Every generator is a policy failure

Rough summary

Across sub-Saharan countries like Nigeria and Ghana, state-owned electricity companies provide cheap but unreliable electricity and thus are unsustainable relying on government bailouts. Poor citizens rely on cheap if intermittent electricity. Better off citizens and businesses rely on expensive diesel generators to fulfill their energy needs. This creates a suboptimal political-economic equilibrium that hinders growth.

Problem 1: Unreliable power is one of the biggest blockers to economic development in sub-Saharan Africa.

Many countries in sub-Saharan Africa have prioritized cheap but unreliable power, forcing their citizens to rely on expensive, dirty diesel generators.

Estimates differ about just how bad the problem is, but according to Nigeria’s National Bureau of Statistics, the country’s national grid is only fully up and running for seven hours a day,

On average, African firms deal with over a week of outages a month (Nigeria is worse than average), and 40 percent of businesses across Africa identify lack of electricity as a major constraint to growth. In Ghana, where the problem is less acute, companies still have had to send their workers home, fire their most expensive employees, and suspend production in response to frequent power outages. Outages have meant that grocery stores, hotels, and restaurants can’t reliably keep food refrigerated and sometimes have to throw out what they had planned to sell.

Problem 2: many people use diesel generators, which are very expensive.

Powering a business by running a diesel generator is expensive. It costs about $0.44 to generate one kilowatt-hour of electricity with a small diesel generator. Not only is that many times the grid price in Africa, it is more expensive than the retail price of grid electricity anywhere in the world.

A 2014 World Bank survey estimated that 71 percent of Nigerian firms use generators, as do nearly half of households.

One survey of 500 Nigerians in Ibadan in 2015 found the average respondent Nigerian spent almost a quarter of their income on power – ten times more than the average American.

Why not solar power?

Solar panels are out of reach for many firms because they require an even larger up-front investment than a generator – perhaps 20 times higher per kilowatt. So generators it is – expensive and inconvenient as they are.

(Not to mention that there remains the need for around-the-day electricity, and storage is very expensive, even in the West.)

Problem 3: Governments have state-owned energy companies that provide below-cost electricity — but it isn't sustainable.

In order to expand access to electricity, African governments have tried to make it very cheap, usually through a government-owned energy company.

This drive for cheaper energy makes some sense: Ghanaians have less disposable income than Americans or Brits, so energy should be cheaper in Ghana in order for people to access it. Instead of charging $0.12/kWh, roughly the rate in the United States, the government caps the price at a much lower level.

There’s just one problem with this. The price that electricity utilities are allowed to charge is not sufficient to cover the cost of generating and distributing electricity. For instance, in 2014, Nigerian energy companies only collected about $0.06 for every kilowatt hour they provided, even though they spent around $0.20.2 That is: Utility companies are losing money on every unit of energy they distribute.

Of course, they do provide some electricity, and lose money doing so. As mentioned earlier, utilities in much of sub-Saharan Africa only stay afloat through periodic government bailouts... Thus, by subsidizing electricity to below the generation cost, governments have simply created a very elaborate scheme in which citizens still (indirectly) pay the full generation cost of electricity.

Thus, Nigeria – and much of sub-Saharan Africa – have found themselves in the worst possible equilibrium:

1. Electricity companies provide low-cost electricity.
2. It is so low-cost, though, that electricity distribution companies provide extremely low-quality service and reliability to limit their losses.
3. Government bailouts (barely) cover distribution companies’ losses from the low prices.
   The cycle repeats.

Problem 4: The poorest depend on cheap electricity, even if unreliable. But businesses would prefer more expensive, reliable electricity because it'd be cheaper than running a generator and allow them to grow.

When Nigeria’s government tried to increase prices by a relatively small amount in 2020, protests erupted against the move. The increase did eventually stick, but it didn’t solve the problem. Residents are still deeply unhappy with the continued increases – and the new, higher price still isn’t enough for power companies to break even. At best, they are collecting about $0.12 per kWh – nowhere near the $0.20/kWh they would need to stop losing money.

So there's a catch-22. Price caps prevent state-owned electricity companies from becoming sustainable and providing reliable electricity which unlocks economic growth. But ending price caps causes short-term economic pain for ordinary people, which is obviously politically unfeasible. So everyone is stuck in this very suboptimal equilibrium.

There are policy ideas at the end of the article.