Report No. PIC5051 Project Name Ethiopia-Energy II Project Region Africa Region Sector Energy Project ID ETPE736 Borrower Federal Democratic Republic of Ethiopia Implementing agency Ministry of Mines and Energy (MME), Ethiopian Electric Light and Power Authority (EELPA), Ethiopian Energy Studies Research Center (EESRC). Date of PID preparation April 28, 1997 Project appraisal date May 1997 Projected Board date June 1997 1. Country and sector background. Recent economic performance by Ethiopia has been remarkable. This performance has been favorably affected by an improved policy environment, the start in the rehabilitation of infrastructure, and favorable rainfalls. Real GDP grew at 5.4% in 1994/95, compared to more than -3% per annum during the pre-reform period (1991/92). GDP growth in 1995/96 was impressive: an estimated 10.4%. Still, Ethiopia is one of the poorest countries in the world, with a population of 56.5 million and a per capita income of US$100 in 1995. 2. Ethiopia has one of the lowest levels of energy consumption per capita in the world. Only 5% of the population has access to electricity. Electric power supply in Ethiopia is under the jurisdiction of EELPA, with the country divided into two major divisions, the interconnected system (ICS), consisting primarily of the large hydro generating facilities supplying the main supply grid, and small self-contained systems (SCS). The total installed capacity in the ICS is 378 MW. Power sales totaled 1,142 Gwh in 1995, of which about 42% were to domestic customers, 44% to industrial customers, and 14% for commercial customers and street lighting. The total installed capacity in the SCS in 1995 was 30.5 MW with total sales of 35,612 Mwh in 1995. 3. Continuity and quality of electric supply in the ICS are essential to support the country's continued economic growth. Expansion of the SCS, possibly under new institutional arrangements, will address the low access rate and help support further economic activity in the rural areas. In 1994, Ethiopia suffered a drought that, combined with the very narrow capacity margins, necessitated widespread load shedding. The Government responded by acquiring about 60 MW of thermal plant to help relieve the shortages under these circumstances and provide for more effective use of the water resources. However, it is clear that, with the rapidly expanding economy, a substantial block of capacity must be added to the ICS to forestall major shortages in the future. 4. Project objectives. The project objectives are: (A) to increase efficiency and sustainability of the power sector in Ethiopia, and to increase electricity generation capacity for economic growth and improved quality of life for its citizens; and (B) to improve utilization of rural renewable energy. The progress on these objectives will be measured by Ethiopia achieving by the end of 2002: (i) capacity reserves of 10% in terms of firm energy, and of 30% in terms of installed power; (ii) continuity of supply of not less than 0.998; (iii) 250,000 new customers connected to the grid after rehabilitating and expanding distribution network under a separate project; (iv) 100% of new industrial applicants for power connections will be satisfied; and (v) decreased biomass requirements for cooking purposes by 50%. 5. Project description. The project proposes to support: (i) power sector reform program in Ethiopia; (ii) construction of the Gilgel Gibe Hydroelectric Plant (180 MW); and (iii) improvement in utilization of rural renewable energy. The Gilgel Gibe hydroelectric plant will be built on the Gilgel Gibe river, a tributary of the Omo River in the Jimma Zone of the Oromiya Region, about 260 km southwest of Addis Ababa. Several studies of hydroelectric plants on the Gilgel Gibe river were carried out in the past. The final scheme selected has a single power plant. The rural energy component includes biomass inventorization of the northern regions, and a nationwide promotion and dissemination of an efficient biomass stove for household use. 6. Project Financing. Initial project cost estimates total US$279.3 million, of which the foreign currency cost will be US$202.5 million. The tentative financing plan includes an IDA credit of US$200 million and cofinancing of US$62.5 million. 7. Project implementation. -- Implementation Period: Five years, 1997-2002. - Executing Agencies: (i) MME for the power sector reform program; (ii) EELPA for the Gilgel Gibe construction; and (iii) EESRC for the rural energy component and for Woody Biomass Inventory. - Implementation arrangements: (i) For the power sector reform, the planning wing of the MME with the help of short-term consultants as needed. (ii) For Gilgel Gibe, project management consultants are being appointed. (iii) For Rural Energy components, EESRC will establish a project implementation team, with a project manager and accounting staff. Consultants will be hired to assist with technical specifications and project management. - 2- 8. Project sustainability. Important factors for sustainability will be: (i) the ability of the utility to maintain tariff levels that reflect full commercial operation; (ii) corporatization of EELPA; and (iii) restructuring of the power sector creating an enabling environment for open competition in generation/distribution. 9. Lessons learned from past operations in the country/sector. One of the important lessons learned in this sector is the importance of reasonable load forecasting before undertaking a major hydro project given the time lag requirement and to make sure that the investment is not premature. The proposed project, of which Gilgel Gibe is a part, is based on a realistic load forecast. Another major lesson learnt is that unless the utility (EELPA) is fully commercialized it would not be possible to improve supply efficiency. It is, therefore, necessary that the relationship of MME and EELPA be streamlined so that their responsibilities and accountabilities are transparent and clear. EELPA has to be made fully autonomous and accountable to supply electricity in an efficient and business- like manner. An independent tariff setting mechanism will ease commercial operation of EELPA, and will help to eventually attract private sector participation in the sector. 10. Poverty category. Not applicable to this project. 11. Environmental aspects. The proposed project is in category "A". There will be resettlement of 2,476 households. An Environmental Impact Assessment has been prepared showing a satisfactory mitigation plan. Also, a Resettlement Report has been prepared showing detailed resettlement arrangements and satisfactory compensation for the affected households. The resettlement arrangements include unique features that provide for the needs of the resettled population in a way not normally seen in similar projects; for example, a legal fund has been established for resettled people to use if they feel their human rights have been violated. 12. Program objective categories. The program objectives that will be addressed under the proposed project include: private sector development, through the power sector reform program; and, environmental sustainable development, by expanding power generation and improving utilization of rural renewable energy with a positive environmental impact. Contact Point: Alfred Gulstone, Task Manager The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. - 3 - Processed by the Public Information Center week ending May 2, 1997. - 4 -