New private sector-led approaches for electricity provision in Yemen

The war in Yemen has adversely impacted the country’s public finances. Limited resources are available for investment in improving electricity generation, transmission, and distribution infrastructure. It is also difficult for the Internationally Recognised Government (IRG) to move towards cost-reflective tariffs in the current economic situation. The fragile security situation, regulatory uncertainty, electricity losses (~40%), poor collection rates (~50%), lack of payment guarantees, and highly subsidised tariffs currently applied in the IRG-controlled areas have discouraged private sector investment in Yemen’s electricity sector, particularly in distribution.

Private sector is typically involved in electricity generation

The private sector is heavily involved in electricity provision in many developing countries. In most cases, this has taken the form of private sector involvement in the generation of electricity, mainly through independent power producers (IPPs) who produce and sell electricity to a single government-owned buyer under a power purchase agreement (PPA). This model has been successful in expanding investment in generation but is dependent on the single buyer or off-taker being able to credibly commit to payment under the terms of the PPA. Often, deals are only bankable where an explicit sovereign guarantee is provided by the government to underwrite the PPA. However, this approach is unlikely to be viable given Yemen’s current economic situation.

Identifying a bankable model for involving the private sector in electricity distribution is important and could generate revenue through sales directly to customers, eliminating the need for the government to provide a guaranteed source of financing. There are a variety of ways in which the private sector can be involved in electricity distribution including management contracts, distribution services contracts, distribution concessions, bilateral contracts, and a full utility concession. Each of these approaches have their own set of advantages and disadvantages. In the Yemeni context, a utility concession might be an effective approach and should be piloted in a specific city or region to assess its suitability.

Pre-requisites for a utility concessions model to work

In the Yemeni context, there are several factors that have a major influence on the design of the system and must be considered during planning for a successful PSID model. Key factors include:

1. Security

No private company would be willing to invest in distribution without political backing to ensure security on the ground. It is essential for any local reform to have the backing of both the de facto and formal authorities of the area.

2. Regulation

Since changing legislation and regulation is complex and time-consuming, it may be best to consider regulation by contract, at least in the first instance. No new laws are needed but there must be a means of enforcing the contract.

3. Role of the Public Electricity Corporation (PEC)

The dominant position of PEC and its deep contextual knowledge of the sector means that reforms should be complementary to the work of the PEC and should benefit it as an organisation. Reforms which threaten the interests of the PEC are unlikely to be successful.

4. Tariff

The commercial viability of the system is only achieved if it is possible to reform tariffs ‘at the margin’, i.e., if it is possible to distinguish between customers who are willing to pay a higher tariff for a greatly improved service and charge them differently from other customers.

Assessing feasibility in a pilot location

 It is necessary to assess the feasibility of the concession in a pilot location. Conducting a pilot programme in a clearly designated area is particularly important in situations with high levels of uncertainty, such as in Yemen. There could be a range of economic, political, and social factors that make implementation of any model of electricity provision more (or less) difficult, and these are not predictable in advance.

There are two key criteria for the selection of a pilot area:

1. The area chosen must have good security, both in terms of physical security (i.e., no conflict and the application of the rule of law) and political security, in the sense that the political leadership of the region must be reasonably stable so that decisions made by the local government are enforced.
2. It is important that the area chosen for the pilot has a political leadership that is willing to experiment, innovate, and solve problems as they arise. To be successful, the local government must have a strong sense of ownership of the pilot and a desire to put in whatever effort is needed to safeguard its success.

If an area that meets these criteria can be identified, then five practical steps need to be undertaken to implement a pilot programme, as indicated in Figure 1.

Figure 1: Steps for implementing a pilot programme

Notes: The figure shows five key practical steps that must be taken to increase the likelihood of success for a pilot PSID programme in Yemen.

Policy recommendations

Utility concession could be an effective approach in Yemen to involve the private sector in electricity distribution and should be piloted in a specific area first to assess its suitability. If such a concession is to work, it will require a robust and enforceable regulatory framework, collaboration, flexibility, and strong political support from the central government, as well as from the political leadership in the pilot area. Key recommendations for how to proceed are:

1. Communicate the idea and agree on the approach

Introducing the private sector into distribution is a new concept and approach for Yemen. It is important that the idea is explained well and comprehensively discussed among all key stakeholders, including regional actors, so that any decision does not come as a surprise. If it is felt that PSID is an appropriate approach to pilot, this decision must be a formal one made at the highest level, so that there is no ambiguity.

2. Identify potential locations for a pilot and choose the most suitable one

Suitable locations for a pilot of the approach require the support of both formal and informal political authorities in the chosen area. The government should enter discussions with potential regions, assess their suitability both from a political and a technical perspective, and agree on a final choice with the selected area.

3. Prepare for implementation of the pilot

Preparation for conducting a pilot concession involves the following steps: baseline assessments, preparing a prospectus, procurement, analyses of bids, and negotiation of a contract. These can start immediately after a pilot area has been selected and agreed upon. Donors can be invited to support this process.

4. Study models of mini-grid concessions for off-grid areas

The above model is suitable for a utility concession serving a diverse urban area. But many Yemenis live far from the grid and will not benefit from this approach. In off-grid areas, the current approach of electrifying key public facilities with donor support is a good one. However, it would be useful for further research to study the viability of mini-grid concessions in off-grid areas to explore whether the reach of the private sector can support electrification in these areas as well.

Learn more about how the private sector can be involved in the electricity provision in Yemen in this IGC report.