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1.1 Energy Sector Mozambique is one of the poorest countries of the world with about 54% of the population living below the national poverty line. Forest resources satisfy more than 85% of total domestic energy requirements and more than 95 % of energy supply in rural areas. Mozambique has considerable but little exploited energy resources, including natural gas, coal, hydro, oil, solar, biomass and wind. The energy sector is key to the country's economy already today, since energy exports make up a large share of total foreign exchange earnings. Moreover, the availability of cheap electricity is one of the main reasons for the significant foreign direct investment in energy-intensive industries in Mozambique. Energy exports (hydropower, coal, gas and possibly oil) and projects to cover the growing domestic electricity demand will play an increasingly important role in the years to come. The liberalisation of the power sector initiated in 1997 allowed for third parties from the private sector to enter the power generation, transmission and distribution markets. Mozambique's Poverty Reduction Strategy Paper sets quantitative targets for rural electrification. A rural electrification strategy has been adopted and FUNAE, a fund for promoting ac-cess to energy, has been established. At the same time EdM, the public power utility has established a power masterplan that foresees constant expansion of the main grid. However these extensions require financial assistance from external donors and company applies substantial cross-subsidies from urban areas to the running cost of rural connections.
1.2 Problem Situation Access to electricity is among the lowest in the world, especially in rural areas where only 1% of the population is supplied. The national grid only reaches a small part of the country. Many district capitals depend on expensive and often unreliable power generation with diesel generators. Outside these towns, the situation is even worse. The overwhelming majority of rural households, most rural schools, health centres and administrative posts are without access to electricity. Lack of mechanical power is a bottleneck for the rural subsistence agricultural production, as grain producers have to walk long distances to the nearest milling facility. Rural areas lack electricity for lighting, radio and communication in households and for refrigeration in small commerce. Nevertheless, many rural households spend a considerable share of their income for modern energy in the form of kerosene or batteries (EUR 4–5 per month). Lack of access to electricity restricts the local population’s opportunities for income-generating activities. The regulatory framework lacks appropriate private sector involvement conditions. The sector has a very low level of technical and financial capacity in nearly all relevant segments.