Hydro Power Drives Export Ambitions

BMI View: While Ethiopia has the raw potential to realise extremely ambitious plans to utilise excess capacity and become an East African electricity export hub, we question the country's almost exclusive reliance on hydropower and highlight numerous competing factors that could jeopardise these plans. The threat of drought, the controversy that surrounds hydropower and the antipathy that can grow between countries as they compete for scarce water resources could cap Ethiopia's considerable - if still nascent - potential.

China (via the Export-Import Bank of China) has again entered Ethiopia to provide funding for the two 500 Kilovolt (KV) transmission cables that will connect Addis Ababa to the 6,000MW Grand Ethiopian Renaissance Dam on the Blue Nile River, which will be the biggest hydropower project in Africa when it is completed in 2018. The 619km line will be built over the next three years by China Electric Power Equipment and Technology, according to Deputy Prime Minister of Economy and Finance Debretsion Gebremichael.

This latest move is indicative of a wider trend (seen across East Africa) under which Ethiopia has aggressively mobilized sources of financing - tapping the likes of China, the African Development Bank (AfDB) and the World Bank - as it attempts to ensure energy security, support economic development and become less reliant on expensive imported oil for electricity generation. With state-owned Ethiopian Electric Power Corporation (EEPCo) advancing these aims by implementing a revised (and in our view, ambitious) 25-year power sector strategy that aims to boost generating capacity to 37,000MW by 2037, Ethiopia is keen to use such funding to ramp-up capacity, both for domestic generation, but more interestingly, to export electricity to its regional neighbours.

Achieving Regional Power Hub Status

While electrification will be key to domestic economic development (our Country Risk team forecast GDP will grow at annual average of just under 6% to 2022), Ethiopia is also looking to establish itself as a regional energy hub (it is part of the nine-country East African Power Pool) - a key part of its energy strategy. Under EEPCo's 25-year power plan, a considerable amount of generation is intended to be surplus power for export. At first, this may appear counterintuitive, particularly when Addis Ababa and other urban population centres are suffering blackouts - something that has not been lost on the domestic population. Furthermore, some international donors (not something that has worried Chinese investors) have questioned the feasibility of exporting electricity at a time when, according to some estimates, only 10% of the total energy consumption is supplied by electric power and the rest is from primitive resources, such as wood fuel and dung.

However, the government is justifying the move based on improving its balance of payments position, with the country currently reliant on expensive imported oil which is having a deleterious effect on its current account deficit. To this end, Ethiopia and Djibouti inaugurated a 283km transmission line in October 2011 that has enabled Djibouti to import up to 60MW of electricity and is estimated to be earning Ethiopia at least US1.5mn per month, according to Reuters. Similar plans are also afoot to export electricity to Sudan and, significantly, Kenya, which it is hoped will one day be the largest buyer of Ethiopian power once a transmission line connecting the Kenyan and Ethiopian grids is established in 2016.

A Watered Down Generation Mix
Ethiopia's Generation Capacity Mix (MW), 2010

Can Ethiopia Do It?

We believe Ethiopia certainly has the raw potential to achieve regional energy hub status based on its considerable generation potential, but subject to numerous and significant caveats.

In favour of its export plans, the country has been aggressively developing its hydropower capacity for a number of years and its huge water resources on the high plains mean it is has estimated generation potential of 45,000MW (second only to the Democratic Republic of Congo in terms of hydropower potential in Africa, according to the World Bank) - greater than the generating capacity target established in its 25-year plan; and that is without taking into account other potential sources of power generation such as geothermal ( see our online service, April 18 2013, Geothermal Sparking Opportunities In The Rift Valley). However, like many African countries, a lack of diversification is a concern, particularly in a region where drought is a problem. According to Energy Information Administration (EIA) data, in 2010, Ethiopia had 1,850MW of installed hydroelectric capacity, accounting for just under 90% of the capacity mix.

Potential To Power The Region?
Selected Members Of East African Power Pool, Capacity Expansion In 2013 And 2017

Additionally, some of these projects are highly controversial as they involve damming rivers and starving regions located downstream of precious water resources - with disputes already having flared between countries along the Nile. In Ethiopia's case, come some of these countries are the very ones to which it hopes to export electricity. The Kenyan population has already raised objections to the 1,870MW Gibe III dam - which is under construction in southern Ethiopia on the Omo river - because of the displacement of communities and fears the dam will harm Lake Turkana in northeast Kenya, the largest desert lake in the world. Similar concerns have fallen on deaf ears in Sudan. As a consequence, it is certainly worth bearing in mind that political risk can play a big part in the future of large scale hydropower projects and often lead to delays.

Furthermore, relying on China to finance projects also creates risks and potential rewards in terms of project realisation. While, many international institutions refused to fund the Gibe III dam based on ecological concerns, China had few qualms about offering finance, with construction being undertaken using US$500mn dollars in equipment funded by the Industrial and Commercial Bank of China (ICBC). While this helped the Ethiopian government get the project off the ground, it has also led many to criticism of China and its interference in African affairs, with the Asian giant accused of only being interested in exerting its influence over fast-growing African nations via the exploitation of water resources (particularly along the Nile) in a wider bid to assert itself as a global player on the world stage.

This article is tagged to:
Sector: Infrastructure, Power
Geography: Ethiopia, Ethiopia, Ethiopia, Ethiopia

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