as enterprise development, job creation and simple dignity.
In public hearings held by the Botswana Energy Regulatory Authority (BERA) in August 2022, the BPC asked for two consecutive tariff increases of five percent each for the 2022–2023 and 2023–2024 financial years. None were granted and the rising regional electricity crunch as well as fuel price hikes during that period, mean the BPC’s operating costs have been rising.
The Namibian experienceLast week, Namibian energy officials took their local counterparts through how that country has been able to not only reach cost-reflective tariffs but also ensure a competitive energy sector with high private sector investment and job creation.
Namibia has a similar sized population to Botswana and a comparable peak electricity consumption of about 640MW.
Speaking at an energy regulators’ conference in Gaborone recently, the Electricity Control Board of Namibia’s general manager of economic regulation, Pinehas Mutota, said the coastal nation had followed principles set years ago by SADC.
After many previous attempts, SADC energy ministers in 2015 resolved that the regional organisation’s member states should move towards cost-reflective tariffs by at least 2019. After that, the Namibian government made commitments at Cabinet and policy level.
“We did a national tariff study which was then seen as a cost of service study that gave an indication to what methodology could be used because this is an important factor,” he said.
“You might find that in some years the utility will not recover all the revenue, but within the methodology, we have a revenue reconciliation or a clearing account.
“As long as there’s an understanding between the regulator and the industry on how this will be sorted, we are on the right path.”
According to the energy regulation expert, his country’s electricity utility, Nampower, has not received any operational external subsidy since the cost-reflective tariffs kicked in and it can meet its financial obligations.
A possible plan
Economic brains in the country have long urged government to end its blanket tariff subsidies for electricity. The Bank of Botswana in particular has frequently called for targeted subsidies in health, education and electricity, as part of broader fiscal consolidation, particularly as the economy’s revenue drivers like diamond mining, narrow.
“The government has a social register and we have also advocated for a digital or biometric Omang where we can load everyone’s profile and say this person is an orphan, or this person is earning less than P5,000 and when they go to Marina (Hospital), they are the ones that can be allowed to come in without paying,” former BoB governor, Moses Pelaelo, told Mmegi previously.
“But there are those of you who are seeing private doctors every week and month, and paying a P270 consultation fee and you also pay P100,000 for being hospitalised in a week at a private hospital.
“In Marina, that number is P60 a day, I think.
“We need cost recovery of some kind to deal with this question of fiscal consolidation.”
At present, the BPC’s tariffs are divided into households, small, medium and large businesses as well as government. According to Mutota, Namibia’s tariff structure contains ‘cross-subsidies’ in which tariff support flows from businesses and high-consuming residential customers to low-consuming domestic users.
“When we talk about cost-reflective tariffs, we are not saying everyone must pay that true cost. “There will be instances where some customer categories need to be assisted and those are done through cross-subsidies amongst the customers, as long as it’s understood where this cross-subsidy is coming from,” he said.
The result of cost-reflective tariffs for Namibia has been an explosion in private-sector activity in the electricity sector. At least 25 Independent Power Producers (IPPs) are active in Namibia, contributing 26% of the installed national generation capacity of 702MW. All of the IPPs are renewable, reducing Namibia’s carbon emissions and providing space for technological advancements in the sector.
Namibian IPPs are increasingly active in the Southern African Power Pool, from where they are planning to sell their power for uptake in the region.
For the BPC and government, the Integrated Resource Plan (IRP), which represents all the power generation projects government plans to procure in the years to 2040, is key to cost-reflective tariffs. Analysts believe the IRP presents the clearest path to greater, targetted cost-reflective tariffs, based on a needs assessment and backed by a biometric/digital social services or national registration system.
According to Mutota, countries which have set energy generation guidelines such as Botswana’s IRP could use these to determine their tariffs over the years and secure buy-in from the industry and other stakeholders.
The IRP has already farmed out 300MW in coal-fired power and authorities are finalising talks for a further 300MW expansion of the same project. In addition, the Minerals and Energy ministry is fast-tracking other contracts for renewable projects, including utility-scale plants such as the 200MW Concentrated Solar Thermal whose tender closes in March.
To the consumersWith government set to introduce free electricity connections for households from April 1, the number of consumers is expected to grow and add pressure on the existing generation and tariffs.
“This could be the right point to revisit the issue of cost-reflective tariffs,” an energy industry analyst told Mmegi this week.
“The country’s income inequality is reflected in the BPC’s user register.
“You have those who can easily afford cost-reflective tariffs, paying the same rate as the poorest in society.
“Government has registers at local government level and below, that show which households need subsidies and this could be the time to see how to integrate these in the various subsidy programmes.”
Mutota said besides encouraging investment and boosting utilities’ self-reliance, cost-reflective tariffs carry another key, but an overlooked advantage.
“If we are not sending the correct tariff signal to consumers, then the product tends to be misused and efficiencies are not considered,” he said.
In other words, blanket subsidies tend to result in misuse and wastage of electricity because consumers are not paying or “feeling” the true cost incurred by utilities like the BPC to produce and supply the electricity.
Cost-reflective tariffs could, therefore, inadvertently, encourage greater electricity usage efficiencies, which for fossil fuel-dependent countries such as Botswana, would contribute to emissions.
The Namibian energy regulator said while the route to cost-reflective tariffs may differ between countries, the factors driving the need to do so, are the same and the benefits could equally be similar.
“The situations are unique but the principles are the same,” Mutota said.
“Take the principles and make them your own.
“What’s happening in Namibia may not be happening in Botswana but the principle is the same.”