Overcoming obstacles in procurement from independent power producers

Background, challenges, and context

Competitive bidding for renewable energy from private sector investors, often referred to as RE-IPP (Renewable Energy Independent Power Producer) agreements, involves setting a target level of investment in renewable energy capacity and allocating contracts to the lowest bidders. It is gaining prominence in developing countries due to its relatively simple institutional design and its potential to attract significant private investment.

However, the actual design and implementation of RE-IPP can face complex obstacles due to its relations with the broader regulatory system, friction with incumbent actors, and a mismatch of expectations between regulators and private investors. Despite RE-IPP’s huge potential, there are notable knowledge gaps regarding how these obstacles, risks, and pitfalls can be addressed and avoided. 

Research overview and objectives 

This project aimed to understand what policy frameworks need to be established for renewable energy competitive bidding programmes to be effective in Ethiopia. It was designed to draw lessons from Ethiopia’s experience of IPP initiatives and from other countries’ renewable energy auction programmes.

It specifically aimed to answer questions around barriers and opportunities for private sector participation:

• What is the history and performance of IPPs in energy and other sectors?

• Are there transferrable lessons from other countries in incorporating private sector participation? How can these be adapted to the Ethiopian context?

• What barriers and constraints are faced during planning, engineering, procurement, construction, and decommissioning of energy projects?

• Are there adequate skills available in Ethiopia to design, build, and operate energy projects? How does the capacity gap get addressed?

• What are the key agendas of the private sector actors involved in IPPs in Ethiopia, and what levels of risk are acceptable for them?

Research methodology

The team provided a historical review and analysis of IPP activity, focusing particularly on the country’s recent past projects, and conducted a comprehensive review of Ethiopian government policies, legal frameworks, and programme documents on IPPs. This was complemented by in-depth interviews with energy regulators, utilities, grid companies, and other state and quasi-state actors directly involved in renewable energy policy processes.

The combination of interviews and document analyses helped to reveal the power dynamics and dominant narratives around regulatory choice and policy process in renewable energy activities. The team also examined private actors’ risk appetite and their business strategy in the Ethiopian market.  

In addition, the team compared the Chinese and South African RE-IPP experience and explored their implications for Ethiopia. These two countries are highly relevant and provide critically important learning for Ethiopian energy regulators and researchers; both are fast-growing economies that adopted renewable energy auction programmes to kick-start their renewable energy sectors; many of their renewable energy projects are located in remote and underdeveloped areas where the private sector was previously reluctant to invest; and both countries’ auction programmes have also produced mixed results with notable successes and setbacks.

The findings enabled the team to bring together existing knowledge, evidence, and data, and to identify key policy challenges and existing capacity gaps among central and local policy stakeholders. The mismatches between policy goals, policy means, and policy outcomes were assessed. Key institutional constraints and barriers were identified, as well as the ways in which these can be overcome. Participatory methods were used to facilitate policy learning and change via capacity building training programmes. 

Research results, key messages, and recommendations

(i) The governance of renewables, relevant policies and requisite technical expertise for managing projects are dispersed across the main institutions, and there is no ‘one-stop-shop’ for investors, which impedes the procurement process. Many IPP project developers find themselves caught between several agencies. The Public-Private Partnership Directorate General (PPP-DG) and Ethiopian Electric Power (EEP), the government-assigned contracting authority, which generates and transmits electricity across Ethiopia, need to increase awareness among key institutions involved in IPPs and project tendering processes, making procedures clear and circulating them widely, including through websites.

(ii) The legal and institutional framework to facilitate electricity procurement from independent producers has taken off from a solid foundation and resulted in several ongoing projects in Ethiopia. Since 2018, Ethiopia has held two tenders to procure 1,000 MW of electricity. The first tender for two solar photovoltaic (PV) projects led to a Power Purchase Agreement (PPA) in 2019 with the Saudi Arabian company ACWA Power and one of the cheapest tariff rates in sub-Saharan Africa, at US 2.526 cents/kWh over 25 years. However, owing to a delay in project implementation, the two projects won by ACWA Power, Gad & Decheto, were terminated in May 2022.  

(iii) The number and size of IPP projects is too ambitious.

(a)  A large number of projects stuck in the pipeline will overstretch the limited institutional and technical capacity when dealing with multiple and simultaneous negotiations. There are also challenges connecting with transmission lines of the overall electricity network in Ethiopia. The immediate focus should be on designing and implementing an exemplar project and generating lessons that can address many of the (seemingly intractable) challenges and demonstrate the credibility of the process.

(b) Ambitious energy plans are inherent in the system and driven by policy narratives that emphasise Ethiopia’s rich renewable resources and unmet demand. However, these plans at present pay less attention to institutional and technical capacity to plan implementation, and the risks that investors face as they raise project finance and implement projects. Planners appear to see IPP projects as ‘magic bullet’ solutions, which can create false optimism. Target-setting should be more realistic and – besides demand – needs to be based on understanding complex factors, such as risk to investors in raising project finance.

(iv) IPP governance is rife with institutional tensions: overlapping roles and responsibilities between the PPP-DG and EEP are the main cause, with political and technical differences at the core. The PPP-DG and EEP need to draw on their competency areas and work together to succeed. The former should focus on providing sovereign guarantees for IPPs, and the latter, as a buyer, could focus on the technical aspects of electricity procurement through IPPs.

(v) IPP project auction design and implementation capacity deficits need to be addressed in a systematic way: relevant institutions need to work together, identifying and capitalising on existing capacity. The political economy environment needs to be conducive to training, attracting, and retaining staff, and developing clear career pathways within organisations, with improved salary scales.

(vi) The biggest challenge relates to a shortage of foreign currency and convertibility of the birr to international currency. To mitigate the challenge, the government should commit to a timeline for profit repatriation and allocate a certain proportion of foreign currency from energy exports to repatriating profits.

(vii) Weak policy support for the nascent domestic private sector: except for one junior partner in the Metehara solar PV project with Enel Green Power, the study found no Ethiopian company participating in renewable energy IPP tenders. Supporting the nascent domestic private sector could mitigate the foreign currency supply and currency convertibility issues described above. A viable domestic sector could reduce the need to convert birr into foreign currency to repatriate profits, and would also enhance knowledge and increase technology transfer, boosting local technology development and manufacturing. Thus, the government should nurture the domestic private sector through tax incentives, training and coaching, and promoting joint ventures.

To ensure universal access to electricity and meet UN Sustainable Development Goal targets, Ethiopia needs to urgently address impediments to procuring electricity from IPPs. The intended impact of this project was to improve the design and implementation of IPP projects to promote the renewable energy sector in Ethiopia. Key deliverables have included policy briefs and workshops with the EEP, the Ministry of Water and Energy (MoWE), and other energy policy stakeholders, including the Ethiopian Electric Authority (EEA) and the Ministry of Finance (MoF).

Local partners

Ministry of Water and Energy (MoWE)

Ethiopian Electric Power (EEP)

Ethiopian Electricity Authority (EEA)

Ethiopian Ministry of Finance (MoF)