Power markets in the capacity range of the Malawi power market and even those with far bigger capacities such as Malaysia, Egypt, South Africa, Egypt, Kenya, Tanzania and Zambia all dominated by State-owned vertically integrated power utilities with a sizeable number of privately owned independent power producers (IPPs) have been reformed, more particularly to pave way for independent power producers (IPPs).
The role of single buyer has been assigned to the national power utility.
The reasons for this preference are premised on considerations of both electrical engineering and electricity, economics which can be summarised as follows: The flow of electricity in the network follows the natural laws of physics; electricity is the consummate real-time product as production and consumption must essentially happen at the same time and electricity supply must match demand second by second, requiring the balancing of differences between the planned and actual output of individual generators and the planned and actual loads of individual distributors.
This gives the entity responsible for real-time dispatch the exclusive right to buy electricity from generators and sell it to distributors.
The single-buyer model within the national power utility, which owns the power network and has trained personnel to operate and maintain it, greatly facilitates the balancing.
Others include judicious system-wide coordination to achieve real-time balancing of supply and demand enables the meeting of specific physical parameters such as frequency, voltage and stability.
An imbalance can cause the entire system to shut down, which may take time to restore, resulting into cost ramifications; having a separate single buyer will require a regime for third-party access to the system which can be costly and complimentary technical and administrative services placed under the supervisory ambit of one functional division of a power utility will avoid unnecessary duplication and result in a conducive environment for multi-skilling and other optimisation efforts of expensive human resources and full utilisation of economies of scale.
The tasks assigned to the single buyer such as long-term forecast of power demand upon which can be based least cost long-term generation and transmission plans and preparation of generation forecasts can best be performed by the system operator who has all the required information first hand.
But the single buyer is also charged with the responsibility of negotiating and concluding of power purchase agreements (PPAs) with distribution licensees and for power importation and exportation.
This means that the onus of buying power from IPPs and ensuring that these are paid on time rests with the single buyer. Assurance of timely payment for power supplied to the national grid operated by the national State-owned power utility is key in attracting IPPs to invest in our power sector.
Having another entirely detached incorporated State-owned company to play the role of single buyer was clearly an anomaly and its correction drew many a sigh of relief.
National utility as single buyer
In a liberalised power market where the national power utility, Electricity Supply Corporation of Malawi (Escom), which is State-owned, has rightfully been assigned the role of single buyer and there is another State-owned major power producer, Electricity Generation Company (Egenco), in competition with privately-owned IPPs, it is imperative that all stakeholders are assured, both in terms of power dispatch and timely payment, of equitable treatment.
IPPs already in our market and those considering entry will seek a level playing field. This can be achieved by ‘ring-fencing’ of the single buyer unit within Escom which must be subjected to a strict code of conduct to be enforced by the management and board of the national power utility and single buyer rules to be enforced by Malawi Energy Regulatory Authority (Mera).
Ring-fencing can be described as separation of accounts, business activities and governance of an entity without taking out an organisation, to allow it (ring-fenced entity) provide its services effectively while the remaining part of the organisation can provide services in a competitive market.
In our market, ring-fencing should have three broad objectives:
(a) Avoiding cross-subsidisation by using revenues to subsidise other business units before fully settling regulated obligations.
(b) Preventing Escom from using regulated revenues for other activities before settling dues to IPPs and other priority stake holders.
(c)Ensure non-discrimination so that Escom treats any related businesses and third parties on an equal basis. For example, Egenco is a former strategic business unit of Escom is owned by the same shareholder. In that sense, it is not an ordinary IPP. Other IPPs supplying power to Escom will wish to see that Egenco is accorded the same treatment as any power producer in the power market.
(d) Information sharing – providing relevant information to all commercial parties on equal basis to support competitive market outcomes.
The ring-fencing rules must be closely monitored and subjected to periodic internal and external audits. The staff in the single buyer unit has to be subjected to a code of conduct.
The objectives of the code of conduct are: To outline the fundamental principles of conduct that the single buyer’s management and employees are expected to follow; to emphasise the duty to maintain independence and avoid conflicts of interests by the single buyer in performing its functions; to promote transparency and market confidence in the operations of the single buyer and to serve as a reference guide for the employees of the single buyer.
Employees of the single buyer unit will have to be provided with periodic training about the code of conduct and its breach must attract stern disciplinary action .
Another important component in the governance of the single buyer unit must be the single buyer rules enforced by Mera ensure compliance with provisions applicable to the single buyer as spelt out in the Electricity Act and good market conduct.
The power utility as State-owned enterprise
The State is generally taken as synonymous with government which in itself is understood in a number of senses. To others, government is made up by political party politicians who are elected by citizens to form and run government. Hence, the oft heard prefixing political party names to the term ‘government’.
It has to be accepted that political parties once in power implement programmes which may either be in the wider general socio-economic interest or in the narrow or parochial interest of the political party and its supporters.
The implementation is carried out by hired civil servants in the country’s civil service which, in yet another sense, is also taken as government.
Civil servants are supposed to loyally implement the programmes of the government of the day formed by the political party or political parties which carried the day in the general election, wield power in their own right arising from their unique position which makes their actions to be pre-supposed as instructions from the government of the day.
Usually, policies of a political party contesting for State power are summarised in its manifesto which is explained and justified to the electorate during campaigning. The supposition, true or false, is that a political party is elected on the strength of its manifesto.
Civil servants who sit on the boards of State-owned enterprises, usually as ex-officials, are expected to be government agents entrusted with the responsibility of ensuring that the policies of the State-owned enterprise are in synch with extant government policies.
The position that they take during deliberations at the board level more often than not holds sway as it is taken as government position.
One of the major challenges that managements and boards of State-owned enterprises face is what we can call government interference in the management and operations of the entity.
Sometimes this intrusion has been actively pursued by some members of the board with strong political connections often for wrong and selfish reasons harmful to the national interest and much to the detriment of objective professional judgement and frustration of management. Our national utility has not been spared the scourge.
The power sector reform programme
The much-publicised power sector reform programme envisaged a national power utility that is a State-owned enterprise, but independently managed by a professional management team supervised by a board. The role of government would be confined to that of shareholder.
Before the reforms, all government owned organisations were designated as statutory corporations regardless of whether they were expected to generate their own operational funds and make profits or established to provide essential services and expected to operate on State subventions. Sometimes the profit seeking State-owned companies were referred to as commercial statutory corporations.
After the reforms, the national power utility was re-christened from Escom established by a special Act of Parliament to incorporated under the Companies Act, with its general governance and powers guided by duly registered Articles and Memorandum of Association.
A government gazette notice delisted the corporation from the list of statutory corporations. The practice was that all registration number plates of vehicles of statutory corporations had to bear the letters “SC”.
After the notice, Escom, like other reformed commercial statutory corporations, notably Malawi Telecommunication Limited (MTL), were allowed to have private number plates just like vehicles of Press Corporation.
These changes were more than symbolic. They were, in my view, signals to Escom management and its board that the national power utility should operate like any corporate entity and take advantage of commercial opportunities like other State-owned power utilities in the region and beyond, particularly in such areas as long-term financing.
There was a lot of excitement over the corporatisation of our power utility and the resolve both on the part of government as shareholder and the management and board of the power utility make the reforms work was palpable.
Escom held annual general meetings where eternally audited financial statements were considered in accordance with the corporation’s dividend policy, dividends declared or otherwise.
Financing State-owned companies in the power sectorAs a statutory corporation, our national power utility depended on multi-lateral institutions such the International Development Corporation of the World Bank family, KFW of Germany and others of that nature for its long-term financing which was guaranteed by government as were its short-tern finance requirements which were mostly procured from commercial banks in the form of overdrafts.
The demand for power in our country continues to increase by leaps and bounds. In our liberalised power market, unlike in times past, the single buyer can procure power from variable renewable energy (VRE) sources. Equally, clean power generated from conventional sources such as hydro is, however, more reliable and, therefore, preferred.
Malawi is blessed with hydro-potential and a sizable number of sites along the Shire and other rivers have been identified. These sites, although identified long time ago, have not been developed obviously due to lack of finance. Given the so called donor fatigue and other factors, financial assistance from multi-lateral institutions may not be as forthcoming as it did in the past.
Following the corporatisation of our national utility, one wonders why it is not moving in the direction of other major corporations, including corporatised national power utilities in the region and beyond, in terms of long-term financing for its projects.
Malawi has a Malawi Stock Exchange and Egenco which can raise part of its long-term capital requirements through offering shares to the public on the stock market or issuing its own redeemable commercial paper to enable it commence the development of some of the identified generation sites, guided in sequencing by the corporation’s least cost development plan. Escom can do the same as it has enormous finance requirements.
It has been proven that finance raised locally through such facilities as the Malawi Stock Exchange can be much cheaper than loans from multi-lateral institutions which may seem more affordable owing to quoted low interest rates, but prove prohibitively expensive over the long-term, taking into account the almost inevitable exchange rate devaluations. Besides, economists have taught us that there is no such thing as free lunch.
*Kandi Padambo is the former Electricity Supply Corporation of Malawi chief executive officer
