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Ethiopia's solar power reforms

19 August 2019

HelloSolar, a pay-as-you-go home solar systems provider, on 12 August released a report on its pilot project, which detailed the regulatory challenges faced by off-grid renewable energy investors in Ethiopia. The country has significant renewable energy demand potential, given low electrification rates of 43%, but has lagged regional neighbours in diversifying from on-grid to off-grid transmission systems. This is because of gaps in the regulatory framework, notably the lack of a stable tariff system for investors in off-grid and 'mini-grid' projects. Mini-grids are quicker to install than a national grid extension, but more powerful than single-home, off-grid systems.

At the Africa Energy Forum in July 2019, officials from Ethiopia's Ministry of Water, Irrigation and Energy announced that the government was reviewing the regulation of mini-grids, with a view to finalising the tariff structures for private operators. According to the African Development Bank, 16.2% of Ethiopia's population of more than 100 million can be more efficiently served by mini-grids, creating a potential market of USD639 million for private investors.

Significance

The government's emphasis on accommodating diversified electricity systems is likely to help attract venture capital and private equity investment into Ethiopia. These investors have driven the sector's growth in Kenya and Tanzania, where they have proven the profitability of the 'pay-as-you-go' model necessary to serve lower-income families in rural areas. Even if the new tariff structures are finalised, likely within six months, there remain other gaps in Ethiopia's regulations.

A key indicator of increased inward investment would be if sector-specific investor protections, including a clear legal process for recourse to foreign arbitration, were drafted by the ministry and approved by parliament. However, domestic commercial courts remain relatively efficient and independent in handling contract dispute resolution. We assess, therefore, that is likely to be more than one year before the regulatory framework is on a par with the best practice seen elsewhere in the region. If the government publicises an on-grid electricity transmission roll-out plan in 2019 that covers at least a five-year period, then this will indicate that private investors will be able to better anticipate where mini-grids will remain profitable and encourage inward investment into the sector.

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