Power Sector Reforms in Ethiopia: Implications for Rural Electrification Short Term Draft Report

 By Mr. Mengistu Teferra

EXECUTIVE SUMMARY

This study attempts to examine the legal and regulatory framework in the power sector of Ethiopia from the point of view of enhancing private investment in rural electrification. Local private investors are expected to take up RE ventures, and therefore their capability to mobilize local financial, technical and managerial resources has also been examined. By way of setting the scene, the study has also attempted to make a literature review of power sector reforms at the global, regional, and country levels.

The literature review on power sector reforms (PSR) attempts to assess the origins of the reform history on the global scene, the current status of reforms and its relevance to Ethiopia. Various authors point out that the objectives of reforms, the paths of reforms followed, and the advances made in reforms so far, vary from region to region and from country to country. The general notion that is formed by any reader on PSR is that these reforms are about restructuring of public utilities, corporatisation and commercialisation of utility operations, establishment of the legal and regulatory framework, setting a level playfield for all operators in the power sector, privatisation of existing public utility assets and private sector investment in green-field power projects.

Africa, in particular, appears to be on the trailing end of the reform process, with only a few countries having attempted internal restructuring and commercialisation of their public utilities.

Ethiopia appears to have taken the first essential steps of setting up a regulatory agency, issuing proclamations to change the legal and regulatory framework, restructuring its public utility (EEPCO) and re-orienting EEPCO's duties and responsibilities on commercial lines.

Available literature on PSR is found to be lacking with respect to RE in general, and RE by local operators in particular. It appears that the original reform objectives that were tailor-made for the developed world excluded RE, presumably because RE is not any more an issue in developed countries. By comparison, RE remains a major issue in the power sector of Ethiopia on several grounds (economic, social and political). The power sector reform in Ethiopia should address the issue of enhancing RE, particularly through the newly opened up opportunity for private business. The review of RE situation in Ethiopia and the issue of private sector participation in RE underlines the importance of taking up further study focusing on 3 important prerequisites for addressing RE issues:

• The financial, managerial and technical resources that can be mobilized locally by investors.

• The legal and regulatory framework governing the sector.

• The financial viability of RE schemes.

Accordingly, the financial, managerial and technical capability that can be mobilized by local investors has been studied inhere, along with the actual requirements of such capability for setting up and running rural IPDs. The findings on these lines are that:

•      Local investors will have no problem of obtaining bank loans for the investment amount required for setting up independent power generation and distribution systems in rural areas, as long as they present proof of the financial viability of RE schemes. However, the study has not as yet established the financial viability of RE schemes under prevailing loan terms in local banks.

•      Local investors will have no problem of meeting skills requirements to set up and run rural power supply systems. However, electrical equipment and materials for electricity supply line works are not available on the market, and therefore have to be purchased from EEPCO on special request.

The legal and regulatory framework in the power sector has also been investigated inhere. To this end, all existing proclamations and regulations have been studied in some detail. The findings are that:

• The legal and regulatory framework allows the setting up of independent power generation and distribution systems in rural areas for commercial purposes,

• The legal and regulatory framework is mute on the issue of bulk purchase and onward retail of grid electricity to rural customers, thereby indicating a critical regulatory loophole that is not conducive to investors in RE business.

The recommendations arrived at are:

1. An explicit legalisation of bulk purchase and onward retailing of grid electricity to investors in RE

2. Enhancement of capacity building within the Electricity Agency

3. Fostering cooperation between EEPCO and private investors in RE (for supply of electrical equipment and materials, as well as training of technicians in privately operated rural electricity supply centres)

Further study of the financial viability and special incentives package for investors in RE (to be able to make specific recommendations that could improve the financial attractiveness of RE for investors).

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