Growth and energy: Reflections on Ethiopian Context

Ethiopia has experienced rapid growth over the past decade. The government’s strategy of Agricultural-Development Led Industrialisation (ADLI) aims to stimulate development in the agriculture sector and thereby improve living conditions for the rural poor; the next phase is to rapidly shift the agricultural workforce to more productive sectors. They have succeeded in the first phase with strong agricultural performance, which has in turn stimulated growth in the service sector.

Growth and transformation from agriculture to the industrial sector is the next phase of ADLI. Therefore the emphasis for the next phase of the GTP should be on the ‘right’ growth – i.e. growing light manufacturing by shifting the workforce to sectors with low skill entry points but high productivity. This will be supported by rapid urbanisation, linked to employment opportunities.

There is also a necessity to focus on a growth model which is explicitly linked to the poverty eradication THROUGH growth, rather than growth through poverty reduction. This might consist of three elements:

  1. Sustained rapid growth through shifting to industrialisation
  2. But not growth at any cost. This growth should be as equally distributed as possible
  3. Ensure that economic gains are translated into social gains via progressive social policies

Influences on energy domain-

Assuming this framework –then what is the role of the energy sector in this growth story?

Energy constraints can inform strategic choices. Energy exports are an opportunity to improve balance of payments position $1.9bn a year by 2030. 2013 exports were $2.8bn around 2/3 of existing exports. Prioritise industrial sectors based on several factors, including energy demand.

Lack of energy can be a drag on growth, particularly in energy intensive sectors. The strategy of developing Special Economic Zones is heavily dependent on a reliable energy supply. In addition, sustainable urbanisation requires reliable energy supply – both electricity and fuels.

Energy sector development can stimulate economic gains for the poorest. The development of the energy sector in Ethiopia is also an opportunity to stimulate jobs and incomes. This is directly through the energy sector, but also by enabling local enterprises.

Three policy objectives can be identified for the role of the energy sector in Ethiopia’s growth:

  • Getting a fair deal on electricity exports – Ethiopia could export up to 32,018 GWh per year – at 0.06/kWh this would equate to around $1.9bn of foreign exchange income. However, some countries or industries could be willing to pay significantly more than this, so there is need to be strategic in targeting export partners. Secondly, contracts need to be structured to fairly share risk between partners. Ethiopia should aim to maximise returns without compromising domestic supply. Potential indicator: export price per kWh.
  • Meeting electricity demand from Special Economic Zones – accurately forecasting demand and ensure generation and transmission are matched to demand. Potential indicator: unserved demand in SEZs
  • Sharing the benefits – ensuring that the poorest also benefit from the growth of the energy sector. This is through developing SMEs enabled by the energy sector as well as within the energy sector. In addition, redistributive policies to improve access to modern energy services. Potential indicators: Gross Fixed Capital Formation. Energy productivity. Use of modern energy services (electricity + clean cooking fuels)

Development priorities for the sector-

Under-pinning these objectives is the need for a reliable energy supply and a reduction in unserved demand. Ultimately this is achieved by scaling up the energy supply infrastructure and improving demand management.

  • Generation planning, financing and construction – The government has clear and viable objectives for generation and transmission, however it lacks the strategic planning required to ensure delivery.
  • Distribution management – Expanding the supply infrastructure will take time, in the meantime, the Government needs to improve load management to reduce unserved demand. Ethiopian Energy Services (EES) is responsible for handling this and the current contractors (PGIL) have been set targets to achieve over the next 2 years – but ongoing management of the energy supply infrastructure is critical to long-term growth.
  • Fair and predictable pricing – Finally, the long-term pricing structure needs to be defined. As with most countries, tariff economics is a major and sensitive political challenge. There are three objectives within tariff setting:
    • Financing ongoing maintenance and expansion of infrastructure
    • Ensure domestic affordability to consumers across the income spectrum
    • Provide long-term certainty to businesses – evidence shows that businesses prioritise certainty over price when it comes to energy supply.

Potential engagement strategies for development partners-

The energy sector is a crowded but inefficient space. Development partners shall identify its core comparative value additions which could add value to the sector if developed in the right way. Firstly, it is crucial to engage with the right Government actors from the start to build trust and understanding – this is a long process requiring patience, political sensitivity and continuous conversation. The ‘right’ actors will depend on the particular areas of intervention. Secondly, any engagement should be co-ordinated with other actors to avoid duplication and build common activities.

Rather than adopt a general capacity building approach that tries to cover the entire sector, a specific focus on the ‘pinch-points’ for growth (i.e. where sector priorities are critical to the growth-related objectives) will help improve impact.  There is also an urgent need to look at supporting donor co-ordination and supporting to Government to take a stronger lead in setting the agenda.

Keshav C Das

April 19, 2016

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