Project Brief
1. Identifiers:Project Number: /
P077380
Country / EthiopiaProject Name: / Renewable Energy Project
Duration: / 5 years
Implementing Agency: / World Bank
Executing Agency: / Ethiopian Electricity Agency, Government of Ethiopia
Requesting Country or Countries: / Ethiopia
Eligibility:
UNFCCC: / Ratified on April 5, 1994.
GEF Focal Area: / Climate Change
GEF Programming Framework: / OP#6
2. Summary:
3. Costs and Financing (Million $US):
gef financing: / PDF:
Project GEF / US$ 0.28 million
US$ 4.93 million
Co-Financing: / IDA / US$ 7.40 million
Government & Private / US$ 3.0 million
GEF Total Support:
Total Project Cost: / US$ 5.21 million
US$ 15.61 million
Associated Financing:
IDA
EC: European Investment Bank
Government / US$ 125.30
US$ 15.42
US$ 43.07
Total Associated Financing: / US$ 183.79 million
4. IA Contact
Christophe Crepin
Senior Regional coordinator
Africa Region
World Bank
1818 H Street, NW, J6-177
Washington, DC 20043
(202) 473-9727
A. Project Development Objective
1. Project development objective: (see Annex 1)
1.1The project’s development objectives are to: (i) establish a sustainable program for expanding the population's access to electricity and improving the quality and adequacy of electricity supply, thus supporting broad-based economic development and helping to alleviate poverty; (ii) reduce environmental degradation and improve energy end-use efficiency; (iii) reduce the barriers to the wide spread adoption of renewable energy technologies, in particular solar photovoltalic (PV) and micro-hydro power generation in rural areas, thereby contributing to the reduction in greenhouse gas (GHG) emissions via displacement of kerosene and diesel that would otherwise be used for lighting and electricity generation; and (iv) provide technical support for institutional and capacity building of key sector agencies, including for regulatory, fiscal and institutional reforms in the mining sector.
1.2 The Global Environment Objective:
The proposed global environment objective is to initiate the process of eliminating the barriers that impede the development of renewable energy, in particular solar photovoltaic (PV) systems and develop micro hydro capacity. The global objective would contribute to the reduction of GHG as some of the use of diesel for power generation would be displaced by the renewable energy.
2. Key performance indicators: (see Annex 1)
2.1Increased Access to Electricity: (i) access to reliable, affordable and sustainable electricity service to an additional 850,000 people (and indirectly to another 250,000 people who will benefit from improved public services) as a result of the rural electrification and urban rehabilitation and expansion components; (ii) significantly faster rate of small business development in newly electrified areas than in similar locations not yet electrified; and (iii) establishment of a regulatory and institutional structure for private sector-led rural electrification.
2.2Improvement in the Quality and Adequacy of Existing Service: (i) adequate distribution network to meet requests for new customers (backlog reduced by 75%); and (ii) reduction of the incidence of low voltages and voltage fluctuations beyond acceptable ranges.
2.3Improved Management of Biomass Energy: (i) increase in the supply of woodfuels to rural and urban areas with about 302,000 ha of natural forest brought under participatory community management, and of at least 384,000 ha of farm/agro-forestry schemes established; (ii) faster rate of growth for income enhancing and economic diversification businesses in areas covered by the project; and (iii) the production and sale of 320,000 efficient injera-baking stoves by the private sector.
2.4Improved renewable energy business environment: (i) increase in the numbers of viable solar PV distributors and other renewable energy businesses, such as micro hydro and wind; and (ii) adoption by GoE of a renewable energy action plan acceptable to the Bank.
B. Strategic Context
1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)
Document number:17009-ETDate of latest CAS discussion: 9/9/1997
1.1For the energy sector, the CAS focuses on projects which will improve infrastructure necessary to meet Ethiopia’s expanded growth and distributional objectives. An important component of such projects is creating an environment conducive to private sector development. The Energy Access Project is consistent, not only with the CAS, but also with the Interim Poverty Reduction Strategy Paper (SecM2001-0072) which was discussed by the IDA Board on March 20, 2001. The Interim Poverty Reduction Strategy Paper (I-PRSP) was prepared in year 2000 following the cessation of the border conflict and was aimed, among key priorities, at addressing immediate human and infrastructure needs as well as restoring the economy to a growth path. A new CAS being prepared to cover the period FY03-05 is expected support the I-PRSP and the full PRSP which is also under preparation.
2. Main sector issues and Government strategy:
2.1Like many other Sub-Saharan countries, a marked feature of Ethiopia’s energy sector is the high proportion of biomass relative to modern forms of energy consumption (more than 90%). The limited supply of modern forms of energy and their high costs relative to the low average income per capita (US$100), has reinforced the dependence on biomass energy. This pattern of consumption has led to increasing deforestation, shortages of woodfuel and degradation of rural ecosystems – a problem worsened by inadequate supply-side measures for improving forest stocks. Hence, the Government strategy for development of the sector is aimed at improving the supply of electricity and biomass energy in an efficient and cost effective manner, and promoting rational inter-fuel substitution.
2.2Electricity Sub-sector. In the electricity sub-sector, the specific main issues are the: (i) low rate of the population’s access to power supply (less than 6% based on the number of people actually connected to electricity supply or 13% when all persons living in electrified areas are counted); (ii) inability to connect large new commercial and industrial customers, due to the overloading of the distribution network; and (iii) high cost of future generation investments.
2.3The percentage of the population with direct access to electricity is low, currently less than 6%. The majority of the people with access are supplied by the Government-owned Ethiopian Electric Power Corporation (EEPCo). EEPCo has about 600,000 customers, most of them in Addis Ababa and a few other main towns that are connected to the main grid. There are very few rural consumers connected to the grid. Apart from the low per capita incomes, other main constraints to increasing access have been a shortage of investment resources because of low tariffs (until about five years ago) over a long period of time, limitations in management and technical expertise, the absence, in the past, of a clear objective and strategy for increasing access. The low level of access to infrastructure services, including to electricity, is a major barrier to economic development and to the provision of social services in towns and rural areas. EEPCo’s limited capacity to speedily connect large new consumers, upon request, is thus constraining commercial and industrial growth. Further, the poor quality and variability of existing service, characterized by low voltage levels and voltage fluctuations beyond acceptable ranges, frequent breakdowns and delays in restoring supply after a breakdown has occurred, is an ongoing problem.
2.4Related sub-sector strategy. The Government has embraced increasing electricity access (from about 13% today to about 20% by 2012) as an integral part of its strategy for promoting income-generating activities and social services outside major urban centers to improve living standards and reduce poverty. Promoting access to electricity is also part of its strategy to decentralize the delivery of services throughout the country. A multi-faceted strategy for increasing access, and for improving the quality of services to EEPCo’s existing consumers, comprises the following:
(a) development of the country’s substantial hydropower resources through both private and public sector investment for domestic and export markets (Sudan and Djibouti);
(b) liberalization of power generation, transmission, distribution, and supply in the isolated areas in order to complement EEPCo's efforts in the interconnected system;
(c) commercialization and decentralization of EEPCo’s operations in order to improve operating efficiency, and the quality of services to consumers and to unlock resources for investment in systems expansion; and
(d) strengthening the system of regulation to improve the sector’s commercial and operational efficiency.
2.5The generation capacity requirement for the National Interconnected System (NIS) is forecast to increase from the current 473 MW to about 981 MW in 2012. This is based on an annual load growth of about 7% projected using the current existing average tariff of about US$0.056 per kWh, equivalent to about 62% of the long-run marginal cost of supply. These results from the draft report of the least-cost expansion plan are being updated to include, among other factors, the lessening of load growth when long-run marginal cost tariffs and demand side management measures are applied in forecasting demand. In addition the effect of reducing system losses on capacity requirements will also be incorporated into the least-cost expansion study. Nevertheless, even after taking into account the moderating impact of these measures on demand, it is expected that the system expansion requirement, for the next 5 years or so, will be high and related capital expenditure will be similarly large (US$1.2 billion in March 2002 prices). Hence, to help finance the expansion, the government is encouraging private investors to develop and operate hydropower projects and to sell their production to EEPCo, as a single buyer, for transmission, distribution and commercialization. While discussions are already in progress with potential investors in Gojeb Hydropower Plant (102 MW slated for commissioning in 2008), the Government is also exploring measures for creating an attractive investment environment for the private sector, including setting up a one-stop shop through which investors can obtain all licenses, clearances and permits.
2.6In addition to opening up the hydropower generation segment of the Electric Supply Industry (ESI) to private sector participation within the interconnected generation, transmission and distribution systems, in the isolated systems the Government has allowed (since 1998) the private sector to invest in all segments of the ESI. Only minor restrictions remain with respect to the isolated systems (e.g. the limitation of investment in isolated thermal generation to domestic investors and up to 25MW), but these are being reviewed for possible removal.
2.7The liberalization of the isolated system is intended to spur expansion of access to rural and peri-urban areas. It has arisen from the Government’s realization that, because of capital, management and human resource constraints, EEPCo alone could not feasibly expand access rapidly enough within a reasonable period of time. The Government has therefore adopted a two-track strategy comprising grid-extension by EEPCo and isolated electrification by the private sector, including communities. For the grid-extension track, the key to progress will be success in implementing the commercialization/ decentralization of EEPCo’s operations.
2.8An inter-institutional committee has prepared an RE strategy paper. The strategy includes among other things; (i) the government’s long-term vision for increasing the rural population’s access to electricity; (ii) the objective of increasing access to 20% of the population by 2012 from 13% today; (iii) the functions of an independent Rural Electrification Board and Secretariat; (iv) sources of revenues for a Rural Electrification Fund (REF) to be utilized to co-finance initial capital expenditures for rural electrification schemes; and (v) management arrangements for the fund. The strategy paper proposes that detailed work be carried out to design this architecture for rural electrification, including preparation of the legislative instrument (proclamation).
2.9With regard to the operation of the existing power plants, and the NIS, the Government’s strategy is to decentralize and commercialize operations so as to improve efficiency and expand access. EEPCo was established in 1997 to take over management of the power system from the former Ethiopian Electric Light and Power Authority (EELPA). Regulation No. 118/97, under which it was established, helped to enhance its managerial and financial autonomy to run the NIS. The decentralization of EEPCo’s operations to eight regional offices is in progress. A management information system, including an accounting module, to support the operation of the regions as distinct profit/cost centers is being implemented with NDF support under the Energy II Project. The Government considers strengthening the management and skills base for the NIS to be a central aspect of its strategy to improve operating efficiency. Hence, it has decided to secure a management contract arrangement for EEPCo with an experienced utility for a 3 to 5 year duration. In preparation for the management contract, the Government will prepare a business plan with the help of consultants to be financed by the Austrian Development Cooperation. The business plan will provide baseline performance indicators, projected targets for the next several years and recommend measures for achieving the targets. The decentralization and commercialization strategy, including the contract management plan is one of the short term measures for improving the sector's efficiency and increasing access to power. In the medium to long-term, a sector-wide approach, rather than one focused on EEPCo only, is required. Hence, the project will finance a long-term Strategy Study for the power sector. The study will comprehensively review the main challenges faced by the sector and suggest strategies for addressing them.
2.10To strengthen regulatory capacity for the electricity sub-sector, in 1997 the Government established the EEA, under Proclamation 86/97. EEA was charged with regulating the ESI to ensure safe and efficient operation of the system, to recommend tariffs and license operators, among other duties. The EEA is headed by a General Manager appointed by the Prime Minister on the recommendation of the Minister responsible for energy (currently the Minister of Infrastructure). Among EEA’s current key activities are the licensing of EEPCo’s power plants, regional distribution offices and the transmission function; and participation in the discussion of regulatory and contractual issues for the private sector generation projects in the pipeline. With the launching of the second track of the rural electrification (RE) strategy focusing on the isolated systems, EEA will need to strengthen its regulatory capacity to include light-handed regulation of small systems.
2.11 Biomass Sub-Sector. On the supply side the main issue is the depletion of forest resources, mainly through the unsustainable consumption of woodfuels – fuelwood and charcoal. In most areas of the country, current wood consumption levels exceed annual forestry yields. Thus, even assuming no increase in consumption, depletion of limited wood resource stocks will continue. The management of forest resource use needs to be clearly defined. On the demand side, population pressure is expected to exacerbate an already serious biomass shortage problem. The demand for wood products, especially fuelwood, is expected to increase at about the same rate as the population, at around 3% annually. Without substantial mitigation measures, major fuel deficits are likely to result, eventually leading to “energy poverty”. Already there is a notable fuel deficit in certain areas, and data indicate that agricultural residues and dung are widely used as fuel alternatives. Also, inadequate supplies of fuelwood and inefficient use directly impact on rural women’s health and workload. Improved supply will reduce the drudgery associated with collecting fuel far from home. More efficient stoves reduce woodfuel consumption by up to 50% and emit less particulate matter, which is a significant factor contributing to respiratory diseases.
2.12Related sub-sector strategy. On the biomass demand-side, the focus on expanding the use of efficient fuelwood stoves is expected to have an immediate and significant impact. On the supply-side, the Government’s key strategy is to involve the rural population directly in forest development, not only as tree growers but also as key players in sustainable management. Experience has shown that conservation of natural resources is possible only if the people perceive direct benefits. Efficient fuelwood stoves were disseminated under a project financed by the Department for International Development of the United Kingdom. Tests have shown that these efficient stoves can reduce fuelwood consumption by half. Furthermore, under the Energy I project, techniques for their effective commercial dissemination were proven.
2.13Renewable Energy Sub-Sector. Rural electrification is a critical necessity for economic development of and improvement in quality of life for the Ethiopian people. The present level of access to electricity services in the rural areas is extremely low, and what is available is often environmentally unsustainable in the long run. On the other hand, Ethiopia has considerable renewable energy resources that offer a sustainable alternative for rural electrification by expanding the generation base and rendering it environmentally more balanced and friendly. Moreover, the private rural energy entrepreneurs have the ability to act as drivers for rural energy supply and sustainable rural development. However, there are serious barriers at the (i) financial, (ii) policy, (iii) awareness, (iv) organizational, and (v) technical levels that act as impediments to the progress of renewable energy sector development and private sector involvement in Ethiopia. Elimination of these barriers is critical for enhancement of rural access to electricity services and to improve environmental sustainability.
2.14Related sub-sector strategy. The Government recognizes the potential and environmental promise of decentralized renewable energy based electricity technologies to serve very small, disperse loads for which it is not cost effective to supply from the national grid. It plans to remove the barriers – as described above - for widespread use of renewable energy technologies by a ten-year program. The objective of the program contributes to the overall goals of the Government by providing electricity generated by renewable energy systems for rural development through improved quality of life of households; improved social services in the health, education and water sectors; improved productive uses and income generating activities; and, private sector and entrepreneurial development. The means to this objective is to create, in five to ten years, a sustainable market for renewable energy systems. This will be done with the involvement of the private sector, communities, (micro) finance institutions, line ministries, government as market enabler, and international donor agencies. Bearing in mind the challenging agenda as described above, a few strategic directions emerge in which future actions would take place: (i) cross-sectoral systems for health, education and water sector; (ii) commercial solar systems for households; (iii) micro-hydro systems for communities and villages, and (iv) renewable energy systems for augmentation of supply to the grid. The Project would support the first two phases of the program.