Power Sector Reform, Investment and Modernization in Ethiopia (PRIME-1)

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The Power Sector Reform, Investment and Modernization in Ethiopia (PRIME) MPA program will support a medium-term transition of the electricity sector towards universal access, reliable supply, utility financial sustainability, increased private investments, and a climate resilient diversified generation mix. This transition will be underpinned by structural reforms that will encompass a gradual segregation of the competitive segments of the sector from the monopolistic segments to enable increased private participation under a competitive market regime. In parallel, the program will pursue operational reforms that will enhance utility financial sustainability through timely adjustment of tariffs, greater energy accountability, efficient investment planning, improved collections, reduced losses, and modernization of systems. This medium-term reform transition will be achieved through upfront adoption of a reform mandate by the Government, time-bound reform actions intertwined with investment support, and institutional capacity building to support the preparation and implementation of specific reform actions.Using a multi-phase approach, the PRIME program will support investments in expansion and strengthening of the electricity network to facilitate accelerated expansion of electricity access with improved reliability of supply. The program will also enable private sector investments in non-hydro renewable energy generation. The network strengthening investments under the PRIME will complement investments in last-mile electricity access under the ongoing ‘Ethiopia Electrification Program (ELEAP)’ and ‘Access to Distributed Electricity and Lighting in Ethiopia (ADELE)’ projects, as well as the Ethiopia phase of the upcoming ‘Accelerating Sustainable & Clean Energy Access Transformation in AFE Region MPA’ (ASCENT Ethiopia). Risk mitigation measures to enable private sector investments in non-hydro renewable energy generation will be co-supported by the ongoing Renewable Energy Guarantees Program (REGREP MPA). Together, these interventions will help Ethiopia achieve the triple goals of delivering universal electricity access, energizing faster economic growth, and establishing itself as a regional energy hub.The first phase of the PRIME program will improve the reliability and capacity of the electricity network in select towns and mitigate risks for private investments in non-hydro renewable energy through upstream preparation activities, while also establishing the medium-term sector reform trajectory. PRIME-1 project will improve the reliability and capacity of the electricity network in select towns and augment transmission with new lines and associated substations, while modernizing some aspects of the electricity systems. Building on the earlier success in geothermal resource establishment through drillings at Aluto Langano, this phase will establish geothermal resources for at least two new locations for subsequent private sector-led development under competitive selection modalities. Finally, this phase will oversee the adoption and initial implementation of the medium-term reform roadmap through a combination of capacity building and Performance-Based Conditions (PBCs) that will intertwine network investments with specific reform actions.The first component of the PRIME-1 project will improve the quality of supply in select towns across Ethiopia by rehabilitating the electricity distribution network. Power distribution networks in these towns are old and, in some extreme cases, have not been expanded or modified over the past decades. As a result, equipment failures and unplanned power outages are widely prevalent. Many of the wooden poles used to support the wires were installed over two decades ago and are now severely aged and unreliable. Further, these distribution network systems are now much overloaded. While on the one hand, it is difficult to meet the growing electricity demand imposed on these networks by new connections, on the other hand this causes higher technical losses and frequent unplanned interruptions. Distribution networks in these towns will be strengthened by reconfiguring and upgrading feeder conductors as well as transformers, and replacing poles and insulators as needed.This component will also provide technical assistance as well as institutional capacity building support to EEU specifically for structural and operational reforms. The key reforms at EEU that will be supported are: (i) Segregation of Public Service Obligations (PSO) from commercial business of EEU, (ii) Establishment of strategic business units (SBUs) along the regional EEUs, (iii) Tariff adjustments to reflect variations in inflation and currency exchange rate, and (iv) Least cost distribution expansion planning. The key areas identified for program level institutional capacity building are project management, contract administration, procurement, and safeguards (including environment, social, gender equality, health, and safety aspects).The second component will construct ten new substations and related transmission lines to ensure adequate transmission capacity for the above towns (and the surrounding areas) as well as four additional lines with substations to improve the overall grid reliability and carrying capacity. This component will also support the ‘System Defense Project (SDP)’ which involves modernization of the transmission grid by resolving the challenges of frequent system wide instability and outages due to miscoordination of primary, secondary, and tertiary frequency control systems and undamped oscillation issues.This component will also provide technical assistance as well as institutional capacity building support to EEP specifically for structural and operational reforms. In terms of reforms, support will be provided for (i) Accounting, functional, asset, and human resource separation across the Generation, Transmission, and System Operation functions of EEP, (ii) Tariff adjustments to reflect variations in inflation and currency exchange rate, and (iii) Least cost distribution expansion planning. The key areas identified for program level institutional capacity building are project management, contract administration, procurement, and safeguards (including environment, social, gender equality, health, and safety aspects).The third component will finance drilling for geothermal resource establishment at additional locations beyond the Aluto Langagno area (covered under GSDP) in preparation for private sector-led development of over 100MW geothermal power. Building on the successful drilling of wells at Aluto Langano, this sub-component will deploy existing drilling rigs owned by EEP (purchased under the GSDP) to further establish geothermal resources at two or more new locations that will be agreed during project preparation. These wells will supplement the wells currently being drilled at the Aluto Langano site under the GSDP and together establish a set of adequate geothermal resource for downstream development of a large geothermal power generation program.Component four of the PRIME-1 project will provide support to the regulator specifically for reform related technical assistance and capacity building.