Thursday, April 18, 2024
NewsLow electricity tariffs discouraging private investment in energy: state utility firm

Low electricity tariffs discouraging private investment in energy: state utility firm

Power bills set to rise by September

Heads of the state utility Ethiopian Electric Power (EEP) claim considerations for private sector investment in the energy sector are behind their plans to raise electricity tariffs later this year.

Ashebir Balcha (Eng.), CEO of the state-owned power monopoly, said subsidized electricity tariffs remain “one of the biggest challenges” in the energy sector during the UK-Ethiopia Green Tech Forum earlier this week. In attendance at the Radisson Blu were consultants, representatives from regulatory agencies, diplomats, and energy investors from the UK.

The Forum focused on Ethiopia’s abundant green energy resources and obstacles in the energy sector, such as legal constraints and low return on investment due to subsidized tariffs. Ashebir told attendees that tariffs “aren’t cost reflective” and announced plans to raise them in the coming months.

The plans are based on the recommendations of a World Bank-sponsored study commissioned by the Ethiopian Electric Utility (EEU), the other half of the state monopoly on energy. An unidentified foreign consultant carried out the study, and the resulting tariff policy is expected to be introduced sometime before September.

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Legislative and bureaucratic issues surrounding power generation are another problem officials say need to change.

Mekdes Mezgebu, founder of Mekdes and Associates Law Office, observes that, although power generation was liberalized a few years ago, private sector investment is slow and there are not many projects getting off the ground.

Her firm represents a private investor that was among the first to take a gamble in the energy sector via an off-grid power generation project following legislation that allowed private investment in the sector in 2021.

Mekdes says it took the investor two years to set up the grid due to bureaucratic and legislative uncertainties and pushback. But, she says there is progress.

“The laws are good. It provides a starting point for implementing a project. But there are still a lot of challenges that go into developing the project,” she told The Reporter. “Mini-grids are typically very small; the budget is small so the requirements have been challenging.”

Another company represented by her firm faced issues in importing components necessary for its energy investment, according to Mekdes. The authorities prevented the firm from importing the equipment on the basis that it held a power generation license, and not a license for distribution or transmission.

It is a dilemma that needs legislative solutions, as the law “does not recognize the end-to-end nature of off-grid investment,” according to Mekdes. 

The company was “very stuck in between” and forced to acquire a transmission license to get its equipment through customs, paying the requisite initial investment despite already holding a license for generation, she said.

Mekdes says the progress so far is positive but wants to see improvements in legislation. She suggests that building a track record of successful energy projects would help attract more investment.

“Investors that are on the ground need very strong regulatory support because their success will unlock more investment in the country,” she said. “They pave the way for others to come in as investors always look to others that have succeeded with their investment decisions.” 

Meleket Sahlu, deputy head of the Ethiopian Investment Holdings (EIH), was also in attendance at the Forum this week. EIH has over two dozen state-owned enterprises, including EEU but not EEP, under its wing, and engages with foreign investors looking for partnerships in various sectors, including energy.

The Deputy CEO recognizes the bureaucratic and legislative issues facing energy investment.

“We understand the government is coming from a strategic interest perspective. We understand that there is a lot of negative perception in the business climate as well as in the political space, but we hope that it won’t overshadow the opportunities the country presents,” said Meleket.

Ethiopia has a power generation capacity of around 5,000MW, and less than 60 percent of the population has access to electricity.

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