The Economics of West African Power Pool: Cost Efficiency of Electricity Distribution Companies

One of the paramount objectives of the West African Power Pool (WAPP) under the administration of the Economic Community of West African States is to encourage countries that have adequate supply of electricity to support... [ view full abstract ]

One of the paramount objectives of the West African Power Pool (WAPP) under the administration of the Economic Community of West African States is to encourage countries that have adequate supply of electricity to support others that are deficient in electricity supply. The need of regionalisation has been based on the disparity that exists in the member states in terms of availability of energy resources as well as the recognition that through regionalisation, trade in energy and other commodities could expand in the sub-region. The ECOWAS block intends to reduce the electricity supply deficit through the power pool concept by correcting issues of mismatch in the demand and supply of electricity, inadequate installed capacities of member states and the highly unstable price of fuel as well as the inadequacy of tariff that compensate players fairly. Solutions to these problems aforementioned as viewed by ECOWAS include development of generation and transmission infrastructure by encouraging private public partnerships, establishment of a regional market and establishment of regional regulator and regulatory framework. Overall, there has been some progress in achieving these three objectives. 

The WAPP and the ECOWAS Region Electricity Regulatory Authority (ERERA)have since been established and charged with physical integration and regulation of the electricity market respectively. Incentive regulation which complements the two main types of regulation (RoR and Price Cap) utilises efficiency indicators to bench-mark players in the market in order to promote efficiency in the system.Therefore in bench-marking, it is imperative to have a fair, robust and uniform technique to measure relative efficiency which allows for both discretionary and non-discretionary parameters. Thus the use of simple ratios like customer to sales ratio, energy sold by employee, output per circuit kilometre and operating cost per employee may be unfavourable to some firms due to their inability to control certain factors outside their realm.  An all-encompassing and resolute relative efficiency measuring technique is thus required in the commonly used bench-marking regulation.

We therefore acknowledge the importance of bench-marking in electricity market regulation and further find it useful to estimate a baseline cost efficiency of electricity distribution sector of West Africa. The aim of this research is to estimate the cost efficiencies of the electricity distribution companies in the West African Power Pool using the Stochastic Frontier Approach. Cost efficiencies are estimated from an unbalanced panel of 14 electricity distribution companies over the period 2007-2014 using several panel data models including the pooled model, the random effects model, true fixed effects model and the true random effects model. 

The results confirm the EDCs in WAPP operate at an average efficiency level of 81% which is relatively less than the 92% efficiency level of the supposedly most efficient EDC of East Africa (KEDC of Kenya) in the final year of assessment. Notwithstanding, the abysmal performance of KEDC  on annual average efficiency revealed improvement from very low efficiency of 48% to 92% over a couple of years. Regulators and management of the EDCs could investigate and emulate and improve on the strategies adopted by KEDC.