Damaging subsidies

Low electricity prices damage the effect of Norwegian energy aid in Mozambique, write Ryan Glenn Anderson and Ingar Flatlandsmo from Multiconsult in the newspaper Dagens Næringsliv.

20. March 2014

Article published in Dagens Næringsliv on 19 March:

In many cases, Norwegian aid to the African energy sector results in substantial losses for local utility companies. This is shown by the study “Impact Assessment of Rural Electrification Projects in Mozambique”, conducted by Multiconsult on behalf of Norad. The losses arise when expanding the power grid in countries where electricity prices are less than the utility companies’ actual costs.

The state-owned utility company Electricidade de Moçambique (EDM) in Mozambique received support to the tune of $38 million from Norway and Sweden during the period 2005-2008. The funding was earmarked for the construction of three power line projects in the north of the country. The aim was to fight poverty through increased access to electricity and by enhancing value creation in the affected areas.

Good social economy, poor sustainability

EDM is one of the utility companies in Africa that performs best with regard to customer connections to the grid and the Norwegian-funded projects have also delivered ahead of target in this regard. Multiconsult’s cost-benefit analysis for the projects demonstrated a strong positive benefit but with a social economic internal rate of return of 19 per cent.

If the profit was distributed in a reasonable manner, the projects would be of great benefit to both the consumers and the utility company. Unfortunately the calculations found that the extremely low electricity prices in Mozambique provide consumers with disproportionately large, short-term benefits at the utility company’s expense. Customers’ electricity prices are actually way below production cost.

Even if electricity prices were to substantially increase going forward, EDM would, according to Multiconsult’s calculations, lose a total of $117 million on the Norwegian-funded projects during the projects’ service life.

In the short term the situation is threatening EDM’s opportunities to expand the power grid and provide more people with access to electricity. In the longer term it is threatening EDM’s ability to maintain existing infrastructure and thus also the sustainability of the entire power sector. This would result in less expansion in the power grid and poorer quality in the deliveries to existing electricity customers.

Aid policy must be reassessed

The study finds that aid for electrification can have a crucial effect when it comes to fighting poverty but also that subsidised electricity prices have a detrimental effect on the sustainability of Norwegian aid.

This knowledge should guide future approaches in Norwegian energy aid. It should be considered whether Norway should prioritise providing aid for expansion of the electricity grid in countries unwilling to implement electricity prices that better reflect costs.

By Ryan Glenn Anderson, Senior Consultant/Economist and Ingar Flatlandsmo, Consultant/Civil Economist, both Multiconsult