Does Electricity Supply Strategy Matter? Shortage and Investment:Reflections based on CGE Analysis

Ethiopia?s fast growing economy has brought about an unprecedented rise in power demand. Unfortunately, the demand could not be met in the last three years because of delays in capacity expansion and shortage of rainfall which resulted in power shortage. The government followed a rationing strategy to solve the problem in the short run while for the long run it has been investing heavily in power generation capacity with further intention to export. Using a Static CGE model, this study analyzed the impact of the electricity shortage on the economy. The analysis is based on IFPRI?s standard CGE model and the 2005/06 Ethiopian Social Accounting Matrix (SAM). The paper assesses government?s measure of electricity rationing (rationing that favors export sectors and disfavors selected sectors) and compares it with other alternative strategies (uniform rationing, rationing that favors export sectors, and rationing that favors activities of high electricity productivity). The study found that the impact of the shortage was significant, with a GDP loss of 3.1 percent. While the government?s measure in favoring export oriented activities had a positive impact on GDP,the disproportionate disfavoring of other activities had a negative effect that outweighed the positive impact. Other rationing mechanisms could have a lower cost to the economy. The study also found that the government?s plan in electricity investment and export would have a significant growth contribution to the economy. The investment is expected to bring about a 6.1 percent rise in GDP. The output growth is expected to come from the electricity generation and its effects as a vital input in the economy. However, the foreign exchange inflow from electricity export would bring an output reduction in other tradables as a result of the induced real exchange rate appreciation.