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Saturday, July 2, 2011

How Electra can fix its energy problems and cut its losses

According to the World Bank country partnership strategy report of March 25, 2009 for Cape Verde, investment in infrastructure is critical for the Government’s economic transformation agenda, especially in energy, water, transportation, and infrastructure for the tourism and fisheries sectors. Furthermore, the report goes on to say that the high cost and inadequate supply of electricity is without doubt one of the most important constraints to the economic development of the country.

What are the factors causing the high costs and inadequate supply of electricity? The factors are well documented by the World Bank in its study. Here is the relevant excerpt:
"While Cape Verde will always face high costs of electrification as an archipelago, the present sector arrangements warrant significant upgrading and a reassessment. Electra, the national power utility, supplies electricity in the nine inhabited islands of the country and also operates as a water distribution utility in the four main islands. Electra’s financial performance has deteriorated rapidly, mainly due to lack of investments in generation, delayed and partial tariff adjustments, customer arrears, obsolete equipment, and an escalation of non-technical losses due to fraud and unauthorized connections to the grid.

While Electra increased generation by over 8 percent per year to 250MWh during 2002-06, the current system relies almost entirely on multiple, inefficiently small, expensive and polluting diesel-run generators on each island, connected to clients by an inadequately low voltage transmission system and an ageing distribution network. The resulting power supply disruptions have an immediate negative impact on economic growth, and while power outages are infrequent compared to other countries in the region, there is not yet a widespread practice of back-up generation so that the outages are more costly and disruptive to business.

Even though Cape Verde has exceptional wind energy potential, at 3 percent of generation this is as yet largely untapped. Finally, with losses equivalent to 1.3 percent of GDP in just one year (2007) erasing half of Electra’s net worth, the company is de-capitalized and without credit from its main suppliers, the oil companies. The explicit fiscal risks to the budget are clear, since domestic debt issued to cover Electra’s losses reached approximately 4.5 percent of GDP by the end of 2008.31 Government therefore intends to invest heavily in more sustainable, low-cost wind generation (including via PPPs) and in upgrading the network while seeking greater efficiency in the management of Electra."
The World Bank made the following recommendations to improve the situation:
  • Improving the company’s commercial performance;
  • Ensuring the approval of more timely and better calibrated tariff adjustments by the Economic Regulation Agency (Agência de Regulação Económica or ARE);
  • Significantly increasing generation and reducing its cost by consolidating generation in larger units using heavy fuel oil, upgrading transmission lines, and pursuing substantial investment in wind energy through independent power producer arrangements (which would also provide a steady supply of energy during non-peak hours for desalination);
  • Upgrading the aging distribution network;
  • Instituting good corporate governance practices in Electra, with more active monitoring; and
  • Mobilizing direct financing and guarantees for Electra.

The government is well aware of the issues and the recommendations and are moving, though some might argue - much too slowly - to address the issues. For example, while there is a 10 mW wind energy project by Cabeólica, that is slated to come online by August 2011 to provide electricity to the capital city Praia, and which will is suggested will supply the equivalent of about 25% percent of the energy used by all of Santiago, Praia and other communities across the Cape Verde islands have been recently experiencing frequent day-long blackouts.

It is clear that these blackouts are related to the recently elevated world spot prices for diesel oil that is used by Electra's current generators while Electra has limited budgets to pay for the diesel oil. Thus, it is likely that the utility is shutting down its generators to save money.

The Cabeólica wind farm project can't happen soon enough for the public. But it's not enough. More private renewable energy projects are needed and fast. In addition, the government and Electra should implement more of the recommendations. A simple step is to clean house and replace management and government officials who have presided over the energy problems for years. It is curious that such steps are not taken more quickly and with greater urgency.

In addition, there is one serious issue that the World Bank identified but where it failed to make even a single recommendation or express a single idea about. The issue of fraudulent and unauthorized access to the grid. Electra estimates that about 25% of the energy it sends across the grid is lost to theft with the estimates even higher in Praia. Why do citizens steal so much energy and what can Electra do about it?

People probably steal because the cost of electricity is high. In other words, it's a valuable commodity and the high poverty levels in some areas would create an environment where it is worth the user's effort to steal electricity off the grid using illegal connections. ARE probably tries to take this leakage into account in setting electricity rates, but this only makes the price higher, the commodity becomes even more valuable and causes even more theft. From 2005 to 2009, prices increased by 30%; but theft increased by 50% over the same time period! It's a vicious cycle and the numbers confirm it. But it also suggests stealing could be reduced if the price of electricity could be significantly reduced!

So here are my ideas about what could be done to turn this cycle around and make energy more affordable for all:
  1. Move very aggressively to encourage the installation of private renewable energy projects which can supply energy to the grid for a significantly cheaper price that Electra can afford on it's own;
  2. Use heavy fuel oil which is much cheaper than diesel. This is easier said than done. If the generators run diesel, it would be somewhat expensive to reconfigure them for heavy fuel oil. So any expansion by Electra for new generators should use generators configured for heavy fuel oil;
  3. Do more audits to find unauthorized connections to the grid.
  4. Install meters ahead of communities, including "clandestine" communities to measure how much energy is supplied to the community versus how much energy is paid for by the community. The idea is to actually find ways to reward the community for doing a better job of closing the gap. For example, offer to reward residents in the community for conservation of electricity and scoring a certain level of paid service to used service. These payments could be made in cash to residents who pay their bills. Money can be a big incentive. It may cause peer pressure within the community.
  5. Create an "amnesty" program to wipe out all or a portion of past accumulated unpaid electric bills (which Electra might never have collected anyway) but base the amnesty on proxy or demonstrated levels of income. This would give people a "new start" so that they could start paying for usage in future, including some who perceived that they had no alternative but to risk life and limb to make unauthorized connections to the grid.
  6. Change the pricing structure for domestic use to create pricing tiers for PEAK and OFF-PEAK usage. In other words, give people an option that shows them how they can use electricity in the OFF-PEAK times where the price might be significantly cheaper. This is commonly used in other countries.
  7. Provide people with more informative electricity bills so that they can see how much electricity they use by the day or time of day or by peak and off-peak periods. This way users have a picture that shows them how to save money.
  8. Provide people with in-house meters that show the rate at which electricity is being consumed at any given moment. This of course may require certain technology capabilities which may not currently be available but the point is that this should be in Electra's future plans.
  9. Install pre-pay electricity systems in certain areas where the residents are generally of lower income levels. The problem is that if people do not know how much electricity they are using, or how much it will cost till the end of a month when they finally receive a bill, it may be too late and they may realize that it is much more than they can afford to pay.
  10. Educate the public about energy conservation and create energy conservation programs, contests and so on. Provide incentives to both among domestic users and businesses.

None of these ideas will necessarily work by themselves. They may need to be used in combination. But the real message here is that creativity is needed. Ideas should also be sought from the citizens as well. If Electra is not coming up with any ideas themselves, or if they are simply making excuses, then some heads should roll. This is what would happen at a privatized company otherwise it would quickly go out of business.

I've provided 10 ideas. I'd like to hear ideas from readers of this article. Use the comments to express your ideas. All ideas are welcome!


Marcos Carrera said...

I think your post resume perfectly the ideas of saving and conserve the energy resources.
The first stage it is the information and education. What is the energy, and what it is the enviromental efect and the cost of for example to turn on the tv.
The second is saving energy anywere, every peopple can think about who spend less energy in their life. But we need first to control and to konw hom much are we spending.
The third is to use energy cheaper and easier (renowable or not) but efficencier.
In Inergia, we make strategy programs in this way, that we think its the right one.

Angelo said...

Marcos, thanks for your comment. Note it is perfectly fine to comment in any language on this blog.

I like the way you summarized the steps: (1) educate about energy and its cost; (2) encourage energy conservation by providing information and techniques to reduce energy use; (3) use of cheaper sources of energy.

This is great for individual consumers and businesses. What about the government? This is also a source of frustration in Cabo Verde.

If I were the Minister of Energy in Cabo Verde, I would hire you yesterday!

Angelo said...

I was recently asked about any success stories about privatization in Cape Verde, and how the problem of finding potable water on these "desert islands" could be solved. Here is my response:

According to CV government officials, they have historically completed a large number of privatizations in the past. I can't point to any of them myself - I suspect these were small projects though every bit certainly helps. There have also been some unsuccessful ones like Electra (if was previously privatized but was a dismal failure). They need to turn Electra over to more capable private owners who actually have ideas and aren't in it just to make a buck.

And of course there are the successful recent examples of private FDI into the infrastructure, for example Cape Verde Fast Ferry and Cabeólica (the new wind farm slated to begin services next month), which are both operated as public-private partnerships. So these aren't 100% privatized, but I'm a believer in partial-privatization as a place to start.

The challenge is that the biggest infrastructure opportunities are big nuts to crack. Those are electricity and water (Electra), air transportation (TACV) and national maritime transportation (partially solved with CVFF).

Those are the big ones, but apparently the most challenging for the CV government. But it's actually not as difficult as one might imagine. The real obstacles lie in the politics, or I should say, the politicians who are loathe to give up control, because that's what privatization does. It wrests control out of the hands of government and places it squarely in the hands of the private sector.

Now imagine the politician who actually saw this as an opportunity instead of a threat. For example, Cape Verde could have 100% of the energy it needs today without spending a single dime of government money. And it could have all the potable water it needs (via properly engineered desalination plants). All at a substantially lower cost than it costs them to produce today. The technology exists. You think a politician who gave the people and businesses of Cape Verde all the electricity and water they needed while lowering the prices of these utilities would be viewed as a hero? That would be the understatement of the century. They would go down in Cape Verde lore second only to Amilcar Cabral!

Where the government can surely help is by letting the free market do its job. Instead, they tend to roll out the red carpet. Not that one, the other one. The red TAPE carpet! LOL

But if they rolled out the REAL red carpet, and if investors could source all the capital required (there are billions of FDI out there looking for a home like the one presented by the opportunities in Cape Verde), you would have the problems essentially solved today (or as quickly as these ventures could be implemented).

O povo de Cabo Verde said...

We agree with you and many compliments for your great work!
Renato Evarchi

Angelo said...

Thank you Renato.

Anonymous said...

If you have contacts with ELECTRA technical staff, they can explain better than me, why the privatization of ELECTRA done in 1999 has failed. They can explain what the private operator have done, from 2000 to 2002, in all islands, in order to decrease production and distribution costs of electricity and water and in order to satisfy demand. They can inform you too of the real decrease on tariffs done in 2000 in St. Antão, S.Nicolau, Maio, Fogo and Brava and in the power systems of north Santiago (Sta Catarina, Calheta, Tarrafal and Sta Cruz) also. They can explain the almost total electrification of Brava Island, and Sto Anto Antão in 2000, S. Nicolau on 2001 and a large number of small projects which doesn’t have need of a huge time of conception. The projects that need a more careful integrated conception have been contracted in 2001 and its operation started on 2002. Palmarejo, Lazareto and Palmeira power stations, equipped with diesel units prepared to burn heavy fuel-oil of 380 cSt and based on same type of cylinders independently of their capacity, with automatic control of all the back-up auxiliary systems were substantial improvements on the technologies used before in Gamboa and in Matiota power stations and they took important reductions on production costs. Palmarejo RO desalination station was another important change in production costs reduction and in the demand satisfaction.
However, in 2001, PAICV won the national elections and arrive on Government with a Marxist vision of the Country, keeping a particular ideological fight against the privatizations. They have done whatever they could to demonstrate that privatizations were the worst solution for electricity and water operation. The representative of the Government on Electra Board of Directors and on Executive Committee tried to manipulate engineers and other high level staff against the management team, in order to delay projects, and together with the trade-unions they try to sell the idea that the “foreigners” were in Cape Verde to explore Cape Verde people and resources, in order to promote conflicts. In a public meeting done in one of the power stations, such representative o Government in the Board o Directors assumed that he would like to be the representative of the capeverdian workers in the Board in order to protect them from the “foreigners”. However in generality the staff, except the less qualified and some fanatic people, had not followed the mermaid song and it has been possible to perform a substantial lot of essential projects. But the intention was still on, and the Government when in October 2001 doesn’t accept to correct tariffs due to the increase of diesel oil and heavy fuel oil in Cape Verde started the process of suffocation of privatization process. Some contracts for the supply of generators signed in 2001 witch kick-off were forecasted for the middle of 2003 were suspended in the end of 2002 due to economical results on 2002 and never more the original investment project had been followed.
At present, PAICV speaks on ELECTRA re-privatization, but I can not believe that the investors with experience in electricity and water management in small systems (what it is important in our country) will risk to invest after such so bad experience.

Manuel Calado

Angelo said...

Manuel, I appreciate your thorough response that gives perspective from someone who was present and can describe what was happening on the ground both politically and management-wise.

It is clear that the political decisions made in 2001-2002 that capped energy and water prices despite the rise in oil prices, lead to the ultimate failure of the privatized Electra (EDP was the owner at the time). However, I would also lay some blame at the feet of EDP who failed to do their homework by not writing into the privatization deal, a trigger provision that would allow the energy prices to be renegotiated with oil price increases and to require the government to pay for any delays in increasing the tariffs. I've written in other posts about the economic effect of price caps.

The government then made matters worse. Governments cannot run businesses efficiently. They failed to anticipate that they themselves would be choked by the very same medicine they dealt to EDP - the continued escalation of oil prices along with the absence of a coherent plan to implement the very same cost saving energy projects that they killed in 2002.

So now the energy demands have escalated and the supply has not kept up because the government cannot afford to fund the building of all the new plants that will be needed to meet the demand. Thus fully funded private investors MUST enter the picture and the government has no choice but to welcome with open arms.

Private companies do not need to invest in Electra! The privatization I envision is not the privatization of Electra as a supplier but the ultimate replacement of Electra by private, independent energy suppliers who ultimately make Electra less relevant as a power and water generation company. In other words, Electra can eventually be replaced as a supplier.

Yet, there is a role for Electra as a power and water distribution company. Someone has to maintain the overhead wires and water pipes that run from the private power and water companies to the citizens, and someone has to take meter readings and bill the customers. It is this version of Electra - the distribution company - that can be privatized.

Given the amount of additional power and water that is needed, it is also a good idea that the government and possibly Electra have a minor stake in these private suppliers. This will ensure cooperation among the players. And the investors need to be smarter about the deals they strike from a risk management perspective. The kind of political manipulation that was at play in 2000-2001 can be totally neutered by striking a deal which would force the government to compensate investors for any stunts like setting price caps at uneconomic levels in order to force the private companies out of business.

Anonymous said...


In my opinion EDP failed is mission when they accepted the principle of “there is no tariffs there is no investment” what was read by the Government as “there is no investment there is no tariffs”, instead to use the common mechanisms mentioned in the deal to solve disputes including the recourse to trial. The World Bank as promoter entity of the privatization process had also, in my opinion, a passive intervention in the process. Now, it is clear for me that it would be important to have had IFC in the share capital of ELECTRA, even with only 3 or 4%, when the privatization was done.

The investment necessary to reduce costs and to satisfy the increasing demand, not performed from 2003 to 2006 by EDP and from 2006 to 2008 by the Government, the delay on the projects related with the interconnection of Santiago power systems and the increase of Palmarejo generation capacity (initially those investments were forecasted by EDP to be commissioned in 2005, later on, in 2007, forecasted by the Government, , to be commissioned in September 2009 and now forecasted to April 2012), associated with the incapacity to solve, since 2000 till now, the problem of the non supply of heavy fuel-oil of 380 cSt in Sal and Praia (what inhibits a more substantial reduction of costs in generation) constitute a real disaster for the country economy and for the daily life of the costumers and we are feeling it now in terms of rotating black-outs.

But the electricity and water problems are not only a result of ELECTRA performance. A.R.E., the regulator, had not produced, since 2003, (I try to forget the disappeared ARM) any basic rules, at least: quality of technical and commercial service; tariff rules (the existing tariff structure comes from 1984); commercial relationship rules (rules to be followed and costs due by the different actors in presence (customers, building construction promoters, residential and industrial urbanization project promoters, distributors) when the construction of electrical and water infrastructures and installations).
DGIE- had never been able to produce technical rules to be followed in the electrical installation of buildings. They are also responsible by the non existence of fuel of 380 cSt in Praia and Sal.

But past is past and what is important is to think future. And whatever solution we can envisage one thing is important: to keep one uniform tariff system in all islands, in order to give all islands the same development opportunity.

I agree that it would be possible to have all the generation even in small islands operated by private companies. But, in small systems, market doesn’t exist and it would be necessary to have previous rules:
a) criteria for dispatching in systems with more than one thermal IPP, and, or “must run units”.
b) clear rules about the remuneration of such operators including all de remuneration of all ancillary service to be supplied (spinning reserve; reactive power supply and absorption; frequency regulation, etc, depending on the system)

In my opinion the present restructuring the Government had decided splitting the company in a North brand and in a South brand, each one performing generation transmission and commercialization of electricity and water in some islands, is a model completely against the theories supported by people defending either regulation solutions or deregulation solutions. The ideal would be to split ELECTRA between one generating company and one distribution and commercialization company. IPPs would be easier to implement and the privatization of the existing efficient power stations could be easily done if there are interested investors.

The problem subsists in what concerns de operation of the grid and the commercial operation.

I am afraid that, when Cabeólica starts to operate the problems of payment can be similar to existing now with Enacol.

Its enough for today.

Manuel Calado

Anonymous said...

Electra should seek joint projects with alternative fuel providers, such as waste to energy or solar. The government has great intentions to go green. Electra needs to lead that effort.

Angelo said...

Thanks for your comment. The government, which owns Electra, is indeed seeking alternative energy solutions. They put together an entire alternative energy plan for 2011-2020.

But the problem are these:

1. Electra is so far behind on the basics, like providing a reliable flow of water and energy just to meet even today's demands;

2. The government is looking for "lowest cost" solutions. But that simply encourages alternative providers to come in, set up cheap plants with ZERO maintenance and disappear - Electra then gets caught holding the bag with plants that breakdown. They will NEVER solve the problem with this approach. What good is it if I can buy energy or water at a low price but it doesn't come 24-7. That's the status quo. Electra boasts of low costs of production but produces NOTHING. Makes no sense.

3. They make it difficult for interested parties to help. See my post on "ease of doing business".


Anonymous said...

Very good ideas and well spoken.... but the amount of corruption, abused of power and the notion that 'you need me and I don't need you' won't allow anything to be done in CV. Everybody knows who's steeling diesel/oil from Electra but they are part of that gang. Not to confuse with the other subjet that was the moment they have 2 big planes and ONE for the 9 Islands....850 employees..!!!Keep doing what you are doing and hoping that someone with guts in CV start changing things... By the way, who makes the deal when buyng planes, his/her share is 10%.

Anonymous said...

The last feedback was post by another anonymous... not the one that wrote about Electra. Sorry about that..I'll change it next time.

Angelo said...

Thanks for your comments. I agree with your points about corruption and abuse of power.

Anonymous said...

Cape Verde and Germany reach deal on 100% renewable energy project
15 May 2013 (source Asemana)

Cape Verde and Germany will finalize an accord this year to carry out the “Cape Verde 100% Renewable Energy” project. The accord will touch upon “institutional, legal and financial aspects” to guarantee a framework that is “conducive” to private sector investments. This is the most tangible result of the visit that the Minister of Economic Affairs, Climate Protection, Energy and Territorial Planning of the German state of Rhineland-Palatinate, Eveline Lemke, recently made to the country

Anonymous said...

Angelo said...

Hi Anonymous,

Thanks for your posting the excerpt from Asemana online. I live in Cape Verde and read and listen to the news all the time. I've read the same news in Portuguese. It's all just a bunch of talk, talk, talk. Most of the time, the result of all the talk is nothing. Sometimes, when they do actually follow through, the results are usually 3-5 years after all the talk is done.

From a practical standpoint, this 100% renewable target is also just talk. It will not happen by 2020. In fact, it will not happen at all (though i is good to have a stretch goal). The reason it is futile is that you will always need backup energy. For example, the wind does not blow 100% peak for 100% of the time. Same with the has a tendency to go down at night.

The problem is that the Germans propose battery storage and backup, but everyone who knows the technical aspects of renewable energy knows that battery technology is not as advanced as it needs to be. Batteries will die in 1 year and the cost to constantly replace these batteries is not feasible.

It is well known that the only reliable power backup is fossil fuel generators. And even so, to maintain energy supply across an entire grid, there is a special technology (flywheel) that is needed to produce linear power from all of the (fluctuating) renewable power resources on the grid and to maintain a constant supply.

Finally, the cost of renewable energy in Cape Verde is too high. Instead of bringing down the cost of power to the consumers, the prices are going up! So going to 100% renewable is not something that consumers will accept because it means that they will end up paying more for power. What will happen is that consumers will go to micro-grids that provide the right mix of fossil and renewables at the right price.

In summary, this nonsensical talk about 100% renewables ignores both the macro and micro-economic effects. Instead, they should first determine the appropriate balance of fossil and renewables, and second, they will need all of the right technology to pull off even that mix.

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