Ethiopian Development Research Institute (EDRI) and International Food Policy Research Institute (IFPRI), Semiar series,

1. Does Electricity Supply Strategy Matter? Shortage and Investment:Reflections based on CGE Analysis Ermias Engeda , Eyasu Tsehaye, Seneshaw Tamru Generation capacity

2. Background Ethiopia has economically exploitable hydropower potential of up to 45,000 MW The country endured power shortage which has been worsening year after year over the past three years, 2007/08- 2009/10 due to: Unprecedented rise in power demand; Seasonal fluctuation (or shortage ) of rainfall Delay in the completion of hydropower generating projects. Blackouts had to be scheduled throughout the country.

3. Objective Quantitatively assess the economic impact of electricity cuts on the Ethiopian economy. Investigate the potential economic impact of alternative rationing strategies. Assess the potential impact of the investment on new power generation plants in the next five years.

4. Industries have been the number one users of electricity in Ethiopia followed by households. Electricity usage through out the six years has been steadily increasing in all types of users. Electricity usage by households has increased more than the other types of users in the past three years. Electricity Demand and Supply in EthiopiaTrend in electricity demand

5. Figure : Expected rise in power consumption (in GWH) from all types of users in 2009/10. EEPCO was expecting power consumption to increase in 2009/10 by 962GWH: demand from the industry increases by 371GWH, service by 448GWH and households by 143GWH Total power consumption was expected to reach 4546GWH

6. Electricity Supply Figure : Yearly electric production trend Actual production was almost stagnated between 2002/03 and 2005/06 The completion of TisAbbay I and II and Gilgel Gibe I with 1,520.84 GWH total output has significantly increased production between 2005/06 and 2006/07.

7. Figure: Power generation capacity of the new plants and projects (in MW) In 2009/10 total generating capacity was expected to rise by 1180 MW. There are twelve power generation plants remaining to be completed in five to ten years with 10,542MW potential.

8. Figure: Expected power shortage in 2009/10 EEPCO was expecting to produce some 5272 GWH. That is 2811GWH from the old dams, 1929 GWH from the newly inaugurated dams, and 532 GWH from government owned and rented diesel generators. During Hamle and Nehase total electricity output was expected to be the lowest because of shortage of rainfall during the Belg season. EEPCO forecasted the power shortage to appear only during the two early months of the fiscal year.

10. The newly inaugurated Gilgel Gibe II collapsed after very short time in use. Gilge gibe II was expected to produce the largest electricity output (1134.87 GWH) in 2009/10.

12. Some were allowed to work limited hours ;

13. Some industries that are believed to be ‘key’ (export oriented sectors) were given special privilege in power use. The policy problem is to find ways of reducing the cost of the power shortage on the economy.

14. Model, Data, Simulations, and Results

15. The model Standard IFPRI static CGE model At the top level, value added and intermediate inputs are combined by Constant Elasticity of Substitution (CES) Factors of production (value added) are governed by a constant elasticity of substitution (CES) The intermediate inputs are aggregated in a fixed-share proportion as in Leontief specification. The substitution between domestically sold and exported commodities based on constant elasticity of transformation (CET) Households consumption demand is given by a linear expenditure system (LES)

16. The model…… Macro economic Closures (Assumptions): Factor closures: Capital- fully employed and sector specific Land-fully employed and can be switched between sectors Labor-unemployed and mobile S-I: Savings-driven investment (fixed saving rate) Gov: Fixed tax rates and flexible government savings ROW: The level of foreign savings is fixed and exchange rate is flexible Numeriare: DPI is fixed and CPI is flexible

17. Data We relied on EDRI’s 2005/06 SAM for Ethiopia The SAM is disaggregated in 47 activities (of which 24 are industrial activities), 69 commodities, 10 factors, and 8 institutions including 6 households The SAM also has different taxes, saving-investment, inventory, and ROW accounts to show the interaction of different economic blocks

18. Two simulations: 1. Powershortage and rationing scenarios (Compare Government’s rationing scheme with three alternative rationing strategies) 2. Investment & Export

20. The significance of electricity input in production process

21. share of electricity input from the firm’s output;

23. Significance of Electricity in production process (based on the SAM) Agriculture, fetching water & real estate do not use or use very little electricity as intermediate input. All the other sectors use electricity with different levels of intensity in relation to their outputs

24. The percentage decline in output (productivity loss) for an activity is estimated as: PL = ES * IL WherePL = Percentage decline in output (productivity loss) ES = Electricity Shortage IL = Impact level Where: IL = WhereIL = Impact level = Value of electricity as an intermediate input to sector a Output= Value of Output α = substitutability factor

26. Shortage Simulation Results General impact of electricity shortage Source: Simulation Result The estimated impact of the 12.9% power shortage during 2009/10 is around 3.0 percent of GDP. Manufacturing is the most affected sector 10.3% reduction in value added .

27. Four rationing Scenarios are compared: Government’s rationing scheme (favoring export sectors and disproportionately disfavoring the other sectors)- GOVRAT Rationing all the sectors equally-UNIRAT Favoring export oriented sectors but equally disfavoring all the other sectors-EXPRAT Favoring high-electricity productive sectors together with export oriented sectors while highly disfavoring the lowest electric-productive sectors and equally disfavoring the remaining sectors-PRODRAT

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