Monday, 2 May 2016

Power Distribution Sector- Need to Play as a Game Changer for Ethiopia’s Power Infrastructure

In an effort to meet the local rising energy demand and aspiring to be a regional energy hub, Ethiopia has made a huge public investment to its power infrastructures, more so to the power generation. Beyond that it allowed private sector, both foreign and local, participation in generating power and selling to the state’s power company and utility. Following that Ethiopia has witnessed so much of an interest of the private sector to be engaged in the generation sector although the level of participation is still low. Indeed, leaving the question of price of power aside, generating sufficient capacity to drive the ever rising demand expected to come from the growth in the economy, specifically from the manufacturing sector, and the expansion of the national grid is a daunting task to the country.

It is fair to say that there has also been a considerable high voltage transmission lines construction taking place mainly linking the power plants to the main substations. 
Nevertheless, without the parallel development of the distribution infrastructures, achieving the intended goals will likely be too far.

Some countries experiences suggest that the condition of the power distribution network in a country highly correlates to the level of the private sector participation in the overall power sector investment.  If the distribution sector is in good condition, the private sector is encouraged to make an investment in the entire power sector and vise- versa. The biggest gap in private sector involvement in the developing countries where Ethiopia is one of the best examples is in the power distribution sector.  

Strangely, the power distribution sector in Ethiopia and other many developing countries does not get as much attention as the generation and transmission did even if there exist the greatest potential for improvement and benefits to the countries. It is in the distribution sector where there are high levels of loses; low levels of collections; poor system maintenance and reliability; low level of electrification; and low levels of customer inputs. These are all shortcomings that could be alleviated through proper distribution sector reforms mainly by allowing the private sector participation.

What is even more fundamental, in increasing the effectiveness and efficiency of the distribution sector is that it can greatly strengthen the financial viability of the entire power sector- generation, transmission and distribution alike. If the distribution companies become financially stable and profitable, they will be in a better position to pay for the power from the many independent power producers, and the country will be able to negotiate short and long term contracts of the power supply in general. If this is the case, independent power producers, IPPs, may no longer require government or third party guaranties to invest subsequently minimizing the associated transaction costs and increasing the attractiveness of the sector for investment. In other words, increasing the effectiveness and efficiency of the distribution sector will ensure the private sector that there is a positive cash flow in the industry. 

If the true benefit of the private sector is to be tapped in to for the betterment of the distribution sector, however, the good intentions of the policy objectives should be translated in to action. It is obvious that the power infrastructure naturally requires a lot of capital to be mobilized upfront which will make both public and private resources short to meet demand. One way to pool domestic capital for investment in the distribution sector or otherwise in the entire sector is through the realization of domestic stock markets. In addition to mobilizing more capital for more investment in the power sector, establishing domestic stock markets has a double advantage of shielding the country from the currency risk as the capital mobilized will be in local currency.

Yes, it is understandable that putting stock markets in to action and allowing the private sector to participate in the investment of the power distribution sector will be a long process but at least it could be possible to make improvements as it is through proper incentives and reforms, as much as it is done in the generation sector and paving the way in to the future, stepwise.

The Achilles heel now in the country may be how to reach the many people who don’t have access to clean and modern energy, and worse how to make the available power reliable. Soon or later and as the consumers become empowered, however, the demand for an efficient and competitive power will emerge. The current power and energy policies in the country are way behind to sufficiently guide the way towards the competitive power sector (I will highlight competitive power and the road to it in my next article). The existing monopoly of the state utility and the power company, and also the emerging independent power producers, IPPs, unless thoroughly considered, are binding constraints to the development of competitiveness in the power sector in the country in the long run.

Given the huge amount of investment in many other sectors as well, it may be a burden for Ethiopia to focus on all at a time, as we are witnessing, but it makes less sense to generate power but not distributing it sufficiently as well.