EEG’s project on renewable energy procurement in Ethiopia, being led by the Institute of Development Studies (IDS), aims to identify and overcome the key obstacles in procuring non-hydro renewable energy from independent power producers. Drawing information from a recently published working paper from the IDS project team, head of research and engagement Benjamin Klooss discusses the implementation of a renewable energy procurement programme in Ethiopia.

Investment in large-scale renewable energy is seen as one of the key solutions for addressing climate change, and with the cost of renewable power declining in recent years*, it has become an increasingly attractive and achievable proposition. In fact, despite the economic slowdown caused by the COVID-19 pandemic, global renewable electricity capacity additions in 2021 beat all previous records, exceeding the exceptional expansion seen in 2020 by 3% and growth in 2019 by close to 50%. Renewable electricity capacity grew by a record 290 GW.

And it’s not just developed countries that are moving towards renewable technologies; investment in clean energy in China made up 28% and other emerging and developing countries accounted for another 21% of global investment in 2020.

Renewable energy procurement and power sector reform

Renewable energy procurement (REP) is a competitive tender process designed to facilitate private sector investment into grid-connected renewable energy generation. It is gaining increasing importance globally as a policy instrument for driving energy diversification and sustainable development agendas.

According to the International Energy Agency (IEA), designing and implementing REP programmes can be more challenging in developing countries, with many of them facing severe electricity shortages, and having inefficient and unstable transmission and distribution systems and insufficient funding for renewable energy projects. Nonetheless, an increasing number of countries in Africa (as well as in Latin America and East and South Asia) have launched their first attempts at REP programmes over the past two decades. Different countries have adopted programmes for various purposes, including addressing energy poverty, acquiring technology and filling the void of public financial shortages.

In the EEG-funded working paper on governing procurement of renewable electricity amid power sector reforms, the authors, from IDS and University of Sussex, argue that for newly industrialised and developing countries, REP is often part of the policy mix in a broader sense than solely enhancing renewable energy deployment. Alongside assisting the transition to modern and sustainable energy systems, REP is embedded in the complexity of long-term sectoral reforms to serve various policy goals, such as improving energy access and energy security, enhancing governance efficiency or attracting private investment.

The paper has a particular focus on Ethiopia, and also reviews lessons from REP in China and South Africa. Over the past two decades, all three countries have adopted REP amid sectoral reforms and institutional changes. It provides a comparative historical perspective on the countries’ distinctive or innovative features of REP design to understand how efforts have been made to suit their broader institutional frameworks and changes at a given historical moment of energy transition.

The authors suggest the introduction of REP into a prevailing energy system will challenge the existing institutions and stakeholders, as well as configurations of power and interest among key public and private entities – particularly so when it involves foreign investors and newly established regulatory entities. Therefore, REP should not be viewed as a mere technical instrument; it has, in fact, the potential to destabilise the current political establishment and institutions.

Smooth integration of new actors and institutions into the existing system of electricity governance is crucial for the success of a procurement programme. REP must also be designed to suit the specific historical and institutional context of a country and maintain a considerable level of flexibility to accommodate potential alternations as sectoral reforms proceed. This demands strong state capacity in designing and implementing REP.

REP in Ethiopia

For Ethiopia, the paper’s authors focus on procurement transactions for wind and solar power projects, and links with ongoing public-private partnership (PPP) initiatives – the key institutional reform to attract private investment since 2017.

Ethiopia has abundant and diverse renewable energy resources, including hydropower, solar, geothermal and wind energy – which are yet to be fully exploited. There has been a huge increase in power generation capacity during the past decade, but according to Tracking SDG7: The Energy Progress Report, in 2019, only 48% of Ethiopia’s population had access to electricity. There is an ambition to achieve 100% electrification by 2030, and the past eight years have seen monumental steps being taken towards procuring electricity from solar PV, wind and geothermal sources, including from independent power producers (IPPs).

While engagement with IPPs was ongoing from 2013, the Public-Private Partnerships policy was launched in 2017 to facilitate private investment into major infrastructure projects, including activities in the electricity sector. It recognised the importance of having a robust procurement framework in place to attract private investment, and aimed to partially relieve the pressure of public debt obligations on financing large energy infrastructure for the country’s fast-growing economy. From 2018, several non-hydro renewable energy projects were planned, and auctions have been launched.

The move represented a major departure from the electricity governance structure led by the Ministry of Water and Energy (MoWE). The new governance framework provided a complete set of policy, legislation and institutional arrangements for governing PPP/IPP projects.

IDS’ working paper highlights that there are major challenges – some of which have impeded the implementation of renewable energy projects through IPPs. Despite the number of pipeline projects, Ethiopia’s REP from wind, solar and geothermal resources are all significantly behind schedule.

Some of the challenges include: the risk of foreign currency availability and convertibility of birr to expatriate profits, governance of the electricity sector becoming fragmented and lacking coherence (as investors have to navigate both MoWE and Ministry of Finance systems, and often face bureaucratic hurdles); many government staff not having sufficient knowledge or expertise (working with the private sector on renewable energy development is a new experience for energy sector officials and technical experts); and lack of coordination between central and regional government over project sites.

The paper suggests that enhancing the successful implementation of renewable energy tendering requires further technical skill building and institutional reforms within both Ethiopia’s finance and energy regulatory systems. It also recommends a commitment to a timeline for profit repatriation and these recommendations are consolidated in IDS’ recent report.

IDS’ main finding overall is that the effectiveness of REP programmes is constrained by the historical and institutional context of a country’s electricity sector. The implementation of REP will affect the reform process by integrating new policy goals, intensifying political struggles and presenting additional challenges. All these interactive factors need to be taken into consideration when designing and implementing REP programmes.

*Excluding hydropower, an already advanced technology.