Dig For Fire: A Proposal For Power Sector Reform In Somaliland

This paper develops a proposal for how Somaliland’s electric power sector can become more efficient while generating greater economic sustainability and alleviating strain on the poor. The paper will be useful as a guide for policymakers in Somaliland, but the major challenge will still lie in the ability to commit to and enforce any regulations that are enacted. Ideally, areas of this framework could be applied in a number of sub-Saharan African countries.

However, few countries have the same level of electric sector underdevelopment as Somaliland. As such, the proposals in this framework will not be broadly applicable. If Somaliland can find sufficient investment to reform its power sector and channel its focus towards renewable energy technologies, the results could be dramatic.

Dig For Fire: A Proposal For Power Sector Reform In Somaliland

Erik English

ABSTRACT

Somaliland is a breakaway nation in a dangerous part of the world. They have struggled to gain recognition and legitimacy in the eyes of the international community and, as a result, have faced many more challenges in their own development as a country. Electricity is essential for growth, reducing poverty, etc., and Somaliland is struggling to upgrade its power sector. Energy prices are high and there is no regulatory body to oversee the operations and organization of the power sector.

There is widespread use of charcoal, with enormous environmental and social consequences. There is no financial system to create capital for large-scale investments and no regulation to protect any investors that may be willing to take a chance. There is no plan for how and in what order to overcome these challenges, and attempts to create financial and energy regulations have been stalled in Parliament. But, surmounting these challenges and reforming their power sector can have huge rewards for their GDP and social development.

The challenges are overwhelming and it is unclear in what order to address them, which ministry should focus on which issue, and what the time-frame should be for implementation. This is made worse by the fact that there is a dearth of technical expertise regarding renewable energy in Somaliland and the advantages it provides. The key question of this paper is: Will prioritizing and addressing the challenges of power sector reform set Somaliland on a course to realize its GDP growth potential and social development goals?

Table of Contents 

1 Introduction

2 Somaliland’s Power Sector: Find The Gap

2.1 Current Organization Of The Power Sector

2.1.1 Demand

2.1.2 Generation

2.1.3 Transmission

2.1.4 Distribution

2.1.5 Renewable Energy Potential

2.2 Barriers To Investment

2.3 Social Consequences of Inaction

2.4 Preliminary Conclusions

Power Sector Reform: Close The Gap

2.5 Diversification of Energy Sources

2.6 Organization Of The Power Sector

2.7 The “Textbook Model”

2.8 Cases Studies

2.8.1 Rwanda: Financing Renewable Energy

2.8.2 South Sudan: Regulatory and Legal Frameworks for Success

2.8.3 Ethiopia: Economic Growth and Power Sector Reform

2.9 Preliminary Conclusions

3 Proposal for Power Sector Reform in Somaliland

3.1 Establishing Legal and Regulatory Frameworks

3.2 Restructuring Organization of Power Sector

3.2.1 Generation

3.2.2 Transmission

3.2.3 Distribution

3.3 Incorporating Renewables

3.4 Coordination

3.5 Conclusion

4 Appendix

5 Bibliography

1. Introduction

Somaliland citizens pay some of the highest electricity rates in the world. The power sector is characterized by private utility companies that use imported diesel to generate electricity and the government has no oversight on energy regulation and no plan for increasing the capacities of state and private utility companies to lower unit costs of electricity.

There are a large number of steps that need to be taken over the short, medium, and long term in order to achieve lower unit costs and power sector reform should be considered a necessity for achieving Somaliland’s economic and social development goals. A mass transition to electricity, if costs can be lowered, could be a critical step in generating higher GDP for Somaliland and reducing poverty.

Somalia is well known around the world for violent conflict and failed governance. Terrorist organizations like al-Shabaab and piracy groups dominate the headlines and public opinion is mostly negative. Situated in the Horn of Africa, Somalia is bordered to the northwest by Djibouti, to the west by Ethiopia, to the south by Kenya, and by the Gulf of Aden and the Indian Ocean.

Within this troubled environment, Somaliland is a bright spot in an otherwise bleak reality. Somaliland is a stable autonomous state within northern Somalia, bordered by Puntland, a second autonomous region, to the east (see Maps 1 and 2). Somaliland had been a British protectorate since 1884 (see Map 3) and, only days after gaining independence in 1960, merged with the recently independent state of Somalia, which had been under Italian colonial rule. In 1988, when a Civil War broke out between government forces in Mogadishu and Somaliland separatist rebels. It wasn’t until after the collapse of the Somali government and the Siyad Barre regime that Somaliland officially declared independence on May 18, 1991.^[1]

Since that time, Somaliland has established a currency, set up a functioning government, held free elections, and had a peaceful transition of power.^[2] Despite this, it remains unrecognized as a legally independent state by any country or international organization. Some sources maintain that Somalia wants to keep the Somaliland government close, rather than concede its independence, hoping that the stability and success will have ripple effects in greater Somalia.^[3]

From the perspective of the international community, Somaliland’s claim for independence is strengthened by the adherence to colonial borders that the community supports (See Map 3)^[4]; yet, many Western nations maintain that legal recognition of an African state should come from within Africa.^[5] The African Union seems unwilling to acknowledge independence because of the precedent it would set for other separatist bids, exacerbated by the current crisis in South Sudan.^[6]

This lack of international recognition has not slowed Somaliland’s spirit and drive to succeed, but it has hindered their access to private investment. The government of Somaliland seems to be hoping that a solution will fall into their lap, having issued large oil exploration contracts to Genel Energy, an Anglo-Turkish firm. Their hope may be that discovering oil will generate a windfall of revenue to fund the revitalization of their energy sector. They also have an “offer worth ‘hundreds of millions [of dollars]’ [that] has been tabled by ‘one of the world’s best port operators’ to develop the harbor at Berbera.”^[7]

Despite this opportunity, any regulation or development of the energy industry is non-existent—especially in the power sector. Even if there is a huge windfall from oil discovery or development of their port, it will be useless without an effective financial and regulatory system in place to properly allocate resources and protect investors. The current situation will not suffice.

Electricity is wired through the city through wires that have been cut, split, and reconnected multiple times. There have been more than twenty utilities in Somaliland at a single time, many of whom have overlapping service zones. In certain cases, there are four utilities with electric wires running over the same streets and into different homes and businesses, and consumers often pay ten times what consumers in the United States pay.^[8]                      

A visitor to Somaliland will find themselves on Jigjiga-Yar Road, which stretches from the main highway in Hargeisa all the way to the outskirts of the city. It winds past Gollis University, past the bustling marketplace and open storefronts, past the new mall and government buildings, with dark blue windows reflecting the afternoon sun. It runs all the way to the Man Soor Hotel, an elegant open-air hotel filled with international businessmen, government officials, and entrepreneurs. The walk is warm and the air is dusty, but there is an excitement that can be felt walking through the city.

Beyond this bustling energy of development and progress, there is another kind of energy one can’t help but notice—a constant dull roar a few yards from the main road and in the middle of a cluster of houses—that of a diesel generator.

These kinds of generation facilities can be found all over the city, with a wall of concrete and a tin roof generally being the only thing to hold back the clamor of the engine from the neighboring homes. The generation costs and consumer costs are high because the generators are powered by imported diesel fuel and kept running twenty-four hours a day, seven days a week. There is currently a complete lack of any regulatory body, very high generation costs, poor transmission capacity, high costs for consumers, and very little investment in the industry, despite huge opportunity for development. As the roar of the generator intensifies, it becomes clear that Somaliland’s power sector is in desperate need of reform.

This was the environment I found myself in when I walked off of my Ethiopian Airlines flight and looked out on the tarmac of the recently constructed Hargeisa airport. I worked in conjunction with Qorax Energy and Abaarso Tech University representatives to conduct interviews of eighty families in Hargeisa, Berbera, Wajaale, and Gabiley between June and August 2014. I wanted to understand how people were using electricity, what their service was like, and find a way to channel their experience into actionable recommendations for the government. I also interviewed government officials regarding their perspectives of the power sector.

The main objective was to understand what major barriers are limiting the development of the power sector and creating such high costs for electricity. Preliminary conclusions of the data collected were presented at an event organized by Abaarso Tech University in June 2014. Ultimately, I wanted to know why some of the poorest people in the world were paying so much money for electricity and receiving so little in return.

There is a very strong correlation between electricity consumption, economic performance, and poverty reduction, and, as a result, many developing countries have incorporated power sector reform into their short-term and long-term development goals.^[9] I believe that by focusing on reforming the power sector, Somaliland can achieve a number of goals and take one step further towards recognition as an independent state.

In order to focus on the priorities, I organized the Somaliland government’s challenges from their development action plan into a framework that can be found in Figure 1. It uses a categorization method to order the challenges into related and prioritized pillars. By recognizing that the challenges are factors of a larger problem, it becomes clear that the first priority should be to develop a financial system and pass legislation that would create an energy commission to oversee transition of the sector.

Once established, the commission can oversee goals for growth in generation, transmission, and distribution in accordance with the “Textbook Model” of power sector reform. All of these together, if done properly, can mitigate the environmental and social ills that Somaliland currently faces.

For my research, I conducted interviews in Somali, Arabic, and English using a prepared survey of questions. The interview responses were recorded and later digitized into a spreadsheet; typically, they lasted between 25 and 40 minutes. Interviews of government officials were less structured and often lasted for roughly 60 minutes. The organization of this document was inspired by Paul Maidowski’s Master’s thesis at The Fletcher School, which discussed power sector reform in Mongolia by proposing a phased approach for achieving goals for generation, transmission, and distribution.^[10]

Throughout the paper, I use the term “utilities” generally to refer to any power producer in Somaliland. Most of the independent producers are in the process of merging into larger entities, which makes references to the specific roles of each utility difficult to define.

There is very little data available regarding Somaliland’s power sector. All relevant data was found in the Somaliland government’s Development Plan,^[11] the Private Sector Investment Guide,^[12] a 2011 Private Sector Assessment produced by USAID and DAI,^[13] and limited data from the World Bank.^[14]

Regarding the structure of this document, I first lay out the story and my reasons for becoming interested in this topic, then I discuss my methodology and the literature review involved in the process. I look at Somaliland’s current situation, which is characterized by a vertically-integrated natural monopoly of private utility firms. The largest and most immediate area of concern for Somaliland is the elimination of “mandatory minimum payments,” which disproportionately affect the poorest community members.

Next, I take a closer look at Somaliland’s power sector, and its impact on society, using the Millennium Development Goals as a lens for understanding these impacts. Following that, I begin to look at the traditional understanding of power sector reform, why it is important, and some of its limitations. Specifically, I look at the barriers to renewable energy investment in developing countries, and the impact that power sector reform can have on those investment barriers.

In order to understand goals for power sector reform in the context of Somaliland, I review three case studies for countries that have undergone power sector reform. Using their experience as a guide, I can make better predictions about the impacts of power sector reform in Somaliland. Finally, I make recommendations for reform in Somaliland.

The goal and challenge for Somaliland will be finding an adequate and gradual balance to diversify their energy portfolio, while also investing in upgrades for their current system and incentivizing innovation in renewable energy sources. In many countries that have undergone dramatic shifts in their energy policy, they establish goals in five-year increments, as well as 20 to 25 year increments.

In the absence of investment, regulation, and any real promising discovery of oil, the government should seek to reform its energy sector as a way to lower the cost of electricity and grow GDP while reducing poverty. The priority should be to increase generation in the short, medium, and long term.

Transmission and distribution should not be prioritized in the short term. There will need to be a government body overseeing the reform and ensuring that utilities meet their upgrade quotas. Since there is currently no such oversight body and there are no banks to create access to capital, all of this will be contingent on the passage of two laws currently being debated: the energy act and the commercial banking act.

In reviewing Somaliland’s current situation, power sector reform, and specific cases, I hope to answer the following question: Should Somaliland reform its energy sector as a way to alleviate poverty, attract investment, and further its case for recognition? If so, how can they achieve this?

Read the full paper here 

About the Author 

Erik English is a data wonk and aspiring designer interested in telling engaging stories about complex issues. He is currently an Energy Data Analyst in the Planning and Economic Studies Section at the International Atomic Energy Agency (IAEA).

His work is focused on using data analytics and visualizations to create infographics and explainers, specifically on climate change and the role of nuclear power. Prior to joining the IAEA, he worked in the Office of Global Change at the U.S. Department of State, Power Africa through the U.S. African Development Foundation, and was a Peace Corps Volunteer in Benin. At Fletcher, Erik focused on the intersection of energy, climate, and business. He currently lives in Vienna, Austria, with his wife, another Fletcher Alum.

FOOTNOTES

[1] Lacey, “The Signs Say Somaliland, but the World Says Somalia.”

[2] The Economist, “Can’t Get No Recognition.”

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Carr, “Somaliland: The Opportunity for Renewable Energy.”

[9] Ministry of Infrastructure, “National Energy Policy and National Energy Strategy 2008 – 2012.”

[10] Maidowski, “How To Create Efficient, Reliable And Clean Electricity Markets: A Regulation Design For Mongolia And Northeast Asia.”

[11] Ministry of National Planning and Development, “National Development Plan, 2012 – 2016.”

[12] Ministry of Trade and Investment, Somaliland Investment Guide.

[13] DAI, Somaliland Private Sector Development Assessment.

[14] The World Bank, New World Bank GDP and Poverty Estimates for Somaliland.

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