Ethiopia’s Electric Shock A Balancing Act?

Ethiopia’s recent policy to increase electricity tariffs, while essential for long-term energy sustainability, might become a double-edged sword. While the reform aims to attract investment and improve infrastructure, it also threatens to exacerbate economic hardships for many low-income households and businesses. However, it’s important to note that these reforms also hold the potential to significantly improve the country’s energy sector, paving the way for a more sustainable and efficient future. A careful navigation of this delicate balancing act is urgent, as the benefits of increased tariffs to improve investment needs to outweigh the opportunity costs to consumers. EBR’s Munir Shemsu navigates the intricate issue and offers this report, urging stakeholders to understand and support these crucial reforms.

 A small bakery in the Nifas Silk Laphto Sub-city in Addis Ababa was returning customers from the door on a foggy Wednesday last August. Roza Ahmed, the mid-20s retailer, told prospective buyers to look for other options as the bakery ran out of the 10 birr bread due to a prolonged power outage in the neighbourhood.

“Fresh bread requires a running oven,” she told EBR.

The small family-run business relies on three medium-sized ovens, consuming between 2 and 3.5 Kilowatt Hours (kWh) of energy. Despite consuming several kWh of energy a month, electricity payments were only one of the most pressing costs for the bakery, which opened four years ago.

“As long as there is power, prices were manageable,” Roza told EBR.

However, this might be a short-lived sentiment as their monthly electricity bills are poised to double by the end of the year, a change that could significantly impact the financial stability of many low-income households.

Ethiopia recently swallowed an economic pill prescribed by the International Monetary Fund (IMF), backed by several international development organizations such as the World Bank and marked with distinctively neoliberal features. A shakeup of the economic substructure towards market-determined leanings is the order of the day as fiscal priorities get a prudent makeover. Removing subsidies from services historically anchored in government support is a part of the bittersweet economic pill many Ethiopians will swallow.

Key among the reforms is the introduction of cost-reflective prices for inputs like fuel and electricity.

Riding the reformist winds, Shiferaw Teila, CEO of Ethiopian Electric Utility (EEU), announced a rolling increase in end-user tariffs to be implemented over the next four years as part of a comprehensive power sector reform. The 10% increments every quarter were packaged as foundational in expanding energy access in the country by ensuring the financial stability of the providers.

“We are trying to attract investment into the sector,” the CEO underscored during a press conference held a month ago.

Shiferaw referred to electricity costs in neighbouring Kenya to illustrate the relatively lower energy charge paid in Ethiopia, even with the increased tariffs. Ethiopia charged nearly a sixth of the 0.32 US cents per kWh levied by its southern neighbour despite the latter having almost an 80% penetration rate.

“Commercially viable rates are crucial,” Shiferaw noted.

In seven tiers categorised based on electricity consumption, from households consuming as little as 50kWh to those above 500kWh, an increase nearing 400% will transpire until 2028. While subsidies will be maintained for 75% of households at the lowest consumption tier, albeit with a six fold rise at the end of the four years, those with a monthly use of above 400Kwh are not privy to support.

The new framework which received green light by the Petroleum & Energy Authority (PEA) following approval in June by the Council of Ministers targets cost recovery in electricity generation and distribution. In a bid to remove what the IMF calls’ quasi-fiscal operations’, which are essentially government subsidies that distort market prices and can lead to inefficiencies, state provision of services at less than their commercial cost has no place in the macroeconomic overhaul recently adopted by Ethiopia. Furthermore, the 1.5 billion dollar grant-credit mix provided by the International Development Association (IDA) on July 30 also entails tariff raises by Ethiopia towards full recovery of operational and debt service costs for the electricity sector by 2028

While the Authority had the final say on the new framework, Ethiopian Electric Power (EEP), the state-owned Enterprise responsible for power generation in the country, had insignificant input on the latest changes.

Moges Mekonen, EEU’s communication director, confirmed the Enterprise’s crucial role in setting the new tariffs poised for implementation. He emphasizes that the Ethiopian Electiric Utility (EEU), responsible for retailing electricity to end-users, is working to ensure that the increased tariffs are implemented in a fair and manageable way for consumers. This reassurance is essential in the face of significant changes in the electricity sector.

“A 12 cent increase in power generation each quarter is part of the change,” Moges told EBR.

Ethiopia’s electricity supply chain has been primarily facilitated through the power purchase and distribution agreements between the Ethiopian Electric Power (EEP) and EEU following the split of the Ethiopian Electric Power Corporation (EEPCO) 11 years ago.

EEP is responsible for constructing and upgrading electricity generation in the integrated national grid and distributing bulk power to the EEU. The EEU, on the other hand, is responsible for retailing electricity to end-users, ensuring that the increased tariffs are implemented in a fair and manageable way for consumers. This reassurance is essential in the face of significant changes in the electricity sector.

While the enterprises occasionally step over each other’s toes, the financial feasibility and efficacy of the arrangement have remained questionable.

An Office of the Federal Auditor General audit uncovered a staggering loss of 1.2 billion Br in potential revenues from domestic power sales and nearly 1.1 million dollars in energy exports due to a lack of synergy between the two enterprises. EEP’s financial vulnerabilities go a layer deeper as it accounted for 39.6 % or nearly 208 billion birr of the state-owned Commercial Bank of Ethiopia’s (CBE) outstanding corporate credit balance a year back. While the Finance Ministry issued a directive in May replacing all of EEP’s debt to CBE, it still reflects the precarious financial scaffolding of the Enterprise.

Experts have often recommended diversifying revenue streams, tariff revision, efficiency measures, and new markets to ease EEP’s formidable financial hurdles.

Energy consultant and auditor Yemaneberhan Kiros has long recognized the potential gains from tariff reforms in ensuring the financial feasibility of electricity projects. He recalls how most large-scale power generation projects estimate a payback period of around 20 years upon commencement. This potential for financial feasibility is a vital aspect of the ongoing reforms.

“This is partly due to low tariffs,” he told EBR. “Production costs are quite high.”

However, the experienced energy auditor calls for significant improvements in managing energy leaks and wastages for the grid’s long-term sustainability. Yemaneberhan points to inefficient practices that undermine the power network’s integrity, particularly energy-intensive processes. Over a quarter of our energy production is wasted due to inefficiencies in storage, transmission, and aging infrastructure.

He recommends a mix of efficiency tools, such as Variable Frequency Drives (VFDs), which allow voltage supply adjustment according to application requirements. The energy expert believes minimizing the loss can significantly increase electricity access.

“A tariff adjustment alone is not a guarantee,” he underscores.

Power generated from the 22 stations operated by EEP is distributed across the country in a grid network stretching a little over 22,000 Km, Which the EEU manages.

Yemaneberhan referred to the tariff reform implemented for four years starting in 2018, which resulted in a nearly 164% increase in rates to illustrate the complexity of energy management. He recalls how several energy-intensive establishments adopted a relative consciousness of their energy expenditures due to the elevated cost while the electricity suppliers lagged.

Yemaneberhan says frequent outages, equipment failure, and inequitable distribution will remain factors without an efficiency-minded approach.

He expects the selection process for energy sources by energy-intensive manufacturers and some SMEs to require overhauling as fuel and electricity prices increase. The consultant also notes that most households and businesses prefer ‘long-lasting’ equipment to slightly more efficient options that are less financially burdensome in the long run.

“Comprehensive reforms in consumption patterns are crucial,” according to Yemaneberhan.

While local research into the impact of electricity tariff reforms remains limited, some international organizations have mapped out exciting relationships.

A 2022 working paper by Oxford Policy Management and UK aid that evaluated the impact of previous tariff reforms on Ethiopian firms reflects a peculiar trend. Following a survey of more than 8,000 firms, it found that firms that invested in energy efficiency managed to hold back a marked rise in production costs while those that did not struggled. The paper also highlights an overall cost increase, with smaller firms feeling the sharpest bite.

While the recent tariff reforms mark the third adjustment to rates in the past eighteen years, electricity access still needs to be improved compared to power generation capacities. Despite an installed energy generation capacity of above 5,200 Mega Watts (MW), EEP’s power reaches less than 60% of the Ethiopian populace. Even with a marked uptake of 5,200 MW in power generation expected as construction of the Grand Ethiopian Renaissance Dam (GERD) nears completion, distribution issues have given little room for optimism.

An owner of a food processing plant on Addis Ababa’s outskirts still needs to be convinced of reliable access through a structural overhaul in power-supplying enterprises. He expects a significant increase in monthly costs, mainly due to the intense energy demand from his massive boilers. He attributes the potential rise in selling prices to more than just utility bills.

“Factories are not charged solely on consumption but also usage patterns,” the businessman underscored to EBR.

He referred to a demand charge levied on industrial enterprises that calculates monthly payments based on their usage during peak consumption. The veteran businessman carefully weighs his energy options as he contends with price hikes in nearly every other input.

“Inflation is certain, electricity not so much,” he said humorously.

Nonetheless, Ethiopia’s march towards a liberalized economy has gained feverish momentum in the past two months. A financially sustainable energy policy is a significant condition for the continued provision of the financial packages Ethiopia’s government agreed to.

Discerning observers provide a much more nuanced perspective on the potential allure of tariff reforms for private investment in the energy sector.

Mikael Alemu, General Manager and Co-founder of 10 Green Gigawatt for Ethiopia pins the entry of private capital on several interconnected pillars. He asks whether the increased tariffs cover the entire cost of grid operation and maintenance while noting how many countries don’t allow private sector control of the grid.

“The grid is considered a key part of a country’s security structure,” Mikael told EBR.

He also does not expect a substantial increase in generation due to the reforms despite foreseeing some improvements stemming from replacing faulty components. Mikael underscored that electricity generation requires hefty investments and long return cycles, requiring decades-long commitments.

“Ethiopia is yet to convince investors about the appropriateness of such long term investments,” he noted.

During his last parliamentary address, Prime Minister Abiy Ahmed (PhD) noted that Ethiopia’s energy reforms towards cost recovery are not limited to electricity. A gradual removal of fuel subsidies has been implemented over the past few years, which will see them gone to only on selected public transport in a matter of two years.

While the PM noted the importance of receiving a commensurate return for the government’s fuel imports, opinions remain divided over the exact degree of justifiable state support for its citizens.

Mikael believes that a government needs to help citizens maintain a decent standard of living, with priorities given to the most impactful components, which he reckons means essential food items for low-income households. However, he does not consider electricity a significant component of household costs and opposes tariff subsidies as they could hinder the development of a much-needed energy infrastructure.

“Provide subsidies directly to those in need,” Mikael says. However, don’t reduce the price of subsidized commodities. “

He also gives little credence to fears that the increased tariffs will derail manufacturing, as electricity weighs less than labour or logistics expenses for Ethiopian-based manufacturers, who can compare it to much higher rates in neighbouring countries.

Mikael expects most enterprises to opt for alternative sources of energy (Solar batteries) and reduce their reliance on grid supply.

“Stability of electricity is more important than an unrealistic price,” he underscored.

The veteran industry insider expects long-term energy access to depend on adequate investment in the grid, new transformers and lines, and the deployment of mobile maintenance teams to uphold its long-term integrity.

The expert also identifies hiring and educating competent engineers as one of the most critical elements in improving grid access. He underscores the utility’s importance in maintaining stable cash flow to cover maintenance.

“The role of tariffs is to cover both expenses is critical,” Mikael says.

Energy policy is one of the most critical forces determining the expansion and development of a technology infrastructure. Ethiopia’s rapidly growing population and the government’s push towards a digital economy require affordable, accessible and sustainable energy. With policy options stretched from absolute privatization of energy generation to expanded investments in alternative sources like mini-grids, there is significant space for tailored regulatory interventions. Investments in power generation like GERD need to be complemented by improvements in grid efficiency, updated maintenance schedules and contemporary financial management practices.

Indeed, Ethiopia’s recent decision to increase electricity tariffs is one of the strategic policy moves to address the country’s longstanding energy challenges. While the government offers the lowest electricity prices in the world, the underlying infrastructure and access to electricity remain significant hurdles to the country’s modernisation. To navigate this complex situation, Ethiopia needs to adopt a multifaceted approach that leverages its unique potential for renewable energy generation and draws lessons from other African peers.

Ethiopia should prioritize expanding and modernizing its power generation, storage, and distribution infrastructure as it is at a lower level. Continuing to invest in renewable energy sources, such as hydropower, solar, and wind power, helps diversify the energy mix and reduces reliance on fossil fuels, which is critical. Additionally, exploring innovative energy storage solutions, such as battery technology, can improve grid stability and address intermittent power supply issues that many households and industries suffer from.

A focus on improving energy efficiency and conservation is also essential. By promoting energy-efficient appliances, industries, and practices, Ethiopia can reduce overall energy consumption and alleviate pressure on the grid. Implementing energy-efficient building codes and providing incentives for energy-saving initiatives reduces demand.

However, as the funding to achieve these interventions would be massive, experts advise the importance of deploying innovative resource mobilization strategies. That is why exploring and strengthening public-private partnerships (PPPs) to attract investment in the energy sector become critical. PPPs can help finance large-scale infrastructure projects, bring technical expertise, and improve operational efficiency for the sector. By partnering with private companies, the government can accelerate the development of its energy infrastructure and enhance service delivery.

Addressing the issue of electricity access, particularly in rural areas, is essential to ensuring fairly distributed development benefit for citizens. Expanding the rural electrification grid and implementing off-grid solutions, such as solar home systems, help bridge the energy gap and improve the quality of life for millions of Ethiopians. Government subsidies and targeted programmes can also make electricity more affordable for low-income households.

Indeed, Ethiopia can learn valuable lessons from other African countries that have successfully addressed similar energy challenges. Countries such as Kenya and South Africa have made significant strides in expanding their energy infrastructure and improving access to electricity by implementing policies and strategies that expand power generation and fair distribution.

While Ethiopia’s decision to increase electricity tariffs might increase the cost of living and production, it is one of the necessary steps towards addressing its energy challenges. By investing in infrastructure, promoting energy efficiency, leveraging public-private partnerships, expanding access, and learning from the experiences of other African countries, Ethiopia can navigate this complex situation and build a more sustainable and resilient energy future. EBR

13th Year • October 2024 • No. 134