Raise tariffs and raise Malawi

Malawi’s electricity sector is in crisis.  The lack of reliable power discourages foreign and local investment in manufacturing and commercial agriculture.  It means Malawian factories sit idle, their workers dismissed or on reduced salaries while their customers in Malawi and beyond buy cement or consumer goods from other countries.

Blackouts and inadequate access to electricity are costing Malawi up to seven percent of its Gross Domestic Product (GDP) a year. This is more than any other country in Africa. In comparison, Kenya, Niger, Madagascar and Benin all lose under two percent. The crisis in the electricity sector means Malawi’s poor search for hours for firewood each day.  It means Malawi’s children can’t study at night and get the skills they need to grow Malawi’s economy.

This crisis arises in part because the power utility is burdened with heavy debt resulting from improper procurements, government arrears and, most importantly, the fact that it is selling electricity for less than it costs to produce it.  If the electricity tariff (that is the price of electricity to  Escom’s  customers) is not raised, not even interconnection with Mozambique and Zambia will help. Electricity Supply Corporation of Malawi (Escom) simply will not be able to afford the power it so desperately needs.

Today, Escom customers pay one of the lowest average electricity tariffs in sub-Saharan Africa at K58 per kilowatt hour (kWh). The cost of maintaining these artificially low electricity tariffs is staggering; the government will need to findover K50 billion a year, in subsidies, if current tariffs remain in place.

Affordability of electricity is understandably a top concern of consumer groups, but the expense of using generators and charcoal to fill the gap resulting from inadequate power generation is often underestimated.  Differentiated tariff structures, that provide cheap access to small amounts of power for the poorest, can help address affordability far more directly than depressing the cost of electricity across the board.The low tariff in Malawi is a curse rather than a blessing.  For too many years, Malawi’s electricity sector was under funded because the price of electricity failed to reflect the cost of sustaining and expanding the electricity infrastructure. Since 2014, the average price of electricity has increased by 37 percent. These increases may look substantial but they are not enough to restore Escom’s finances. As a result, Escom has been struggling to connect new customers, and Malawi’s electrification rate is one of the lowest in the world:  Fewer than 11 percent of Malawians have access to power and those who are fortunate enough to be connected are plagued by frequent blackouts.

A strong power sector requires a sound financial base.  When customers pay a cost reflective price for the electricity they use, that money can go towards maintaining, operating, and improving the system, in an effort to reach more people and improve system reliability.

Blackouts will not immediately end when Malawi Energy Regulatory Authority  (Mera) announces new electricity tariffs later this month, even if those tariffs help restore Escom’s finances.  But the reliability of electricity supply should improve dramatically once new generation and refurbished power plants deliver an estimated 150 megawatts of electricity in the near future. Bringing the electricity tariff in line with electricity production and delivery costs will demonstrate Malawi’s commitment to reliable, affordable electricity, and to wider access. Higher tariffs will help Escom to expand access to electricity to 30 percent certainly by 2030, and hopefully much sooner. Improving access to reliable electricity supports growth-powering industrial and agricultural production, encouraging businesses to expand, bringing new companies to Malawi, and helping job creation.

Of course, tariffs are only part of the challenge.  Escom and the government need to take many other drastic steps to improve the effectiveness of Escom’s management,

Malawi’s electricity sector is ready to come into flower, once such steps are in place. But without cost reflective tariffs any such flowering will wither away.  n