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Traditional Energy Opportunities in Ethiopia and Tanzania

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Industrial Parks Strategy – Addis Ababa

One of the main goals of the Ethiopian government is to industrialize the country and make it a middle-income economy by 2025. Much of the industrial development will depend on the ability of Ethiopia to attract foreign investors to set up production facilities in the country. The success of the industrialization policy would bring, in addition to economic growth and employment for thousands of Ethiopians, foreign currency much needed to pay for the investment projects the country is developing.

The key component of the industrialization policy is the development of twelve industrial parks, scattered across the Ethiopian provinces. The parks will provide foreign investors areas with access to all required infrastructure where they can build manufacturing plants and receive tax benefits from the government. For manufacturing investors, access to power supply at competitive prices is one of the main infrastructure requirements the industrials parks must fulfill to attract investors. Thanks to its vast renewable energy resources and subsidies to the electricity price for the end-consumer, Ethiopia is well-positioned against other countries to offer affordable energy.

Power reliability, however, is as important for investors as a competitive price. According to a study by the World Bank, an increase of 1% in power outage duration decreases firm productivity by 0.1%. Ethiopia is not well positioned to offer a reliable power supply to the industrials parks for two reasons. First, the electricity transmission and distribution network fails frequently and requires major investments that cannot be covered by the subsidized tariffs consumers pay. Second, the current power generation mix based on hydroelectric generation and other renewables is subject to variation from external factors: droughts for hydro, cloudy days for solar, and wind variation for wind power. Moreover, the current power generation strategy does not consider the use of reliable traditional power generation sources such as natural gas due to the non-renewable nature of these sources. Although focusing on clean renewable generation is the expected trend going forward, the industry will continue relying on dirty and expensive diesel generation if the national electric grid fails to provide reliable power.

To help Ethiopia provide reliable power to its industrial parks, the Ethiopian authorities should consider two initiatives. First, introduce a reliability charge to industrial clients, subject to guaranteeing minimum service levels, that could help finance the required upgrades of the generation and transmission infrastructure. Companies would be willing to pay this extra charge as long as it translates into more reliability, which would reduce productivity losses and associated expenses of operating backup diesel generators. A key component of this proposal is the minimum service level guarantee, which would require the development of processes to measure and enforce compliance of service.

Second, Ethiopia should include in its power generation strategy the development of efficient conventional power generation, such as gas-fired power plants, as back-up to the main generation plants, particularly to hydroelectric generation in case of droughts. Further into the future, the development of new sources such as geothermal power and the interconnection between Ethiopia and gas-powered countries such as Tanzania could also help to secure the reliability of the electricity supply.

Urban Sprawl – Dar es Salaam

Urban sprawl is becoming an issue for many cities in emerging markets as the population moves towards metropolitan areas in search of better opportunities. Sprawl stresses many critical parts of a city’s infrastructure, including power generation. Extending the grid becomes increasingly cost prohibitive as population density decreases, and power generation resources are often unable to supply enough power to meet peak demand. Dar es Salaam’s population is projected to grow 85% between 2010 and 2025 resulting in an estimated population of 6.2 million by 2025. Additionally, 70% of Dar es Salaam’s population currently lives in informal neighborhoods with limited access to basic infrastructure. This means that creating a concrete plan for power generation is extremely important.

Tanzania has significant unexploited natural gas reserves both along its coastline, and further offshore. However, TANESCO’s financial difficulties have slowed the expansion of the grid, and made the utility a very risky off-taker for any power producer. It is imperative that the Tanzanian government work with the World Bank, African Development Bank, and TANESCO management to restructure TANESCO and create a financially stable organization. This will allow for additional IPP projects in natural gas as the grid expands. Another opportunity to mitigate risk for private sector power generators is to create a lockbox for customer collections and provide a springing lien to power producers, thereby reducing their exposure to TANESCO’s financial instability.

As Dar es Salaam expands and the percent of the population in informal neighborhoods grows, primary energy sources will become a larger concern. Biomass (firewood and charcoal) is currently the source of 85% of the primary energy in Tanzania. As Dar es Salaam increases its dependence on charcoal, it risks increased health problems and environmental degradation. Gas provides a far more efficient and sustainable solution, however, the unit cost of gas to a consumer is significantly greater than charcoal primarily due to upfront equipment costs. This imbalance creates a perfect opportunity for a private sector player to create a micro-finance solution for gas cooking equipment. Most Tanzanians already use electronic payment methods, such as m-pesa or tigo-pesa, making this solution especially viable. Additionally, Dar es Salaam should consider PPP models that would allow it to build permanent in-home gas infrastructure. The most likely model for this expansion would be a build-operate-transfer model. This would allow a private sector player to build transmission infrastructure for in-home gas, but allow TANESCO to own the completed transmission network.

TANESCO’s financial difficulties have hampered Dar es Salaam’s ability to confront the challenges created by increased urbanization and sprawl. In order to cope with a growing population, Dar es Salaam needs to engage the private sector to provide increased generation, transmission, and financing solutions for the future.

Transmission upgrades

Ethiopia and Tanzania both suffer from unreliable electricity supply. Frequent service interruptions are particularly detrimental to the industrialization goals of both countries as commercial enterprises demand inexpensive and reliable electricity – service interruptions can halt industrial operations and destroy economic value. Additionally, transmission losses of greater than 20% further decrease the available electricity supply.

Private capital could help upgrade transmission networks through an energy service company (“ESCO”) model. Under such a model, a private sector player would upgrade transmission lines, and the return on their capital investment would be based on realized loss reductions. The size of this opportunity is large – in Ethiopia, reducing transmission losses from 20% to around the government’s goal of 10%, could translate to cost savings, and value for private capital, of $180 million per year. Additionally, such a model would allow governments to maintain ownership and operation of transmission while not committing capital up front.

Development of hydrocarbon reserves

Both Ethiopia and Tanzania have significant hydrocarbon reserves. In Ethiopia, these reserves are unexploited, as the national energy strategy focuses on increasing hydropower and other renewable resources. In the medium term, these reserves could be exported and used as a much-needed source of foreign exchange. There is concern that in the longer term, a renewables-only energy mix may not be sufficient to meet the rapidly growing needs of the country, so hydrocarbon power generation may also be needed to meet future domestic demand.

Tanzania has already begun to exploit its vast natural gas reserves. Given the pressure recent droughts have exerted on the hydropower-reliant electricity supply, Tanzania will likely make natural gas a larger part of its energy mix. There is already excess pipeline capacity in place to transport natural gas to Dar es Salaam, where there is heavy demand for more generation. The financial situation of the off-taker, TANESCO, is a barrier to private capital, but restructuring TANESCO and giving more confidence to investors would make gas-fired generation extremely attractive to independent power producers. Longer term, natural gas may become a valuable export. Proven reserves far exceed domestic demand, and the completion of a proposed LNG terminal would facilitate the export of natural gas.

Creation of East African energy market

Linking the grids of East African nations and creating a market to enable the sale of energy across countries would help balance the supply and demand of energy on a larger scale. This is particularly valuable in East Africa due the variability of energy sources – hydropower is susceptible to drought, while increasing renewable sources (wind, solar) will further increase the variability of the energy supply.

Ethiopia, with its large hydropower and other renewable potential, could become a significant energy exporter, providing much needed foreign exchange. Tanzania meanwhile, could import energy to meets it growing demand, while also benefiting from its central location within such a market, and capture value from the flow of energy through the country.

One way for the private sector to get involved would be to adopt a model similar to that of POWERX in South Africa. POWERX acts an aggregator, buying power from independent power producers and selling it to consumers. In exchange for profiting from energy trading it mitigates some of the risk for generators and consumers. Reducing this risk, and creating a larger market, would make generation projects more attractive to private capital, but would require significant cooperation between the private and public sectors of multiple countries. An East African energy market would also require significant expansion of transmission capacity. Ethiopia and Tanzania governments are keen to keep transmission under their ownership and operation, so private players could pursue EPC contracts to upgrade and build new transmission networks.


Distribution is another area that could be opened to more private capital in the coming decades. Ethiopia and Tanzania have ambitious electrification goals, but lack the capital to make last-mile connections for many customers. Private sector players could connect more consumers to the grid, and also bring much-needed expertise and experience in smart-metering and billing, increasing the transparency and efficiency of collections. Better metering could also allow the utilities practice demand-side management through more dynamic pricing, such as peak demand charges, allowing them to better match supply and demand. A key condition for private investment in distribution, particularly in Ethiopia, is a higher electricity tariff.

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