Developing countries are increasingly using auctions for the procurement of utility-scale renewable electricity. But countries like Ethiopia face institutional and ideological barriers on this pathway to green energy.
More than 100 countries have implemented renewable energy auction programmes worldwide, making it the most popular policy instrument to procure renewable energy capacity. For most developing countries, auctions on renewable energy capacities can also help achieve the potential for attracting private (and usually foreign) investment urgently needed. However, designing and implementing effective procurement programmes for utility-scale renewable energy projects can be a challenging task due to a variety of institutional and ideational factors on how energy sector is or should be governed in the host country.
Ethiopia has shown great interest in developing renewable energy capacity and in 2017 launched its Public–Private Partnership (PPP) policy and procurement framework to promote infrastructure development. Electricity generation is as essential part of this institutional reform as less than 50 of the country has access to electricity. With the help of the World Bank and international donors, the Ethiopian government organised two rounds of renewable energy auctions from independent power producers (IPPs) in solar PV projects plus three unsolicited IPPs (one on solar PV and two on geothermal) to meets its policy goal of achieving universal energy by 2030. However, the new framework faces numerous challenges and up to now none of the projects have become operational.
Some key factors have accounted for the slow progress thus far including limited technical and institutional capacity to attract, negotiate, and cooperate with the foreign investment.
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It takes time and determination to embrace private investment
Ethiopia’s energy landscape has long been dominated by large hydro capacity (around 90 per cent in the national energy mix) and a totally state owned energy system including its state-run utility, Ethiopian Electric Power (EEP). The strong beliefs in state-led energy governance and in the role of large hydropower infrastructures are therefore deeply embedded in the daily practices of the energy regulators and officials, which are somehow causing reluctance to embrace urgently needed private investment in the non-hydro renewable energy sector.
Consequently, although the highest level leadership have exhibited strong determination to enhance both the efficiency of EEP and the share of non-hydro renewable energy capacities in the national energy mix, among lower-level government officials there is a mixed attitude regarding the role of private investors and non-hydro renewables, as illustrated in the recent released report on Ethiopia’s current status of renewable energy procurement. A stronger consensus is therefore needed to consolidate the transformation pathway proposed by the government and international donors. For any renewable energy IPPs to work well, a certain level of trust between government officials and project developers are needed for constructive contractual and policy relations, which are crucial to nurture this vulnerable ‘niche’ sector. This trust is evolving in Ethiopia, but very slowly.
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Lagging reforms
The complicated relations between government agencies and private project developers are affecting ongoing power sector reforms, which are further delaying the successful delivery of renewable IPPs. A competitive energy generation sector is critical for the long-term operation of IPPs, as monopolistic state utilities on power generation and transmission, such as EEP, have inherent conflict of interests with IPP developers. Such institutional arrangements would create unnecessary difficulties during the negotiations. Therefore, energy sectoral reforms and renewable energy auctions should at least go hand in hand, if reforms lag behind, the inefficient governance structure will negatively impact the performance of auctions.
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Capacity gap
The capacity gap within the public sector in managing the auction programmes, can intensify the friction between the government officers and market participants during the transactional negotiations on IPPs. Even though auctions are often viewed as a less sophisticated policy instrument compared to feed-in tariffs or other policy tools, they still present notable challenges for frontline officials to design procurement documents and negotiate PPAs. The pressure for these officials can be tremendous, particularly when their negotiation opponents are often the best financial, legal, and engineering professionals in the world. In order to address the knowledge gap between the two sides, international doners have developed various capacity building programmes for Ethiopian officials in the utility, and other relevant, ministries. However, our research suggests that many capable officials in the public domain, once properly trained, are later recruited by the private sector. In this regard, the extent to which knowledge gaps can be fully addressed with capacity buildings programmes is uncertain.
Wei Shen is a Research Fellow at the Institute of Development Studies. Tadesse Kuma Worako is a Senior Research Fellow at the Policy Studies Institute, Ethiopia
