Final agreement expected within 3 months
The Ethiopian Electric Power Corporation (EEPCo), the sole electric power utility company in the country, and Reykjavík Geothermal (RG) from Reykjavík, Iceland, concluded the expected Head of Terms Power Purchase Agreement (HoT-PPA) in the middle of the week. Capital learnt that EEPCo is ready to offer 65 US cents /Kilo Watt to RG for the purchase of electricity.
This initial deal allows the Company and EEPCo to carry out further negotiations on the terms of a final Power Purchase Agreement (PPA) and the purchase price of electricity that is expected to be generated from geothermal sources will allegedly depend on the amount generated from these resources. RG has set a target to produce 1,000MW and this has been taken as the baseline for negotiations between the two parties. Reliable sources indicate that RG wants to be paid 85 US cents/Kilo Watt while EEPCo is offering 20 US cents less per Kilo Watt.
Corporation officials who requested anonymity told Capital that negotiations that will include technical details and procedures are being worked out between the two, and that the tariff issue will be finalized within three months.
These sources said that RG will supply electricity at a lower price when compared with the tariff set in other countries. RG is about to become the largest foreign direct investor in Ethiopia negotiating with EEPCo to work on a single project that will generate 1000MW of power in two phases. “We will announce all details, including the tariff, within three months,” EEPCo officials said.
During the signing ceremony held at the Sheraton Addis on Wednesday, October 23, both sides refused to disclose the initial tariff that the two parties agreed upon as the baseline level of production. The two sides have been negotiating for the past 18 months to reach an agreement to sign the HoT-PPA.
Experts at the Corporation told Capital that the sale of such a huge amount of electric power is not included in the feed-in tariff of a normal PPA. “We use the feed-in tariff scheme for power supplies that are quite small, like ten megawatt power projects,” the expert explained.
“But projects like the one RG is negotiating about are handled with special power-purchase deals,” one expert commented. According to the laws of the land, companies can produce electricity from different electric power sources, but they are expected to sell the power they generate to EEPCo via its power grids, and with the tariff that has been set by the Ethiopian Electric Agency.
Geothermal energy is considered the most reliable power source, compared with other means of producing electricity, in terms of capacity and reliability in supplying sustainable power. “The capacity factor of geothermal sources are consistently above 95 percent when compared to other sources; for instance, a 100MW power produced from a geothermal source is equal to a 300MW output from hydro power,” said Mihret Debebe, CEO of EEPCo, during the signing ceremony.
The CEO said that projects of such magnitude are strategic in terms of meeting market demand in the coming decades.
Reykjavík Geothermal has been in negotiations to develop the Corbetti Geothermal Power Project in Southern Ethiopia around the town of Shashemene and sell the power to EEPCo.
Debretsion Gebremichel (PhD) is responsible for the Finance and Economic cluster with the rank of a Deputy Prime Minister, and is the Minister of Communication and Information Technology and Board Chairman of EEPCo, told Capital that the government is responsible for directly following up on such projects to ensure that they are completed during the stated timeframe. He also said that the investment return from geothermal energy takes less time than with other electric projects like hydro power. Dr. Debretsion said that RG would also pay the country fees like royalty fees and taxes.
Gudmundur Thoroddsson, CEO of RG, said power production from the first phase is expected to begin in 2015.
Nejib Abba Biya, the local partner of RG who is involved in several large joint ventures in Ethiopia including the Allana Potash project and gold mining, told Capital that the Company would raise the required funds from various western financers from the US, Canada and Iceland as well as others.
Private investors and investment establishments such as banks and pension funds are expected to be the major financial sources for the project, according to the partner. “Obama’s Power Africa initiative facilitates the process of making funds available from US financial institutions, but other banks will also become involved in the project,” Nejib explained.
But he declined to comment on the percentage that the Company expects US financial intuitions to fund the project using President Obama’s Power Africa scheme. He said that US, Canadian and European equity firms would provide the equity fund for the RG project. “We have extensive relationships in the equity market,” he added.
He disclosed that the company would never borrow from local financial institutions. Most Foreign Direct Investments (FDIs) in Ethiopia demand loans from local financial institutions, mainly from the Development Bank of Ethiopia (DBE), the state-owned bank that is the main provider of loans for private and state-owned developmental projects, but surprisingly, RG disclosed that it does not intend to apply for loans from DBE or other banks in the country.
According to an RG statement, equity financing is expected to cover 25% and the balance will be debt.
“I really don’t like to talk about tariffs because tariffs are not the issue here. EEPCo will go ahead with a suitable price that will allow it to export power to other countries at a profit,” he said. Nejib stated that the company has been in the area since 2009 to carry out geological, geophysical and geochemical research and surveys to determine feasibility. RG’s project has been given due attention by the government. In late September, Prime Minister Hailemariam Desalegn, MoCIT Minister Debretsion Gebremichael (PhD) and EEPCo officials announced the independent power project at an annual UN summit in New York. Recently, Mihret Debebe told Capital that the government is committed to the project and therefore the tariff issue will be resolved in the near future.
“We are talking about a lot of development partners. We are discussing with big power companies to involve them in the project,” Nejib said. The project is expected to commence at the beginning of the coming New Year.
The five-year energy sector development plan states that implementation strategies are to promote a mix of energy sources by developing renewable wind and geothermal resources, preventing power loss and promoting the proper utilization of energy, reducing the unit cost of power generation investments and operations, and providing electricity at affordable prices.
“Implementation strategies will seek to meet increasing demand for energy by encouraging private investors to engage in the sector,” the government plan states. Actions taken to support this strategy include licensing applicants and granting certificates of competence to potential energy producers.
Founded in 2008, Reykjavík Geothermal acquired geothermal exploration licenses covering an area of more than 650sqm in Southern Ethiopia. Initially, the company planned to generate 300MW from the site. However, RG initially expects 10MW of power to come online in 2015, with an additional 100MW expected in 2016. 390MW, which is the balance of the 500MW projected to be generated from the first phase, will come on-line in 2018.
The 1,000MW Corbetti geothermal plant will be built in two stages, each producing 500MW, and is expected to be the largest geothermal facility in Africa, at an estimated cost of USD 4 billion and is expected to take around 8 to 10 years to complete. RG will build and operate the power plant, located at Corbetti Caldera, considered a top geothermal source by a team of Icelandic and Ethiopian geoscientists that surveyed the region.
RG stated that they have made significant progress in geothermal power development in Corbetti. USD 4.5 million has been put into geothermal exploration licenses, detailed geological, geochemical and geophysical feasibility surveys, an Environmental and Social Impact Assessment and an Environmental Management Plan, all of which have come up with positive results.
Aluto Langano, developed in the 1990’s, is the only geothermal site in the country. Its output was around 7.3 MW when it was installed. Additional geothermal development is expected to commence in the coming months that will generate 35 to 75 MW of energy at a similar field in Langano.
In related news, the drilling of four geothermal wells at Aluto Langano, that was expected to begin in December 2012, hadn’t started operations yet. Andarge Eshete, a representative of the generation operations head of EEPCo, told Capital that due to logistical delays, drilling operations haven’t started until now. “Under the new arrangement, it will commence in the near future,” he added.
The drilling project was delayed due to an accident experienced by a truck around the town of Adama (Debre Zeit) that was transporting a cementing machine unit that bonds the drilled well rocks with cement, from the Port of Djibouti to the project area located between Zeway and Shashemane.
Since then, drilling operations were delayed for several months because of the absence of the cementing unit, while the main drilling machine arrived at the project site on time.
The plan had been to drill two wells within six months. “Previously, the wells were drilled vertically, but now we will use the directional (diagonal) method, which will be able to collect more steam than the vertical wells,” EEPCo experts told Capital two weeks ago.
The development of up to 75MW of energy from the Aluto Langano Geothermal field project is expected. JEC, who is responsible for the transportation of the cementing unit, is again expected to transport another machine to the site.
Since 2010, the Japanese consultant firm WEST JEC, in collaboration with EEPCo and the Geological Survey of Ethiopia (GSE), has been conducting feasibility studies. The study was done to see if it was possible to expand the field to 75MW by the drilling of appraisal and production wells. The study indicated that the expansion plan was feasible.
The World Bank, Japan and the Ethiopian government funded the endeavour. The World Bank and Japan have contributed over USD 20 million for the four wells, while the Ethiopian government covered the balance for other related costs, which including the cost of the various studies was around USD 32 million. The World Bank is expected to fund the lion’s share. Japan is also transporting drilling machines and other equipment to the area.
The plan calls for five production wells to be drilled, followed by three re-injection wells and the installation of a power plant.
The power production, power plant construction, and the construction of a substation, along with other project expenses will cost around USD 350 million.
A venture known as the Scaling-up of Renewable Energy Program (SREP) will finance the production and re-injection wells to the tune of USD 23 million. This includes drilling, consultants and training.
These wells will produce steam that will generate 35 to 75 megawatts of electricity. Advanced technology allows them to drill to a depth of 2,500 meters. Each individual well will be able to produce 5 to 10 megawatts.
The Great Rift Valley is estimated to have a high potential for geothermal energy.
The government is planning to increase the country’s power generation capacity by identifying and developing geothermal resources in prospective areas and plans to generate 450MW by 2019 and 10,000MW in 2030 from geothermal energy.
WEST JEC, a prominent company with years of experience handling similar projects throughout the world, was selected through an international bid.
Geothermal energy has been sought after at Aluto Langano since the early 1980s when exploration wells were first dug. Then in the 1990s, exploration wells were drilled and a pilot power plant with an output of around 7.3MW was installed. Although the initial power output was quite small, EEPCo’s plans for geothermal energy are big. It is seen as a critical stage in development that will serve as a catalyst for obtaining energy self-sufficiency and future financing. By 2016, the Corporation’s plan for the Aluto Langano Geothermal Plant is to produce a significant amount of energy. In addition, another site at Tendaho is expected to produce 5 megawatts of additional power