ENERGY SUPPLY AND USE IN MALAWI

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CHAPTER 2: ENERGY SUPPLY AND USE IN MALAWI

This chapter provides an overview of the energy supply and use in Malawi. The first section discusses the structure of the economy of Malawi. The second section discusses the aggregate energy supply and use and presents the energy balance for Malawi. The third and fourth sections discuss the composition of energy demand by production activities and by households. The fifth section discusses the impact of biomass energy use on forest resources and cover. The Malawi national environmental policy framework is discussed in section six. A conclusion section summarises the chapter.

Economic structure

The Malawi economy is driven by agriculture which contributes an average of 35.8 percent to GDP, and about 86 percent to export revenues annually. The agriculture sector has the highest employment  with over 68.72 percent of the total labour force directly engaged in agriculture, fishery and forestry (NSO, 2000). For the last decade ending in 2004 the macroeconomy wascharacterised by an annual GDP growth rate of 4.15 percent. This was achieved mainly through growth in non-agricultural sectors such as mining, construction and financial and professional services. The only traditional sector where growth has been significant over the years is small-scale agriculture (RBM, 2006).
The agricultural sector is organized in a dual structure consisting of large-scale commercial estates with vast landholdings and small-scale farmers with small land ownerships. Typically, estates have legal and institutional rules regulating land tenure, crop production, and occasionally their marketing and pricing. There are about 30,000 estates occupying over 1.2 million hectares and about 2 million households operating as smallholder farmers on 6.5 million hectares of freehold land. Approximately 25 percent of smallholder farmers cultivate less than 0.5 ha on average, 55 percent cultivate less than 1.0 ha, 31 percent cultivate between 1.0 and 2.0 ha and 14 percent cultivate more than 2.0 ha (FAO, 2003). Economic growth in the whole economy is largely influenced by changes in small-scale agriculture, the contribution of which to agricultural value added for the preceding decade averaged 77.5 percent. Smallholder farmers contribute about 80 percent of the national agricultural production, and about 20 percent of agricultural exports, while estates account for 20 percent of the agricultural production and 80 percent of the exports (FAO, 2003). Smallscale agriculture registered an average annual growth rate of 11.3 percent between 1995 and 2004. In contrast, large-scale agriculture registered an average annual growth of 4.5 percent while the entire agricultural sector grew by 9.4 percent annually3. Malawi exports comprise mainly agricultural products. The countries that import from Malawi by order of importance are South Africa (15%), United States of America (9%), Germany (9%), Netherlands (7%), and Japan (<5%). Tobacco account for an average of 59 percent of the country’s exports while manufactured and other products together account for 19 percent (Table 1). The composition of exports has remained stable for the last decade and there is no real movement towards non-traditional exports. Mulaga and Weiss (1996) found that about a third of manufacturing activity is based on the processing of agricultural goods for export, while the majority of the remainder is production of light consumer and industrial goods. Currently non-agricultural manufactured exports account for about 12 percent of total merchandise exports while tobacco and beverages account for 56 percent of exports (UN COMTRADE, 2009).
Furthermore, the economy faces unfavourable shifts in the terms of trade with falling prices for the traditional exports like tobacco, tea and sugar (Mulaga and Weiss, 1996). Export prices declined by 44 percent between 1995 and 2002, with the exception of 1998 when export prices were higher than average. This is in contrast to rising unit prices of imports averaging 31.9 percent annually between 1995 and 2002. Consequently the value of imports rose by an annual average of 35.9 percent for the period 1994- 2002. Transport costs account for about 30 percent of the total import bill. Oil, intermediate manufacturers and transport equipment are major imports. The main import sources by order of importance are South Africa (38%), Zimbabwe (18%), Zambia (8%), and Japan (4%) (NSO, 2002).
Since independence in 1964, the economy’s trade strategy was to develop manufacturing capacity driven by strong primary export capacity in tea, tobacco, and sugar (Mulaga and Weiss, 1996). However, the performance of manufacturing has not impressed much on the economy in recent years. For instance, the contribution of all sub-sectors in manufacturing contributed less than 30 percent to GDP in 1998. During the preceding decade up to 2004, manufacturing was the third largest sector after agriculture and distribution services, contributing an average of 12.97 percent annually to GDP.
In 1998, the manufacturing sector contributed 31.6 percent to the domestic supply, compared with 17 percent services and 6.2 percent agriculture. However, the domestic sales of nonagricultural manufactured goods averaged 42 percent of total sales between 1999 and 2001 (NSO, 2003). The high dependence on agricultural processing is one of the reasons manufacturing has been weak. This exposes the manufacturing sector to the same risks that agriculture is facing. There is also a high import content in intermediate inputs used by the manufacturing sector. For instance, the share of imported inputs to manufacturing in 1998 was 65.7 percent compared with 26.5 percent to services and 7.8 percent to agriculture. This trend is contributing significantly to the growing import bill which has quadrupled in 6 years from MKW27,414 million in 2000 to MKW143, 406 million in 2006 (RBM, 2008).
The macroeconomic performance of the economy determines the microeconomic outcomes such as production efficiency and income distribution. In general, agro-based sectors are crucial in determining macroeconomic aggregates and microeconomic outcomes. Depending on which source one is quoting, poverty headcounts in Malawi varies from 54 to 65 percent of the national population, and between 66.5 and 89.7 percent of rural population (NEC, 2000; World Bank, 2008; Chen et al., 2009)4. At district level, Ntcheu, Ntchisi, Zomba, Thyolo, Mwanza and Phalombe have poverty headcounts of over 75 percent (NSO, 2000). The poverty incidence and severity are a reflection of the sources and distribution of income in the economy. About 78 percent of the income accruing to rural households is from agriculture labour, 12 percent from land, 5 percent from enterprise and 4 percent government. Urban households on the other hand get most of their income from enterprises (i.e., 55% from capital ownership), followed by labour (33%), land (10%) and government (2%).
Since smallholder agriculture is the economy’s growth engine, there are indications that the economy’s growth will continue to put pressure on forest resources and cover as a result of biomass energy use and conversion of forests to agricultural land. It is also expected that as manufacturing expands, there would be an increase in fuelwood demand because of the large agro-processing component (especially of sugar, tea and other food products) in manufacturing. This might be followed by a surge in demand for electricity since manufacturing is also a leading user of hydroelectricity among production activities.
For households, biomass will remain the most important source of energy for the foreseeable future. Apart from the high incidence of poverty which typically means that most households cannot afford modern sources of energy, the other reason for the pervasive reliance on fuelwood is that it is available at no fee or restriction on most customary lands. In urban and semi-urban areas however, high tariff of electricity is a contributing factor, as many people cannot afford to use electric power, hence there is lack of appropriate alternatives technologies to substitute firewood and charcoal (FAO, 2003).

Aggregate energy supply and use in Malawi

The energy needs of the Malawi economy are almost entirely met from biomass sources. Biomass energy consists mainly of fuelwood and charcoal produced from open access forest resources within Malawi. Other biomass sources include fuelwood from private forests or from farms, public forests and from protected lands owned by government. It also includes crop residues, weeds and animal droppings (GoM, 1994a; UNESCO, 2008). Fuelwood and charcoal account for about 93 percent of total energy consumption by Malawian households (UNESCO, 2008; Chagunda et al., 2009). The agricultural sector and households are the main users of biomass fuel accounting for over 90 percent of their energy requirements. Other production activities mainly rely on hydroelectricity and fossil fuels (NSO, 2000; NSO, 2005).
Electricity Supply Corporation of Malawi (ESCOM) is the sole generator and distributor of hydro-energy with an installed capacity of 308.5 Megawatts. It has three power generating stations on Shire River in southern Malawi namely, Tedzani, Nkula and Kapichira that account for 98.5 percent of the installed capacity. Wovwe is the only other power generating plant further north on Rukulu River. At maximum use, household demand for electricity accounts for less than 2 percent of installed capacity whereas industrial demand accounts for 21 percent of capacity. An additional 1 percent is being exported to neighbouring Mozambique, implying that only a quarter of the installed capacity is being utilized (Livuza et al., 1997). Recent estimates put peak domestic demand at 31.2 percent of installed capacity, including 17.4GWh export to neighbouring countries (UNESCO, 2008).
Malawi does not produce energy balance data. However, the International Energy Annual (IEA) published by the United States Department of Energy has some energy production and use data that could be used to produce the energy balance for Malawi (Table 2). The IEA of 2003 shows that except for hydroelectricity, Malawi’s energy requirements are met from imports. This excludes fuelwood from total energy supply as biomass sources are not captured in the IEA. As pointed out above, fuelwood and charcoal are the only sources of energy for most households in Malawi. The major energy import is oil consisting of mainly petroleum and diesel, except about 3 percent (18 million litres per annum) of the requirement which is met by locally produced ethanol (NSO, 2002). However, ethanol production is far short of the required 20:80 petrol-ethanol blend as the current annual production translates to 12:88 petrol-ethanol blends (NORAD, 2002).
Coal and natural gas are also imported, albeit in smaller quantities compared with oil. Currently, the country imports as much as 0.1 trillion Btu of primary coal and metallurgical coke to supplement annual production of 65,000 metric tons (IEA, 2008; Nationmaster, 2009). Coal production in 2007 represents only 59 percent of total annual demand of over 110,000 metric tons in 1992 (GoM, 1994a). For the last four years, expenditure on oil products averaged 998.5 million Kwacha per annum (7.8 percent of GDP) while expenditure on coal by industries averaged 54 million Kwacha per annum, representing 0.4 percent of GDP (NSO, 2002) 5.
The discussion that follows in section 2.3 is based on energy use and supply data extracted from the Annual Economic Survey (AES) conducted by the Malawi National Statistical Office. The AES is by design a panel of companies that reflects the current economic situation in the industrial sector, and does not necessarily focus on energy issues. The variables in AES include sale of goods, stocks, purchases of intermediate materials and supplies used in production, employment, capital investment in fixed assets, and profit.

Energy consumption by production sectors

Oil (diesel, petroleum and other lubricants) is the main source of energy for production sectors, accounting for about two thirds of the total average annual energy expenditure by all production activities (Table 3). Hydroelectricity is the second important source accounting for an average of a third of the total annual energy expenditure by all production activities between 1998 and 2001. Coal and fuelwood are major alternatives to hydroelectricity and oil. Natural gas is also an alternative source of energy in Malawi although its use and supply is still minor. Virtually all gas supplies are imported from South Africa (NSO, 2002).
There are important differences in sources and requirements of energy by production sectors. To a large extent, the nature of products produced and the technology employed determine the type of energy that would be appropriate for an activity. Electricity is mainly used by manufacturing and services (Table 3). Fuelwood is used by agriculture and manufacturing sectors only whereas oil products (petrol, diesel and other lubricants) are mainly used by the services sector. Among production activities, gas is used by four sub-sectors of the manufacturing industry only. Among these, fabricated metal production is the major user contributing 82 percent to total demand for gas. Ethanol is used by the activity of retailing auto fuel (distribution) for blending with petrol. Molasses, which is a by-product of sugar manufacturing, is also used by bakeries and confectioneries. However, the volume and value of molasses are negligible.
“Tobacco and sugar growing” dominate energy demand by all agricultural sub-sectors. The sub-sector is the main user of fuelwood and hydroelectricity in agriculture, and only second in ranking to “tea, coffee and macadamia growing” for its demand for oil products (Table 4). Tobacco farmers are the largest consumers of industrial wood, both for posts and for curing tobacco. It is estimated that estates alone use about 84,826 m3 of firewood for curing tobacco per annum (GoM, 1998a). However, “tea, coffee and macadamia growing” and “tobacco growing” are almost at par in proportional terms for fuelwood demand within agriculture.

DECLARATION 
ACKNOWLEDGEMENTS
ABSTRACT
LIST OF TABLES
LIST OF FIGURES 
GLOSSARY OF ACRONYMS 
CHAPTER 1: INTRODUCTION AND MOTIVATION 
1.1 STATEMENT OF THE PROBLEM
1.2 OBJECTIVES
1.3 HYPOTHESES
1.4 ORGANIZATION OF THE THESIS
CHAPTER 2: ENERGY SUPPLY AND USE IN MALAWI.
2.1 ECONOMIC STRUCTURE
2.2 AGGREGATE ENERGY SUPPLY AND USE IN MALAWI
2.3 ENERGY CONSUMPTION BY PRODUCTION SECTORS
2.4 ENERGY CONSUMPTION BY HOUSEHOLDS
2.5 THE IMPACT OF BIOMASS ENERGY USE ON FOREST RESOURCES AND COVER
2.6 NATIONAL ENVIRONMENTAL POLICY FRAMEWORK
2.6.1 National policies affecting energy supply and use in Malawi
2.6.2 Expected future developments in environmental and related policies
2.7 CHAPTER SUMMARY
CHAPTER 3: REVIEW OF APPROACHES TO STUDYING SECTORAL ENERGY INTENSITIES AND ENERGY SWITCHING POLICIES 
3.1 ENERGY AS A FACTOR INPUT
3.1.1 Energy in production
3.1.2 Energy intensity and efficiency
3.2 APPROACHES TO STUDYING SECTORAL ENERGY INTENSITIES AND SWITCHING POLICIES
3.2.1 Nonparametric and parametric partial equilibrium models
3.2.2 General equilibrium models of energy substitution
3.3 ENERGY AS CONSUMER GOOD
3.4 APPROACHES TO STUDYING HOUSEHOLD ENERGY SUBSTITUTION
3.4.1 Household production framework
3.4.2 Random utility framework and multiple fuels
3.5 CHAPTER SUMMARY
CHAPTER 4: STUDY APPROACH
4.1 INTRODUCTION
4.2 MODELLING INTERFUEL SUBSTITUTION AND AGGREGATE ENERGY AND NON-ENERGY INPUT SUBSTITUTION
4.3 THE GENERAL EQUILIBRIUM FRAMEWORK FOR ANALYSING IMPACTS OF ENERGY POLICIES
4.4 SUMMARY OF EMPIRICAL APPROACH
CHAPTER 5: INTERFUEL SUBSTITUTION AND DYNAMIC ADJUSTMENT IN INPUT DEMAND 
5.1 INTRODUCTION
5.2 DATA AND VARIABLE DEFINITIONS
5.3 ESTIMATES OF RELATIVE FUEL DEMANDS AND INTERFUEL ELASTICITIES
5.4 ESTIMATES OF AGGREGATE ENERGY AND LABOUR DEMAND FUNCTIONS
5.5 ESTIMATES OF CARBON EMISSIONS AND POLICY SIMULATIONS
CHAPTER 6: THE CGE MODEL AND ITS POLICY SIMULATION RESULTS
6.1 INTRODUCTION
6.2 CALIBRATION OF THE GENERAL EQUILIBRIUM MODEL
6.3 DESIGN OF ENVIRONMENTAL POLICY SIMULATIONS
6.4 ECONOMIC IMPLICATIONS OF ENVIRONMENTAL POLICY
6.5 ENVIRONMENTAL IMPLICATIONS OF THE POLICY SCENARIOS
6.6 SUMMARY AND CONCLUSIONS
CHAPTER 7: SUMMARY, CONCLUSIONS AND POLICY IMPLICATIONS
7.1 SUMMARY
7.2 CONCLUSION AND POLICY IMPLICATIONS
7.3 STUDY LIMITATIONS AND RECOMMENDATIONS FOR FURTHER STUDY
APPENDICES 
REFERENCES
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