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Opinion

Nurturing Ethiopia’s domestic private sector for renewable energy transition

Published on 29 June 2021

Image of Seife Ayele
Seife Ayele

Research Fellow

Image of Wei Shen
Wei Shen

Research Fellow

Tadesse Kuma Worako

Policy Studies Institute (PSI)

In recent years Ethiopia has made a significant policy shift towards generating electricity from non-hydro renewable energy resources, some by private suppliers. Despite its abundant and diverse renewables, like wind, solar and geothermal resources, close to 90 percent of its current generation capacity of 4413MW is from hydropower supplied by the state. Ethiopia plans to increase its overall capacity five-fold by 2030, about a quarter of which will come from renewables procured by global private suppliers.

This energy transition is necessitated by many factors, including the urgent need to provide access to the 56 percent of its 115 million population currently without it, and to achieve 100 percent access by 2030. Ethiopia aims to reduce reliance on state generation of electricity (historically the sole supplier) which will reduce its debt to the utility companies. Using its newly established Public Private Partnership (PPP) framework set up 2018, two solar projects of 125MW each were awarded to Saudi Arabian developer ACWA following a record low US$0.02526/kWh tariff in Africa. Meanwhile, the second round of scaling solar containing six projects totalling 750MW is being prepared, and a comprehensive wind energy resource assessment is under way.

Financing and foreign exchange challenges of procuring renewable electricity

Despite these efforts, procurement of renewable electricity from private suppliers has yet to materialise. The ongoing Covid-19 pandemic has affected implementation of this strategy.  At project implementation level, like elsewhere, the Covid-19 pandemic has slowed or interrupted power purchase and financial negotiations, equipment supply logistics and construction work, affecting project development and financing at various stages. At the macro-economic level, the foreign exchange scarcity which predates the pandemic has been further exacerbated due to the drop in exports and rise in imports.

The IMF recently announced that Ethiopia’s debt is assessed to be largely sustainable, after the recent extension of the debt service suspension initiatives from the G20 to December 2021. However, the expected low debt servicing capacity and the prospect of new hurdles in accessing foreign exchange, coupled with recent security challenges, are dissuading new investors in renewable energy activities and halting existing project developers.

Benefits of nurturing the Ethiopian private sector energy sector

There is no magic bullet to immediately solve these challenges. While the pandemic was sudden and unexpected, many issues were pre-existing, being both structural and intertwined. We argue however that nurturing the domestic private sector could go some way to mitigating the forex supply and currency convertibility issues in the medium and longer-term.

As it stands, the domestic energy-related private sector is diminutive. Only a handful of domestic businesses are involved and, apart from one junior partner, none directly participate in large scale project development or in the independent power producer (IPP) bidding processes. The development of the sector could not only reduce the need for converting birr into foreign currency to repatriate profits, it would also enhance knowledge and increase technology transfer, and boost local technology development and manufacturing.

Enhancing national content will reduce reliance on imported equipment and associated foreign exchange requirements in the long run. It will speed up efforts to cut the energy deficit and provide access to all. As a growing sector, electricity will have multiple effects on a range of industries and could be a vehicle for socio-economic transition, for example in reducing poverty and un(der)employment. It will also reduce dependence on traditional biomass energy resources, and thereby, reduce vulnerability to climate change.

Learning from successful green industrial policies

Some African renewable energy IPP programmes, such as South Africa’s Renewable Independent Power Producer Procurement Programme, may provide some lessons here, given their focus on technology transfer and local content of manufactured components. South Africa built on domestic capacity to produce basic inputs for use in procuring renewables.

Many fast industrialising countries in the past few decades, including China, India, Argentina, Malaysia and Turkey, have pursued policies aiming to nurture domestic manufacturing capacity via procurement or IPP initiatives. However, these experiences also indicate that successful renewable or green industrial policies require some preconditions, specifically from government in providing supplementary measures to support newly established ventures via tax incentives, and providing the necessary access to basic infrastructure.

Following the 21 June 2021 general election, the new Ethiopian government will need to continue to work with private electricity suppliers, and give attention to the development of the domestic private sector in the field. Any specific support measures will need to directly address the root causes of the problems that the domestic renewable energy is currently experiencing, and ensure that support is not corrupted by rent-seeking or other negative behaviours. Potential adverse effects such as dependence on state support should also be avoided.

In a nutshell, support measures will need to be implemented in a transparent and accountable manner, ensuring that support leads to performance such as the manufacturing of quality renewable technology parts. With increasing demand for renewable energy in Ethiopia and beyond, the supplier landscape is undergoing major changes, and Ethiopia needs to develop its domestic industry to ensure its stake in this market.

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