CAMEROON’S INFRASTRUCTURE: A CONTINENTAL PERSPECTIVE

# **Box 2. Electricity subsidies for aluminum in Cameroon**

Alucam is Cameroon’s largest electricity consumer accounting for 35–40 percent of the power produced. Under a historic 30-year agreement that ended in 2009, Alucam benefitted from extraordinarily low prices for electricity and a guaranteed supply of power. Alucam was guaranteed 145 MW of power during the dry season and 165 MW during the rainy season. A tariff cap of 7 CFA francs per kWh (around $0.017) until the end of 2009, compared to tariffs of $0.114/kWh and $0.136/kWh for medium- and low-voltage customers, respectively. These prices were exceedingly low in the context of chronic power problems throughout the country. Alucam has been seen as receiving an implicit power subsidy for decades. The overall subsidies can be estimated to be around $120 million per year, equivalent to 32 percent of AES Sonel’s revenue. Since the expiration of the agreement, power prices have been increased by 73 percent to 12.94 CFA francs, or $0.031 per kWh. These prices are above the global electricity tariffs for aluminum companies, which average around US cents 2.56 per kWh. Even with the price increase, they still fall well below the operating costs of power generation at US cents 13 per kWh and the total cost of US cents 17 per kWh, adding to the cost recovery woes of AES Sonel. <u>Source: Husband, McMahon, and van der Veen 2009, World Bank, 2011b.</u> High costs and subsidized tariffs, compounded by weak operational performance, affect the financial sustainability of AES Sonel. Tariffs have historically recovered only 60 percent of the costs, significantly below cost-recovery levels in Africa’s middle-and resource-rich countries (table 10). AES Sonel loses approximately $0.07 per kilowatt-hour sold. Due to the prevalence of theft, transmission and distribution losses have historically been high, at 35 percent, above the level observed incomparable countries. In fact, nontechnical losses increased from 22 percent in 2006 to 26 percent in 2008. Burgeoning illegal connections, decrepit metering systems, and outmoded billing software have compounded the situation.

The burden of financial and operational inefficiencies has increased over time. Hidden costs rose from about 108 percent of revenues in 2005 to 121 percent in 2009. In 2009, system losses drained $167 million from AES Sonel’s revenues. In absolute terms, the largest contributor to the hidden costs was the mispricing of power, which resulted in losses of $265 million in 2009 (table 11). Relative to several of Cameroon’s West and Central African neighbors, the burden of hidden costs for AES Sonel is high (figure 22b).

**Table 11. AES Sonel’s hidden costs**

||Power billings<br>GWh/year|System<br>losses<br>%|Collection<br>ratio<br>%|Average<br>operating<br>cost<br>$/kWh|Average<br>revenue<br>$/kWh|Average<br>effective<br>tariff<br>$/kWh|Total hidden<br>costs<br>$mill/year|Total hidden<br>costs<br>% revenues|
|---|---|---|---|---|---|---|---|---|
|2005|3,264|31|93.7|0.17|0.11|0.10|384|108|
|2006|3,374|28|93.7|0.17|0.09|0.08|435|151|
|2007|3,360|32|93.7|0.17|0.10|0.09|426|128|
|2008|3,512|33|93.7|0.17|0.11|0.10|409|105|
|2009|3,522|35|93.7|0.17|0.11|0.10|454|121|

Source: Briceño-Garmendia, Smits, and Foster 2009; World Bank 2008 and 2011b 34