Millennium Challenge Corporation; United States of America

Open for business: Malawi’s evolving power sector

Earlier today, MCC hosted a panel with leaders from Malawi’s key power sector institutions to discuss efforts underway to reform their organizations and the sector to help increase access to reliable electricity for Malawians. This event, part of a U.S. Trade and Development Agency reverse trade mission, comes at an interesting time. President Obama’s Power Africa initiative—a presidential initiative to triple the number of people with access to power in Sub-Saharan Africa—has turned a spotlight on the challenges of bringing electricity to growing economies throughout the continent.

The challenges Malawi faces in developing its power sector are representative of the issues Power Africa is designed to tackle. Only about 8 percent of Malawians are connected to the electricity network. The country has just 351 megawatts of generation capacity, and demand is expected to grow far beyond this level in the next several years.

The challenge is clear. Yet the government and the electricity utility, the Electricity Supply Corporation of Malawi (ESCOM), do not have the resources required to invest in generation to give Malawi’s economy the power it needs to grow. Bringing in private investment is a priority, and the country’s power sector institutions are adapting to improve the conditions for this to occur. MCC’s five-year, $350.7 million compact with Malawi—the agency’s first program focused exclusively on the power sector—is designed to help the country overcome these challenges.

Several factors currently limit the prospects for private investment. Any privately funded generation projects must sell electricity to ESCOM to reach consumers. This is because the utility owns all transmission and distribution infrastructure in the country. To date, no deals have been concluded, despite a number of ongoing negotiations. In the past, the utility was not viewed as a creditworthy partner for independent power producers because of concerns about its financial and operational health. However, recent improvements, in part supported by MCC, may help allay these concerns.

Additionally, the Malawian regulatory environment is still in its formative stages, creating uncertainty about key issues like access to the electricity grid and tariffs that independent power producers could receive. Finally, the government and ESCOM lack the experience and an established framework to structure complex power purchase agreements that maximize benefits for the Malawian public while ensuing value for money and minimizing potential risks and liabilities.

Malawi’s MCC compact is addressing these constraints head on. It recognizes the fundamental role that strong sector institutions and an appropriate governing framework must play to attract investment into any growing power sector. Our support includes a comprehensive set of technical assistance services to strengthen ESCOM’s finances and operations.

The compact also includes capacity building for the country’s energy regulator so it can play an effective role delivering reliable electricity service while deepening the confidence of investors and companies considering entering the market. The compact is also providing high-level advisory services to the Ministry of Natural Resources, Energy and Mining and supporting the development of a roadmap for restructuring the power market to ensure that roles are clarified as the sector matures.

Collectively, these reforms intend to create a more suitable environment for private sector investment in new electricity generation in Malawi. And the compact’s investments will also strengthen the transmission and distribution infrastructure to facilitate the delivery to customers of any new sources of electricity.

During the panel discussion at MCC today, the CEO of ESCOM, the acting CEO of the energy regulator and the Principal Secretary for Energy described their organizations’ experiences through the compact as well as their own efforts to drive change. Each of them emphasized the need to change the status quo to spur development in Malawi. For example, the Principal Secretary noted that mining is a potential growth avenue but the national grid can’t supply the power they need with the gap currently filled with expensive diesel fuel generators.

The CEO of ESCOM noted that this demand, combined with the ongoing reforms, will attract investors who need to know someone will buy the power they produce. And the CEO of the regulator highlighted the fact that his agency has developed a template for power purchase agreements that they hope to put to use for investors interested in the opportunities the country presents.  

Throughout the discussion, one message was clear: Malawi is ready for growth in a power sector that is now open for business—and, with the changes afoot, the future is bright.