Wednesday, 4 November 2015

The Imperative to Ethiopia’s Revision of the Existing Extra Low Electricity Tariff!

According to sources, Ethiopia is considering to make changes to the existing electricity tariff. Of course, it was on the table awaiting decision quite for a while even if it has not been passed to date. Why now?

The logic is quite simple, to attract investment in the power and energy sector and spur growth in the economy. The nation is at a cross road in providing reliable power supply not just to the emerging industries, small, medium and large scale alike, but also to the general public, the tariff being cost reflective  to the producer and affordable to the consumer.

The existing extra low tariff of electricity discourages the private sector's engagement to invest in the power sector. According to the studies conducted, the existing tariff in place is way below the cost of production of energy, $0.06 vs. $0.09 a Kwh, which the government has been subsidizing the gap. Given the growth in the economy, the state utility is struggling to meet the current power demand let alone the demand from the forecasted economic growth in the future. The current massive investment in the power sector by the state is not going beyond a promise, either slipping in time or not providing the intended capacity of production by the time it is required. So, private sector engagement is critically important to provide reliable power supply to the booming manufacturing industries. Think of the envisioned industrial parks and the consequent implication on the power demand, for example.

By introducing policies that can support the private sector engagement, the government will then have the resources to focus on the access part of the investment as the electricity produced from the anticipated private investment will help carry the sizeable portion of the centralized loads. One of the policy instruments to attract the private sector is, therefore, formulation of flexible, equitable, and financially feasible electricity tariff which the current system does not reflect any one of these. That is the rationale and hence the necessity of revising the existing electricity tariff.

At face value, the change in the tariff may look a burden for the consumers especially to the existing small and medium size industries. As consumers, however, we need to strike the balance between getting all time power supply with relatively higher cost of electricity and unpredictable, sometimes all day off, power supply to really understand the cost and benefit nature of the revision of the tariff either to support the government's effort or issue our concerns. It is a no brainer decision to make.

Moreover, low tariffs naturally discourage the energy efficiency effort throughout the country. This by itself is a misalignment to the climate resilient green economy growth strategic path of the nation which it has been pursuing since 2011.

It may be assumed that the private sector investment in the other sectors will be compromised or discouraged but I personally argue that reliability of supply of electricity will complement or compensate the concern if the income generated from this increased tariff is timely reinvested or spend on the maintenance of the old power infrastructures.

In as much as the necessity of revising the existing tariff, however, the change should allow sufficient time to the existing industries for them to plan ahead with the increased cost of electricity. Ethiopia should never underestimate how good incentive the current price of electricity was to their investment decisions in to Ethiopia. Moreover, the current tariff system categorically reflected the purchasing power of the domestic electricity users and it needs to be maintained in the revised tariff as well.