Sectoral and macroeconomic implications of reducing implicit power sector subsidies in developing countries: Insights from Ethiopia

Policy reforms targeting implicit subsidies to public power utilities are expected to have repercussions on the electricity sector, as well as the rest of the economy. This study aims to glean insights into the potential direct and indirect effects of reforming implicit power sector subsidies in the context of low-income countries. Using a computable general equilibrium (CGE) model, it is demonstrated that a hypothetical reduction in implicit subsidies in Ethiopia would increase the share of off-grid sources in the total electricity supply and enhance production efficiency in the grid electricity sector, with no substantial impact on GDP. • Ethiopia is moving towards cost-reflective electricity tariffs. • This study presumes a scenario of reducing implicit electricity subsidies to achieve this goal. • It incorporated a reasonable value of subsidies in the electricity production costs structure. • The potential repercussions of reducing subsidies to the economy are explored.