Micro- and macro-economic analysis of Ethiopia's tariff reform

Background, challenges, and context

While the Ethiopian government has started to make major investments in the power sector, around half the population currently lacks access to electricity. Thus, many of the country’s homes and businesses still do not have sufficient power supplies for carrying out productive uses, or even for basic services like lighting. Reliable and consistent access to electricity is another major challenge, with even those connected to the grid experiencing frequent scheduled and unscheduled power interruptions.

Low access rates and lack of quality of service are directly and indirectly related to financial challenges in the Ethiopian power sector. Electricity infrastructure projects require substantial amounts of capital, and maintenance and replacement activities depend on power companies having sufficiently strong balance sheets, which may require stable cash flow. Revenue collected from the sale of electricity can be used for these activities, but prior to late 2018, electricity tariffs in Ethiopia had not been changed for more than a decade. Electricity prices in the country were among the lowest in Sub-Saharan Africa, and this situation had created an immense financial burden for the Ethiopian Electric Utility (EEU), the public-owned utility company.

Recognising this problem, the EEU, in cooperation with the Ethiopian Energy Authority (EEA), introduced a new tariff structure and raised tariff rates. Starting in December 2018, the reform involved a minor price increase for the first 12 months, followed by a steeper increase for the following 36 months. Overall, there have been four tariff increases in yearly intervals since 2018. Customers consuming fewer than 50 kWh of electricity per month (likely to be low-income households with low electricity needs) experienced no change in electricity prices. Households or firms consuming more electricity experienced higher costs of electricity per kWh.

Complementary policy measures are also being considered to encourage households and enterprises to engage in energy efficiency and conservation activities.

Research overview and objectives 

The main focus of this research project was analysis of the tariff reform, with the team evaluating the impact on the electricity consumption of households and firms.

However, poor reliability and access to electricity cannot be improved through better-designed tariffs alone. Therefore, the team also studied the effect of prepaid metering on household electricity use. Prepaid meters are thought to reduce consumption and improve revenue collection for power companies.

In addition, the team investigated whether carrying out energy audits (which provide information on the quantity of electricity consumed and offer suggestions for conserving electricity) in commercial enterprises encourages conservation practices and enhances the productive use of electricity.

Research methodology

The team examined the effect of the new tariff on urban households’ electricity consumption by using panel survey data from around 2,000 urban households and six years of electricity consumption data from the EEU. The urban part of the Ethiopian Multi-Tier Framework (MTF) of electricity access survey in Ethiopia, administered by the World Bank in 2016, was used as a baseline. A follow up survey was conducted in 2019, shortly after the first phase of the tariff rise. Using EEU data, the team analysed the trend in electricity consumption (measured in kWh) and expenditure (measured in Ethiopian Birr).

To study the effect of prepaid metering on household electricity use, the team used quasi-experimental methods (propensity score matching and instrumental variable techniques) and aimed to address several questions:

• What is the impact of pre-paid metering on households’ electricity consumption?

• How does this system affect other related variables, such as appliance ownership, and in particular cooking technology alternatives and energy-efficient devices?

• Is pre-paid metering related to customer satisfaction with the services provided by the utility?

A total of 1,182 households were surveyed between August to October 2019 – consisting of all households in the MTF survey from the Ethiopian capital Addis Ababa (where meter replacements have been most extensive), plus an additional 400 households from a list of pre-paid meter customers in Addis Ababa.

To examine the impact of the electricity price reform on the electricity consumption of firms, data was collected from around 1,000 micro and small firms in Addis Ababa from baseline and follow up surveys (in 2016 and 2020, respectively), and an event study analysis was employed. The event study methodology is a technique used to capture the impact of a significant unanticipated event on the outcome of interest. The event study compared outcomes (electricity consumption) for a given firm before and after the treatment (reform).

Furthermore, in cooperation with experts from the EEA, energy audits were conducted for 400 of the 1,000 firms. Both qualitative (descriptive) and quantitative data analysis methods were used to analyse the data.

Research results, key messages, and recommendations

Households – electricity consumption

• Electricity consumption decreased in Ethiopia by a small amount after the introduction of tariff reform, but this did not persist. Electricity consumption in the overall sample appeared unchanged in the post-reform period.

• The increased price was not large enough to significantly reduce electricity consumption among all customers.

• Households did not appear to substitute electricity with other fuels such as charcoal following the tariff increase.

• Modest gradual tariff increases, such as those deployed in Ethiopia, facilitate governments’ efforts to raise electricity supplier revenues without substantially reducing households’ electricity consumption. However, further research is needed to assess the overall welfare effect of the cumulative tariff changes since 2018 and, therefore, the impact of potential further increases in the future.

• Electricity price increases can be coupled with the rollout of pre-paid meters.

Households – pre-paid metering

• Pre-paid meter customers have significantly lower electricity consumption compared to post-paid users, and greater satisfaction with the utility service (mainly due to real-time feedback from pre-paid metering).

• This technology also has a positive, but modest and statistically insignificant, impact on total appliance ownership.

• The impacts of pre-paid meters are heterogeneous across customers: those who are more educated, who have a higher income, and who do not share meters tend to reduce their electricity use more. These groups are more aware of their electricity consumption; higher-income groups who also consume more energy tend to have more scope for conservation; and households that do not share meters have higher per capita consumption than those that do share – meter sharing may dilute incentives to conserve electricity and may diminish the information content of this type of metering system.

• The research findings support continued expansion of the use of pre-paid meters (and the replacement of existing post-paid meters) with a need to educate customers about their advantages.

Firms – electricity consumption

• Electricity price reform has had a significant influence, leading to reduced electricity consumption in firms – suggesting that micro firms (with up to five employees) and small firms (employing 6-30 workers) may not have the option to mitigate the effect of rising electricity prices.

• The statistically significant impact of the new tariff rate on the total electricity expenditure of firms means that their performance may be affected, as it will increase the cost of production for those that are struggling to grow. It is therefore necessary to examine further how this affects their performance in terms of total output and profitability.

• The education level of firm owners plays a significant role in reducing the expenditure on electricity, as better-educated firm owners are likely to be more aware of the importance of energy conservation practices in reducing costs of operation, and hence increasing their profitability. Policy makers may wish to provide targeted education campaigns, such as walk-through energy audit programmes, to encourage energy conservation behaviour.

• Firms that made energy efficiency improvements were successful in minimising their electricity expenditure. Therefore, policies to promote investments in energy-saving technology may be necessary to help firms cope with the increased tariff rate over time.

• As the tariff reform continued until December 2021, it is necessary to consider the impact of the whole tariff reform and to assess how firms will react to these changes over the long term.

Firms – energy audits

• Energy audits increased the use of energy efficient appliances by 14%, resulting in a 10% reduction in electricity consumption.

• However, the cost saving was equivalent to about one US dollar per month, which may not be economically significant compared to the cost of energy auditing and the implementation of efficiency measures.

• Unless auditing is subsidised or made compulsory, such that firms must bear these costs as part of their licensing and other costs, it seems unlikely that firms will implement audits voluntarily.

The project involved experts from the EEA and the Ethiopia Petroleum and Energy Authority (PEA) energy auditing micro and small enterprises for the first time – they usually focus on large industries.

Experts from the Ministry of Water and Energy (MoWE) and the EEU were also involved in the study, particularly in the field survey and discussions with relevant stakeholders.

The project also involved capacity building for staff at MoWE, and students from Addis Ababa University and Duke University. The team plans to disseminate the EEG data to MSc students at Addis Ababa University.

The project has filled important knowledge gaps on the role that electricity pricing reform can play in influencing energy consumption and improving electricity service delivery. The findings are expected to inform interventions that will enhance the Ethiopian government’s efforts to expand access to electricity, address inefficiency in energy consumption, and contribute to the socioeconomic development of the country.

Local partners

Addis Ababa University (AAU)

Ministry of Water and Energy (MoWE)

Ethiopian Electric Utility (EEU)

Duke University, Sustainable Energy Transitions Initiative (SETI)

University College Dublin, School of Economics and Energy Institute

University College London, Science, Technology, Engineering and Public Policy (STEaPP)

World Bank