Ethiopia is embarking on a significant transformation of its energy sector by liberalizing power generation and promoting competition through Independent Power Producers (IPPs). This strategic shift aims to attract private investment, boost electricity supply, and modernize the country’s power market, according to the Ethiopian Energy Outlook 2025 published jointly by the Ministry of Water and Energy, Ethiopian Electric Power (EEP), Ethiopian Electric Utility (EEU), and the Petroleum and Energy Authority (PEA).
Under the new framework, most new electricity generation projects will be developed and operated by IPPs rather than state-owned entities. Two solar photovoltaic projects—Gad and Weransso—are already slated for tender, with IPPs competing to offer the most cost-effective power purchase agreements (PPAs). Similarly, tenders for wind farms at Aysha and Debre Birhan are planned, signaling a broadening of opportunities for private sector participation.
Initially, IPPs will benefit from adjusted remuneration agreements that guarantee returns, helping to mitigate investment risks. However, as the market matures, Ethiopia plans to transition toward a more competitive system where IPPs sell electricity directly on the market, competing to deliver the lowest prices. This evolution is expected to align Ethiopia’s energy sector with international best practices and stimulate efficiency.
A key milestone in this transition is the anticipated operational launch of the East African Power Pool (EAPP) in 2025. The EAPP will facilitate regional electricity trade, enhancing market liquidity and integration. Until the market reaches sufficient maturity, the EAPP will likely operate alongside existing national systems. While market-based pricing introduces greater risk for investors, it also reduces the financial burden on Ethiopian Electric Power and the government.
Integral to this reform is the development of a dedicated Transmission System Operator (TSO), responsible for managing the power grid and ensuring transparent, impartial system operations. Currently, Ethiopian Electric Power serves as both producer and system operator, a structure that could create conflicts of interest as private generation capacity expands. Establishing an independent TSO will be critical to maintaining fair access and credible dispatch decisions, a model successfully implemented in regions like the European Union.
Ethiopia’s energy reform aligns with broader continental ambitions. The African Union is working toward a single energy market to promote cross-border cooperation and competition, although a timetable for full implementation remains uncertain. Meanwhile, Ethiopia’s reforms echo the EU’s internal market directive, which mandates non-discriminatory competition among producers to foster liquidity and efficiency.
Despite challenges such as inflation, supply chain disruptions, and currency fluctuations, Ethiopia is making strides toward universal electrification and sustainable energy development. The government’s National Electrification Plan 2.0 aims to connect millions of households, with a particular focus on underserved rural areas. Investments in hydropower, wind, solar, and geothermal projects are expected to drive economic growth and position Ethiopia as a regional power hub.
