Working Paper 319

Power Sector Reforms in Ethiopia: Implications for Rural Electrification

 by Mengistu Teferra

Executive Summary

This study attempts to examine to what extent the existing legal and regulatory framework (LRF) in Ethiopia will assist rural electrification and then recommend further policy measures that may be taken to enhance rural electrification (RE), particularly through local private investment that is now being encouraged in the context of the power sector reform agenda. The study objective itself emanates from the need to explore an alternative approach to RE, which is now solely undertaken by the public utility (EEPCO). Despite sustained efforts by EEPCO, the electrification level in Ethiopia remains at a mere 13%, and is limited to urban areas. 

The study (undertaken in two parts) examined several factors considered to be important in promoting rural electrification in Ethiopia. These include:

• The financial and technical capability of local investors,

• The viability and attractiveness of RE as a business area for private investors, including treatment of private investment in RE under the current LRF,

• Transparency and efficiency of licensing procedures,

• Tariff setting, structures and levels, and the potential for subsidies.

Furthermore, the local performance of RE in Ethiopia was examined in the light of international experiences in Africa and Latin America. Thus, the experiences of Ghana, Tanzania, Bolivia and Chile have been examined to some extent.  

The conclusions arrived at in part II study are the following:

1. The licensing procedure as set out in the Electricity Operations Regulations does not appear to pose any serious hurdles for private investment in RE; However, delegation of licensing and tariff setting authority to the appropriate Regional Bureaux could assist local investors in RE by decentralising decision making.

2. Although electricity tariff in Ethiopia is controlled and set by Government, it is basically set on 'cost + profit margin' principles. The marginal cost tariff arrived at in 1986 has since remained an important benchmark in terms of checking the relative magnitude of tariffs set for various categories of consumers.  The LRMC tariff would continue to be important in reducing subjectivity in the application of 'cost + profit margin' principles in tariff setting.

3. Since the tariff is set on 'cost + profit margin' principles, electricity suppliers would be assured of returns on investment, as long as the consumers are able to take the price.

4. The current average tariff of 4.9 USc/ kWh, which has been in effect since April 1998, has resulted in a satisfactory financial performance for EEPCO as a whole. However, diesel centres would need tariff levels at least 6 times the current rates to expect any financial returns on investment.

5. The study of a privately- run diesel station at Gewane, Eastern Ethiopia, indicates that supply costs in small diesel centres can be as much as 2.60 Birr  /kWh (or 31 USc/kWh at year 2001 exchange rates), excluding amortisation of initial investment. The supply cost in private diesel centres is thus much higher than the current average tariff of 4.9 USc/ kWh in the EEPCO system and basically poses affordability problems to rural consumers.

6. From the point of view of private sector participation in RE using diesel-based supply, the basic challenge does not lie in getting approval for sufficiently high rates of tariff, but rather in cutting down on supply costs to a level affordable to the rural consumers.

7. At the level of policy analysts and policy makers, the challenge ahead is one of instituting a narrowly targeted system of subsidies to improve the affordability of electricity to rural consumers.  Experiences from Latin American countries (Bolivia, Argentina, and especially Chile) indicate that subsidising the initial investment is simpler to implement, attractive to private investors in RE, and ensures the lowest tariff rates to the rural customers in these countries. 

8. Private operators in RE go by substandard electricity supply infrastructure to minimise costs. Strict application of the requirements in the Electricity Proclamation and in the Electricity Operations Regulation is likely to frustrate operators in RE, at least in respect of adherence to technical standards of electricity supply.  Relaxation of the technical requirements on electricity distribution infrastructure, on the other hand, would be welcome by investors.

The above conclusions led to the proposal of the following set of policy options for enhancing RE through local private investment that is now being encouraged in the context of the power sector reform agenda:

1. Delegation of the licensing and tariff setting authority, for investments in RE, to the appropriate Regional Bureaux

2. Relaxation of the technical requirements on electricity distribution infrastructure in RE

3. Direct subsidy of initial investment, in part or in full, on the generation facility or 15 KV grid extension for RE (if the latter is explicitly legalized as a private investment business area).

Policy options i and ii involve administrative measures to facilitate the requirements on private investors taking up RE. The options do not entail heavy financial, institutional or management burden on the Government, but are likely to contribute to the attractiveness of RE to private investment. Policy option iii has its origins in Chile and other Latin American countries. It is an approach that contributed immensely to rural electrification in Chile in the 1990s. This approach does entail financial burden on the Treasury, but the subsidy level appears to be within the means of the Treasury. 

These policy options cannot be looked upon as a panacea for the problems constraining RE in Ethiopia.  As stated in the introductory sections of this article, the problems surrounding RE are multi-faceted, and so too are the remedial measures that may have to be taken.  The current study has merely looked at ways of attracting private investment into RE to supplement the on-going single - handed effort by the national utility EEPCO. In most cases, the private sector may not be attracted even when the policy measures listed above have been put in place.  However, some richer rural communities may be willing to take the high prices that private investors would be demanding for electricity services.  Such centres would still remain unattractive for EEPCO, which is only allowed to operate on uniform (and effectively lower) tariff throughout its system.  By default, private investment can be attracted to and operate successfully in such centres

This paper is available on an exchange basis. If you find it to be useful, we encourage you to send us any relevant publications from your organization. To request for the full paper, please fill in the publications request form

View the listing of Other Working Papers

   AFREPREN/FWD © 2007