Hope for the Little Guys

Hope for the little guys

A revolution in energy costs has been sweeping the world over the last five years. Or at least, a lot of the world. Technology has driven down the costs of wind, solar and natural gas based energy to levels where, increasingly, they are cheaper alternatives to coal-fired electricity. Compared to 8 cent a kilowatt hour electricity coming from new greenfield coal plants, competitive auctions for wind and solar generation are repeatedly seeing prices of 4 cents or below, or half the cost of coal-based power. With wind and solar making up over half of all new installed generation capacity worldwide in 2017, the prospect of significantly lower energy costs – permanently lower – is getting brighter.

There has however been one problematic aspect of this revolution: it’s only for the big guys.

While the aggregate global numbers of wind and solar penetration have been very impressive, and the number of auctions with bids in the 4 cents or lower range continues to increase, the benefits have been so far going exclusively to big economies. If we look at the list of Emerging Market countries with low cost auctions, we can see they are either large countries (India, Mexico, Argentina, South Africa, Peru) and/or high to medium-high income (Chile, the UAE, Saudi Arabia). The much larger number of smaller economies is… nowhere to be seen.

This is potentially a very big problem. If smaller economies, especially low-income economies, are going to be unable to participate in this energy cost revolution, it is a big issue. It does not take much imagination to see a future where larger, better-off economies reduce their energy costs by 50%, and lower-income economies fail to make the same reductions and fall further behind in competitiveness relative to their richer neighbors. Having electricity costs at 8 cents, or more, when neighbors have it at 4 cents, or less, is not good. Yet one more disadvantage for countries further back on the development ladder.

This is why this month’s announcement out of Senegal is so important.

On April 6, 2018, the Government of Senegal announced the results of its first competitive auction for solar generation. The auction, supported by the World Bank Group’s IFC (International Finance Corporation), replaced the Government’s previous negotiated agreement procurement approach. Under the auspices of the IFC’s “Scaling Solar” methodology, the auction awarded a total of 60 MW of generation rights under a PPA (Power Purchase Agreement) to the grouping of ENGIE and Meridiam. The winning bids? 3.8 and 3.98 Euro cents a kilowatt hour.

This is the first time that a smaller, lower-income economy has successfully tendered for new electricity generation at prices similar to what “the big boys” have been achieving. It augurs very, very well for more broadly-based future economic growth and competitiveness, and for the prospects of lower-income and smaller economies. Three cheers!

Let’s take a closer look. Senegal has a small electric grid: total system capacity is about 700 MW. In 2016, the average tariff was around 24 US cents a kilowatt hour. Yes, 24 cents. And the World Bank estimated a couple of years earlier, in 2014, that full costs of the system might be about 40% higher than what that tariff reflects. At those numbers, that’s (1) expensive power for Senegalese users, and (2) impossible for the country’s power utility to stay afloat financially.

While this first auction was for less than 10% of the system’s capacity, Senegal now has a path forward to cut its power costs – by a lot – probably as much 2/3, accounting for transmission and distribution costs. What a dramatic difference it will make to the Senegalese economy, and to the Senegalese, if electricity prices come down by more than half over the coming years. And if the state-owned power utility, SENELEC, stops losing more than 1% of GDP. So not only will Senegal not fall further behind its bigger international competitors, but it will see a bigger difference, and a bigger positive impact, from being able to cut power prices like the others are doing. Assuming, of course, that it repeats this experience.

Three cheers again – for Senegal, its partners that made this happen, and for smaller economies.