Ethiopia’s GDP growth is 10.7 per cent per annum, making Ethiopia Sub-Saharan Africa’s fifth biggest economy. Addis Ababa is testament to this in currently representing a large construction site due to the plethora of high rise buildings, roads and railways being erected. The Government of Ethiopia (GoE) is on a drive to propel Ethiopia to being a middle income country and make the most of its status as the ‘water tower’ of Africa by embarking on landmark power sector developments which are sufficient not only to power Ethiopia’s rapid industrialisation and urbanisation, but also to power other countries in the region through interconnectors as part of the East African Power Pool.
Ethiopia’s current installed capacity is over 2,000MW, its energy penetration rate is 55 per cent and its energy demand is increasing at 25 per cent per year. Hydropower dominates Ethiopia’s installed capacity, at 92 per cent of the total installed capacity, which means that Ethiopia’s power supply is vulnerable to drought conditions. Ethiopia was ranked 118 out of 144 countries for quality of electricity supply in the World Economic Forum’s Global Competitiveness Report 2014/15.
Ethiopia is being praised by investors and observers as having
a zero tolerance approach to corruption, and efficient and transparent inter-ministerial processes. It is ranked 132 out of 189 economies in the 2015 World Bank ease of doing business index, between Tanzania and Kenya. Moody’s provided a provisional credit rating of B1 to the GoE’s sovereign bond issuance and, despite Ethiopia being the poorest country ever to issue a sovereign bond, its US$1 billion bond was oversubscribed when issued in November 2014.
GoE is focussing on Ethiopia’s abundant renewable resources in providing its target of 10,000 megawatts (MW) by 2020. The most landmark project is the 6,000MW Grand Ethiopian Renaissance Dam (GERD) on the Blue Nile which is currently being constructed. The GERD is being implemented by GoE and the funds required have partly been raised through a local bond issuance, with Ethiopian citizens (including those in the diaspora) being asked to contribute to their country’s growth in this regard. The 1,870MW Gilgil Gibe III hydropower project on the Omo River, a major tributary to Lake Turkana, is also set to be commissioned in 2015. Transmission lines for each of these projects are being financed by China, which is Ethiopia’s largest trading partner. Aside from the GERD and Gilgil Gibe III, Ethiopia has nine river basins and only five per cent of its hydropower potential is exploited so far.
Ethiopia is positioned at the top of the East African Rift Valley and therefore, like neighbouring Kenya, has a high geothermal potential. Geothermal studies in Ethiopia began in 1969 and have identified over 16 areas suitable for power generation, with an estimated power capacity of 5,000MW. The US-Icelandic developer Reykjavik Geothermal is currently developing the Corbetti 1,000MW geothermal prospect which, if developed to full capacity, would be the largest geothermal project in Africa. Other stakeholders in the project are the Africa Renewable Energy Fund (AREF) and Iceland Drilling. Additionally, Italy’s Electroconsult is exploring a 35MW prospect at the Aluto Langano geothermal field, where a further 22 wells are to be drilled under a US$126.2 million project being co-financed by the International Development Association (IDA) with a US$24.5 million grant from the Scaling-up Renewable Energy Program Trust Fund. This is funding part of a US$178.5 million IDA credit approved in May 2014 for Ethiopia’s Geothermal Sector Development Project.
With wind speeds of 6.5 metres a second on the highlands at the edge of the East African Rift Valley, Ethiopia’s energy mix already features wind. The GoE has implemented the 120MW Ashegoda wind project and the 52MW Adama I wind project, and the 153MW Adama II wind project is now being completed. We understand that many other potential sites have been identified, such as the 100MW Debre Berhan which is being developed for GoE by Terra Global Developers LLC with turbines supplied by Goldwind. GoE is eyeing up a total installed capacity of around 1,000MW for wind by 2020.
Northern Ethiopia has a solar irradiation level of 5.5kWh/metre² and in 2014 the GoE signed a memorandum of understanding with the American developer Green Technology Africa, Inc. to develop the first solar photovoltaic project in the country, a 300MW project, which would be on a turnkey procurement basis. The project has completed its pre-feasibility study and is estimated to be worth US$600 million. It is anticipated that the project will have support from the Power Africa initiative.
Ethiopia is also the location of Africa’s first waste to electricity project, the 50MW Reppie project in Addis Ababa, which is being implemented by the GoE and developed by Cambridge Industries in partnership with China National Electric Engineering Corporation (CNEEC).
Despite the advances being made by the GoE into various forms of power generation technology, all the operational power projects in Ethiopia to date have been developed by GoE on a procurement basis. The US$2 billion 1000MW geothermal project (to be phased and built in two stages of 500MW) being developed by Reykjavik Geothermal at Corbetti is the first independent power project (IPP) in Ethiopia’s history. We understand that these project documents have taken a several years to negotiate, and this may be a mark of GoE’s overriding conservatism whilst welcoming the private sector to invest in the energy sector. That said, representatives of the GoE have made it clear to the private sector that there is no limit on the amount of generation that may be developed by the private sector in future.
Given the immense scale of power generation expected export to the grid within the next few years in Ethiopia, the focus must be on whether Ethiopia’s transmission lines and other infrastructure are sufficiently robust to transport such large volumes of power. Ethiopia currently has 10,869 kilometres of transmission lines of 400kV, 230kV and 132kV in capacity, as well as a National Load Dispatch Centre. There are currently six World Bank transmission projects being implemented and the GoE is seeking to establish up to five regional dispatch control centres. The GoE’s aim by 2020 is to have 114 new transmission substations, 63 substation reinforcements and 13,540 km of new 500 kV to 66 kV transmission lines.
The framework institutions in Ethiopia’s energy sector are currently in transition. The incumbent Ethiopian Electric Power Corporation was unbundled into two entities in 2013/4, Ethiopian Electric Power (EEP) and the Ethiopian Electric Utility (EEU). The EEP was established by Council of Ministers Regulation No. 302/2013 and is responsible for generation and transmission, leasing of transmission lines and sale of bulk power. The EEU was established by Council of Ministers Regulation No. 303/2013 and is responsible for distribution and purchase of bulk power. Each of these two entities is now focussing on internal capacity building and drafting of policies and procedures.
The regulator is the Ethiopian Energy Authority (EEA). The EEA issues investment permits pursuant to the Investment Proclamation No. 769/2012. It also issues generation licences, which are 25 years for hydropower and geothermal, and 20 years for wind, solar, biomass and energy from waste technologies. The GoE approves the electricity tariff at national grid level, and the EEA approves the tariff off the national grid, as well as supervising its implementation and issuing guidelines.
There is also a procurement committee within the MoWIE with members nominated from EEA, EEP, EEU and the Ministry of Finance, which deals with the guidelines for submissions of application for competitive procurement and criteria for awarding licences.
The GoE has revised its investment law several times to ensure it is more transparent and competitive, with appropriate institutional frameworks and additional incentives, so that there is a reliable structure in place for investment. We understand that incentives available for foreign developers will include customs duty exemptions for plant and equipment, and a tax holiday of up to five years for the project company.
We would expect project documents to be structured as a power purchase agreement and an implementation agreement. Credit enhancement provided by GoE is not yet clear; although we understand the Corbetti project will benefit from a government guarantee there are signs that such provision is questionable for future IPPs. This is particularly so for smaller projects under 10MW. The EEA is currently preparing model project documents for each technology type, and for large and small scale projects.
The MoWIE is contemplating a feed-in-tariff, and a draft feed-in-tariff proclamation has been submitted by the EEA to the MoWIE. This currently contemplates a small-scale feed-in-tariff for renewable projects equal to or less than 10MW in an aggregate amount of up to 300MW. The feed-in-tariff programme would be accompanied by a standardised PPA. However, our understanding is that there is no fixed timeline for the feed-in-tariff and therefore we do not expect this to be announced in the near future. On this basis we expect IPPs to continue to be bilaterally negotiated in the near term.
There has been some uncertainty in Ethiopia as to whether the EEU or EEP is the offtaker for power purchase agreements. Under Article 5(2) of EEU Regulation No. 303/2013 the EEU has the power to purchase bulk electric power and sell electrical energy to customers, and therefore it would seem more likely that the EEU should be the offtaker. That said, the GoE has also advised that, in the usual course of events, a developer would enter into a memorandum of understanding (if a public private partnership project) or a heads of terms (if an IPP) with the EEP after submission of a letter of interest to the MoWIE. Accordingly there has not been a clear consensus in the industry on this issue. The fact that this current uncertainty exists reflects the necessary transition that is taking place in Ethiopia in order to facilitate and encourage IPPs.
Acting through the EEA, EEP and EEU, GoE is a party to the East African Power Pool. Under the Eastern Electricity Highway Project, which is being partly financed by the World Bank, a 500kV line is to be constructed between Kenya and Ethiopia to enable cross-border power trading. Ethiopia and Kenya have entered into a 20 year 400MW PPA for the interconnected power supply from Ethiopia. GoE is also currently negotiating power purchase agreements with Tanzania and Rwanda, and it is expected these will be signed imminently. Delivery of power to Tanzania and Rwanda would be enabled by the extension of the Eastern Electricity Highway Project.