# **c. What have been historic costs of power production?**

As we have discussed, Africa faces effective tariffs that are up to twice as high as in other developing regions. This reflects the use of costly technologies as well as the small scale of most African power generation systems.

But what have been the historic costs across the various power systems? The first step toward answering this question is to attribute to each kilowatt-hour produced both the capital and operating (O&M) costs of the three power production segments: generation, transmission, and distribution.

O&M unit costs are calculated by prorating total operational costs (as reported in utilities’ income statements) by the total generated electricity over a given year. Data are derived from the AICD’s fiscal spending database,<sup>5</sup> and individual results have been verified by country power experts. Operational costs include salaries associated with system operations, fuel charges, the cost of parts needed for daily operations, and so on.

Unit capital costs are calculated using the levelized power methodology (commonly used by the International Energy Agency). This requires allocating the value of an asset over its lifetime capacity. In essence the unit capital cost is a ratio of the net present value of total lifetime investment to the total electricity produced.<sup>6</sup> For this purpose an annualization factor is applied to the value of generation, transmission, and distribution assets. The overnight investment or capital needed to replace existing assets is the proxy for asset value, to allow for cross-country comparison.

The annualization factor is a reversed version of a standard formula for the net present value of a periodic investment of equal amount. It takes into account both depreciation and interest rates: _r_ _ACC_  _OI_  1  1(  _r_ )  _T_ ; where _ACC_ is annualized capital cost, _OI_ is overnight investment, _r_ is annual discount rate, and _T_ is plant life (in years).

In most African countries, the cost of each kilowatt-hour is 10–20 cents (figure 9). In a handful of countries—such as South Africa, Zambia, the Democratic Republic of Congo, Ethiopia, Mozambique, and Malawi (all of them significant hydro-power producers, with the exception of South Africa)—the power cost is below 10 cents/kWh. Niger and Mali, at the upper extreme, have unit costs over 30 cents/kWh. The balance between capital and operating costs also varies from country to country, largely determined by generation technology. By way of example, capital costs as a percentage of total costs range from 14 percent in Botswana to 77 percent in Nigeria. Full details of these calculations are provided in Annexes 6-8.

> 5 <u>http://www.infrastructureafrica.org.</u>

> 6 Lifetime capital costs are estimated using: (i) the discounted net present value of lifelong capital costs (for example, the sum of the annual investment expenditure throughout the life of a plant), (ii) the discounted historical cost of existing assets, and (iii) the relative value of a similar asset (replacement cost). We are using method (i), with the overnight construction costs as a proxy for the net present value of the lifelong investment expenses.

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