NAE Case Study: Ethiopia, Solar Market Development

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Description

An off-grid solar market development programme has been implemented through policy/regulatory changes and incentives.  The Rural Electrification Strategy prepared in 2002 was aimed at improving access to better social services (communication, water health and education), reducing negative environmental impacts, and promoting private sector participation in increasing access to electricity in off-grid areas.  Solar PV based electrification was recommended for isolated and dispersed electricity requirements. Several projects have since been initiated as part of the programme including Light For Education, Scaling up Solar Energy Supply (Revolving Fund), Lighting Rural homes and community services, Solar power installation for Health institutions, and Lighting Student Homes.  This has involved several national and international funders.  For example, the Development Bank of Ethiopia (DBE) and the World Bank have provided working capital loans to private sector household solar providers, as well as micro-finance to households for the purchase of solar lanterns and Solar Home Systems (SHS).  Also, the Solar Energy Foundation supported the unsubsidized introduction of SHS through entrepreneurs using low-cost downsized systems, RFID (Radio Frequency ID) card payment and revolving-fund micro-finance. This was facilitated with awareness raising/marketing through schools and media campaigns.  Concessionary loans (interest free) were also provided by the national electricity utility (EEPCO) to households for connection charges, with funding from the Global Programme for Output-Based Aid (GPOBA).

Context

Ethiopia’s electricity sector is underdeveloped but with prospects for rapid growth - it has been distorted by past policy and has lacked private sector investment. The government has been committed to urban and industrial upgrades, but most of the population lives in rural areas.  Over the past 15 years, the approach to raising electrification rates has been focused on extending the national grid to more villages and towns. Yet the number of households without electricity remains quite high.  In 2016, less than 30% of the population had access to electricity (which is 15% higher than in 2007, but means that 70 million people are still unconnected).   95% of people in large towns and 83% in small towns have electricity (2014 data) but, in rural areas, only 7.9% of people have access (2016).  In 2015, Ethiopian Electric Power (EEP) announced that it had connected 5,415 rural towns under its Rural Electrification Programme (REP) over the previous nine years.  But the extremely low electricity price makes it difficult for the utility to recover its costs, thus causing problems for rural electrification as a business. There is a growing consensus that stand-alone systems can be an effective means to electrify rural households. At present, diesel generation sets are popular and well known in the country. Renewable sources of energy are less familiar and their contribution to electrification is minimal.  Ethiopia is however seen as a frontrunner in the field of future renewable energy deployment. It has set ambitious targets for carbon neutral growth towards 2025, aligned with its sustainable development and poverty reduction goals. The country has abundant natural energy resources such as solar, water and wind, which supply most of the current electricity production (generally in the form of large scale grid connected systems).  But the supply of such energy to rural areas faces a range of barriers including market uncertainty, no successful business models and no clear policy framework for the future supply of clean energy.

Objectives

The broad goal was poverty alleviation and creating a long-term sustainable solar market in Ethiopia.  Specific targets were 3.6 million solar lanterns and 400,000 solar home systems by 2020.  The programme also aimed to create jobs, and to transfer knowledge by training solar technicians and make them available for the developing solar market.

Legal Basis

The Second Growth and Transformation Plan (GTP II) of Ethiopia (2015/16-2019/20) – National Planning Commission, September 2015, states that the Rural Electricity Access program will continue to be implemented. There are no specific requirements for licensing off-grid solar businesses.

Institutions, Roles and Responsibilities

  • Ministry of Water Irrigation and Energy (MoWIE) Directorate for Alternative Energy Technology Development and Transformation manages programmes related to solar market development; the technical intermediary for projects
  • Rural Electrification Fund Office (REF) has financial resources from donors including UNDP, Power Africa, Energy Plus, the World Bank, and UNCDF. These donors contribute 80-85% of the total budget with the balance coming from the government
  • Development Bank of Ethiopia (DBE): the financial intermediary for several solar market development programmes
  • Ministry of Finance and Economic Development (MFED): involved with financial support from donors for solar market development
  • Ethiopian Electric Power Corporation (EEPC) is responsible for generation, distribution and sale of electricity
  • Ethiopian Energy Authority (EEA) is responsible for setting tariffs, supervising private sector involvement and approval of power purchase agreements
  • Private companies, drawing on this public sector support, are responsible for procurement, installation and sale of solar lanterns and systems.

Interventions

The main incentives offered by the Government are duty free imports and loans for private business and MFIs. These have provided the basis for a range of activities that have been undertaken by the Government in association with international donors, aiming to develop the nascent market for solar systems.  The most significant initiatives have included:

  • DBE established a US$ credit line for importers of solar lanterns; tax exemption for solar products was introduced, linked to quality standards
  • a US$20m fund was established by the Government (with support from Lighting Africa) and administered by DBE; the fund provides foreign exchange denominated working capital to enable companies to import solar products, and MFIs to access credit to support loans to users
  • a US$40-million concessional loan from the World Bank to MFED was passed to DBE and used to provide foreign-currency denominated, collateral free, concessionary working capital loans to developers and credit to MFIs who give market-rate loans to households buying energy products on a revolving-fund basis.
  • in 2013 the government introduced a feed-in tariff and Power Purchase Agreements (PPAs) to encourage investment in RE generation
  • since 2005, the Solar Energy Foundation (an NGO) has provided unsubsidized  SHS through entrepreneurs using low-cost downsized systems, RFID card payment and revolving-fund micro-finance; awareness raising/marketing has been pursued through schools and media campaigns

Impacts Achieved

By August 2016, 40,000 solar home systems had been provided with finance on the basis of 7-year instalment loans (through REF).  In total, close to 60,000 SHS (many without the need for financing arrangements) and 1 million lanterns had been sold (by NGOs and private companies).  The Government estimated that there was a demand for solar products from 14 million households.

Lessons Learned

Experience from the solar market development programme has raised awareness of the limitations & challenges that must be faced.  The lack of a clear policy framework, and no clear plans from the grid company or different donors means market uncertainty, which is a barrier to investment. Also close attention to financial resources is required from the outset since projects cannot be initiated without relevant financial solutions, particularly for start ups.  Other key lessons highlighted by  the programme are i) trust between all stakeholders must be built to allow the market to grow; ii) effective after sales service is necessary to satisfy customers and so spread positive word-of-mouth feedback to grow demand; iii) product availability in local stores is required for customers to access appliances and demand to increase; iv) product quality must be good enough to avoid any negative experiences that will stall market growth; v) proper technicians training is essential to build local capacity and ensure the sustainability of applications.  Other lessons included the challenges for local businesses that were involved in the chain of supply for solar products and services.  These included i) the need of hard currency for imports; ii) arrangements required for the necessary loans (local and from abroad); iii) the need to address poor quality products imported, or fake/copied products, and the associated price competition.  Finally, the programme experience has highlighted additional issues that must be addressed to achieve success: raising awareness of the end user; creating an effective distribution network; using local assembly to reduce prices and create job opportunities; establishing a strong association of stakeholders.

Effectiveness

Ethiopia has recognised the demand for lighting and mobile charging in rural areas, and the opportunity for a range of solar technologies, including solar lanterns,  solar home systems, solar televisions and radios, as well as solar water pumps, water heaters and refrigerators.  The payback experienced for solar lanterns is 6-9 months and, with chargers, <15 months. After one year into the 5-year GTP II programme,  approximately 15% of the SHS target and over 25% of the solar lantern target have been achieved.  The Rural Electrification Fund has provided concessional loans for diesel powered electrification (85% loan with interest of 7.5%) and for renewable energy projects (95% loan with zero interest), as well as capital subsidies of 20-30% of the investment costs to renewable energy project developers on a reimbursement basis.  DBE has supported six private sector entrepreneurs and, through their efforts, nearly 250,000 solar systems will be disseminated under the credit lines.  These developments suggest the establishment of a sustainable national market for solar systems, which are likely to address tier 1 (lanterns) and tier 2 (SHS) levels in the SEforAll framework.  However, despite this growing demand, there has been a lack of proper management in reclaiming loans from end-users.  Loans to prospective end-users also have a high interest rate, which limits their affordability.  Remaining duties on imported technologies compounds this problem.  Therefore, despite the great potential for future solar market development, further measures are required to ensure the value for end-users. 

References



Authors

Authors: Mary Willcox, Dean Cooper

Acknowledgements

The Review was prepared by Mary Willcox and Dean Cooper of Practical Action Consulting working with Hadley Taylor, Silvia Cabriolu-Poddu and Christina Stuart of the EU Energy Initiative Partnership Dialogue Facility (EUEIPDF) and Michael Koeberlein and Caspar Priesemann of the Energising Development Programme (EnDev). It is based on a literature review, stakeholder consultations. The categorization framework in the review tool is based on the EUEI/PDF / Practical Action publication "Building Energy Access Markets - A Value Chain Analysis of Key Energy Market Systems".

A wider range of stakeholders were consulted during its preparation and we would particularly like to thank the following for their valuable contributions and insights: - Jeff Felten, AfDB - Marcus Wiemann and other members, ARE - Guilherme Collares Pereira, EdP - David Otieno Ochieng, EUEI-PDF - Silvia Luisa Escudero Santos Ascarza, EUEI-PDF - Nico Peterschmidt, Inensus - John Tkacik, REEEP - Khorommbi Bongwe, South Africa: Department of Energy - Rashid Ali Abdallah, African Union Commission - Nicola Bugatti, ECREEE - Getahun Moges Kifle, Ethiopian Energy Authority - Mario Merchan Andres, EUEI-PDF - Tatjana Walter-Breidenstein, EUEI-PDF - Rebecca Symington, Mlinda Foundation - Marcel Raats, RVO.NL - Nico Tyabji, Sunfunder -


NAE Overview Page

Any feedback would be very welcome. If you have any comments or enquires please contact: mary.willcox@practicalaction.org.uk, benjamin.attigah@euei-pdf.org, or caspar.priesemann@giz.de.

Download the Tool as a Power Point: https://energypedia.info/images/a/aa/National_Approaches_to_Electrification_-_Review_of_Options.pptx

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