I HAVE decided to write this article to provide my thoughts on the current public discourse on the power sector reforms(PSR). My commentary is based on some articles i have read in the media in the past few days relating to energy industry.
First of these articles is an update from the Vice President Soulos Chilima on his engagement with officials from Escom and Egenco regarding challenges they are facing financially.
The second article appeared in the media with the title”MRA’s board member Lincoln Bailey opposes Power market Limited: ‘Malawi power sector focus wrong.’
There are two main issues which have caught my attention in this article where Bailey is opposing issuance of a single buyer licence to another state power company, Power Market Limited, on the basis that it will add coasts, and he has argued that escom should return to a previous vertically integrated structure.
The history of PSR in Malawi can be traced back to the enactment of 1998 Electricity Act. This act paved the way for the liberalization of the electricity sector with the aim of encouraging private sector participation of Escom. Over the years further legislation has been introduces such as the Energy Regulation Act 2004 which resulted in the establishment of Mera.
Despite the aforementioned reforms, the performance of the sector has has remained abysmal to say the least. There has been a lack of investment especially in generation capacity which has hampered social-economic development at a massive scale. Power supply is erratic, unrealistic and prone to hydrological and environmental constaints. The incumbent utilities(Escom and Egenco) have been plague by financial mismanagement and political interference which has made it difficult for them to attract investment into the sector. According to World Bank estimates Malawi loses up to seven percent of GDP annually due to power cuts, more than any country in Africa.
In comparison, Kenya, Niger, Madagascar and Benin lose under two percent. Annual loss of seven percent in economic output is a huge barrier to achieving sustainable social-ecomonic development in a country.
The power sector reforms introduced by the Electricity (Amendment)Act 2016 are meant to address the above inadequacies in the sector. To be honest, they are the deepest reforms so far in the power sector which, if implemented properly, may just set us on a path of sustainable investment in the sector by encouraging innovation, diversification and private sector participation.
Three main features of the 2016 reforms are the delinking of generation from Escom and formation of Egenco, establishment of single buyer licence(responsible for the long term planning and procurement of generation capacity) and establishment of a Market and System Operator.
This sort of industry structure is not unique to Malawi, it has been followed by many other countries since the beginning of power sector reforms in early 1990s. To facilitate participation of Independent Power Producers(IPPs), many countries have had to unbundle the sector in this way because the sector in this way because it is relatively easier to introduce a market mechanism and competition in generation rather than in transmission and distribution to ensure a level playing field and avoiding impartial purchasing and dispatch decisions and/or a perception thereof, by the power off-taker/single buyer entity.
For this reason, in my opinion, the suggestion that we should abandon the Egenco project at this stage and go back to the previous state of a vertically integrated utility will just set us up on a backward footing. We Malawians are all witnesses of the pains that we have had to endure up until this day.
So, in all honest, I cannot see what we will be trying to achieve by going back. Lets stay focused, steady and progressive in our pursuit of healthy investment in this sector.
My ask to the Vice President as he is discussing with stakeholders and making key decisions is to resolve the legality of the newly formed state company, Power Market Limited(Single Bayer). Section 5 sub section 2 of the Electricity(Amendment) Act 2016 says, and i quote”on commencement of this act, the Authority shall issue licence for system and market operation and single buyer to the current holder of the transmission and distribution licence.” The current holder of transmission and distribution licences is Escom. I am not aware of any other legislation subsequent to the 2016 Act, that may have established the function of a Single Buyer outside the current holder of transmission and distribution licences.
Accordingly, we should simply follow the law by operationalising the entity of Singe Buyer within Escom, rather than creating another company, unless the law is changed. Let me add that other countries which have had success in attracting IPPs in the sub Saharan region such as Uganda, Kenya and Namibia all have single buyer functions within the transmission licensee. Malawi will not be unique by following this structure . Additionally, ring fencing the single buyer entity within Escom, would result in lower transaction and agency costs.
The final point i would like to make as we are thinking about operationalising the reforms is the argent need to address the management and financial health concerns of the incumbent entities. that is Escom and Egenco. Yes, these entities have talked about the financial challenges they have been facing.
However, we should look at the bigger picture of how these institutions can operate as commercial entities instead of using the current challenges to try to stifle reforms. I do not need to repeat here a catalogue of mismanagement. misprocurement, corruption, fuel scandals and political interference which have rendered these institutions financially unsustainable and operationally unstable.
These failures have been adequately catalogued in a number of reports and other sources. Our focus should be aimed at addressing these failures, so that these institutions can return to financial health and profitability and be able to honor obligations to one another and indeed to the IPPs once they become operational.
The Daily Times_August 7, 2020_Maxwell Mulimakwenda-My Point of View
Maxwell Mulimakwenda is a Manager at National Grid UK, a multinational energy company operating in UK and US but is writing in his personal capacity.