This Chapter of the Investment Guide focuses mainly on the status of and investment in the electrical energy sector, and does not cover oil, natural gas and other hydrocarbons.
Currently, the principal sources of energy in Somaliland are of two main origins: Imported petroleum and local biomass resources. Petroleum is imported in the form of refined diesel, petrol, and aviation gas, all of which are used for transportation and electric power generation. Other imported petroleum products including kerosene and natural gas which are used for cooking by certain segments of the urban community. Kerosene, in addition to cooking, is also used for illumination by a large number of consumers.
Somaliland power producers now use imported diesel fuel as the only source of energy to generate electricity. It is estimated that collectively, companies burn more than 90-100,000 liters of diesel fuel every day in Somaliland. Independent Power Producers (IPPs)4 also struggle with heavy operational and maintenance costs of diesel generators. The electricity tariff rate in Somaliland is probably the highest in Africa at approximately $1.00- 1.40 /kWh5. As global consumption, fuel costs and unstable imported fuel supply problems continue to rise, electricity costs will also rise. This level of cost is already restricting business development in Somaliland, and as it increases, at a certain point it will be too expensive for the majority of business and ordinary consumers in Somaliland. For power producers, it is becoming difficult to stay profit and be sustainable. As a result, the Government is prioritizing energy investment from private and public sources, and is confident that major investment opportunities exist to upgrade, diversify and modernize this important sector.
It has been estimated that the capital investment required by Somaliland’s energy sector is US$15.17 million for 2012-2016, of which $5 million is expected to come from the private sector (National Development Plan 2012-2016). Key priority challenges that investors, policy-makers and donors need to address in the sector include:
The need to invest in the outdated power plants and limited power distribution network;
The need to diversify away from the dependence on imported fuel for power generation – which has resulted in higher electricity costs in Somaliland.
The development of necessary skills and technical resources to utilize alternative energy sources for power production.
The development, review, passage, enforcement, and wide dissemination of key pieces of energy legislation.
The need to promote energy saving culture and invest in energy efficient technology.
Since the declaration of independence in 1991, Somaliland’s electricity system was rebuilt and is now operated almost entirely by independent power producers each supplying areas in its neighborhood. Some of these are “dedicated” IPPs who sell electricity as a central part of their business model, but many others need electricity generation for their own business activities and sell excess electricity to nearby customers to supplement their own income and recoup costs. Both kinds of IPPs have fully vertically-integrated systems; they have built and maintained infrastructure to generate, transmit and distribute electricity in the areas in which they operate.
In Somaliland, each area’s electricity infrastructure has been developed by the IPP working in that area. Until now, grids have not been connected, and the systems have not been unbundled, due to the high fixed cost of building new infrastructure. In each of those areas, almost all power distribution is via diesel generators for which fuel is expensive and of variable quality.
While over 20 IPPs operate in Somaliland, there has been significant consolidation of IPPs in recent years with many IPPs coming together to form one large company in order to deal with duplication and inefficiencies. This is a trend that is emerging in Hargeisa, Somaliland’s capital, as well as other cities. Larger players have used this opportunity to pursue outside funding which is considerably more difficult for smaller players.
There is a clear need for investment in the energy sector, to reduce costs and prices, and to keep up with Somaliland’s rapid economic expansion.