Partially Unbundled with Private Sector Participation in generation
The Ethiopian Energy Authority (EEA) was established by the Proclamation 810/2013 which replaced Electricity Proclamation No. 86/1997,and Counsel of Ministers Energy Regulation 447/2019 and gives it the statutory right to regulate the electric power industry in Ethiopia. The establishment of EEA by an act of Parliament, enhances the credibility of the institution and is likely to have a positive impact on investor and consumer confidence.
Clarity of Roles and Objectives
The regulatory functions of the EEA and the obligations of the regulated utilities are clearly stated in the primary legislation establishing the Authority and other regulations. This eliminates overlaps in the roles and obligations of the regulator and the regulated utilities. However there appears to be an overlap in the policy formulation roles of the Ministry of Water, Irrigation and Electricity (MoWIE) and the Ethiopian Rural Energy Development and Promotion Centre (EREDPC) with regards to their Energy Policy formulation functions. Although EREDPC is assigned Rural Energy Policy formulation, rural-urban evolution is continous and therefore the energy policy must encompass both urban and rural energy and their evolution.
The EEA maintains a substantial level “arm’s-length” relationship with the government. Although the Executive (President or Prime Minister) appoints the CEO and members of the board, the board members are drawn from relevant government institutions for a term ranging from 5 to 7 years, renewable once. The sector minister appoints the chairperson of the board. There is no provision for staggering the terms of commissioners to ensure continuity and knowledge transfer among commissioners, The direct appointment of the leadership of the authority by the executive limits the level of independence from the executive required for the regulator to operate. A good provision is that the majority of the permanent staff of EEA are recruited through competitive processes. EEA is rated low with respect to independence from stakeholders mainly because there are no provisions in the law that prohibit the commissioners from holding other public offices in the energy sector during their tenure. Furthermore, the law does not prohibit the CEO/board members from holding positions in the utilities before and after their tenure at EEA. Although the law prohibits board members from being employed or having any interest in the regulated utilities during their term of office, the CEO is not affected. By these provisions, there is the potential for regulatory decisions to be skewed towards future personal benefits of regulatory officials. This limits the required arm’s length relationship of the regulator with regulated stakeholders.
EEA has a high level of decision-making independence. Board decisions regarding tariffs, issuance and amendment of licenses and resolution of disputes between companies on the one hand, and between companies and their customers on the other are final and legally binding. The authority does not need to seek approval from the executive on regulatory decisions and the executive arm of government cannot also legally overturn regulatory decisions of the authority. EEA is required to and undertakes public consultations to engage with the public and relevant stakeholders before taking regulatory decisions.
EEA has a low level of financial independence from government because it relies entirely on government budgetary allocation approved by parliament for its operations. The minister responsible for the Ethiopian Civil Service decides on the authority’s staff salary level, which is based on the civil service scale. The average level of the salaries of the regulatory staff is significantly lower than those of the utilities. Under the current circumstances, the regulator may not be able to implement its programs and would be unable to attract, train, maintain and retain qualified and skilled staff, and risks regulatory capture.
EEA maintains a substantial level of accountability to stakeholders in the sector. EEA is required to answer requests from or attend hearings organized by parliamentary committees. It has a legal obligation to produce annual reports on its activities, which are presented to the sector minister and Parliament for scrutiny. There are formal provisions for regulated utilities (or other parties), to challenge EEA’s regulatory decisions. However, the normal judicial system is used, and the process can be lengthy and frustrating for investors. Ethiopia is yet to establish a special independent body or energy tribunal that can review or overturn the EEA’s decisions. Regulatory review and appeal procedures are necessary to ensure that regulatory decisions are made according to the regulatory commitments expressed in law.
EEA is rated substantial in terms of transparency of decision making. All major regulatory decisions of the authority are accessible to the public, through the EEA website, www.eea.gov.et, from where key regulatory documents may be accessed. Although, it is not required by law, when these decisions are published, the rationale behind them is also published. The publication of all regulatory decisions and explanations will strengthen both investor and consumer confidence.
EEA has a substantial level of development in predictability. A documented tariff methodology that sets out a timetable for major tariff reviews – is in place. It has been reviewed within the last five years and was changed by the regulator, in accordance with the law, in consultation with regulated firms and stakeholders. Procedures and schedules for obtaining licences is also published. With this substantial level of predictability, investor and consumer confidence is assured.
EEA is rated substantial on participation. The consultation of different stakeholders prior to taking major regulatory decisions is a regulatory requirement under the Energy Proclamation 810/2013. EEA involves all the major stakeholders in its decision-making process through public hearings and ad-hoc meetings. Although the authority does not publish comments received during the consultation exercise, it considers stakeholders’ inputs and provides feedback on comments received from stakeholders.
Open Access to Information
EEA is rated substantial with regard to the level of development of its regulatory framework on open access to information. The institution has a website,www.eea.gov.et , that allows utilities and stakeholders to have access to key documents and ensures that underlying justifications to major regulatory decisions are made available.
Economic Regulation – Tariff Setting
EEA rates medium with regard to the development of economic regulation framework. Although EEA has developed a well-documented tariff setting methodology, which includes a formula for setting end-user tariffs, the tariff methodology does not include a tariff indexation mechanism or a schedule for major tariff reviews. Tariffs are reviewed as needed. The regulator has carried out a cost-of-service study but the current tariff level is not cost reflective. It is a requirement that the utility seeks approval from the regulator prior to making major investments.To make tariffs affordable to support low-income consumers, the poor and vulnerable, a lifeline block cross-subsidy is used, with industrial and commercial consumers paying for the benefit of residential consumers. The downside of the subsidy arrangement is that the productive sectors of the economy are made to provide the subsidies, and this could lead to an increase in the cost of doing business in Ethiopia.
Technical regulation – Quality- of-Service
EEA is rated high in terms of development of quality-of-service regulations. A Quality of Service regulation is in place and provides for monitoring the performance of the regulated utility on technical performance and quality-of-service performance parameters such as the System Average Interruption Duration Index (SAIDI) and System Average Interruption Frequency Index (SAIFI), consumer complaints, billing accuracy, and connection related issues. National transmission and distribution grid codes are in draft form and to be approved and published. EEA has carried out and published a customer satisfaction study, which it has discussed with the utility. Distribution utilities are penalized for failing to meet the allowed loss target path. Time-bound performance parameters are regulatory requirements stated in the quality-of-service regulations. They include such parameters as the time that it takes a utility company to respond to a customer request for a new connection; the time that it takes for an actual connection to be made; and the response time for responding to customer complaints.
There is a high level of development of the licensing framework, which covers both grid-connected and off-grid systems to guide potential investors interested in entering the electricity market.
Although there is a need for the regulator to strengthen capacity in some areas of regulation including tariff modelling, there is an overall substantial level of development of the human capacity to deal with key regulatory functions of the EEA.
Renewable Energy Development
There is a medium level of regulatory development for renewable energy (RE). The Energy Proclamation 810/2013 and Energy Operations Regulation 447/2018 provide the legal basis for the development of RE in Ethiopia. Access to the grid is guaranteed for electricity generated from renewable energy sources. EEA is responsible for regulating renewable energy, but the Ministry of Water, Irrigation and Energy is responsible for the development and implementation of renewable energy strategies. However, there are no technology-specific model contracts or power purchase agreements for different renewable energy technologies.
Mini-Grid and Off-Grid Systems
There is a high level of regulatory development for mini-grid and stand-alone systems, both grid-connected and off-grid. There is legislation, Mini-grid Directive, that provides for the development of mini-grids. The Ethiopian National Electrification Plan 2 (NEP2) is a national program which is designed to support the development of mini-grid systems. Mini-grid tariffs are based on the cost of service. Connection codes provide for the connection of mini-grids to the national grid and allows for the sale of electricity. Mini-grid specific licensing arrangements under which mini-grids with a capacity of less than 50kW can negotiate the retail tariff with its customer is available. Under the national program to support the development of stand-alone systems, duty and tax exemptions are granted.
Energy Efficiency Development
EEA is rated substantial for the level of energy efficiency development. A national energy efficiency action plan was developed and approved in 2019 to reduce system losses. EEA is in charge of energy efficiency regulation. Under the Energy Efficiency Program and Activity Plan, targets have been established for transmission and distribution losses. Financial mechanisms for energy efficiency projects is lacking. The government provides funds for energy efficiency, but the budget is limited. Minimum energy performance standards (MEPS) have been developed for industrial electric motors and the Ministry of Construction has developed a building code and supervises its implementation. There is a requirement for periodic energy auditing and reporting by heavy energy consuming beverage, cement, metal, textile and sugar industries.
Financial Performance and Competitiveness
From the perspective of the utility, there is a low level of regulatory development in terms of financial performance and competitiveness of the utility. A Cost-of-Service Study has been conducted by the utility and approved by the regulator and the recommendations are being implemented. The current level of average end-user tariffs is not in accordance with the utility’s cost of operations. The collection rate is 71-99% of invoices but this is not factored into tariffs. A loss reduction target has not yet been agreed between the utility and the regulator. No regulatory mechanism has been established to deal with electricity theft but the utility has instituted its own measures to address. The regulator has not approved PPAs signed between the utility and IPPs and does not recognise price adjustments in PPAs. The regulator has formulated a transparent procedure for reviewing end-user tariffs and always follows the procedure and schedules. It is important that the new directive for electricity tariff setting methodology and Guideline No. 008/2012, approved in May 2020, is implemented.
Quality of Service Delivery (Commercial and Technical)
There is a low level of regulatory development in the area of quality-of-service delivery. Important indicators such as SAIDI and SAIFI values are not factored into electricity tariff setting, and consumers do not benefit from any form of service consistency. There are Quality of Service regulations however, there is no requirement for the utility to undertake periodic technical audits or a valuation of its assets to establish the true state of its facilities and it is also not a regulatory requirement for the utility to calculate and publish its SAIDI and SAIFI. The current draft grid code contains provisions for ceilings of SAIDI and SAIFI. New directives on quality of service, with penalties for non-compliance (approved in September 2019) need to be implemented.
Facilitating Electricity Access
The regulatory framework for facilitating electricity access is rated substantial. The government and the utility provide funds for rural electrification. Investment made in rural electrification is recovered in the tariffs. There are no regulatory mechanisms in place, aimed at providing access to electricity, but regulatory ceilings on the number of days to provide electricity connection to a customer after making payments
The regulatory law should be amended, or secondary legislations developed to make provision for the following:
- Alternative and independent sources of funding for the regulator, such as levies and license fees to reduce reliance on government subventions
- Staggering the terms of commissioners to ensure maintenance of institutional memory and knowledge transfer
- A cooling off period after the terms of office of the CEO and commissioners before their employment in a regulated entity
- Overhaul the salary scale to at least the level of the utilities to retain trained staff.
- Prohibition for the regulator CEO from holding other offices in the government during their tenure
- Prohibition of the appointment of commissioners previously staff of a regulated company
- Parliament to approve the level of the Licence fees charged by the regulator
The regulatory law should be amended, or secondary legislations developed to require the regulator to publish all regulatory decisions and rationale behind
The regulatory law should be amended, or secondary legislations developed to make provision for the creation of specialized and independent bodies outside the regulator and the traditional court system to address energy/ electricity related disputes
The entire regulatory asset base of the utility should reflect in the tariffs to ensure financial sustainability of the utility.
Develop a model regulatory accounting framework for utilities in tariff applications
The National Transmission and Distribution Grid code should be urgently finalized and approved for implementation to guide technical access and operation of the interconnected grid.
The regulator should develop and implement a comprehensive capacity building program to train more energy regulatory professionals to ensure adequate capacity of staff in areas of tariff setting and utility performance analysis.
The regulator should develop model technology-specific power purchase agreements for all renewable energy technologies to guide investors and utilities in concluding their negotiations.
Technical standards for stand-alone systems should be developed and applied for compliance by installers.
An energy-efficiency standard and labeling system for electrical equipment should be developed and adopted as an energy efficiency measure.
The regulator should set and enforce a ceiling and thresholds on key quality of service indicators, such as SAIDI and SAIFI, with incentives and penalties to instigate compliance by the utilities.