Using Value Added Services To Solve The Energy Crisis in Africa

I delivered the paper below at the PowerAfrica Conference in Jo’burg on July 18, 2018. The presentation deck itself is here https://www.slideshare.net/james.agada/using-value-added-service-to-solve-energy-crisis.

Abstract

Electricity distribution is a major headache in Nigeria and several African countries. Historical neglect has led to a situation where investment in distribution networks now require significant investment. In many cases this investment is out of the reach of both governments and electricity companies. This is true when this distribution network is reserved exclusively for distributing electricity. However a functional and widespread distribution network is a platform for providing a huge slew of value added services whose revenue dwarfs the revenue from electricity. Electricity Distribution companies as well as governments have to start looking at and financing the distribution infrastructure from this angle.

Introduction

Who is an electricity distribution company? Traditionally the distribution company is the company that owns and operates the assets with which electric energy is delivered to the end customers. The distribution company is also responsible for billing customers for the energy consumed and collecting the payments. Her revenue model is based on the difference between the cost of the energy delivered, the cost of owning and operating the assets and the price that customers pay for the energy delivered. Economically therefore, a distribution company is incentivised to reduce the cost of owning and operating the asset and to reduce the cost of energy delivered. She is also incentivised to maximise the price paid by customers for the energy consumed.

From this premise it is thus easy to understand the World Bank prescription for making distribution companies viable and also the conclusions of the PwC survey for WorldBank on private investment in power generation. Both papers focus on increasing efficiency, reducing theft and increasing the tariffs. It is also against these parameters that most investments in the Disco business are judged. By how much will it bring in more paying customers or reduce shrinkage or reduce the cost of energy being distributed. In effect how will it push the levers of the existing business model. In this light it is not difficult to understand the precarious state of most electricity distribution companies and networks in Africa. With dwindling state resources in most of Africa and the relative poverty of the next level of consumers, why and how will a disco mobilize resources to build and operate networks that serve majority of the citizenry when the actual power consumption ability of the citizens is low on the average and ability to pay is also poor. This is before we look at whether the power is being generated or not. The diagram below from Norfund shows that Norway’s energy consumption per capita is a few hundred times that of sub saharan Africa. Of course it is possible that thi s is simply as a result of non-availability of electricity. It is safe to assume therefore that justifying investments in electricity distribution infrastructure on clear business terms in the traditional business model is going to be hard. Our argument in this paper is that that situation is not likely to change very quickly and therefore it is important to change the basis for making those investments away from the traditional business of the distributing company. The assets that the distribution companies have can be used to generate revenue in ways that the traditional business model totally ignores. Using these revenue models will justify investments in things like metering and network expansion which would otherwise not be feasible.

New Revenue Streams From Old Assets

Let’s start by re-looking at the business model of the disco, the assets it has and the revenue streams it can generate therefrom. As earlier stated, the disco is ordinary in the business of delivering electricity to consumers, billing them and collecting the revenue. As it is today, the consumers are the customers of the disco. The disco has almost unrestricted access to their homes and offices as well as the route to their homes and offices. The disco should also have information about their income, their credit habits and if it wanted which appliances they are using. She should know when they are at home and when they are not. When the office is open and when it is closed. When the factory is operating at full capacity and when it is not. In essence therefore, the disco has information about the customers as well as proxy information for economic and commercial activity. The table below lists some of the assets of the disco and potential uses that are not captured in the traditional business of the disco. Can the revenues generated from utilising these assets be enough to justify investments in the distribution infrastructure even when the returns from the traditional business of selling electricity does not justify the investment?

Right of Way

Most if not all electricity distribution companies get a government guaranteed right of way to business and homes. They have right of way for both high voltage and low voltage transmission. In many cases the distribution companies already have their infrastructure utilising the right of ways to ducts, tunnels as well as over land. These right of way have been sited as big impediments to the growth of broadband in Nigeria, India and other emerging markets. Phase3 Telecom in Nigeria boasts of more than 700Km of fibre on electricity transmission lines while other provider in Nigeria bemoan the fact that the RoW fees are not fixed and vary from location to location making it extremely difficult for broadbank infrastructure to be built out. India has proposed new RoW rules putting down a cost of Rs 1000 per km for fibre. It is not inconceivable therefore that a distribution company can leverage her right of way to help communication companies install high speed internet services directly to homes. The least they can do is to rent out their right of way. A more futuristic looking distribution company can utilise the benefit of her right of way to install fibre to home and rent out the capacity to content and service providers.

Poles, Towers and Ducts

Poles that are used to deliver electricity over land which is very common in Africa are especially valuable for use as towers for various microcells ( especially useful for 5G deployments). They can also be used as locations and mounting points for IoT hubs, security cameras and the like. A distribution company can lease out these assets for the use of smart city operators or broadband providers , telcos and other providers of wireless communication.

Customer Address Information

A big problem in Africa is the lack proper addressing scheme in majority of the continent. Companies like 3aa are inventing new ways of providing address information. Discos already have address information if they can properly reference which customer is connected to which electricity meter or which electricity pole. An address of Mr James Agada, Meter Number A10987645 is an identifiable location for the distribution company. And typically this meter location is well identified by GPS co-ordinates and route. It is also know to the distribution company. Two separate revenues open up here for the disco — she can provide some address lookup services by name for her customers, she can ask her customers to use their reference numbers for addressing and then offer routing service to logistics and delivery companies. The disco can also operate her own logistics company and utilise her addressing information to deliver packages faster and more efficiently especially in areas where the formal addressing codes are not applicable. Last mile delivery is a major headache for African ecommerce providers and considerable investment has been going into solving this problem.

Energy Consumption and Credit History

Energy consumption is very well known as a predictor of economic activity and also economic well being. Homes that consume more electricity are usually more affluent while patterns of consumption can be used to differentiate between residential and commercial districts. These information become very valuable for marketers and also to businesses seeking to locate shops, restaurants and other outlets. Knowing the average income in a neighbourhood can also be used to provide discriminant pricing. Energy consumption is also potentially valuable data for credit scoring in emerging market where other data is not available. With credit history, discos know precisely the credit worthiness of every consumer and this credit history can be expanded to other credit offerings. The disco can partner with FinTechs and be able to provide loans quickly and effectively. The disco can also provide these input to credit bureau’s for a fee. Disco’s can also use their data as proxies for economic activity and publish indices which can be followed and used by economic analysts and reporters for a fee.

Meters at customer premises

The meters inside the customer premises is a beach head with which the disco can transform herself from an old industrial company to a new age digital company. The meter can serve as a hub for home automation allowing for remote control of home appliances and security equipment. The meter can also serve as a set top box for the delivery of video content either wirelessly or via fibre on the transmission network. The meter can also serve as a WiFi hot spot in the home or office. Of course this kind of meter will not be your traditional electricity consumption meter but must be designed specifically for that purpose. CWG Plc makes such meters today. With a versatile meter in place, the disco can become a major player able to displace communications companies, internet service providers as well as cable TV providers. Of course this may require additional licenses depending on the regulatory environment.

How Much Is it Worth?

The big question is how much are all these possible revenue streams worth? Are the worth enough to embark on electricity distribution projects even when the traditional business models are not going to be profitable? There are several combinations to explore here but to keep it simple we can take a situation that is very straightforward — installation of smart meters. Typically the benefit of the smart meter is to reduce losses due to theft. This can be quiet substantial as even a 5% reduction in theft is a hefty sum. Experience in places like Nigeria and India where there is prevalent energy theft show that unless there are other theft prevention technologies deployed, smart meters do not provide that much protection as direct connections and by-passing is used rather than tampering with the meters. Taking the Nigerian experience further, there is a projected 20 million metering gap that needs to be filled if the sector is to be made attractive. Our projections show that it is possible to earn an additional $2 per annum per meter just from reselling data access plans for telcos and ISPs that are delivered via the meters. Essentially the data sales is enough to pay for the meters. A metering project can therefore be executed purely on the basis of the data sales revenue that can be generated.

It is instructive to note that the additional revenues that can be generated using the disco assets are not mutually exclusive. They can all be deployed simultaneously.

Conclusion

The traditional business model of electricity distribution companies is not very attractive if the revenue model depends solely on the sales of electricity in Sub Saharan Africa. This is because of the income levels and electricity consumption level prevalent. However, the assets needed for, and generated from the distribution business creates secondary revenue models that can by themselves justify additional investments that can strengthen the disco business.

innovator.consultant.investor.poet. asking why not?