Access to clean energy is key to the advancement of Ethiopia. As such, pursuing renewable energy development is essential to attain energy security and economic sustainability, while helping to mitigate climate change and its devastating impacts. Ethiopia is among few countries in the world with great potential for renewable energy generation. Aware of the country’s potential, the government launched a plan to speed up the development of different renewable energy sources, a decade ago.
Tulu Moye Geothermal Operations (TMGO) project is one of the initiatives launched to develop an optimum level of renewable energy mix in Ethiopia. The project, expected to generate 150MW at a cost of USD800 million, is situated in the main Ethiopian Rift Valley close to the eastern margins of the rift and northwest of Assela town. Established in December 2017, TMGO, was formed by a consortium of western investors—French firm Meridiam and the Icelandic Geothermal company Reykjavik Geothermal. TMGO signed a power purchase agreement and an implementation agreement with the government on December 19, 2017 and restated documentation in March 2020. This makes the company the first private-sector-led power project in Ethiopia.Darrell Boyd, CEO of TMGO, says geothermal energy complements Ethiopia’s aspirations of becoming a green energy hub in Africa. By investing in the right mix of renewable energy, Ethiopia can become the power house of green energy in the coming years, according to Boyd. EBR sat down with him to learn about the project and the need to invest on the right mix of renewable energy.
What is the current status of the Tulu Moye Geothermal Operations (TMGO) project?
The project involves drilling three geothermal exploration wells up to 2,500 meters deep. The drilling of the first well has now reached 1,340 meters. The second one is around 400 meters deep. It takes approximately 2.5 months and USD5 million to drill each geothermal exploration well.
On another front, we are at an important stage of selecting the bid winner for the power generating station installation, having issued our tender documents. Initially, 40 international companies participated which we downsized to seven. The winner will be selected in the coming months.
What is the deadline for each phase of the project and power generation capacity?
The first phase of the project is expected to generate 50MW of electricity in 2023. The second phase is expected to be finalized in 2025 with an additional 100MW.
How much have you invested until now?
We have invested USD40 million thus far. Total investment is estimated to be around USD800 million.
But the total investment was USD2 billion initially?
Yes. Initially the plan was to construct a geothermal project that generates 520MW, at a total investment cost of around USD2 billion. But this plan was changed at the request of the government down to its current 150MW. This is still a very large undertaking and ambitious endeavor in the geothermal sector. For instance, it took Kenya 40 years to build up to their current installed capacity of 800MW.
What is the agreed selling price per kilowatt of electricity?
It is USD0.07 per kilowatt.
Is this more or less compared to other African countries?
In Ethiopia, the selling price of electricity is cheap and highly subsidized by the government. Although this is good for consumers, it is not enough to attract investors in the energy sector. Seven US cents for a kilowatt might seem expensive in Ethiopia. But if you see Kenya and elsewhere around the world, it is very cheap.
When will you start collecting the return on your investment?
After about ten years, due to high front-end investment costs, risks of geothermal drilling, and power plant construction.
You agreed to build, operate, and then return the project to the government after 25 years. Are you certain you will see a return on the investment and make a profit within this period?
Exactly. Our investors are confident that the return on investment will come over the next 25 years. They are long-term investors, and so, are happy to take that long-term view. We are building the project under build-operate-transfer modality. We have secured a 25-year agreement with the government.
What challenges have you faced thus far?
Drilling geothermal exploration wells requires a lot of water. So, we built a ground water supply system by drilling 500 meters to get the water. We then had to channel the water, found 16 kilometers away, to the main geothermal drilling site. The ground water supply system has the capacity to supply 5 million liters of water per day. We do not consume that much, but required it to be on standby for safety reasons.
In fact, we had to build every piece of infrastructure, including roads, by ourselves. This is why the development time of the project is over the plan by many years.
Who are the investors and stakeholders of the project?
Meridiam is the majority investor alongside Reykjavik Geothermal. Investors in those two organizations come mainly from Iceland, the UK, France, and the USA.
The drilling work of the project is conducted by KenGen, a Kenya-based firm. It is 60Pct owned by the Kenyan government and listed on the Kenyan Stock exchange.
What is the reason for awarding the drilling work to a foreign company?
There are no Ethiopian companies engaged in the geothermal drilling business or with the necessary equipment and experience. So, we had to bring from Kenya, where there are many drilling firms. We also brought many Kenyan expats but have very firm plans to train Ethiopian staff so that this expertise will be available here in the future.
Investors and companies from various countries participated in the project. Is there a special reason for this?
Ethiopia is new to geothermal energy production. So, the only option we had was to bring the best companies in the field and investors to Ethiopia. That is why so many countries are involved in the project. What we predominantly did was to bring skills, knowledge, and capital from countries that have accumulated them through the development of their own geothermal energy.
For instance, Reykjavik Geothermal has expertise in developing geothermal energy for 15 years and, alongside Meridiam, has over 70 long-term infrastructure investment projects across North America, Europe, and Africa.
How do you evaluate the participation of foreign investors in Ethiopia?
Currently, many investors and companies from various countries are coming into the country. This is because Ethiopia has huge market potential. If foreign investors do not invest in Ethiopia today, the cost of entering and investing in the country will increase dramatically ten years from now. I believe those who know this fact do not want to miss out on the opportunity.
Recently, the government unveiled 17 mega projects worth USD7 billion to be developed under public private partnership (PPP) schemes. Do you have a plan to participate in these projects?
It is great news the government unveiled these projects. But for now, we will stick to the development of Tulu Moye. In the future, however, we are aware that our two project sponsors, Meridiam and Reykjavik Geothermal, plan to engage in the development of other projects including airport, other geothermal, hydropower, and telecom projects.
The development of geothermal energy requires a lot of investment capital. Why did you prefer investing in geothermal?
Geothermal energy requires high capital only to build. Once built and operational, it can generate energy for over 40 years without requiring too much additional capital. Geothermal projects built 40 years ago in Kenya are thus far operating without major problems. But if you take other energy sources and their infrastructure, they require substantial investment for maintenance compared to geothermal.
Ethiopia has better potential in hydropower energy. Do you think it is a good decision to invest in geothermal energy?
I believe that Ethiopia is developing the right mix of renewable energy. Geothermal energy complements Ethiopia’s aspirations of becoming a green energy hub in Africa. Especially geothermal and solar energy can be critical for good energy security.
By investing in the right mix of renewable energy sources, Ethiopia can become the power house of green energy in the coming years. Other African countries like Tanzania and Kenya are also doing good in this regard. But Ethiopia has a better chance when it comes to achieving an optimum level of renewable energy mix by attracting the right long-term investors.
Does this mean Ethiopia should invest in all renewable energy sources?
Not necessarily. There are many countries that have a potentially good mix of energy sources. But this does not mean that they should invest in all forms. I think Ethiopia understands well what is best to achieve its inspirations and that is why I believe they are taking the right direction to a better green energy future.
Some experts suggest African countries can benefit by developing small-scale nuclear energy.
It takes decades to develop nuclear energy. So it could be one for the future for Ethiopia. However, countries sitting on volcanically susceptible zones, such as the Rift Valley, are reconsidering nuclear development because of the risks. For example, Japan, following the Fukushima disaster.
But you are developing the geothermal energy project inside the Rift Valley.
A big volcanic eruption recently destroyed a geothermal energy project in Hawaii. But we do not expect the same to happen here in Ethiopia for the next tens of thousands of years. Our geothermal project is not located near active volcanoes. It is located outside dangerous ranges.
How do you compare the level of investment in the Ethiopian energy sector with that of other East African countries?
Kenya is doing a pretty fantastic job in this regard. Ethiopia will be catching up fast and will even overtake all of its neighbors, we believe.
While having huge potential, why is Ethiopia failing to harvest energy in a greater manner?
Having vast potential does not always guarantee a high level of energy harvest. Of course, the potential is one of the main prerequisites. But if you do not develop or attract the right expertise and capital, you cannot tap into the huge energy potential. It is rather about taking advantage of what you have than having expansive natural resources.
How do you evaluate the investment environment in Ethiopia?
Accessing finance is difficult but this is improving under the government’s reforms of the recent past. There are also issues related with bureaucracy in Ethiopia and this is well-known but is manageable since there are no ill-willed intentions. There are also hurdles in attracting foreign direct investment. When it comes to attracting foreign investors, Ethiopia is in competition with Kenya and other economies in the region.
Overall, I think Ethiopia has done a pretty fantastic job to make itself attractive for foreign investors. The country is managing to attract some good long-term investors.
What do you think Ethiopia should improve on to attract more especially long-term foreign investors?
Ratifying international conventions such as international arbitration instruments is vital in attracting international investors and boosting investors’ confidence. This ensures the protection of investors under any circumstance, and it was great to see that Ethiopia recently did this. Secondly, building the capacity of government institutions will be critical to manage these investments and ensure Ethiopia enjoys the best value for money and attracts the right investors. EBR
9th Year • Jan 16 – Feb 15 2021 • No. 94