Ethiopia has signed a preliminary agreement with a U.S.-Icelandic firm for a US$4 billion private sector investment intended to tap its vast geothermal power resources and help it become a major exporter of energy for East Africa.
Reykjavik Geothermal, whose Icelandic geothermal expertise is backed by U.S. investors, signed a deal with Ethiopia on Wednesday to construct a 1,000 MW geothermal power plant, Africa's largest, in the volcanically active Rift Valley.
When complete, the project will be Ethiopia's biggest foreign direct investment, run by its first privately owned utility. In an economy traditionally dominated by state spending, the government has suggested that the nascent sector could be a model for increased private investment.
"This is an epic moment for all of us ... bringing Ethiopia to the forefront of geothermal development," said Reykjavik Geothermal CEO Gudmundur Thoroddsson, who signed the deal with Mihret Debebe, his counterpart at the state-run Ethiopian Electric Power Corporation (EEPCO), in Addis Ababa.
Ethiopia currently suffers frequent blackouts because of a lack of power. But it is due to boost its generating capacity from 2,000 MW to 10,000 MW within the next three years, much of it coming from the 6,000 MW Grand Renaissance Dam under construction on the Nile.
Experts put its hydropower potential at around 45,000 MW and its geothermal potential at 5,000 MW, but Reykjavik says the accessible geothermal resources could be nearer 15,000 MW.
"For 50 years, everyone has known that there was potential, but the initial risk and initial cost of developing geothermal is high," said Reykjavik Geothermal managing director Thorleifur Finsson.
"After we managed to develop many sites in Asia and America, eyes have been opened that there is a possibility and ... today's technology has minimized that financial risk," he said. "There is huge potential."
Power will be extracted from under the volcanic Corbetti Caldera crater by pumping water to a depth of more than 1,000 meters to be superheated in geological strata where the temperature is around 350 degrees Celsius (660 Fahrenheit).
Finsson said it was envisaged that the first 500 MW of power from the Corbetti Caldera would come onstream in 2018, and the second 500 MW by 2021, but that finance had so far only been committed for a first phase of exploration drilling.
Depending on the results of this, he said he expected "financial close at around end of December 2014 or beginning of 2015". He said the power purchase agreement was expected to commit EEPCO to buy the station's output for 25 years.
Ethiopia, Africa's second most populous country, has also been one of the continent's fastest growing economies, with 9.7 percent growth in fiscal 2012/13.
However, much of this is the result of heavy public infrastructure spending; the International Monetary Fund has said balance of payments pressures and the difficulties faced by the private sector - whose share of Ethiopia's GDP is the sixth lowest in the world - raise doubts about its growth model.
At the unveiling of the geothermal project in New York last month, Prime Minister Hailemariam Desalegn, in office for just over a year, suggested this might have to change if Ethiopia was to meet its expanding power generation ambitions.
"My vision is that over the next 30 years, we will need to harness as much as 80,000 MW of hydro, geothermal, wind and solar power, not just for Ethiopia, but for our neighboring countries as well ...
"We will need to partner with the private sector to bring in significant private investment going forward. From that perspective, this 1,000 MW project with RG is not that large - but it's a great start. What Africa needs now is not just aid, but trade and investment."
By Aaron Maasho
Additional reporting and editing by Kevin Liffey
Source: Thomson Reuters, 2013.