diversifying ethiopia’s energy portfolio with geothermal...

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Diversifying Ethiopia’s Energy Portfolio with Geothermal Energy:

A Benefit-Cost Analysis of the Corbetti Concession’s Potential to Offset

Hydroelectric Overdependence

Energy and Energy Policy

University of Chicago

Paper by: Team 14

Cyrus Adamiyatt, Daniel Kang, Martin Montoya-Olsson,

Romain de Planta, Andrew Song, Justin Shin

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Table of Contents I. Introduction ................................................................................................................................3

I-i. The Problem: Overdependence on Hydroelectricity ..............................................................3

Methodology.............................................................................................................................4

II. Energy and Energy Policy in Ethiopia ....................................................................................5

II-i. Policy and Trends ..................................................................................................................5

National Energy Policy.............................................................................................................6

Centralized vs. Decentralized Electrification Policy ................................................................9

II-ii. Ethiopia’s Current Energy Status .......................................................................................10

Rising Demand .......................................................................................................................12

Problem of Electrification ......................................................................................................14

Electrical Grid ........................................................................................................................17

III. Icelandic Model of Geothermal Energy ..............................................................................18

III-i. A Geothermal Success Story .............................................................................................18

III-ii. Geological Profile of Iceland and Ethiopia ......................................................................27

IV. Geothermal Prospects in Ethiopia .......................................................................................31

IV-i. Power Africa Initiative ......................................................................................................31

IV-ii. History of Geothermal Energy .........................................................................................32

IV-iii. Current Geothermal Energy and Prospects .....................................................................35

IV-iv. Geothermal Technology ..................................................................................................37

IV-v. Case Study: The Corbetti Concession ..............................................................................38

V. Cost Benefit Analysis ..............................................................................................................42

IV-i. Cost Function Analysis ......................................................................................................42

IV-ii. Geothermal vs. Hydroelectricity LCOEs .........................................................................44

IV-iii. Cost Function: Overall vs. Discounted Projection ..........................................................52

IV-i. Factors of Benefit-Cost Analysis: Geothermal vs. Hydropower .......................................53

IV-ii. Overall Benefit-Cost Analysis ..........................................................................................61

V. Conclusion................................................................................................................................64

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I. Introduction

I-i. The Problem: Overdependence on Hydroelectricity

As we will show, there are numerous issues the Government of Ethiopia currently is and

will be dealing with regarding electricity access and supply, and there are a variety of possible

policy solutions it can take. One specific problem that resonates within Ethiopian renewables and

energy policy is the energy sector’s apparent overdependence and emphasis on hydropower for

electricity generation. Corroborating this statement, the Ethiopian Electric Power Corporation

has recognized the “risks of overdependence on hydropower, and the need to diversify the

country's energy sources to ensure a stable supply.”1 According to EEPCO’s Mulugeta Asaye,

“rainfall in Ethiopia varies considerably from year to year, therefore an overdependence on

hydropower makes the energy supply very unstable, while instability of supply creates negative

impacts on industry and the economy.”2 As droughts become an increasing phenomenon with the

onset of climate change, Ethiopia’s renewable “second priority”3, geothermal energy, has the

potential to support the existing hydropower infrastructure and provide the diversification that

the country needs. The tangible danger of droughts manifested this year as Ethiopia prepares for

El Nino and its subsequent droughts, reported by the UN weather agency as this year’s El Nino

will be “the worst in more than 15 years.”4 El Nino is a weather phenomenon that “sparks global

climate extremes,”5 and such extreme droughts will have profound adverse effects on not only

the country’s hydropower production, but also the economy as a whole. Given such perceptible

1 Matthew Newsome, “Ethiopia looks to realize its geothermal energy potential,” The Guardian, February 13, 2013,

http://www.theguardian.com/global-development/2013/feb/13/ethiopia-geothermal-energy-potential. 2 Ibid.

3 Ibid.

4 Nina Larson, “El Nino worst in over 15 years, sever impact likely: UN,” Yahoo News, November 16, 2015

https://uk.news.yahoo.com/el-nino-worst-over-15-years-severe-impact-142716273.html#OU51mRr. 5 Ibid.

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drought risks, are there benefits to be realized if Ethiopia pivots away from hydropower

development to geothermal energy investment, and if so, what is the magnitude of these benefits

from diversification? How long will it take for Ethiopia to realize this diversification benefit?

This paper will extensively examine the varying costs and benefits attached to both technologies,

hydropower and geothermal, and hopefully provide deeper insight into future policy decisions

regarding Ethiopian renewables for the energy sector.

Methodology

We first introduce Ethiopia’s historical and current issues with respect to electricity and

energy generation. In order to provide better contextual understanding as to why Ethiopia should

pursue geothermal energy in particular and not other renewable sources, we then introduce the

country of Iceland and its success with geothermal energy. With a similar geological profile as

Ethiopia, Iceland serves as a model solution for Ethiopia to embody with respect to geothermal

energy development and application. The paper then addresses the prospects of continued

geothermal energy development in Ethiopia, largely through a deep-dive analysis of the Corbetti

project, a historic geothermal plant slated to generate 1,000 MW at its highest potential.

Intimately understanding Corbetti, a geothermal plant already in the midst of development, and

all of its implied financials, energy output, environmental robustness, and economic impact,

allows us to generate a comprehensive cost-and-benefit analysis. Laying out the costs of

geothermal and hydroelectricity in a levelized cost of energy analysis, and modeling the benefits

of diversifying Ethiopia’s energy portfolio, we analyze the potential benefits or costs to pivoting

towards geothermal energy for Ethiopia. We conclude the paper with our findings and any

recommendations for the GoE deriving from our results.

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II. Energy and Energy Policy in Ethiopia

II-i. Policy and Trends

Ethiopia’s status as “one of the fastest growing economies in the world”6 and its unique

geographical location in the East African Rift provides for a distinct platform to grow hand-in-

hand its energy sector and economy. In academia and in governmental policies, energy

consumption and availability have been interlinked to GDP growth and higher quality of life.

Both private and public enterprises have commented on this distinct relationship. A recent

McKinsey Publication titled “Brighter Africa: The growth potential of the sub-Saharan

electricity sector” determined that “fulfilling the economic and social promise of the region, and

Africa in general, depends on the ability of government and investors to develop the continent’s

huge electricity capacity.”7 The Executive Director of the International Energy Agency, Maria

van der Hoeven, laments the dire need for energy with respect to poverty: “Overall, the energy

sector of sub-Saharan Africa is not yet able to meet the needs and aspirations of its citizens.”8

Evidently, the lack of supply and infrastructure in sub-Saharan Africa vastly outstripping

demand is a common theme for the region, and these reports corroborate the exciting potential of

African natural resources regarding renewable energy. Ethiopia is a unique case study for our

project given the government’s high interest in and commitment to energy infrastructure

6 U.S. Department of State, “Ethiopia Investment Climate Statement 2015,” 2015 Investment Climate Statement,

May 2015, 1. 7 Antonio Castellano, Adam Kendall, et al., Brighter Africa: The growth potential of the sub-Saharan electricity

sector, February 2015,

http://www.mckinsey.com/~/media/mckinsey/dotcom/insights/energy%20resources%20materials/powering%20afric

a/brighter_africa_the_growth_potential_of_the_sub-saharan_electricity_sector.ashx. 8 International Energy Agency, Africa Energy Outlook: A focus on energy prospects in sub-Saharan Africa,

accessed November 18, 2015,

https://www.iea.org/publications/freepublications/publication/WEO2014_AfricaEnergyOutlook.pdf.

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development, substantiated by the Climate Investment Fund’s decision to “priorit[ize]”9 Ethiopia

with its Scaling up Renewable Energy Program, citing “a major driver for pursuing SREP

finance was the Ethiopian government’s desire to further develop renewable energy resources,

and thereby augment on-going energy development to meet the huge demands for power.”10

Given this contextual background, this section will evaluate and dissect past and current

Ethiopian energy and renewables governmental policy, and reveal what kind of environment our

geothermal energy project will take place in.

National Energy Policy

Established in 1994, Ethiopia’s national energy policy was first proclaimed by the

Transitional Government.11

There were two main goals: the first was “to ensure a reliable supply

of energy at affordable prices, particularly to support the agricultural led industrial development”;

the second “to ensure and encourage a gradual shift from traditional energy sources to modern

energy sources to develop and utilize local sustainable energy resources with the aim of

achieving comprehensive rural energy development.”12

There was also a specific interest in

prioritizing hydropower: “Development of modern energy shall be based on hydro-power

resource development.”13

This is most likely due to Ethiopia’s geological profile, which will be

touched upon later in this paper.

9 Neha Rai, Nanki Kaur, et al., “Scaling up Renewable Energy Programme (SREP) in Ethiopia - a status review,”

Climate Investment Funds, September 2013, http://pubs.iied.org/pdfs/10053IIED.pdf?, 11. 10

Ibid. 11

Bekele Bayissa, “A Review of the Ethiopian Energy Policy and Biofuels Strategy,” Digest of Ethiopia's National

Policies, Strategies and Programs (Addis Ababa, Ethiopia: Forum for Social Studies, 2008), 210. 12 Zereay Tessema, Brijesh Mainali, Semida Silveira, “Mainstreaming and sector-wide approaches to sustainable

energy access in Ethiopia,” Energy Strategy Reviews 2, no. 3-4 (2014): 318, February 2014, http://ac.els-

cdn.com/S2211467X13000977/1-s2.0-S2211467X13000977-main.pdf?_tid=49a40e80-8fd5-11e5-8b32-

00000aab0f27&acdnat=1448058373_0f4fd08d3eaf3bce2f77cf118ff7baf7 13

Bayissa, “A Review of the Ethiopian Energy Policy and Biofuels Strategy,” 213.

http://ac.els-cdn.com/S2211467X13000977/1-s2.0-S2211467X13000977-main.pdf?_tid=49a40e80-8fd5-11e5-8b32-00000aab0f27&acdnat=1448058373_0f4fd08d3eaf3bce2f77cf118ff7baf7



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Utilizing energy to spur economic growth is the crux of this 1994 policy. However, there

are major critiques to this policy. Tessema et al in “Mainstreaming and sector-wide approaches

to sustainable energy access in Ethiopia” argue that the government has been pursuing “grid-

based electrification which favors mostly urban areas,” while “the implementation of the second

objective of the energy policy...was virtually left to development partners.”14

Tessema also

brings attention to the lack of commitment devices in the policy, and the passive nature of the

policy with respect to strategy and private sector involvement. The paper states, “The national

energy policy lacks policy instruments and specific directions to support new and innovative

technical and financial solutions from local and foreign actors.”15

However, perhaps Tessema’s biggest critique of Ethiopia’s current energy policy pertains

to the participation of the private sector and the underdevelopment of competition in Ethiopia.

Described as “the main hurdle to scale up and replicate sustainable energy access projects in

rural Ethiopia,”16

a host of problems exist within the private sector, including how: “The rural

energy market in Ethiopia is still small”; “Rural communities lack the capacity to pay for energy

technologies and services”; “[the] private sector is viewed as profit seeker (sic) and

conventionally also as less trustworthy.”17

Weak private enterprise should not come as a surprise

due to Ethiopia’s competition policies tilting towards “state-owned enterprises” and “ruling party

affiliated ‘endowment’ companies”.18

The U.S. Department of State’s Investment Climate

Statement of Ethiopia in 2015 states that due to the proximity and close relationship between

state-owned enterprises and the state, many private business owners “complain of the lack of a

14

Tessema, Mainali, Silveira, “Mainstreaming and sector-wide approaches to sustainable energy access in Ethiopia,”

318. 15

Ibid. 16

Ibid., 319. 17

Ibid. 18

U.S. Department of State, “Ethiopia Investment Climate Statement 2015,” 2015 Investment Climate Statement,

May 2015, 14.

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level playing field when it comes to state-owned and party-owned businesses.”19

The privileges

of public sector companies include “priority foreign exchange allocation, preferences in

government tenders, and marketing assistance” which allow for such market dominance.20

The

restriction in private enterprise was also cited as one of the aggravating factors in determining

Ethiopia’s credit evaluation, set as “B+” by Moody’s and “B” by S&P and Fitch respectively.21

Though there have been recent efforts by the Ethiopian government to lessen their involvement

in the energy sector, highlighted by the decision to “split into two the Ethiopian Electric Power

Corporation (EEPCO), one of the state owned giant public utilities and renamed it the Ethiopian

Electric Power Office (EEPO) and Ethiopian Electric Service (EES),”22

there is still much room

to improve.

Ethiopia’s most recent energy directive is renewable-friendly and ambitious. The Growth

and Transformation Plan (GTP) is a 5 year plan enacted in 2010 designated to “to achieve 11.2 –

14.9% GDP growth annually as well as achieve the Millennium Development Goals and attain

middle-class income status by 2025.”23

The plan aims to achieve these economic milestones by

leveraging sustainable renewable energy sources, with a particular attention to hydropower,

much like the original 1994 national energy policy. The government has announced that “By

2020 it aims to reach 15,000 megawatts of electrical generating capacity, including 1,500 MW

from wind energy, 11,000 MW from hydropower, 1,200 MW from geothermal, 300 MW from

solar and 600 MW from co-generation.”24

However, financing for all renewables remains a key

barrier as “financial resources are not allocated for the development of renewable energy sources

19

Ibid. 20

Ibid. 21

Ibid., 2. 22

“Ethiopia (2014),” REEEP, October 11, 2013, https://www.reeep.org/ethiopia-2014. 23

U.S. Department of State, “Ethiopia Investment Climate Statement 2015,” 3. 24

“Ethiopia to step up as regional clean power exporter,” World Bulletin, May 13 2015,

http://www.worldbulletin.net/news/159130/ethiopia-to-step-up-as-regional-clean-power-exporter

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other than hydro power.”25

There seems to be an unambiguous bias towards hydroelectricity in

Ethiopia’s national energy policy direction.

Ethiopia’s simultaneous pursuit of policies of exporting energy to other East African

countries under the GTP, though well-intentioned, comes to question Ethiopia’s commitment to

rural electrification.26

Tessema brings to light how these two policies, electrification and

exportation, can contradict each other, despite claims that profits from exports will go into

development: “However, there is no clear direction as to how the revenue from the regional trade

will be used in the rural energy sector development and GTP lacks clarity in balancing these two

trajectories.”27

Clearly, priority alignment is in order and elucidation necessary to drive

Ethiopia’s renewable energy production in a socially efficient, productive manner.

Centralized vs. Decentralized electrification policy

One of the key points within the supply chain of electrification is the distribution channel

- after electricity generation, how is this electricity going to flow to individual residential homes?

Renewable energy providers will need to make a decision whether to pursue a centralized grid

model, a decentralized model, or a hybrid of both. There are advantages and disadvantages to all

three, and with respect to sustainable energy, Ethiopia pursues a decentralized, “donor-driven

approach.”28

25


316. 26

Ibid. 27

Ibid. 28

Ibid.

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While centralized grids need a much higher investment in capital and a bigger

distributive network, they generate energy at a much higher scale than decentralized grids.29

Under Ethiopia’s Universal Electricity Access Program, working with the World Bank and

Africa Development Bank, the EEPCO is aiming to achieve 100% penetration by 2015 via a

centralized grid.30

Projects such as these are often backed by large institutions and adequately

financed, which reflects the priority in the government’s development - generation and

presumably, exportation: “...allocation of financial resources are based on priorities in the

development plan.”31

Predictably, it is easier to pitch to a government megawatts of guaranteed

electricity generation (centralized grids) at a cost of a big distributive network, as opposed to

kilowatts in hard-to-reach areas (decentralized solutions) despite “no long supply lines, and

much smaller capital requirements for cost-effective power generation.”32

II-ii. Ethiopia’s Current Energy Status

Energy in Ethiopia can be bifurcated into traditional sources of biomass and modern

sources such as electricity and petroleum; since more than 80% of the population is involved in

agriculture in rural areas, it is reasonable that 88% of total energy is covered by biomass sources

such as wood, dung, and agricultural residues. 33

In sub-Saharan Africa, Ethiopia is one of the

largest populations with a high level of dependence on traditional use of solid biomass for

29

John Farrell, “The Challenge of Reconciling a Centralized v. Decentralized Electricity System,” Institute for

Local Self-Reliance, October 17, 2011, https://ilsr.org/challenge-reconciling-centralized-v-decentralized-electricity-

system/. 30


316. 31

Ibid., 317. 32

Farrell, “The Challenge of Reconciling a Centralized v. Decentralized Electricity System.” 33

Solomon Kebede, “Geothermal Exploration and Development in Ethiopia: Status and Future Plan” (paper

presented at Short Course VII on Exploration for Geothermal Resources, Kenya, October 27-November 18, 2012.

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cooking.34

These biomass fuels, however, have increasingly become challenging to harvest in

rural areas, and are costly in urban areas.35

Extended use of biomass fuels also has severe

environmental repercussions; the depletion of such traditional resources will adversely affect

“soil moisture, recycling of soil nutrients, and conservation of water, soil, and wildlife.”36

Henceforth, it is not surprising that the Government of Ethiopia is keen on promoting

diversification of its energy portfolio.

While the exploitation of biomass is considered highly uneconomical, hydropower

exploitation rates are extremely low at 4.4%, and geothermal energy is hardly exploited.37

That is,

although Ethiopia is enriched with substantial amounts of renewable energy, exemplified by its

hydropower potential, the country’s full energy potential is hardly capitalized due to limited

technologies, insufficient capital, and inadequate regulatory frameworks to foster efficient

extraction and distribution of energy. According to the EEPCO, Ethiopia “has around 2,000 MW

of installed power generating capacity, out of which 1,980 MW (99%) is generated from

hydropower plants. The remaining 12 MW (0.6%) and 8 MW (0.4%) comes from thermal and

geothermal sources respectively.”38

34

International Energy Agency, 34. 35

Japan International Cooperation Agency, “Energy Policy of Ethiopia,” IEEJ, July 5, 2011,

https://eneken.ieej.or.jp/data/3959.pdf. 36

Naod Mekonnen, “Energy Use Patterns and Energy Efficiency in Ethiopia,” Ethiopian Economic Policy Research

Institute. 37

Japan International Cooperation Agency, “Energy Policy of Ethiopia,” 7. 38

“Ethiopia (2014),” REEEP, October 11, 2013, https://www.reeep.org/ethiopia-2014.

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Table 1: Ethiopia Energy Resource Potential

Resource Unit Exploitable Reserve

Exploited

MW GWh

Hydropower MW 45,000 2,100 <5%

Solar/day kWh/m^2 4-6 NA <1%

Wind GW; m/s 1350>7 171 <1%

Geothermal MW 7,000-10,000 7 <1%

Wood mm tons 1,120 560 50%

Agricultural waste mm tons 15-20 6 30%

Natural gas bn m^3 113 NA 0%

Coal mm tons >300 NA 0%

Oil shale mm tons 253 NA 0%

(Source: Ministry of Water and Energy) 39

Researchers argue that a successful development of renewable energy is imperative to

Ethiopia for a variety of reasons; it is suitable for a decentralized application system; its relative

availability is much higher than non-renewable sources, also considering its low contribution to

total energy use; it can potentially save hard currency that is required for importation of

petroleum and fossil fuels; it fosters energy and environment security.40

Renewable energy,

generally speaking, also faces a multitude of challenges such as high costs, unstable yield, high

up-front capital requirements, difficulties adapting to evolving technologies, and limited off-

shoot industry potential.41

Rising Demand

One of the most essential issues of the current Ethiopian energy sector is reflected by

consistently rising demand for power. According to the Ministry of Water and Energy, the target

39

Dereje Derbew, “Ethiopia’s Renewable Energy Power Potential and Development Opportunities,” Ministry of

Water and Energy, June 22, 2013,

https://irena.org/DocumentDownloads/events/2013/July/Africa%20CEC%20session%203_Ministry%20of%20Wate

r%20and%20Energy%20Ethiopia_Beyene_220613.pdf. 40

Japan International Cooperation Agency, “Energy Policy of Ethiopia,” 19. 41

“Geothermal Development in Africa: The Corbetti Example,” accessed November 29, 2015, http://www.eu-africa-

infrastructure-tf.net/attachments/Press/25-04-2013_grmf-and-the-corbetti-geothermal-project.pdf.

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scenario would have demand grow by 32% from 2011 to 2015.42

Such extraordinary growth in

demand can be attributed to a number of factors such as double-digit GDP growth for nine

consecutive years, steep population growth, expansion of national grid to rural areas, and

implementation of customer service reform programs.43

Ethiopia’s robust growths in demand are

met with a shortage in supply. In the past decade, “rapid population growth, low per capital

income, recent boom in the construction sector, and limited investment”44

has led to the current

energy supply crisis.

Figure 1: Target and Moderate Forecast of Power Demand

(Source: Ministry of Water and Energy 2013)

In order to meet growing energy demand and address its imbalance with supply, the GoE

plans first and foremost to scale up resource exploitation. GoE’s long term goal is to maximize

the energy potential of the country, which is speculated to be 45,000 MW hydropower, 10,000

42

Dereje Derbew, “Ethiopia’s Renewable Energy Power Potential and Development Opportunities,” 5. 43

Solomon Kebede, “Geothermal Exploration and Development in Ethiopia: Status and Future Plan,” 3. 44

Naod Mekonnen, “Energy Use Patterns and Energy Efficiency in Ethiopia,” 1.

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MW Geothermal, and 1.03 mm MW wind power, according to EEPCO.45

At the end of the Great

Transformation Plan, it is projected that “at least 80% of households will be beneficiaries of

modern energy services from … other renewable energy sources.”46

Table 2: Current and Future Composition of Power

(Source: EEPCO, Corporate Planning Department)

Problem of Electrification

Ethiopia, even among other African countries, faces serious challenges in the generation

and distribution of electricity such as unreliability or insufficient reach of the electrical grid and

the poor quality of electricity. A lack of electricity clearly denotes impairment in the quality of

life of the citizens, but an equally serious concern emerges in the fact that “the low level access

to electricity [is] a major barrier to economic development, as well as to the provision of social

services in rural areas.”47

For example, it is argued that the limited access to electricity impedes a

viable development of the informal sector—consisting mostly of unregistered small

enterprises—which is an “important source of employment and form the main source of income

for the poor.”48

45

“Ethiopia (2014),” REEEP, October 11, 2013, https://www.reeep.org/ethiopia-2014. 46

Ministry of Water and Energy, “Scaling-up Renewable Energy Program Ethiopia Investment Plan,” Investment

Plan for Ethiopia, March 8, 2012. 47

The World Bank, “Implementation Completion and Results Report,” June 24, 2015. 48

E.J.M. Van Heesch, “Ethiopian Power Grid,” Electrical Power Engineering & Environment, March 21, 2014.

Type MW GWh % MW GWh % MW GWh %

Thermal 79 564 6.90% 79 564 1.40% 79 564 0.57%

Non-renewable total 79 564 6.90% 79 564 1.40% 79 564 0.57%

Hydro 1,851 7,574 92.50% 10,642 36,506 90.80% 22,000 86,724 87.26%

Wind NA NA 0% 773 1,928 4.80% 2,000 4,030 4.05%

Geothermal 7 49 0.60% 77 571 1.40% 1,000 7,446 7.49%

Bagass NA NA 0% 104 627 1.60% 104 627 0.63%

Renewable total 1,858 7,623 93.10% 11,595 39,632 98.60% 1,858 7,623 93.10%

Total 1,937 8,187 100% 11,674 40,196 100% 25,183 99,390 100%

Existing 2015 Existing

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Figure 2: Electricity Penetration of Ethiopia

(Source: International Energy Agency 2014)

In 2012, the annual per capita electricity consumption was 100 kWh/yr.49

Today, it is

around 200 kWh/yr. These figures, despite showing growth, reflect the severe shortage of

Ethiopian electricity relative to the world, considering the fact that the average minimum level

consumption per capita for “reasonable quality of life”50

is 500 kWh/yr.

While electricity penetration rate has been shown to be 46%, the metric is calculated by

the proportion of population residing in the electrified zone, and does not account for the fact

that “many households cannot afford the connection from the distribution lines from the grid to

their home.”51

The rate of electricity losses is also high, reported to be around 20% in 2008,

compared to the world average of 13.5%; such losses are shown to be incurred in the distribution

from the grid to the end user, shedding further light on the inadequate system of electricity

49

Ibid., 4. 50

Ibid., 4. 51

Ibid., 8.

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distribution.52

Whereas the shortage of electricity supply is evident, there also exists a growing

demand that exacerbates the energy situation. Not only is domestic electricity demand increasing

at a rate of 14% per year, but the growth of electricity-intensive industries, according to the

Ministry of Water and Energy, is also outpacing GDP growth at 15% per year.53

The poor quality of electrification also has consequences. It has been reported that

electric power interruption is a “daily phenomenon.”54

A project study on the service quality of

EEPCO, the state-owned utility monopoly, demonstrated that “there is a substantial gap between

customers’ expectation and that of the service received.”55

Power outages have also been shown

to significantly raise costs for businesses.56

Furthermore, electrification is applied disproportionately to urban and rural areas. In

urban areas, 75.3% of residents use electricity for lightning, while in rural areas 80.1% use

kerosene and 18.5% use firewood: the latter forms of energy are more expensive than electricity

as they are low quality fuels purchased at the end of the supply chain. 57

We find that rural areas

suffer from a vicious cycle of energy, whereby the lack of viable energy or electricity reduces the

output of machinery and thus productivity, leading to lower profits from which new energy

sources are bought.58

This is essentially a national problem as a vast majority of the Ethiopian

population (83.2% as of 2010) live in rural areas.59

Therefore, the central problem of electricity in Ethiopia is twofold: not only is there

insufficient supply of quality electricity, but there exists also an imbalance of supply such that

rural residents, which make up the majority of the population, have little or no access to the grid.

52

Ibid., 8. 53

Ibid., 9. 54

Ibid., 27. 55

Seyoum Akele. “Customer Service Quality in Ethiopian Electric Power Coorporation” (Uppsala University, 2012). 56

E.J.M. Van Heesch, “Ethiopian Power Grid,” 6. 57

Ibid., 6. 58

Ibid., 6. 59


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It follows that the appropriate remedies to the situation must include an augmentation of

electricity generation as well as a more effective system of distribution. As more of the country

is electrified and prices stabilize, a combination of short term and long term benefits will arise in

both the public and private sector. The World Bank expects that stable access to electricity will

“create new business opportunities … provide enhanced income-generating opportunities,

support healthcare, improve agricultural productivity … [and] support improved educational

services,” as well as enhance local security with public lightning.”60

Electrical grid

Ethiopia’s electrical grid consists of the national Interconnected System (ICS) and the

local Self-Contained System (SCS). As of 2011, the country generated approximately 2,052 MW

of power, of which 1848.75 MW came from hydropower, 142.82 MW from diesel, and 7.3 MW

in geothermal.61

The Interconnected System is responsible for urban areas, and accounts for

nearly 98% of Ethiopia’s total energy sales.62

The difficulty in supplying rural residents with electricity arises from the fact that “the

cost of extending transmission lines to remote village over large distance is much greater than

the need for electricity,”63

especially considering that rural villagers usually use alternative

source of biomass. The transmission over long distances to rural areas will incur costs are neither

viable nor profitable.64

As a result, many argue that if rural electrification is to be an economic

and social reality, the Government of Ethiopia must support a sustainable off-grid distribution

system. The desirable approach would be an efficacious harvest of renewable energy such as

60

The World Bank, “Implementation Completion and Results Report,” 19.

61


Ministry of Water and Energy, “Scaling-up Renewable Energy Program Ethiopia Investment Plan,” Investment

Plan for Ethiopia, March 8, 2012. 63


Ibid., 22.

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geothermal via the Self-Contained Systems (SCS), which could potentially be integrated to the

Interconnected Systems (ICS).65

III. Icelandic Model of Geothermal Energy

One would be ill-advised to talk about the development of geothermal energy without at

least mentioning Iceland. Indeed Iceland is regarded as one of the world’s leaders in geothermal

research and development, but what is equally important is that both Ethiopia and Iceland share

geological similarities. Due to their geological similarities, Iceland and Ethiopia both have

resources at their disposal to access geothermal energy that other countries simply do not have.

To understand Ethiopia’s untapped geothermal potential, one must first look at Iceland’s

geothermal advances. Therefore, we will explore Iceland’s history of developing electricity

generation by means of geothermal energy. By doing so, we hope to give the reader a firm grasp

as to the underutilized potential Ethiopia has at their disposal to generate electricity from the

relatively clean and renewable resource that is geothermal energy.

III-i. A Geothermal Success Story

Very few nations have invested in geothermal energy as much as Iceland. From a report

in 2013, Iceland’s primary energy supply (69.2%) came from geothermal hotspots, and in 2012

30% of the total electricity production came from generating 5,210 GWh using geothermal

energy66. Iceland regards one of its own agencies as “one of the leading geothermal energy

65

E.J.M. Van Heesch, “Ethiopian Power Grid,” 22.

66

Árni Ragnarsson,, “Geothermal Energy Use, Country Update for Iceland.” Paper presented at European

Geothermal Congress 2013, Pisa, Italy, 3‐7 June 2013.

19

research institutions in the world”67

, and with good reason. The following is a short introduction

into Iceland’s history of developing its geothermal profile.

As early as 1918, when Iceland was still under the Danish Kingdom, energy was at the

forefront of national security for Iceland. During the First World War, coal prices increased to

the point where coal was rationed. As a result, when the coldest winter recorded winter in

Iceland hit in 1918, the country was greatly affected. 68

Now known as the “Great Frost Winter”,

the cold winter along with the rationing of coal resulted in two-thirds of the population becoming

ill when the Spanish Flu was introduced to Iceland in the same year. 69

What followed was the

Inland Waters Act of 1923. According to the Icelandic government agency, the National Energy

Authority, this legislation was

“…the first government initiative concerning energy… It [the Inland Waters Act] was

regarded as both a necessary and natural step for the government to take the initiative in the

utilization of domestic resources, both by carrying out exploration for potential energy resources,

and through direct participation in developing energy production and distribution facilities.”70

By 1926, the Prime Minister, Jón Þorláksson, used his engineering background to initiate

a move to increase geothermal use by developing district heating system71

. This early period in

Iceland’s marks the beginning of Iceland’s role in developing geothermal energy.

67

Sveinbjörn Björnsson, Geothermal Development And Research In Iceland, (Printing: Litróf, February 2010,

ISBN: 978-9979-68-273-8), 32.

68

“The Weather and Climate of Iceland”, Wow Air, http://wowair.us/magazine/blog/the-weather-and-climate-of-

iceland.

69

“Top Ten Historical Moments in Reykjavik”, Reykjavik Convention Bureau,

http://www.meetinreykjavik.is/whyreykjavik/top10%C2%B4s/view/toptenhistoricalmomentsinreykjavik.

70

Agusta S. Loftsdottir, and Ragnheidur I. Thorarinsdottir, Energy in Iceland: Historical Perspective, Present Status,

Future Outlook, Printing: Gudjon O, Second edition, September 2006, ISBN: 9979-68-198-5, 10

71

Jonas Ketilsson, “Geothermal Utilization in Iceland.”

http://wowair.us/magazine/blog/the-

20

Geothermal energy was mainly used for heating, and geothermal energy was not used to

generate electricity until 1944 when a small northern farm used a small turbine to generate

electricity using steam from a geothermal hotspot. 72

Incidentally, 1944 was also the year that

Iceland became fully an independent republic.

In 1967, the Icelandic government established the Energy Fund to further increase the use

of geothermal resources. Over its existence, the National Energy Authority claims the Energy

Fund has “granted numerous loans to companies for geothermal exploration and drilling. Where

drilling failed to yield expected results, loans were converted into grants.”73

However, the

National Energy Authority itself is an equally important government institution that was also

established in 1967. 74

Already mentioned in this paper, the National Energy Authority has

played a crucial role regarding Iceland’s development of geothermal energy for many reasons.

This is what the National Energy Authority says about its role: it considers itself a “government

administration that specializes in the energy sector;” it deals with “contracting and researching

on resource utilization,” and “accumulates and maintains databases on energy utilization”. 75

Further, the National Energy Authority “administrates funding of governmentally financed

research, surveying, and monitoring with the aim of utilizing the natural resources”. 76

We will

72



73

Sveinbjörn Björnsson, Geothermal Development And Research In Iceland, Printing: Litróf, February 2010, ISBN:

978-9979-68-273-8, 18 74

Ibid., 40. 75

Helgason, Hafsteinn, “Geothermal Power in Iceland”, Presented at the Geothermal Energy Workshop, Salta,

December, 2014,

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0ahUKEwi4spqK7abJAh

WHmx4KHU7YDaEQFggqMAI&url=http%3A%2F%2Falcuenet.eu%2Fdms-

files.php%3Faction%3Ddoc%26id%3D680&usg=AFQjCNHqkhR4BecrSq8MAQRJavYgJDIa-

Q&sig2=ktsBCsWV9wrXcqn0aQQTVQ

76


978-9979-68-273-8, 32

21

dwell more into its supervisory and initiative responsibilities in a bit. Following the creation of

the Natural Energy Authority, the first commercial power plant to utilize geothermal energy was

established in 1969 in Bjarnarflag with an installed power of 3 MW. 77

This began the new era of

Iceland’s generation of electrical power from geothermal energy.

Meanwhile, during the 1960s, Iceland was looking to diversify their exports (which was

largely based on fishing). 78

Therefore, the Icelandic government looked to attract investors to

expand different industries. As a result, in 1966 the Icelandic government made a deal with

Alusuisse (a Swiss company) to build an aluminum plant (ISAL). Two years later in 1970, the

first ISAL plant was fully operational, and According to the National Energy Authority,

“Iceland’s power intensive industry consumed almost half of all the electricity produced”79

. As a

result, the 1960s shows how Iceland’s government played a key role in both developing domestic

energy utilization and developing their power intensive industry, which demanded a lot of

electricity. 80

This is important because of what followed: the energy crisis of the 1970s.

Following the OPEC Oil Crisis of 1973, the market price for crude oil rose by 70%, and

Iceland changed its energy policy, reducing oil use and turning to domestic energy resources.

hydropower and geothermal energy. 81

Once again, energy independence with focus on domestic

development became a national issue. However, it is of note that most of the policies from the

1970s were aimed at reducing dependency on imported oil by focusing on space heating. 82

By

promoting the expansion of the district heating utilities, the Icelandic government increased the

77


Future Outlook, Printing: Gudjon O, Second edition, September 2006, ISBN: 9979-68-198-5, 12. 78

Ibid., 25. 79

Ibid., 26. 80

Ibid., 26. 81


978-9979-68-273-8, 15.

82



22

proportion of space heating generated by geothermal energy from 43% in 1970 to 83% in 1984.

83 Regardless, one can assume that research for geothermal electricity generation benefited from

these policies. Whether it is for space heating or electrical production, the research used to find

geothermal hotspots helps both aims.

One of the most important legislations that strengthened the Icelandic government’s role

in developing geothermal energy is known as the Act on Survey and Utilization of Ground

Resources, No. 57/1998, of 1998. This Act defines regulations on resources within the ground. 84

According to the National Energy Authority, “the term resource applies to any element,

compound and energy that can be extracted from the Earth, whether in solid, liquid or gaseous

form, regardless of the temperature at which they may be found.”85

The Act also gives the

Minister of Industry, Energy and Tourism the power to take initiative or give instructions on

surveying and prospecting for resources in the ground anywhere in the country, and the Act gives

said Minister the power to issue licenses for those to do so in his/her place. 86

Further, the

“utilization of resources within the ground is subject to a license from the Minister of the

Industry[ and Energy and Tourism] whether it involves utilization on private or public land…”,87

according to the National Energy Authority. This is important because it establishes property

rights [or lack thereof, one could argue] of any resource below the ground, which by definition

includes geothermal energy. It results in the need for licensing for both utilizing geothermal

energy and surveying and prospecting geothermal hotspots. It sets up regulations and

government intervention for anything geothermal related.

83

Ibid., 12.

84


978-9979-68-273-8, 7 85

Ibid., 7. 86


978-9979-68-273-8, 7 87

Ibid., 8.

23

By 1999 the government created the “Framework Programme for Utilization of Hydro

and Geothermal Energy Resources” as a way to reassess the country’s potential for electricity

generation using domestic resources. 88

According to the National Energy Authority,

“The objective of the Framework Programme is to evaluate and compare various power

development proposals, and discuss their respective impacts on: the environment, natural and

cultural heritage, other resources, and regional development”89

In 2003, the first phase dealt with 24 geothermal plant proposals.90

With growing

technological advances in generating electricity via geothermal energy, this plan gave Iceland’s

already centralized geothermal industry more guidelines and structure with which to issue with

proposals to construct new geothermal power plants.

In the same year of 2003, Iceland passed the Electricity Act, No.65/2003. This act

increased regulation on licensing by requiring licenses to construct and operate a power plant

(with the exception of a power plant with the rated capacity of under 1 MW, granted said power

plant is not connected to a distribution system or national transmission grid). 91

The Act also gave

the National Energy Authority the oversight to regulate the compliance of companies operating

under said licenses. 92

In addition, partially due to the Electricity Act, the National Energy

Authority was given the power to grant licenses on behalf of the Minister of Industry, Energy

and Tourism – which was effective as of 2008.93

Further, the Act established Landsnet, a limited

liability company, to provide electrical transmission and system operation services by taking

over various companies who would trade their transmission system lines and equipment for

88


Future Outlook, Printing: Gudjon O, Second edition, September 2006, ISBN: 9979-68-198-5, 31 89

Ibid., 31 90

Ibid, 32 91


978-9979-68-273-8, 8 92


978-9979-68-273-8, 8 93

Ibid., 8

24

equity. 94

This resulted in the transmission system to grow by 43%, and it caused equalization in

transmission costs across customers, including those from rural areas. 95

This is congruent with

Icelandic economic policies because according the National Energy Authority, “equalization of

energy prices is a decades old Icelandic policy” which is very evident with geothermal space

heating policies. 96

Further, the National Energy Authority became responsible for supervising

the transmission and distribution of electricity. 97

However, although distribution and

transmission prices are not competitive, the generation and sale of electricity is done in an open

market. 98

Therefore, the Electricity Act was very important in centralizing the State’s control

over transmission and distribution, while giving the National Energy Authority more oversight

and responsibilities.

Again, in the same important year of 2003, the Icelandic government passed legislature

that established a consulting and research institute named the Iceland GeoSurvey. 99

Research

activities previously conducted by the National Energy Authority became outsourced to the

Iceland GeoSurvey. 100

Although a government institution, the Iceland GeoSurvey receives no

direct funding from the government and is a self-financed, non-profit institution that operates on

a project and contract basis. 101

Under service contracts with Icelandic energy companies, the

Iceland GeoSurvey provides a wide range of consulting and research services relating to

94



Ibid., 31. 96


978-9979-68-273-8, 17 97



Ibid., 30. 99

“About Orkustofnun”, Accessed November 29th

, 2015, http://www.nea.is/the-national-energy-authority/about-the-

nea/.

100

Sveinbjörn Björnsson, Geothermal Development And Research In Iceland, Printing: Litróf, February 2010,

ISBN: 978-9979-68-273-8, 18 101

IBID., 33.

25

geothermal energy. 102

In addition, the Iceland GeoSurvey has provided services abroad,

including in Ethiopia. 103

This government institution is another example of how Iceland’s

policies have reflected their investment on researching geothermal energy.

The Icelandic government’s investment in developing electricity generation from

geothermal energy has been paying dividends in recent years. Nearly a fifth of the electrical

output in 2005 was generated by geothermal power plants. 104

Iceland has historically pushed

towards aluminum production; 2005 data shows that electricity consumption is primarily driven

by aluminum production, and as a result, power intensive industry consumed 62% of the

electricity produced in Iceland. 105

Further, household demands for electricity have also been

increasing. The National Energy Authority attributes the increase in household demand in

electricity to two reasons. Due to the increasing standard of living, the number of electrical

appliances has been increasing. 106

The other reason being that share of electricity relative to a

household’s budget decreased, which leads to a lower incentive to save electricity.107

Figure 3

102

Ibid., 33. 103

Ibid., 33. 104

Agusta S. Loftsdottir, and Ragnheidur I. Thorarinsdottir, Energy in Iceland: Historical Perspective, Present

Status, Future Outlook, Printing: Gudjon O, Second edition, September 2006, ISBN: 9979-68-198-5, 12 105

Ibid., 24. 106



Ibid., 24.

26

(Source: National Energy Authority)

By 2008, 24.5% of the total 16,468 GWh electrical output was generated by geothermal

plants, with 78% of that electricity used by the power intensive industry (mainly aluminum).108

Four years later (2012), 30% of the total electricity production came from generating 5,210 GWh

using geothermal energy.109

Figure 3, provided by the National Energy Authority, shows

electricity generation from geothermal energy in GW/h as a function of time (1970 – 2013).

From figure 3, we can see that electricity generation from geothermal energy has been increasing

over time especially in the last few decades. It is important to note that much of Iceland’s use of

geothermal energy has been dedicated to space heating. However, 37% of geothermal energy

utilization went to the generation of electricity in 2010, 110

and 40% of geothermal energy

utilization went to electricity generation in 2013. 111

Therefore, electricity generation relative to

other uses for geothermal energy increased from 2010 to 2013. Figure 4, provided by the

National Energy Authority, shows that the aluminum industry consumes 68% of the electricity

produced. Due to Iceland’s aim of expanding its aluminum industry, the proportion of

geothermal energy used for electricity generation is likely to grow in order to augment the

aluminum industry112

.

Throughout Iceland’s modern history, we have seen that Icelandic policies have bolstered

geothermal electricity production. With emphasis on centralized distribution, heavy oversight,

regulation, research, and funding, Icelandic policies have paved way for one of the best

108


ISBN: 978-9979-68-273-8, 5 109

Árni Ragnarsson, “Geothermal Energy Use, Country Update for Iceland.” Paper presented at European

Geothermal Congress 2013, Pisa, Italy, 3‐7 June 2013. 110


ISBN: 978-9979-68-273-8, 12 111

“Direct Use of Geothermal Resources”, Accessed November 29th

, 2015, http://www.nea.is/geothermal/direct-

utilization/. 112


ISBN: 978-9979-68-273-8, 13

Figure 1 (source: 16)

27

geothermal success stories of the modern era. Now we will turn our attention to Iceland’s

geological advantage regarding geothermal energy.

III-ii. Geological Profile of Iceland and Ethiopia

We will briefly go over very basics of plate tectonics. Plate tectonics is the theory that the

Earth’s surface is made up of separate plates that move relative to each other and glide over the

mantle – the inner layer above the core but below the surface. 113

Where these plates meet we

will refer to as a boundary. In regards to Iceland and Ethiopia, the boundary we are concerned

with is known as a divergent boundary, in which two plates are spreading apart. 114

As we will

explain, this type of boundary is the reason we can relate these two very different countries at all.

Figure 4

113

Becky Oskin, “What is Plate Tectonics?”, December 04, 2014, http://www.livescience.com/37706-what-is-plate-

tectonics.html 114

Ibid.

28

As we have learned, Iceland is located between two tectonic plates – the North American

and Eurasian tectonic plates. 115

These two plates form what is known in plate tectonics as a

divergent boundary, meaning that the two plates are moving in opposite directions. According to

the National Energy Authority, “the two plates [the North American Plate and the Eurasian Plate]

are moving apart at a rate of about 2 cm per year.”116

This divergent boundary is known as the

Mid-Atlantic Ridge, as demonstrated by Figure 4 as the purple area.

The National Energy Authority claims that Iceland’s geothermal resources are closely

associated with the country’s close proximity to the Mid-Atlantic Ridge. 117

In part this is due to

the fact that activity in the mantle is exposed as hotspots of unusually high volcanic activity. 118

As a result of this unusually high exposure to the mantle, temperatures of underground water

(characterized as steam due to its chemical state in this circumstance) tend to be very high.

Within 1,000 meters under Iceland’s volcanic zones, there are at least 20 high-temperature areas

containing steam fields with underground temperatures reaching 200 degrees Celsius. 119

In

addition, there are around 250 lower temperature hotspots surrounding the volcanic zones. 120

With activity and energy from the mantle unusually close to the surface, the amount of energy

flowing beneath Icelandic hotspots is estimated to be around 30 GW. 121

However, the National

Energy Authority claims that near the surface the energy current splits in such a way that of the

30 GW only 8 GW is stored in the form of water and steam in geothermal hotspots, which is still

115


ISBN: 978-9979-68-273-8, 10 116

Ibid. 117



Sveinbjörn Björnsson, Geothermal Development And Research In Iceland, Printing: Litróf, February 2010, 10. 119

Ibid., 10. 120

Ibid. 121

Ibid., 11.

29

a significant amount. 122

Further, the Energy Authority estimates that of the 30GW, 7GW could

be tapped into for anthropogenic purposes. 123

Due to this high access of geothermal energy,

Iceland is unique among the world in its potential to extract geothermal energy. As a result of the

divergent boundary running through the middle of the country, Iceland is also unique in the sense

that it is one of the few countries that has an active divergent boundary above sea level. 124

Figure 5

(Source: National Energy Authority)

However, Iceland is not the only country with a divergent boundary running through its

continental land mass. Ethiopia is another country with this unique property, as seen in Figure 6.

The “Nubian Plate”, which makes up most of Africa to the west of the boundary, moves in the

opposite direction of the “Somalian Plate”, and in addition to moving away from each other they

are both moving away from the “Arabian Plate” to the north. 125

A collection of plate tectonic

boundaries in East Africa is known as the East African Rift, which starts in the Red Sea and ends

122

Ibid., 11. 123

Ibid. 124

Sveinbjörn Björnsson, Geothermal Development And Research In Iceland, Printing: Litróf, February 2010, 10. 125

James Wood and Alex Guth, “East Africa’s Great Rift Valley: A Complex Rift System”, Accessed November 29,

2015, http://geology.com/articles/east-africa-rift.shtml.

30

in Malawi. 126

The best-defined and oldest rift occurs in the area commonly referred to as the

Ethiopian Rift. 127

Although not as active as the Mid-Atlantic Ridge in Iceland, the plates in the

Ethiopian Rift move apart by 0.7 cm per year, according to the Iceland GeoSurvey. 128

The fact

that the plates are moving apart results in magmatism and the composition of volcanic activity,

the intensity of which depends on the opening rate. 129

Similar to what we learned from Iceland,

the Iceland GeoSurvey states that “high temperature geothermal resources are closely related to

the volcanic centres” in regards to the African Rift Valley. 130

Therefore, based off what we have

learned about Iceland’s plate tectonics, Ethiopia has potential geothermal resources due to the

divergent boundary running through the country’s land mass.

Figure 6

(Source: University of Edinburgh)

126

Kristján Saemundsson, “East African Rift System - An Overview.” Paper Presented at Short Course V on

Exploration for Geothermal Resources, Lake Bogoria and Lake Naivasha, Kenya, Oct. 29 – Nov. 19, 2010. 127

James Wood and Alex Guth, “East Africa’s Great Rift Valley: A Complex Rift System”, Accessed November 10,

2015, http://geology.com/articles/east-africa-rift.shtml. 128

Saemundsson, “East African Rift System - An Overview.” 129

Ibid. 130

Ibid.

31

Although Ethiopia is still very much developing its economy, it is worth noting that

countries like Iceland have successfully added geothermal energy to its portfolio for generating

electricity. Although it is worth noting that Iceland has a smaller population with a move active

boundary. Iceland’s population of approximately 331 thousand131

residents is dwarfed by

Ethiopia’s population of approximately 99 million residents. 132

Based off the Iceland

GeoSurvey’s claim that volcanic activity is dependent on the opening rate of the boundaries, we

should expect more geothermal resources from Iceland due to their opening rate of 2 cm per year,

which exceeds the Ethiopian Rift’s opening rate of 0.7 cm per year. As a result, one could argue

that you would expect Iceland to generate more electricity using geothermal energy relative to its

other resources. Regardless, from Iceland’s story of successfully developing geothermal energy

we take away one important inference. We can infer from our study of Iceland that Ethiopia sits

on a potentially grand resource that they can harness to generate electricity.

III. Geothermal Prospects in Ethiopia

III-i. Power Africa Initiative

Over the course of the coming decades, it is the goal of the Government of Ethiopia to

become a regional power in the realm of renewable energy.133

As it currently stands, Ethiopian

economic growth is substantial, but a key limiting factor lies in the underlying energy constraints

the economy faces. Historically, energy has been sourced through predominantly outdated

methods such as wood and waste burning. Yet, Ethiopia is now at a key juncture at which

131

“Iceland”, CIA, Accessed November 11, 2015, https://www.cia.gov/library/publications/the-world-

factbook/geos/ic.html. 132

“Ethiopia”, CIA, Accessed November 11, 2015, https://www.cia.gov/library/publications/resources/the-world-

factbook/geos/et.html.

133

“What Power Africa Means for Ethiopia,” last modified July 25, 2015,

https://www.usaid.gov/powerafrica/partners/african-governments/ethiopia.

https://www.cia.gov/library/publications/the-world-factbook/geos/ic.html

https://www.cia.gov/library/publications/the-world-factbook/geos/ic.html

32

infrastructure and research have finally begun to catch up to demand for energy, thus positioning

the country well for increased energy development in the coming years—particularly from

renewable energy sources—and specifically, geothermal energy development due to unique

geological profile. That said, in order for this development to be realized, private sector

investment is critical. The Government of Ethiopia has indicated a willingness to increase private

sector involvement in the energy sector, and is working to further develop transmission and

distribution networks in order to pass on increased power production to customers.134

Even so,

the Power Africa Initiative, started by President Obama, has proven to be absolutely essential in

the development of energy sources in Africa, and especially in Ethiopia.

To give a general overview, the Power Africa Initiative is designed to bring ‘together

technical and legal experts, the private sector, and governments from around the world to work

in partnership to increase the number of people with access to power.’135

As we will show in the

case of the Corbetti Concession, the Power Africa Initiative has played a key role in increasing

private sector involvement by aiding the Government of Ethiopia and the Ethiopian Electric

Power Company (EEPCo) in research and in their negotiations with private investors in the case

of Independent Power Producers (IPPs).

III-ii. History of Geothermal Energy

Before delving into the specifics of the Corbetti Concession, it is necessary to give an

overview of the history of geothermal energy in Ethiopia to contextualize the potential for

advancement in the coming years. As surprising as it may be given historical lack of

134

Ibid. 135

“Power Africa,” last modified November 10, 2015, https://www.usaid.gov/powerafrica.

33

development in Ethiopia, long-term geothermal exploration began all the way back in 1969.136

As mentioned prior, the geological profile of Ethiopia, particularly areas within the Ethiopian

Rift Valley, are extremely conducive to geothermal energy developments. After surveying

massive areas through Ethiopia, 120 localities were identified with independent heating and

circulation systems, making them potential geothermal project target areas.137

Of these, roughly

20 were believed to have high enthalpy resource development potential – with a much greater

number of locations deemed to have non-electricity production capabilities. The figure below

illustrates these locations and the level of development achieved thus far.138

Figure 7

(Source: Kebede 2012)

136

Solomon Kebede, “Geothermal Exploration and Development in Ethiopia: Status and Future Plan” (Paper

Presented at Short Course VII on Exploration for Geothermal Resources, organized by UNU-GTP, GDC and

KenGen, at Lake Bogoria and Lake Naivasha, Kenya, Oct. 27 – Nov. 18, 2012.), 1. 137

Ibid. 138

Ibid.

34

Since the 1970s, significant testing and research has been conducted in the Abaya,

Corbetti, Aluto Langano, Tulu Moye, and Tendaho geothermal prospects, among others.139

Tests were conducted in order to estimate potential for future energy development. Further

research took place in the central and southern portions of the Afar depression, but despite

containing many of the best prospects for geothermal development, development was first made

elsewhere. There were a variety of reasons for this, but it was primarily due to weak

infrastructure for transmission and power generation, as well as a very low local load demand for

electricity, making it difficult to support expensive development projects. That said, in the

current state, having made significant infrastructure improvements in the past few decades, the

Afar depression is favorable for developmental projects. It was in the 1980s that exploratory

drilling began, specifically at the Aluto prospect. The project consisted of eight exploratory wells

of which five ultimately were productive sites140

. Drilling also took place throughout the mid-

1990s at the Tendaho prospect. That said, throughout these decades resource development was

insignificant because of infrastructure constraints as well as technological and operational

deficiencies.

Finally, in the late 1990s a pilot plant was installed in the Aluto Langano prospect with

the potential for about 7 MW. Unfortunately, the development of this plant was not as fruitful as

hoped. Mismanagement, as well as an insufficiency of operational expertise, led to inefficient

production.141

The plant was largely out of operation until 2007, when these issues were targeted

and operational improvements to mitigate these problems began. As it currently stands, the plant

is back in operation at partial efficiency, with output of about 4 MW. Nonetheless, it is an

139

Ibid, 5. 140

Meseret Teklemariam, “Goethermal Exploration and Development in Ethiopia,”

http://www.ethdiaspora.org.et/phocadownloadpap/Publications/geothermal%20potential%20of%20ethiopia.pdf, 88. 141

Ibid.

http://www.ethdiaspora.org.et/phocadownloadpap/Publications/geothermal%20potential%20of%20ethiopia.pdf

35

important development, and shows the ability for growth within the improved modern

infrastructure constraints, as opposed to the adverse conditions for earlier development.

Over the past few decades, a great deal of work has been put in and has resulted in high

levels of information and geothermal resource identification. The key now is the execution of the

development of plants to extract the aforementioned resources. Ethiopia is currently at a key

turning point regarding geothermal energy development. In prior decades, while research

conducted by the Geological Survey of Ethiopia added value in the form of increased

information and targeting of resources, infrastructure and expertise were too minimal for

significant development. Yet, with the Power Africa Initiative and increased private investment

in the sector, it seems Ethiopian geothermal energy is finally ready for development. Given the

decades of research and prospect identification, coupled with increased access, technology, and

private investment, geothermal energy is poised for growth in the coming years. As of now, there

are a number of plants in various stages of development throughout prospect areas, many of

which have significant power potential.

III-iii. Current Geothermal Energy and Prospects

Ethiopia, along with Kenya, is naturally endowed with considerable amounts of

geothermal resources, thanks to the East African Rift Valley: one of the greatest prospects of

geothermal energy, with an estimated potential between 10 GW and 15 GW.142

While Ethiopia’s

geothermal resource potential was previously estimated to be 5,000 MW, EEPCO believes that

the true potential is 10,000 MW.143

The table below shows projections of geothermal power

142

International Energy Agency, 59.

143


36

plants in Ethiopia; it is important to note that the estimations were made as of 2012, and some

projections may have been modified.

Table 3: Geothermal Power Projects in Ethiopia by 2018

Project Estimated initial output Commissioning

Auto Langano 75 2016

Tendaho 100 2018

Corbetti 75-300 2018

Abaya 100 2020

Tulu Moye 40 2018

Dofan Fantale 60 2018

Total 450-675

(Source: Kebede 2012)144

Aside from the benefit of diversifying energy mix, geothermal energy is often advocated

due to its cost of generation that is competitive with fossil fuels.145

This implies that geothermal

energy has a cost advantage compared to other renewable sources of energy. Moreover,

geothermal energy has stable yield, on the one hand operating at a very high capacity factor, and

on the other enjoying a well-proven steam power generation technology.146

Experts at Reykjavik

Geothermal also argue that geothermal energy development is equipped with high potential to

foster other industries, as it historically has with spas, food processing, or district cooling.147

In a Power Africa Geothermal Roadshow presentation, Mekuria Lemma, an expert in

Ethiopian power planning, states that while the geothermal sector in Ethiopia has strong

prospects given the absence of restrictions to private investment in geothermal energy, mining,

and electricity, substantiated by the country’s ongoing investigations in a field with high

potential, the sector is also susceptible to weaknesses such as the lack of commercial and

144

Solomon Kebede, “Geothermal Exploration and Development in Ethiopia: Status and Future Plan,” 14.

145

International Energy Agency, 59. 146

“Geothermal Development in Africa: The Corbetti Example,” accessed November 29, 2015, http://www.eu-

africa-infrastructure-tf.net/attachments/Press/25-04-2013_grmf-and-the-corbetti-geothermal-project.pdf. 147

Ibid.

37

technical expertise in development of geothermal resources; barriers to the sector development

include but are not limited to: the lack of a policy directly supporting geothermal development,

and the inadequate legal and regulatory institutions to attract private investment.148

The relative

scarcity of active geothermal projects, despite geothermal energy development being the second

in priority after hydropower, may be in part due to the inherent risks associated with starting a

geothermal plant, such as the huge initial investment and failures of costly excavations.149

Therefore, from the perspective of policy, it is imperative that Ethiopia provides support and

incentive for private sector to invest, specifically in geothermal energy production.

III-iv. Geothermal Technology

All geothermal power plants consist of large turbines that run electrical generators. These

turbines are turned using steam and this process can be achieved through a variety of techniques.

One of the most efficient and viable geothermal platforms is the binary cycle power plant which

incorporates hot geothermal fluid and a secondary “binary” fluid, which is a liquid that has a

boiling point much lower than that of water. In a binary cycle plant, this binary fluid, typically a

butane or pentane hydrocarbon, is passed through a heat exchanger at a high pressure in which

heat from the geothermal fluid causes it to rapidly vaporize. The resulting vapor drives the

turbines and is then cycled back through the heat exchanger after being condensed by cold air or

water. The process then repeats itself in this effective, closed-loop system.150

There are key advantages of the binary cycle power plant compared to other existing

geothermal technologies. First, because it is a closed-loop system there are virtually no emissions

to the atmosphere and thermal efficiency is at an average of 10-13%. Second, and most

148

Mekuria Lemma, “Power Africa Geothermal Roadshow,” Ministry of Water and Energy, September 28, 2014. 149

Embassy of Japan in Ethiopia, “Study on the Energy Sector in Ethiopia,” September, 2008.

150

“Types of Geothermal Power Plants,” http://energyalmanac.ca.gov/renewables/geothermal/types.html

38

importantly, binary cycle plants are bound to far less restrictions in terms of geological

conditions. Unlike direct dry steam plants that directly utilize geothermal steam and flash stream

stations which require geothermal fluid temperatures of at least 180 degrees Celsius, binary cycle

plants are viable in areas with geothermal fluid as low as 57 degrees Celsius because of its use of

a binary fluid. Since most geothermal areas contain water at moderate temperatures, binary cycle

technology is the most viable form of widespread geothermal electricity. However, a main

disadvantage of the binary cycle power plant compared to its peers is its high initial cost of

construction.151

III-v. Case Study: The Corbetti Concession

The Corbetti Concession in particular has potential for dramatic effect on Ethiopian

power generation, and embodies many of the changes that have taken place over the past few

decades. In a country in which generation and distribution of electricity is state-controlled, the

Corbetti Concession is monumental in that it is the first project of its kind in which private

investment has been allowed.152

If the two-stage project is completed to its full potential, it will

be the largest geothermal plant in Africa, and possibly in the world, with estimated capacity of

up to 1000 MW.153

The 1000 MW of potential electricity generation is estimated to have the

capability to power roughly 2 million households.154

The Corbetti Concession is located within a

silicic volcano system within a 12 km wide caldera containing widespread and potentially

lucrative thermal activity. Thorough investigations have identified geothermal reservoirs with

151

Ibid. 152

“Ethiopia: Electric Power Signs Groundbreaking Agreement to Buy Geothermal Energy,” Brook Abdu, last

modified August 3, 2015, http://allafrica.com/stories/201508032221.html. 153

“Corbetti project signs 500 MW PPA with Ethiopian State Utility, last modified July 27, 2017,

http://www.thinkgeoenergy.com/corbetti-project-signs-500-mw-ppa-with-ethiopian-state-utility/. 154

“Ethiopia: Electric Power Signs Groundbreaking Agreement to Buy Geothermal Energy”, Brook Abdu.

39

temperatures reaching 250°C and higher.155

One of the vital aspects of the Corbetti Concession

project is its proximity to power transmission lines. A key concern for many developers is the

actual distribution of electricity generated at these plants – in some cases, generation is feasible,

but is useless because proper transmission is lacking. The Corbetti prospect, however, is located

within 15 km of a 132 KV power transmission line, which is the main line to southern Ethiopia

and runs through towns along two branches of the highway to Kenya.156

With easy road access,

connectivity to the national electric power grid, and dense population concentration,

infrastructure is aligned to make the project a success. This is also a fortunate scenario due to the

desire of many Ethiopian leaders to export some of this electricity and create a market for trade

within the region.

Regarding the specifics of the project, a consortium of private investors, including

Reykjavik Geothermal, Icelandic Drilling Company, and the African Renewable Energy Fund

managed by Berkeley Energy are leading the development. Cost estimations are $100 million for

the first 20 MW of output, $2 billion for the first 500 MW within the next 5-8 years and an

additional $2 billion for 500 MW to be developed between 2023 and 2025. The additional 500

MW is currently in negotiation for development in Tulu Moye and Abaya.157

Overall the

financing mix will be roughly 25% equity and 75% debt and will cost roughly $4 billion in

total.158

The interaction between the private sector and policy initiatives has made this project

particularly interesting. Regarding private sector participation, a Heads of Terms Power

Purchase Agreement (HoTPPA) for Corbetti in 2013 between EEPCo and Reykjavik Geothermal,

155

Kebede, “Geothermal Exploration and Development in Ethiopia: Status and Future Plan.” 156

Ibid. 157

“Ethiopia agrees on first deal for privately produced electrivity after Obama visit,” William Davison, last

modified July 29, 2015, http://mgafrica.com/article/2015-07-29-ethiopia-agrees-on-first-deal-for-privately-

produced-electricity-after-obama-visit. 158

“Africa: Ethiopia Plans Africa’s Largest Geothermal Well,” Kennedy Senelwa, last modified August 1, 2015,

http://allafrica.com/stories/201508031511.html.

40

with a purchase price of 7.9 US cents per kWh for the first 500 MWe and 6.5 US cents per kWh

for the latter 500 MW.159

These negotiations took a great deal of time and ultimately in 2015, the

official Power Purchase Agreement for the first 500 MW was signed at a rate of 7.53 US Cents

per kWh.160

This agreement was signed during President Obama’s visit to the area, with details

being confirmed by Edward Njoroge, the chairman of the Corbetti geothermal power project and

a leading member of Berkeley Energy. Regarding the price for electricity generation, Njoroge

suggested that while terms were tight, they were manageable. These rates were slightly lower

than past projects in Africa, as similar geothermal projects in Kenya had a cost of electricity of

about 8.5 US Cents per kWh to 9 US Cents per kWh. It is important to note, however, that

Kenya is Africa’s biggest producer of power from steam. After the agreement was signed,

Njoroge announced that drilling rigs would be mobilized shortly and that they should enter

Ethiopia within the three months after July 2015, when they will immediately begin drilling for

steam. 161

The Corbetti Concession is part of Obama’s Power Africa Initiative and most likely could

not have come to reach the developmental stages of power generation without the program.

Power Africa was instrumental in facilitating the negotiations between the Government of

Ethiopia, the state controlled Ethiopian Electricity Power Company (EEPCo) and the private

investors involved. Whether it was legal or funding related, the Power Africa Initiative was

crucial in these two parties coming to terms, moving beyond the negotiation stage, and initiating

development for production.162

159

“Ethiopia: Electric Power Signs Groundbreaking Agreement to Buy Geothermal Energy,” Brook Abdu. 160

“Ethiopia agrees on first deal for privately produced electricity after Obama visit,” William Davison. 161

Ibid. 162

“What Power Africa Means For Ethiopia”

41

Going forward, this bodes very well for other projects in their early stages. Obama even

cited Corbetti as an example of the tremendous role the private sector can play in electricity

development and general economic growth. It is his hope that the project drives further

electricity access and opens the market for development of other significant renewable energy

sources. As Michael Phillip, Chaiman of Reykjavik Geothermal said, ‘The impact of the U.S.

Power Africa program cannot be underestimated’ as it has ‘significantly reduced the cost of

equity funding for major energy infrastructure projects in Africa, such as Corbetti, by raising the

profile of energy investments in Africa to the institutional investment community in the U.S. and

around the world.’163

In conclusion, the Corbetti Concession project has the potential for massive

implications even beyond the generation of 1000 MW, in that it will roughly double the previous

largest independent power producer agreement of any kind in Africa and possibly open the doors

to future development and private investment. 164

Our project assesses the Corbetti geothermal plant as a possible alternative and

complement to much more prevalent hydropower plants in Ethiopia. We believe the core benefit

of the Corbetti Concession is its contribution to energy diversification, and consider it as a

potential solution to Ethiopia’s overdependence on hydroelectricity. We acknowledge, however,

that geothermal energy development faces steep initial costs, compared to relatively low

production costs of hydropower. As a result, it is our goal to analyze—both quantitatively and

qualitatively—the economic costs and benefits of this model power plant, as well as to shed light

on whether investment in geothermal energy is practical with respect to the Ethiopian energy

sector.

163

“Reykjavik Geothermal and Iceland Drilling Sign Agreement In Ethiopia,” Vala Hafstad, last modified August 5,

2015, http://icelandreview.com/news/2015/08/05/reykjavik-geothermal-and-iceland-drilling-sign-agreement-

ethiopia. 164

“Ethiopia: Electric Power Signs Groundbreaking Agreement to Buy Geothermal Energy,” Brook Abdu.

42

IV. Cost Benefit Analysis

IV-i. Cost Function Analysis

Equation 1: Global Cost Function for Geothermal v Hydropower Electricity Production

( ) ( ) ( )

( ) ( )

∑ (

( ) )

∑ (

( ) )

Equation 1 serves as the main cost function of the benefit-cost analysis and is defined as

the difference between cost of geothermal and cost of hydroelectric. Costs of geothermal and

hydropower are calculated using Levelized Cost of Energy (LCOE), the net present value of the

unit-cost of electricity, for the respective technologies. Equation 2 relates the net present value of

that function when discounted over the lifetime of the technologies.

Equation 2: NPV Total Costs for Geothermal v Hydropower Electricity Production

∑ (

( ) )

∑ (

( ) )

Equation 3: LCOE function

∑ ( ( )

)

∑ (

( ) )

Equation 4: Electricity Production Function

As shown in Equation 3, the LCOE (Levelized Cost of Energy) for geothermal and

hydroelectric installations can be modeled directly as a function of their related discounted

43

investment costs for exploration, drilling and power plant ( ), operation and maintenance costs

( ) as well as the electricity production and its various factors, over their lifetimes. As can be

expected, the main conclusions from Equation 3 and 4 are that the LCOE of geothermal and

hydropower are proportional to the investment cost and discount rate, and inversely proportional

to the capacity factor, assuming constant O&M costs as a percentage of investment costs. When

lower O&M costs can be achieved, the resulting LCOE would be proportionally lower. Table 4

shows the different inputs of the LCOE model for Geothermal vs. Hydropower plants in our

analysis:

Table 4: LCOE Model Inputs

Geothermal Model Direct Inputs Hydroelectric Model Direct Inputs

I: Investment Upfront Cost ($) 4,000,000,000.00 I: Investment Upfront Cost ($) 1,200,000,000.00

M: Maintenance & Operations Cost ($/year) 300,000,000.00 M: Maintenance & Operations Cost ($/year) 78,000,000.00

E: Electricity Production (kWh/year) 7,884,000,000.00 E: Electricity Production (kWh/year) 4,380,000,000.00

r: Discount Rate (%) 7.0 r: Discount Rate (%) 5.0

n: Lifetime (years) 30.00 n: Lifetime (years) 60.00

Geothermal Model Indirect Inputs Hydroelectric Model Indirect Inputs

Nameplate Capacity (MW) 1,000.00 Nameplate Capacity (MW) 1,000.00

Capacity Factor (%) 75.0 Capacity Factor (%) 47.0

Table 5: LCOE Model Outputs

Geothermal Model Outputs Hydroelectric Model Outputs

Sum of Costs over Lifetime ($/Lifetime) Sum of Costs over Lifetime ($/Lifetime)

30 Year 7,722,712,355.05 60 Year 2,676,484,582.96

Sum of Electrical Energy Produced over Lifetime (kWh/Lifetime) Sum of Electrical Energy Produced over Lifetime (kWh/Lifetime)

30 Year

88,097,400,575.63 60 Year

87,290,288,119.81

Levelized Cost of Energy ($/kWh) Levelized Cost of Energy ($/kWh)

30 Year 0.0877 60 Year 0.0307

44

IV-ii. Geothermal vs Hydroelectricity LCOEs

Investment Costs ($)

The cost of installing hydropower in Ethiopia is approximated to be around $1,200 per

installed kW.165

From this metric, we can calculate that a hypothetical hydropower plant with a

total capacity of 1000 MW will cost a total of $1.2 bn for installation. This means that the

Corbetti geothermal plant, at an estimated installation cost of $4.0 bn., is $2.8 bn more expensive

than the hydropower alternative.in terms of upfront cost. These installation costs of $4.0 bn for

geothermal and $1.2 bn for hydropower serves as the investment metric in the LCOE calculation.

Operations & Maintenance Costs ($/year)

Once built and put in operation, hydropower plants usually require very little

maintenance and operation costs can be kept low. O&M costs are usually given as a percentage

of investment cost. The EREC/Greenpeace study166

and Krewitt et al. 167

used 4%, to which our

model adds a premium of approximately 2% accounting for Ethiopia’s developing economy.

Each geothermal power plant has specific O&M costs that depend on the quality and design of

the plant, the characteristics of the resource, environmental regulations and the efficiency of the

operator. The major factor affecting these costs is the extent of work-over and make-up well

requirements, which can vary widely from field to field and typically increase with time.168

For

this model, we value geothermal O&M costs at 7.5% of the initial investment costs, which

represents around 25% premium relative to hydropower O&M (~ 6%).

As observed in the figure below (Figure 8), O&M costs are characterized as a percentage

of the investment costs and LCOE increases exponentially for each incremental increase in costs.

165

“Hydropower,” https://energypedia.info/wiki/Ethiopia_Energy_Situation#Hydropower. 166

Teske et al, “Energy [R]evolution 2010,” Energy Efficiency. 167

Krewitt et al, “Role and Potential of Renewable Energy and Energy Efficiency for Global Energy Supply,”

Climate Change, 18/2009. 168“Hydropower,” https://energypedia.info/wiki/Ethiopia_Energy_Situation#Hydropower.

https://energypedia.info/wiki/Ethiopia_Energy_Situation#Hydropower

45

Figure 8

Discount Rate (%)

The discount rate is not strictly a performance parameter, but it has a critical influence on

the LCOE. In this model, discount rates are fixed according to the risk-return characteristics of

the hydropower and geothermal and the investment alternatives they represent against each other.

This 7.0% discount rate assigned to Geothermal is higher than the 5.0% discount rate used for

hydroelectric in order to account for the difference in capital costs. In this model, a higher

discount rate will be beneficial for and is therefore assigned to geothermal due to its higher costs

relative to hydropower.

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

3% 4% 5% 6% 7% 8% 9% 10% 11%

LCOE [$/kWh] v O&M [%] of Investment

( 75%,DR 7%)

( 47%,DR 5%)

46

Figure 9

As observed in Figure 9, all else equal the Discount Rate is positively related to the LCOE.

Lifetime (Years)

One important performance parameter is the economic lifetime of the power plant. Twenty-five to

thirty years is the common planned lifetime of geothermal power plants worldwide, although some of

them have been in operation for more than 30 years, such as Units 1 and 2 in Cerro Prieto, Mexico (since

1973), Eagle Rock and Cobb Creek in The Geysers, USA (since 1975 and 1979, respectively), and Mak-

Ban A and Tiwi A, the Philippines (since 1979).169

On that basis, this model incorporates a 30 year

lifetime for the geothermal installation. In contrast, a 60-year economic design lifetime is common

practice for hydroelectric plants, and accounted as such in this model.

Sum of Costs over Lifetime ($)

169

Barry Goldstein et al. “Geothermal Energy” (In IPCC Special Report on Renewable Energy Sources and Climate

Change Mitigation)

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

0.1

0% 2% 4% 6% 8% 10%

LCOE [$/kWh] v Discount Rate [%]

( 75%,O&M 7.5%)

( 47%,O&M 6.5%)

47

The graph of the sum of the costs of the two technologies over their lifetime is obtained by

combining the different costs associated with geothermal and hydropower as detailed above, and

discounting those costs to their net present value (NPV).

Figure 10

As such, the Sum of the NPV Costs over Lifetime for geothermal is $7,722 mm.

Figure 11

On the other hand, the sum of the NPV Costs over Lifetime for hydropower is $2,676 mm.

-

1'000

2'000

3'000

4'000

5'000

6'000

7'000

8'000

9'000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Mil

lio

ns

Geothermal: Sum of the PV of the Costs of Production [$] over

Lifetime [Years]

-

'500.00

1'000.00

1'500.00

2'000.00

2'500.00

3'000.00

0 6 12 18 24 30 36 42 48 54 60

Mil

lions

Hydropower: Sum of the PV of the Costs of Production [$]

over Lifetime [Years]

48

Total Capacity (or Nameplate Capacity) (MW/year)

This model is comparing the LCOE of geothermal and hydropower for a set nameplate capacity

of 1000 MW/year. That capacity represents the total capacity used in the model’s calculations.

Capacity Factor (%)

Capacity factors are an important measure of electric generator usage. Geothermal

technologies operate at a fairly steady and high capacity factor. Geothermal energy is currently

used for base load electric generation in 24 countries, with an estimated 67.2 TWh/yr (0.24

EJ/yr) of supply provided in 2008 at a global average capacity factor of 74.5%; newer

geothermal installations often achieve capacity factors above 90%.170

Hydroelectric generators

show both seasonal and annual variations reflecting changing levels of precipitation, river flow,

and snowmelt. Thus, with hydropower, the capacity factor can be indicative of how hydropower

is employed in the energy mix, the water availability, or the equipment and operation

optimization.171

The total worldwide technical potential for hydropower generation is 14,576

TWh/yr (52.47 EJ/yr) with a corresponding installed capacity of 3,721 GW, roughly four times

the current installed capacity. Worldwide total installed hydropower capacity in 2009 was 926

GW, producing annual generation of 3,551 TWh/y (12.8 EJ/y), and representing a global average

capacity factor of 44%, compared to an African average of 47%.172

As such we consider the

African average as the benchmark capacity factors for the technologies in our model.

170

Kumar et al. “Hydropower” (In IPCC Special Report on Renewable Energy Sources and Climate Change

Mitigation) 171

Ibid. 172

Ibid.

http://www.eia.gov/todayinenergy/detail.cfm?id=2650

49

Figure 12

As discussed, the capacity factor has inversely exponential relationship with LCOE.

Electricity Production (kWh/year)

Electricity production is merely a result of the technologies’ capacity factors and the nameplate

capacities.

Sum of Electricity Production over Lifetime (kWh/Lifetime)

The graph of the sum of the electricity produced by the two technologies over their lifetime is

obtained by taking the net present value of the total electricity production over time.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0% 20% 40% 60% 80% 100%

LCOE [$/kWh] v Capacity Factor [%]

______ (𝐷𝑅 7%,O&M 7.5%)

______ (𝐷𝑅 5%,O&M 6.5%)

50

Figure 13

As such, the Sum of the NPV of Energy Produced over Lifetime for geothermal is 88,097 mm

kWh/Lifetime.

Figure 14

-

10'000

20'000

30'000

40'000

50'000

60'000

70'000

80'000

90'000

100'000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Mil

lio

ns

Geothermal: Sum of the PV of Energy Produced [kWh]


-

10'000.00

20'000.00

30'000.00

40'000.00

50'000.00

60'000.00

70'000.00

80'000.00

90'000.00

100'000.00

0 6 12 18 24 30 36 42 48 54 60

Mil

lio

ns

Hydropower: Sum of the PV of Energy Produced [kWh]


51

On the other hand, the Sum of the NPV of Energy Produced over Lifetime for hydropower is 87,290 mm

kWh/Lifetime.

LCOE per Technology

The table below resembles a LCOE sensitivity table based on varying degrees of discount rates,

capacity factors, and maintenance costs.

Table 6

Discount Rate

[%]

Capacity Factor

[%]

Maintenance

Costs as [%] of

Investment Costs

LCOE

Parameter

w.r.t.

Technology

Geo. Hydro. Geo. Hydro. Geo. Hydro. Geo. Hydro.

Bull Case, Low

LCOE 5.00 3.00 90.00 55.00 5.00 4.50 0.0548 0.0195

Base Model,

Standard

LCOE

7.00 5.00 75.00 47.50 7.50 6.50 0.0822 0.0370

Bear Case,

High LCOE 10.00 7.00 60.00 40.00 10.00 8.50 0.1418 0.0499

Figure 15

-

'0.1000

'0.2000

'0.3000

'0.4000

'0.5000

'0.6000

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Geothermal & Hydropower: LCOE [$/kWh] over Lifetime [Years]

𝐺 ℎ 𝑌 30 0.0882

𝐻 𝑤 𝑌 60 0.0307

52

The overall LCOE analysis can be summarized by Figure 15.

IV-iii. Cost Function: Overall vs. Discounted Projection

Figure 17

In Figure 17, the constant annuities from years 2015 to 2045 are calculated using the delta of

geothermal and hydropower LCOE as the present value.

Figure 18

These annuities are then discounted by a rate of 7% to achieve the curve demonstrated in Figure

18. As such, Figure 18 represents the cost function of our Benefit-Cost analysis. A more detailed

explanation of the construction of these cost curves is given in the following section dealing with the

benefit-cost analysis.

$-

$'100.00

$'200.00

$'300.00

$'400.00

$'500.00

2010 2015 2020 2025 2030 2035 2040 2045 2050

USD

mm

Year

Overall Cost Projection: LCOE

Cost (Difference between Geothermal and Hydropower)

$-

$'50.00

$'100.00

$'150.00

$'200.00

$'250.00

$'300.00

$'350.00

$'400.00

2010 2015 2020 2025 2030 2035 2040 2045 2050

USD

mm

Year

Overall Discounted Cost Projection

Cost (Difference between Geo and Hydro)

53

IV-iv. Factors of Benefit-Cost Analysis: Geothermal vs. Hydropower

The benefit-cost analysis between geothermal and hydropower considers two cases:

developing the Corbetti geothermal plant and a separate scenario where a hydropower plant with

an equivalent power capacity (1000 MW) is built, holding the key assumption that each plant is

the only one to be constructed in Ethiopia during a time frame of 2015-2045. In addition, two

main factors are considered in this analysis:

1. Difference in Levelized Cost of Electricity (Cost, Hydrothermal is Cheaper)

2. Savings from diversification (Benefit for Geothermal)

Difference in Levelized Cost of Electricity (LCOE)

The levelized cost of electricity was determined to be $0.088/kWh for the Corbetti

geothermal plant and $0.0307/kWh for the hypothetical hydropower plant. Multiplying these

amounts by the present value amount of electricity generated in the lifetime by each respective

plant, a present value cost of $7.72 bn for geothermal and $2.68 bn for hydrothermal was

calculated. In the determination of lifetime electricity generation, the nameplate capacity of 1000

MW, capacity factor (75% for geothermal, 47% for hydro), and average lifetime for power plant

(30 years for geothermal, 60 years for hydrothermal) were considered. By subtracting

hydrothermal present value of cost from that of geothermal, a present value cost difference of

$5.308 bn was obtained. This cost difference serves as the main cost of the benefit-cost analysis

as it represents how much more expensive geothermal development is in respect to hydropower.

Since the cost of $5.308 bn is a present value, the following equation was used to determine the

cost annuity for each year between 2015 and 2045 at a discount factor of 7%:

54

∑

( ) 3

⁄

The following graph showcases both normal and discounted cost annuities from 2015 to 2045.

Figure 19

Savings from Diversification

According to geologists, rainfall is predicted to decline 10-20% in the East African region

over the next 50 years due to climate change. Along with droughts, climate change is expected to

create more dangerous floods which can damage existing dams, dramatically reducing their

effectiveness. The following diagram by AFREPREN in the report “Large Scale Hydropower,

Renewable Energy and Adaption to Climate Change” outlines the general response in response

to a drought-induced energy crisis by governments in East and Horn of Africa.

Figure 20

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

$450.00

2010 2015 2020 2025 2030 2035 2040 2045 2050

USD

mm

Year

Cost Annuities: Normal vs. Discounted

Normal Discounted

55

(Source: Karakezi et al173

)

The main factors to consider are the reduced power generation of hydropower from

climate-induced droughts and the compounding increase in cost of power caused by the

government emergency response. A clear estimate of these costs on various East and Horn of

African countries with a similar profile to Ethiopia is outlined in the following table by

AFREPREN.

Table 7

(Source: Karekezi et al174

)

Extrapolating from this data, the average loss as a percent of GDP as a result of drought-

imposed emergency power generation is approximately 1.89%. Applying this number to

Ethiopia’s GDP of 54.80 bn USD in 2014 leads to a total loss of 1.035 bn USD. Another key

statistic to gain from this table is that countries with higher diversification in electricity

173

Steven Karekezi et al, “Large Scale Hydropower, Renewable Energy and Adaptation to Climate Change: Climate

Change and Energy Security in East and Horn of Africa,” Energy, Environment and Development Network for

Africa No. 33: 9,28,31. 174

Ibid.

56

generation through renewable energy sources are more resilient to the costs imposed by drought-

imposed shortfalls. Kenya experienced an estimated loss of 1.45% of GDP, a figure lower than

Rwanda’s 1.84% and Uganda’s 3.29%. This is largely a result of Kenya’s diverse energy

portfolio, which boasts over 10% of electricity generation from geothermal energy. During

Kenya’s dry spell, geothermal energy was able to run at a close to 100% availability when many

hydropower stations were rendered useless.175

Comparing Kenya with Rwanda which has yet to

develop any geothermal electricity output, a 1% increase in geothermal energy in the total energy

portfolio roughly translates to a 0.04% decrease in annual cost. Applying this to Ethiopia’s

framework in 2014, every 1% increase in geothermal energy is equivalent to an annual saving of

22 mm USD in the case of a drought. To quantify savings from diversification through the

Corbetti geothermal power plant in Ethiopia from 2015-2030, the following factors are taken into

consideration:

Projected GDP (2015-2045)

Ethiopia’s current GDP is calculated to be 54.8 bn USD. From historical data, we assume

GDP to increase at an average rate of 9.6% each year.176

From this estimate, GDP for the next 30

years can be projected as shown below:

175

Ibid. 176

“Ethiopia GDP Annual Growth Rate,” http://www.tradingeconomics.com/ethiopia/gdp-growth-annual.

57

Figure 21

% of GDP saved per additional 1% of geothermal energy in total energy portfolio

As described above, every 1% increase in geothermal energy in the total energy portfolio

roughly translates to a savings of 0.04% of GDP in the case of a severe drought.

Geothermal Energy from Corbetti as a percent of Total Energy

To calculate geothermal as a percentage of total energy, Corbetti’s total expected output

for each year between 2015 and 2045 must be determined. Three data points are known from the

expectations outlined by the Corbetti project: 0 MW at 2015, 500 MW at 2023, and a finalized

total capacity of 1000 MW at 2025. Furthermore, every year after 2025 will have a constant total

capacity of 1000 MW. To calculate the expected total capacity for the rest of the years between

2015 and 2025, an exponential regression was run and an equation of

28.4025 0.3 6

[where Y is total capacity and X is number of years since 2015] was obtained. Applying this

equation to estimate total expected capacity for each year and dividing these points by Ethiopia’s

current total energy capacity of 10,000 MW, the following projection was constructed.

58

Figure 22

Probability of a Drought

According to historical data, a severe drought is anticipated to occur in Ethiopia every

two years, and this probability is only increasing over time. In this model, probability of drought

is set to 50% for the base case of 2015 in order to capture the minimum chance of a severe

drought occurring every two years. To account for the increasing probability of drought over

time, the model incorporates an additional .05% increased chance each year.177

Summary

From all these factors, minimum expected savings by diversification through the Corbetti

plant is given by:

𝐺𝐷 (% 𝐺𝐷 % ℎ )

(𝐺 ℎ % 00) 𝐷 ℎ

A projection of expected savings from 2015-2030 is shown below:

177

“Annual Probability of Drought,” https://hiu.state.gov/Products/EastAfrica_ProbabilityDrought_HIU.pdf.

59

Figure 23

Unlike the cost function in which the present value was known in the form of levelized

cost of electricity (LCOE), this benefit projection shows the annual monetized benefits from

2015-2045. To calculate the present value of this stream of benefits, the following equation is

used:

∑

( )

3

Using a discount rate of 7%, present value of benefits from diversification through Corbetti is

calculated to be 3.79 bn USD. The discounted benefit stream is also modeled below:

$-

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

2010 2015 2020 2025 2030 2035 2040 2045 2050

USD

mm

Year

Expected Savings by Diversification through Corbetti Geothermal Power Plant ($mm)

60

Table 24

This clear cost reduction by hedging Ethiopian hydropower overdependence risk through

geothermal energy development is the main benefit to consider in the overarching benefit-cost

analysis.

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

2010 2015 2020 2025 2030 2035 2040 2045 2050

USD

mm

Year

Discounted Expected Savings by Diversification through Corbetti Geothermal Power Plant ($mm)

61

IV-v. Overall Benefit-Cost Analysis: Discounted Benefit and Cost Streams

Year Savings from Diversification

(benefit) USD mm

Difference in Cost,

Geo-Hydro (cost) USD mm

Net Benefit

2015 $ - $ 375.76 $ (375.76)

2016 $ 4.30 $ 351.18 $ (346.88)

2017 $ 6.35 $ 328.20 $ (321.85)

2018 $ 9.38 $ 306.73 $ (297.35)

2019 $ 13.86 $ 286.67 $ (272.81)

2020 $ 20.47 $ 267.91 $ (247.44)

2021 $ 30.23 $ 250.38 $ (220.15)

2022 $ 44.65 $ 234.00 $ (189.36)

2023 $ 67.02 $ 218.70 $ (151.67)

2024 $ 97.34 $ 204.39 $ (107.05)

2025 $ 143.25 $ 191.02 $ (47.77)

2026 $ 148.06 $ 178.52 $ (30.46)

2027 $ 153.03 $ 166.84 $ (13.82)

2028 $ 158.14 $ 155.93 $ 2.22

2029 $ 163.42 $ 145.73 $ 17.69

2030 $ 168.86 $ 136.19 $ 32.67

2031 $ 174.47 $ 127.28 $ 47.18

2032 $ 180.25 $ 118.96 $ 61.29

2033 $ 186.20 $ 111.17 $ 75.03

2034 $ 192.35 $ 103.90 $ 88.45

2035 $ 198.68 $ 97.10 $ 101.57

2036 $ 205.20 $ 90.75 $ 114.45

2037 $ 211.92 $ 84.81 $ 127.11

2038 $ 218.85 $ 79.27 $ 139.59

2039 $ 225.99 $ 74.08 $ 151.91

2040 $ 233.35 $ 69.23 $ 164.12

2041 $ 240.93 $ 64.70 $ 176.23

2042 $ 248.74 $ 60.47 $ 188.27

2043 $ 256.79 $ 56.52 $ 200.28

2044 $ 265.09 $ 52.82 $ 212.27

2045 $ 273.64 $ 49.36 $ 224.27

Present

Value $4,540.81 $5,038.58 -$497.77

62

Figure 24

As can be seen from the above table and graph, benefits start low but eventually overtake

cost at year 2028 at a net benefit of $2.22 mm. The initial exponential growth of benefits is

primarily due to the construction of the Corbetti plant and the resulting growth in geothermal

energy supply. However, by the year 2025 when the project is complete and supplying 10% of

total Ethiopian energy in the hypothetical scenario assumed by this analysis, benefits grow at an

approximately linear rate. From 2025 and onwards, increase in benefits is largely driven by GDP

growth and an increasing probability of drought.

Cost in this context is defined as the difference between the cost of the Corbetti plant and

that of a hydropower plant with an equivalent capacity. Essentially, it is the measure of how

much more expensive geothermal is compared to an alternative renewable energy development.

Geothermal energy’s high LCOE compared to that of hydropower is largely a result of the high

upfront costs that go in to the installation of the former technology. While this cost will gradually

diminish over time, it can be deduced from the graph above that costs encountered for the first

several years are significantly high.

$-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

2010 2015 2020 2025 2030 2035 2040 2045 2050

USD

mm

Year

Overall Benefit-Cost Projection (Discounted)

Benefits from Diversification Cost (Difference between Geo and Hydro)

63

Overall, while annual benefits do eventually catch up to costs and a positive net benefit is

achieved for every year after that point, this is not enough to offset the high initial cost of

geothermal energy. This is confirmed by subtracting the present value of cost from the present

value of benefits and arriving at a net present benefit of -$497.77 mm. If such a negative value is

achieved under assumptions built into the model, the benefit-cost analysis further justifies the

immense costs associated with developing geothermal energy that will only be magnified by the

conditions of the real world. For example, the entire benefit-cost analysis assumes that Corbetti

is the only power plant to be developed and Ethiopia’s total electricity capacity stays constant at

the 2015 target level of 10,000 MW. This assumption creates the case in which every additional

megawatt capacity of Corbetti has a large impact on increasing the total percent of geothermal

energy in the country’s overall energy portfolio.

However, in the real world, additional projects ranging from hydropower to wind are

going to be co-developed alongside Corbetti. These projects will inevitably increase the total

energy capacity of Ethiopia and the percentage of energy as geothermal will drop considerably,

drastically reducing savings from diversification. In this sense, the net present benefit of the

Corbetti plant is likely to be even more negative in the real world. While Ethiopia direly needs to

diversify its electricity generation in order to stabilize its supply, the negative net present benefit

produced by the benefit-cost analysis as well as consideration of real world factors that can

further drive this value even lower suggest that developing geothermal energy is an incredibly

costly venture which significantly impedes the potential benefits to be gained from this

renewable energy source.

64

V. Conclusion

From the results of the benefit-cost analysis, our final recommendation for the Ethiopian

government is that currently geothermal development is not a viable investment. Even with the

potential benefits from diversification that are only growing over time, the associated costs of

installation and maintenance are much too high to be outweighed by these benefits. That being

said, geothermal plant development is not completely out of Ethiopia’s energy forecast. Once

technological and efficiency innovations begin to drive down Ethiopian geothermal LCOE,

geothermal is a key renewable energy source through which increased energy security can be

attained. By serving as a substitute for drought-vulnerable hydroelectric power, geothermal

electricity can significantly hedge against the costs associated with the increasing risks

associated with climate change.

From our LCOE analysis, we determined key technological and efficiency factors that

can drive down costs to include an increased capacity factor and decreased installation cost.

Advances in geothermal power plant technology have allowed some plants to achieve a capacity

factor of 90%, compared to the average 75% used by this paper’s model to calculate cost. 178

Furthermore, installation costs are expected to go down as exploration and drilling begins to be

completed by pilot projects such as Corbetti. 179

With these clear improvements in efficiency

taking place, geothermal LCOE is expected to reach lower levels over time. In the present day,

the Ethiopian government can actively implement measures to accelerate this decrease in cost

driven by technological innovation by promoting research and development as well as investing

in human capital, similar to the previous policies made by the Icelandic government.

178

Barry Goldstein et al. “Geothermal Energy” (In IPCC Special Report on Renewable Energy Sources and Climate

Change Mitigation) 179

Ibid.

65

Once a profitable LCOE is reached in the future and geothermal becomes a viable avenue

for diversification, there are several factors that the Ethiopian government must consider in their

development strategy. For example, as described in the benefit-cost analysis, it is important to

consider the overall energy portfolio and the other on-going energy development beside

geothermal. If Ethiopia develops 1000 MW of geothermal and 1000 MW of hydroelectricity at

the same time, geothermal energy as a percentage of total energy will not be as high as the case

in which only geothermal is developed, marginally driving down expected savings from

diversification. A potential way to ensure a certain energy distribution is maintained is for the

Ethiopian government to implement capital subsidies to motivate geothermal over other

alternative sources.

Ultimately, the main benefit for geothermal electricity generation in Ethiopia is in dealing

with the risks of overreliance on hydroelectric power. However, diversification through other

energy sources such as geothermal is not the only way to mitigate this risk. Until a viable cost for

geothermal energy is attainable, Ethiopia can advance its current hydropower infrastructure

through reservoir improvements and better watershed management, along with promoting

technological innovations that will lower geothermal costs. And, when geothermal LCOE is

finally low enough, Ethiopia can truly mitigate overdependence risk through diversification and

utilize the parameters outlined in this paper in their implementation of geothermal energy.

66

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