ELECTRICITY REGULATION IN ETHIOPIA

1. ELECTRICITY REGULATION IN ETHIOPIA Presented by: -Seifu Ali ECOPA Mauritius March, 2007

2. ELECTRICITY COVERAGE • A. AN OVERVIEW • Electricity coverage is the percentage of population which have access to Electricity. • 1.6 – 2.0 billion of the world population have no access to electricity of this;- • 50% in south Asia (35% in India alone) • 32% in sub Sahara Africa • 14% in East Asia (not including China)

3. In rural areas of developing countries 4 out of 5 live without electricity. • 99% of the people without Electricity live in developing countries • It is clear that Electricity is closely linked to development both as a cause and a consequence.

4. Circular Analysis of Improvement in electricity Coverage Increase in Electricity Coverage Help in increasing output in productive sector Increase national output & Income Improved Living Standard Increase the ability to pay Electricity bill Increased investment in the electricity sector Expansion in electrification program

5. The major means to accelerate electricity coverage is to undertake a nationwide Rural Electrification (RE) program • Currently many developing countries are undertaking RE program to… • Economic development • Poverty Reduction

6. B. Rural electrification Program in ETHIOPIA • The current Electricity coverage in Ethiopia is about 17% of the total population • The per capital Electricity consumption is about 30 kwh/year, which is significantly small as compared to the African average (500kwh/year) • In order to alleviate this trend the Ethiopian government has embarked up on a new program • Universal Electricity Access Program (UEAP)

7. The UEAP Document is prepared on April 2005 with the objective of:- • Increasing the national electrification program from the 15% to 50% with in 5 years (2006 – 2010) • Through the supply of:- • Adequate - coverage and continuity • Affordable • Reliable electricity to the rural poor in a sustainable basis • In the past 50 years only about 10.6 million of the population (>977.000 customers) have access. • But in the coming 5 years it is expected that about 24.9 million people will have an access.

8. UEAP is an autonomous program with in EEPCO (Ethiopian Electricity and Power Corporation) which has its own administrative and technical staffs and the required materials along with financial resources. • The whole program is financed by:- • 80% subsidy provided by the government • 20% from EEPCO • The government acquires grants and loans from bilateral and multilateral sources and then channels to the UEAP program in the form of subsidy to EEPCO.

9. The target area of UEAP are:- • Towns • Villages • All productive and service sectors, especially the agricultural sector including agro-processing and irrigated commercial farms. • All the regional states of the country except Addis Ababa. • Currently until last week (March 18, 2007 the first phase of the progamme budgeted 133.4 million dollar (loan from WB) as well as EEPCO was able to electrified 350 rural towns and villages. • With the 2nd phase of the programme EEPCO requested 129 million dollar to electrify 335 rural towns and villages expected to commence in sep.2007. • However , the high cost of connection and operation compared with the affordability of the rural people has been significant factor to limit the program. • The market is highly characterized by small pockets of demand center widely spread through out the country and therefore operation cost has been frequently high.

10. II. Electricity Regulation In Ethiopia A. OVERVIEW • Ethiopia has a huge hydropower potential which is estimated to be about 30,000 MW. • Of which only about 2% is harnessed. • EEPCO provide 791 MW of Electric power from 9 large and small scale hydropower station and from diesel generators. • By 2011, the power that the company will be able to generate will reach 2218 MW and increase the amount of customer to 2.6 million. (Fortune vole 7No 359, March 18, 2007). • The total installed capacity of the ICS is about 784.1 MW, of which hydropower plant comprises 662.6 MW. • The SCS has a capacity of 30.09 MW (soar)

11. B. REGULATORY FRAMEWORK 1. Regulatory Structure and responsibilities • Electricity proclamation no 86/1997 and electricity operations of council of ministers regulation No 49/1999 has established regulatory agency with a major purpose of regulating the power industries. • The “Electricity Agency” while it is an “independent” federal organ is accountable to the Ministry of Mines and Energy (MME) and is entrusted with the objective to promote efficient, reliable, high quality and economical electricity service. • Towards this end the agency has been vested with a power to:- • Determine the quality and standard of electricity service. • Issue, suspend and revoke license for generation transmission, distribution and sale of electricity. • Study and recommend tariff and supervise its implementation and other specific obligation and right of Agency has been established by the same Law. • The regulation established obligation and responsibilities of both the operators and the utilities and the expectation of conduct in the business relations.

12. 2. Regulatory Independence • The Agency has been provided with a general mandate by law in the area of:- • Tariff setting and • Technical and commercial services. • Licensing (professional competence, contractors) • From the point of view of independence, demands that specific technical and non-technical subjects that are potentially lead the regulatory action has to be established preferably by law.

13. The regulation has not been procedural and too specific in technical matters. • rather it requires the Agency to dispose such function by menace of directives. • To Support the independent conduct of the regulatory which reduce discretion and at the sometime maintaining balance from risk. • Procedures ought to be developed.

14. 3. Regulatory Transparency • Transparency in the regulation has been incorporated in area of issuance of license by specifying general and specific requirements including project specific feasibility analysis. • Outlining of time bounded procedural steps for:- • Procurement of license • Condition for refusal or revocation of it. • In establishing efficiency rate, it has been stated that operators would be consulted before adapting efficiency parameters to be incorporated in tariff formula. • The transparency requirement ought to go through the decision process when disputes arise:- • Providing opportunity of the different parties to present their views before final decision. • Providing appeal forum for parties injured by the decisions.

15. This would also be instrumental to build regulatory impartiality under situation where the government might appear as:- • Owner. • Operator and • Through its ministerial offices as a regulator • However, price regulations which is highly sensitive and decisive as far as private investment in the sector is concerned to be supported by detailed and transparent procedure to guarantee Return on Investment (ROI)

16. 4. Price Regulation • With respect to pricing, principles has been established with the acknowledgment of the need to minimize discretion in regulatory control of price by way of directives. • From the legal provisions tariff is regulated and fixed by the Agency including generation price to be paid to the independent producers. • The pricing approach has paid sufficient emphasis to cost of service for a regulated rate of return with adequate incentives incorporated into appropriate cost components.

17. 5. Procurement Regulation • In the National Grid system generation procurement managed by through competitive bidding in Build Own and Operate (Boo) arrangements after determining the additional capacity and energy that is desired to be purchased. • Depending on the interest of the purchaser, the arrangement could be on the Basis of Project Transfer (BPT) after a period of operation where sufficient capital reform is achieved. • Private power generation involves a number of contractual arrangements between • The owner/developer the public utility • Insurer • Loan financiers • Equity investors • Contractors • Operators and • Credit suppliers

18. This chain of contractors are interlocked and can result a chain of undesirable effects, if the terms are stringent, vigorous • Temporary ownership is the most favored arrangement where after a certain period of operation the project to assumes adequate return on investment be transferred to the government or its utility, The transfer assumes adequate Return on Investment. • Private investors have a particular concern about commercial risks • Currency fluctuation risk • Performance risk – poor technical performance • Social risk – non-payment of bill • Political risk – civil conflict • Block tariff • The extra cost to cover such risks will inevitably be passed on the customer, thus aggravating affordability problems. • There is no doubt that such risk a real deterrent to investment.

19. Independent Power Producers(IPPs) finance requires efficient risk allocation among the contracting parties, where usually the purchaser takes demand risk and the supplier constriction and operation risks. • Since IPPs do not directly participant in retail trading, market risk are to be borne by the purchasing utility. • Private sector-Independent power producers (IPPs) is advocated for not only complementing the capital need but also for spill over effect of efficiency to public sectors. • The country should design and seek options to increase efficiency of the power industries for a better service to the economy and to increase internal resources in as much possible way to finance development. • Against the wide spread and rampant sector problem ranging from governance to operational efficiency and financing, reform measures is important that affect the industry at different level.

20. C. Scenarios for ORGANIZITIONAL REFORM AND INDUSTRY STRUCTURE • Even though, the regulation emphasizes bulk procurement of power from private producers for distribution to customers the Ethiopian Electric Power Corporation (EEPCO) is likely remain major power supply source. • The regulation and Electricity law is not articulated in regard to the desired structural requirement of the power industry. • Power industry in the country, characterized by governance problem, where policy making, ownership and operational activities is vaguely defined with apparent lack of clear objectives and legal and regulatory frame work. • The industry structured with monopolistic responsibility virtually closed to private capital. • The Ministry of Mine and Energy (MME) play a conflicting role as operator and regulator. • There is no any clear delineation of MME in its role as supervisor and regulator.

21. Many activities are centralized beyond the manageable limit creating additional burdens on top management. • This actually distract policy issues and overall development visions in the sector. • Even contemporary major source of power – EEPCO adopted industry structure indicate a vertical integration of all functions under one corporation management. • Within the National Grid it is possible to maintain a vertically integrated (Generation, transmission, distribution) utility, while organization or administrative disintegration is not a mandatory condition.

22. disintegration of the industry in the free system (separate, generation, transmission, distribution company) considering the prevailing market size in this center may be a necessary pre-requirement. • Since the regulation is open on this subject, some details may be required to provide guidance in regard to when and when not to establish organizational or accounting internal disintegration or both at generation level. • The regulator has to look and provide investment opportunities for promoting “Yardstick” competition in the market.

23. Conclusion and Recommendation • As one prominent Harvard law school scholar in the area of Electricity regulation at one occasion said “Regulation is the art of making unpleasant choices wisely” • Besides government regulation is said to be burdensome and intrusive. • Vertically integrated structure of electricity industry dominate and hurdle the way of introducing competition. • Though the regulation promised to provide access for generation, transmission and distribution the private investor couldn’t possibly come to the upfront to exploit this opportunities. • The private sector is largely detached from readiness as well as experience in medium and large scale power business.

24. The domestic finance is similarly, poorly developed to assume any significant level of financing. • Therefore, Ethiopia as a developing country, the transition to private sector will not be easy. • There has been a sustained attempted at implementing the existing law and regulation, to create competitive market in the Electricity supply chain. • Much more is to be done, towards the restructuring reform of the power market. • Such reform accompanied by the establishment of relatively autonomous government regulatory office, replacing direct ministerial control.

25. To be certain enough, whether unbundling and private sector participation will constitute long term improvement towards:- • Economies of scale advantage • Electric market need to have a certain scale to be successful. • In small market there is no enough “room” for sufficient large-scale power companies to create a competitive market. • To provide sufficient market for large size of hydropower potential, there should be series of attempts to join regional power market, which now is highly concentrated in East Africa. (Djibouti, Sudan, Kenya). • Towards this end their has been a remarkable move to create regional power trade and further enhance this- via regional power pool market in the best interest of mutual benefits among participating countries.

26. 2. The presence of a competent and independent competition authority and/or an equally well-organized electricity regulator. This is the second requirement for competition in electricity. • If those requirement are not fulfilled, benefit of liberalization are elusive. • Where technically feasible competitive procurement have also been considered to fairly impact end-users with the gain of competition at the generation level which roughly shares 50% of the total average tariff. • However this alone cannot be enough to alleviate the potentially strong biting effect of private finance on the economic of developing countries like Ethiopia. • Private financing is as much as it is necessary and important to supply the capital needs, its introduction in the power sector will require meticulous care.

27. Apart from the issue of public or private ownership, what really matter is that:- • Is unbundling is realistic? • As long as the federal and state governments still a monopoly. • Does grid-based electricity move in exorability back forwards vertical integration? • Whenever experience of unbundling, competition and private sector participation in electricity supply deals with: • Problem of scarce public capital . • Inadequacies of good governance and management will not go away. • This issue of equitable distribution of supply is a vital interest of the consumers.

28. We strive that consumers should participate and represent in the regulatory process and monitoring of public utilities – like electricity. • Complaint handling process • Mediation of disputes • Price policy. (tariff settings) • Provision of sustainable, affordable power supply. • We believe and adhere to the premises that public service have a less risk than privatization option, government and management reforms are essential. • Risk of maintaining sustainability and affordability • Risk of accessibility than the unbundling • Risk of power surges and interruption of supply at inconvenient time (Rota cuts) • The difficulties and limitations of private sector participation must not be used to justify inaction in reforming public sector services

29. Thank you!!