Energy Access – Lessons from Ethiopia

 An active state prioritization and engagement in energy sector development matters: the Ethiopian experience has clearly shown that prioritization of energy sector development, and active engagement of the State in energy sector positioning makes quite a difference.

Ethiopia has set ambitious targets, and matches them with aggressive action that led to substantial increase not only in energy capacity, but also in expansion of domestic use and exports. Ethiopia is pressing forward with the same plan in the foreseeable future, which will likely make it an energy export center for the sub-region, while experiencing rapid capacity development. The lesson for the sub-region is that an engaged and active government is key, one that prioritizes energy sector development and sets ambitious targets and aggressive implementation. The financing aspect of the engagement, particularly domestic resource mobilization, also offers collateral lessons.

 Balancing energy access expansion with export offers optimal beneficiation: energy policy makers are often advised that large-scale development of energy potential is only viable under export scenario, to markets with better purchasing power to justify energy resource development. As a result, there seems to be export-bias in energy development in high-potential countries, often undermining domestic energy access goals. The Ethiopian experience demonstrates that a dual strategy can be viable. As shown earlier, both the export potential growth and domestic service expansion in the country are improving simultaneously. Therefore, energy resource development for export need not undermine efforts to achieve expanded access domestically.

 Commitment to regional energy trade generates beneficial outcome for the sub-region:

trade is beneficial to freely participating agents, as the lesson of economics teaches. In the case of energy, it cannot be any more accurate. Energy export will bring Ethiopia hard currency that can be invested back in the sector, or utilized to finance its development.

Importing countries can also benefit from cheap energy import which otherwise would have to be produced locally at higher cost, potentially undermining economic competitiveness, particularly in land-locked countries. The sub-region will benefit from reducing all barriers to energy trade.

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 Energy access will be accelerated through introduction of supportive institutional arrangements: domestic energy access in Ethiopia is institutionally supported. There is Rural Electrification Program, Energy Technology Program and Universal Access Program, aside from traditional energy institutions. These added institutional capacity support specific targets, such as ensuring universal access targets. To countries in the sub-region with institutional gaps, the Ethiopian case study offers some perspective and applicable model.

 Using centers of productive uses of energy to anchor energy access expansion is a useful strategy: the decision to select towns and villages to electrify in the Ethiopian case is partly determined by the existence of productive uses of energy in towns and villages, such as schools, clinics, public administration offices, economic development activities and the like. By anchoring access expansion along these existing service centers that also provide public services, the dual objective of strengthening public service centers through energy access and supporting sustainability and affordability of connections are considered. Though ultimately the goal of universal access to electricity is to find solutions to deliver access to all households, anchoring the productive sectors as a spring-board for short- to medium-range energy access targets seems a model worth examining and considering. Ethiopia is not unique in this regard as many countries in the sub-region are utilizing a somehow similar approach.

 How policymakers understand energy access to mean makes a difference in terms of household access: the Ethiopia model of energy access expansion is not household-focused. It is towns and villages-household-focused. Therefore, policy makers assess that if a village is connected to the grid, all households in the village are considered as having access.

This leads to different understanding of what universal access is, and Ethiopia has already declared that it will achieve that target by 2015. This is contrary to the global effort to expand access, at the household level, ensuring actual, not potential, connection of households. In this regard, the Ethiopian model is likely to face two challenges. One, economic development actually being dependent on households also having access to modern energy, a focus at the town and village level is likely to disregard this fact. This will lead to a series of connected towns and villages with potentially a sizable share of households still lacking access, though the State considers them as having “access”. This will likely undermine the effort to see actual connections at the household level. Two, Ethiopia can learn from the rest of the sub-region in terms of accelerated efforts for expanded access at the household-level. Challenges of financing, initial connection cost, settlement pattern of households, intermittent income of rural households and the like are structural challenges for which countries in the sub-region are exploring innovative solutions. In this regard, Ethiopia can examine these experiences in the sub-region and expand its ambitious energy access program to include households, in line with the global agenda of universal access for all (households) by 2030.

4.2.4 The State of Energy Security and Key Lessons 4.2.4.1 The State of Energy Security

Energy security depends on the structure and sources of energy to meet final energy demand in an economy for socioeconomic activities. The structure of energy consumption in

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1% 9%

45%

45%

Petroleum coke LPG

Hard coal Electricity

Light petroleum products Heavy petroleum products 92%

8%

Traditional fuel Modern fuel

Ethiopia reveals that as many of the countries in the Eastern Africa sub-region is characterized by heavy reliance on traditional biomass (92%) and barely on modern fuels (8%) (see Fig. 81). Much of the 8% modern fuels utilized is imported, as electricity accounts for 9% of the 8% modern energy usage. The remaining 90% are in imported light and heavy petroleum products, and 1% on imported hard coal.

Figure 81: Traditional and modern energy usage structure - Ethiopia.

Source: Ministry of Water and Energy, Energy Balance and Statistics, 2011.

As a result, biomass accounts for a predominant share of total energy supply, followed by imported energy (see Fig. 82). Even though hydroelectric power expansion is quite signifciant, its share of total energy supply pales, and is still lower than the share of imported energy. The household sector is by far the largest energy consuming sector (using mainly biomass for cooking), followed by the transportation sector (using almost exclusively imported fuels, except recent efforts to integrate biofuels into the mix). The industrial and service sector demand a mach lower level of the energy share. Therefore, from energy security perspective, what happens to sustainable management of the biomass in the country, the trend in imported fuel dependece and progress in the electricity sector are areas to closely follow closely. In terms of biomass, detailed discussions are offered in the Environment and Energy Security Assessment chapters for the Eastern Africa sub-region.

Findings suggest that rapid decline in forest bio-stock and growth in demand in Ethiopia, coupled with the largely unsustainable harvest are sources of serious concern for biomass-dependent household energy security in terms of continuity of sufficient supply and affordability of wood and charcoal, particularly in urban areas. The pace of transition to alternative indifenous green energy sources (such as electricity), integration of improved and efficient cookstoves as a mitigation technology, sustainable forest harvest and overall energy portfolio transition are going to remain structural challenges for Ethiopia.

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In the electricity sector, efforts of the Government to rapidly expand generation from 2,000 MW to 10,000 MW by 2015, expansion of energy access to towns and villages and export infrastructure development and power delivery are areas of improvement. For domestic connected consumers, the reliability, affordability and availability of power is of prime energy security importance. Energy shortages in the last few years and repeated interruptions due to aging distribution infrastructure undermine the quality of electricity supply. But affordability is a key strength of the Ethiopian electricity sector, and to electricity consumers.

Figure 82: Energy requirement and consumption by sector.

Source: Ministry of Water and Energy, Energy Balance and Statistics, 2011.

The levelized generation cost of electricity is US$0.045 cents/kWh, the transmission cost is US$0.007/kWh, and distribution cost is US$0.014/kWh, making the leveled cost of power supply for the period 2011-2015 at US$0.067/kWh (Ministry of Water and Energy, 2012).²⁵ This makes Ethiopian power among the cheapest in the sub-region. Electricity tariff to consumers was revised in 2006, partly due to concern that the tariffs were inadequate to meet the cost of supply. The previous tariff structure remained without revision for 15 years leading to 2006. By 2006, a 22% tariff hike was introduced, keeping it at US$0.06/kWh (Ibid), with some variation by consumption type (see Table 26). Due to inflation, some argue that the real tariff today is around US$0.032/kWh. As a result, EEPCo has already submitted a request to the regulator, Ethiopian Electricity Agency (EEA) to revise the tariff to adjust to system cost recovery level to ensure financial viability of EEPCo.

To evaluate the likelihood of whether lower cost electricity, hence affordability, including to export markets, will continue or not depends on the cost of hydroelectric units in the system, including upcoming projects. Most of the large-scale hydroelectric developments have generation cost profile of at or below US$0.045/kWh, except Chemega Yeda (slightly

25 Ministry of Water and Energy of Ethiopia and SREP. 2012. “Ethiopia Investment Plant.” Addis Ababa, Ethiopia.

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above US$0.05), Aleltu East (slightly above US$0.065/kWh), Gojeb (around US$0.075/kWh) and Aleltu West (slightly above US$0.0825) (see Fig. 83). Therefore, the bulk of capacity added will continue to remain at lower generation cost, with some projects introducing higher marginal costs. Therefore, the risk of higher generation costs for the bulk of hydroelectric generation in the short to medium-range are less likely, ensuring continued affordability of Ethiopian power for domestic and export markets, hence offering energy security buffer in Ethiopia and its electricity importing countries.

Table 26: Tariff structure from 2006 to present – Ethiopia.

Tariff Category Consumption

(kWh/month)

Tariff Rate (Birr/kWh) Domestic Equivalent Flat Rate 0.3897

First Block First 50 kWh 0.2730

Second Block Next 50 kWh 0.2921

Third Block Next 100 kWh 0.4093

Fourth Block Next 100 kWh 0.4508

Fifth Block Next 100 kWh 0.4644

Sixth Block Next 100 kWh 0.4820

Seventh Block Above 500 kWh 0.5691

General Equivalent Flat Rate 0.5511

First Block First 50 kWh 0.4990

Second Block Above 50 kWh 0.5691

Low Voltage Time-of-Day Industrial Equivalent Flat Rate - 0.4736 High Voltage Time-of-Day Industrial 15 kv Equivalent Flat

Rate

- 0.3349

High Voltage time-of-Day Industrial 132 kv Equivalent Flat Rate

- 0.3119

Street Light Tariff Equivalent Flat Rate - 0.3970

Source: EPPCo, Corporate Planning Department.

Note: Exchange rate of the Birr against the dollar is 18.1597Birr per US$as of December 20, 2012 (data from National Bank of Ethiopia).

Figure 83: Generation cost profile of future hydroelectric generation portfolio – Ethiopia.

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1 2 3 4 5 6 7 8 9

Generation Cost (US$c/kWh) Source: EPPCo, Corporate Planning Department.

The risk to electricity supply domestically and in export markets is likely to come from weather and climate change related impacts. Ethiopia, along with hydroelectric producing countries in the sub-region, have been repeatedly impacted by draught and marked decline in volume of water flows, causing the marginal value of water to go up.

Energy experts in Ethiopia believe that the network of watersheds (nine of them) that feed into the hydroelectric system are the most diverse in the sub-region, adding a layer of safety, compared with less diversified watershed systems, such as the Congo river. However, climate change, especially in draught prone areas such as the Eastern Africa sub-region, can have system-wide impacts that can hamper the security of supply of electricity in Ethiopia and its export markets.

Ethiopia’s response to draught events in the recent past is demonstration of such risk.

Following the draught of 2006, and water shortages in subsequent years, emergency power generation through rental thermal units had become common in much of the sub-region, including Ethiopia. Thermal fuel use for generating electricity in both the self-contained system (SCS) and the interconnected system (ICS) increased (see Fig. 84). Light fuel oil use in ICS increased sharply. Sustained draught conditions will therefore continue to pose energy security challenge in the electricity sector.

For export markets, the 14% per year electricity demand growth in Ethiopia and the 15% per year energy-intensive industries growth (Ministry of Water and Energy and SREP, 2012) can, in the absence of continued expansion of capacity, reduce available export supply.

But given the short- to medium-term generation plans, this risk is likely to surface in the long-term, which may be fully mitigated if generation plans continue at full pace.

Figure 84: Consumption of fuel for diesel power plants - Ethiopia.

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Source: Ministry of Water and Energy, Energy Balance and Statistics, 2011.

In the transportation sector, Ethiopia, as the rest of the sub-region, is fuel import dependent. Exposure to imported transportation fuel poses energy security challenges.

Continual fuel supply and therefore energy security in the country faces numerous challenges.

 Import dependence: the complete import dependence of the country to transport fuel stocks exposes the country to price shocks, which makes it necessary to expend more hard currency reserves to import the same level of fuels stock, and with growing demand and increasing prices, the challenge to sustain fuel imports becomes apparent (see the Energy Security chapter to trace the economic impacts of fuel imports).

 Landlocked country: as a landlocked with no pipeline infrastructure, Ethiopia trucks fuel imports from the port of Djibouti, through inadequate road infrastructure. Trucking fuel hundreds of kilometers adds significantly to the cost of fuel, particularly to northern, western and southern parts of the country, undermining affordability further, particularly in an environment where fuel is sold at cost. The train connection with Djibouti is inadequate for fuel transportation, due to its narrow track, a technology from over 100 years ago. The decision of Djibouti to revise transit fees upwards has applied further pressure on affordability.

 Price regulation and speculative behaviour: petroleum price is regulated, and prices are revised at the end of each month. If the price, at the end of the month, is revised upwards, there will be windfall gains for distributors who still have unsold stock. The windfall gain is surrendered to the Government. On the contrary, there are reports that if prices are reduced downwards and there ware windfall losses, no compensation is given to distributors. This system has led to rampant speculation, and distributors prefer to keep their fuel stock at port in Djibouti before the revised prices are declared. This speculative risk management system of distributors, given windfall gain or loss management of Government, has introduced a series of temporary and artificial fuel shortages. It is commonplace to see fuel shortages at end of month as a result, undermining energy security.

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 Product adulteration and regulatory enforcement: maintaining the quality of petroleum products is vital to consumers. Profit motives and lax regulation of standards has led to incidents of adulteration, which has caused concerns to regulatory institutions. The Ministry of Water and Energy is working on a new anti-adulteration bill to close loopholes. The lack of adequate enforcement presence at the distribution level will continue to be a problem, since the profit motive, with lax enforcement, offer sufficient incentive to continue to adulterate petroleum products.

 Regional instability: Ethiopia used to rely on oil refinery in the port city of Assab, in Eritrea. The refinery used to refine fuel supplies to both Eritrea and Ethiopia. In 1997, disagreements over fees and questions about the feasibility of continued operation led Ethiopia to pull from using the refinery, leading to significant draw down of needed refining capacity. Modernizing the refinery to meet the needs of both countries was being debated. When the Ethio-Eritrea boarder war broke out in May 1998, it completely severed Ethiopia’s potential access to the refinery and the port facilities in Eritrea. Even though a legal decision has been given to resolve demarcation of their boundaries (the declared source of the conflict), following the Organization of African Unity (OAU) brokered and internationally endorsed Algiers Agreement both parties accepted as a framework to resolve their disputes legally, no progress has been made to restore normal relations between the two countries. Ethiopia continues to ask for dialogue and negotiation before implementing the demarcation decision by the international arbitration court, a position rejected by Eritrea, which calls for demarcation of the final and binding delimitation decision and subsequent dialogue to normalize relations. The dispute continues to severe access to Eritrean alternative port facilities to Ethiopia, particularly the northern part of the country that used to rely on the port of Massawa as an import and export route. Ethiopia also sources refined oil products from the Sudan.

The dispute between the Sudan and South Sudan has led to termination of oil production, causing refining activities in Khartoum to be scaled-down, as a result ceasing fuel exports to Ethiopia. Mediation efforts by Ethiopia have led to an agreement, but there are concerns if the parties will continue to abide by the agreements reached in Addis Ababa in September, 2012. Instability in Somalia also led to rampant piracy, affecting maritime traffic, including to Ethiopia. Sub-regional efforts to tame the insecurity in Somalia have led to active military intervention. While piracy activities have been reduced markedly, following NATO anti-piracy activities in the Indian Ocean, the incidence nonetheless has continued at some rate. Regional instability impacts Ethiopia’s energy security. A broader sub-regional effort to ensure peace and security will be productive to all member States.

Even though there are no known energy security response policies in the country, there are however operational safeguards to respond to energy security challenges. Ethiopia has a publicly managed strategic petroleum reserve, distributed in major cities such as Arbamench, Mekele, Addis Ababa, Bahr Dar and Dre Dawa. The main goal of the Government is to keep three months of fuel stocks to respond to disruptions. The global rise in energy prices has left maintaining such a stock challenging, given hard currency and budgetary constraints, and reserves are at around 45 days capacity. Aside from speculative holds of industries and commercial enterprises, private sector holdings are not coordinated and are outside regulatory oversight. The strategic reserve system contains an estimated 370 million

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liters (370,000 m³) of fuel. Population and economic growth have placed added pressure to the need to maintain an even larger fuel stock as an emergency buffer.

The second strategy pursued to deal with energy security of imported fuels is diversification. A Biofuels Development and Utilization Strategy was formulated in 2007 by the then Ministry of Mines and Energy (currently Ministry of Water and Energy). To enhance the role of biofuels in energy security, the biofuel development program seeks to: gain 195 million liters of ethanol by 2015; gain 1.6 billion liters of bio-diesel; earn US$ 1 billion in foreign exchange from biofuel export; increase blending mandate to 25% using 64.4 million liters of bio-ethanol for blending; enhance bio-diesel and diesel blending to 20% by using

The second strategy pursued to deal with energy security of imported fuels is diversification. A Biofuels Development and Utilization Strategy was formulated in 2007 by the then Ministry of Mines and Energy (currently Ministry of Water and Energy). To enhance the role of biofuels in energy security, the biofuel development program seeks to: gain 195 million liters of ethanol by 2015; gain 1.6 billion liters of bio-diesel; earn US$ 1 billion in foreign exchange from biofuel export; increase blending mandate to 25% using 64.4 million liters of bio-ethanol for blending; enhance bio-diesel and diesel blending to 20% by using